[h=3]By CLARE CONNAGHAN[/h]As nerves build that Cyprus might drop out of the euro, banks and currency-trading system operators are ready with the breakup contingency plans that many last reviewed for Greece during the heights of the euro-zone crisis in 2011 and 2012.
Unless the tiny island can draw up a workable deal to unlock international aid by Monday, the European Central Bank says it will pull the plug on emergency assistance for the country's banks. That still seems a tough task, and market-watchers are bracing for what was once unthinkable.
REUTERSBanks and trading firms say they're preparing contingency plans if Cyprus were to exit the euro. Lines form on Thursday at an automated teller machine in Nicosia.
"There is a non-negligible risk that a satisfactory deal cannot be reached by early next week and that the banks might have to reopen without ECB support, which could probably only be done by imposing capital controls," said Beat Siegenthaler, a foreign-exchange strategist at UBS in Zurich.
"In extremis, this scenario could see a collapse of the financial system with all the dire consequences this might entail, including potentially a euro-zone exit," Mr. Siegenthaler said.
This would likely unleash a huge shock to the global financial system, not because of the dent to Cyprus alone, but because of concerns over what this might mean to the viability to the euro as a whole. Likely capital controls and other operational headaches would mean any new currency, if it came, wouldn't trade smoothly to start with.
For whatever small comfort it offers, however, banks and trading systems say they are ready to reintroduce a new version of the old Cypriot pound--which was swapped for the euro in 2008--at short notice, with many having put in place plans when Greece appeared to be treading a similar path in the last two years.
"Plans cover all aspects... including - but not limited to - requirements for implementing new currencies; system changes and capacity requirements; and preparatory discussions with internal and external risk, operations and technology professionals," said a spokesman for CLS Bank, the New York-based industry utility that ensures each side of currency trades gets paid.
"We routinely undertake system-performance and capacity testing for various stress-event scenarios to ensure systems have processing capabilities far in excess of their usual day-to-day activity," the spokesman added.
Thorny issues remain, such as what Cypriots themselves would use as a currency during any transition period, and what currency would be used to settle old debts. But currency-trading banks say they are ready to accommodate trade requests from companies and investors. "We have been mapping the outcomes and consequences of various euro-zone scenarios for at least 18 months," said John Gibbons, head of Treasury Services at JP Morgan Chase & Co, the sixth-largest currencies-dealing banks.
"Our databases, products and feeds are specifically designed so that we can add or remove currencies very easily and quickly," said a spokeswomen for Thomson Reuters Corp. (TRI), which runs one of the largest currencies dealing platforms, and also competes with Dow Jones Newswires for news and information services.
"If we see changes in the euro zone, our systems will be ready to adapt to those conditions and our customers will be able to use our data and trade with confidence," the spokeswoman added.
Write to Clare Connaghan at [email protected]
Unless the tiny island can draw up a workable deal to unlock international aid by Monday, the European Central Bank says it will pull the plug on emergency assistance for the country's banks. That still seems a tough task, and market-watchers are bracing for what was once unthinkable.
REUTERSBanks and trading firms say they're preparing contingency plans if Cyprus were to exit the euro. Lines form on Thursday at an automated teller machine in Nicosia.
"There is a non-negligible risk that a satisfactory deal cannot be reached by early next week and that the banks might have to reopen without ECB support, which could probably only be done by imposing capital controls," said Beat Siegenthaler, a foreign-exchange strategist at UBS in Zurich.
"In extremis, this scenario could see a collapse of the financial system with all the dire consequences this might entail, including potentially a euro-zone exit," Mr. Siegenthaler said.
This would likely unleash a huge shock to the global financial system, not because of the dent to Cyprus alone, but because of concerns over what this might mean to the viability to the euro as a whole. Likely capital controls and other operational headaches would mean any new currency, if it came, wouldn't trade smoothly to start with.
For whatever small comfort it offers, however, banks and trading systems say they are ready to reintroduce a new version of the old Cypriot pound--which was swapped for the euro in 2008--at short notice, with many having put in place plans when Greece appeared to be treading a similar path in the last two years.
"Plans cover all aspects... including - but not limited to - requirements for implementing new currencies; system changes and capacity requirements; and preparatory discussions with internal and external risk, operations and technology professionals," said a spokesman for CLS Bank, the New York-based industry utility that ensures each side of currency trades gets paid.
"We routinely undertake system-performance and capacity testing for various stress-event scenarios to ensure systems have processing capabilities far in excess of their usual day-to-day activity," the spokesman added.
Thorny issues remain, such as what Cypriots themselves would use as a currency during any transition period, and what currency would be used to settle old debts. But currency-trading banks say they are ready to accommodate trade requests from companies and investors. "We have been mapping the outcomes and consequences of various euro-zone scenarios for at least 18 months," said John Gibbons, head of Treasury Services at JP Morgan Chase & Co, the sixth-largest currencies-dealing banks.
"Our databases, products and feeds are specifically designed so that we can add or remove currencies very easily and quickly," said a spokeswomen for Thomson Reuters Corp. (TRI), which runs one of the largest currencies dealing platforms, and also competes with Dow Jones Newswires for news and information services.
"If we see changes in the euro zone, our systems will be ready to adapt to those conditions and our customers will be able to use our data and trade with confidence," the spokeswoman added.
Write to Clare Connaghan at [email protected]