Euroland won't be built in a day
The euro's born, and everything went right. The transition had been rehearsed so many times that it comes as almost no surprise. The process went even faster than we had planned," says Michel Haski, chief executive of Dresdner RCM Global Investors in Paris. "The accountants were able to close the 1998 exercise some hours in advance and proceed to the conversion ahead of schedule." So, for most institutions, the currency transition was implemented by the Saturday instead of the Sunday. All portfolios are now valued in euros and all securities are quoted in euros. From this perspective, the franc, along with other Euroland currencies, has disappeared. But this doesn't mean it's all over. The euro won't be built in one day. From several points of view, the pilgrimage has only just began.
Firstly, French institutions still have to deal with the redenomination. The problem is simple: all bonds' nominal values were denominated in the currency they had been issued. With the new currency, all these nominal values need to be 'redenominated' in euros, in order to ease coupon payments and redemption.
To lead the way, governments have redenominated their debts first, as of January 1. Most Euroland governments have redenominated all their bonds in units of E0.01. But for inexplicable reasons, the French government has chosen to redenominate all its bonds in units of E1, which means that for every line of French bonds investors hold, the new nominal amount of securities won't match the old nominal amount converted in euros. The difference, which is less than E1, will be repaid by the government. "This is an enormous amount of work for us," says Hervé Douard, consultant with asset-liability advis-ory firm Fixage. "There are enormous software problems in many institutions we work for. There are many subtleties software programs haven't seen and we need to treat them one by one." Among the bugs, Douard mentions a case where software mistook deutschemarks for euros.
Another problem comes from the fact that not all government bonds have the same redenomination pattern. For instance Zero coupon bonds are mostly redenominated in E0.25, but a few others are redenominated in E0.5 or E1. And this is only the beginning. "There's also a debate to choose if we treat the tiny repayments as re-demption or revenues", adds Douard. "And to decide if it changes the yield to maturity of the line or not." The worst is that many more redenominations are still to come, and probably less orderly. All other public and private issuers will have to redenominate their debt in the coming years but there is no long-term schedule. They will come in small groups every Saturday, like French Coal and Société Générale on February 13; Credit Agricole on March 6, and so on.
The whole Euroland bond market is worth an estimated E6trn (the US is $11trn) and France is only 24% of that pool, but this doesn't mean that French institutions are rushing to re-allocate 76% of their bond portfolios in other Euroland countries. "Some institutions just won't do that because they're not allowed to invest in foreign securities", says Jean-Claude Le-conte, president of consulting firm, Image & Finance. But even for the others, jumping in the euro pool is not an easy choice. For insurance companies, for instance, the accounting issue is huge. Selling their existing French bonds would realise their potential gains. And, technically, they won't be available to offset virtual losses that could occur if they bought euro bonds at today's level. Gilles Pouzin"