WHERE THE BIG BANG WILL BE DEAFENING (int'l edition)In financial services, the euro watershed is New Year's Eve
It looks like a typical November workday in the ornate trading room of the Amsterdam options exchange. Traders shout bids at each other--pencils in hand, phones clutched to shoulders. But they're clad in sweaters and jeans instead of their customary blue blazers. It's Sunday morning. And the trades are imaginary, part of a trial run to test the exchange's readiness to start dealing in euros. ''If somebody doesn't make the switch on time, all of a sudden parts of the system won't be able to talk to each other,'' says George A. Moller, chief executive of the Amsterdam Exchanges, as he prowls the floor. ''We can't let that happen.''
All over Europe and as far away as Tokyo and New York, the countdown to the euro is in its final days at banks, insurance companies, and stock exchanges. Weekend trials are taking place everywhere to prepare for what's being called Big Bang Weekend--the 90-hour period when one of the most awesome financial projects in world history will be launched. The entire financial industry will have only from early afternoon on Thursday, Dec. 31, when the European Commission will set final exchange rates for the euro, until the morning of Monday, Jan. 4, to make an electronic conversion that involves trillions of bytes of data. Says Rob Rowley, chief financial officer of Reuters Group PLC: ''There are people working on this around the clock.''
Unlike consumers and corporations, which will be able to cling to the old currencies a bit longer, finance houses have no choice about whether or not they will be euro-ready. For them, Dec. 31 is the watershed. The savviest banks and institutions have been positioning themselves for this development for years, inventing new services and invading one another's territory. And since size will be an enormous advantage in the euro zone, merger fever is climbing into the stratosphere. After the New Year, when stocks and most bonds will begin trading only in euros, the race to reap the rewards of Europe's new unified capital market will get hotter. Even the nimblest institutions risk losing opportunities to the competition if they're not prepared to jump into new financial niches as they arise.
Shifting to the euro currency will involve a massive financial and logistical expense. Spain's Banco Bilbao Vizcaya is spending $70 million and giving its 23,000 employees some 175,000 hours of euro-related training. Munich-based insurance giant Allianz is pumping $124 million in euro-related data processing and is putting the equivalent of 342 years' worth of extra employee time into euro conversion. But that's peanuts compared with the strategic changes that the new currency will bring to European financial markets. Skirmishes are already breaking out, for example, over which of the Europewide stock indexes will become the global benchmarks and which investment banks will dominate the new market in euro-based, high-yield debt.
Although euro bills and coins won't go into widespread circulation until the first few weeks of 2002, the prospect has some bankers quaking even now. There simply isn't enough vault space anywhere to warehouse all the euros. But it's the collection and destruction of old banknotes that worries banks the most. Central banks, which must verify the authenticity of the old bills before they're destroyed, are fretting about how to stop counterfeiters and money launderers from having a field day during the confusion. Some governments are even considering calling out the army to distribute the new banknotes, just as Bonn did when East German marks were exchanged for Deutschemarks during reunification in 1989.
HEADSTART. If all goes well, the changeover will begin with the flip of thousands of switches in financial programs worldwide. Teams of computer jockeys have been laboring, some for a year or two, to have software ready to go into action as soon as the EC posts euro rates on the Internet on Dec. 31. European banks are lobbying for an early-afternoon posting, to buy a few extra hours. Rivals in New York will lose precious conversion time, because they can't shut their systems down until the market closes on Wall Street. Since that's not until 10:30 p.m. Continental time, the Europeans will have a headstart.
During New Year's weekend, software programs will be checked and rechecked for accuracy. A tiny system bug could wreak havoc, sullying the euro's reputation before a single bill is issued. With teams of programmers planning round-the-clock vigils and with backup teams of brokers and bankers on alert in case of trouble, London hotel space is already tight for Big Bang weekend. Morgan Stanley alone has 100 rooms reserved. Local authorities have declared a parking meter holiday to handle the expected volume of cars in the City of London. Cafeterias will be open and serving through the weekend. Some shops even plan to keep champagne on ice for programmers toiling on New Year's Eve.
The pressure won't let up after Big Bang Weekend, though. Banks must keep scrambling to adapt their strategies to the new competitive realities of the euro zone. It is widely believed that creating a unified currency market will bring massive expansion to European equity markets, now only one-fourth the size of the U.S. market. Even before the euro arrives, demand for asset management products with Europewide portfolios has exploded. For instance, assets of DWS's formerly stodgy Eurovesta fund have more than quadrupled since April, when it was reoriented to invest in a European growth portfolio. A DWS Europewide small-cap fund has jumped from zero to $600 million in assets in about the same period.
FEW SURVIVORS. With foreign exchange revenues falling as the 11 currencies turn into just one, the banks must stake out new businesses. Germany's Commerzbank is investing heavily to become a major player in euro-based cash- and liquidity-management systems for companies, going up against such competitors as Citibank, Chase Manhattan, Deutsche Bank, and ABN Amro. ''Only a few banks are going to survive in this business, and we want to be one of them,'' says Peter Wolf-Koppen, Commerz' guru on implementation of the euro.
Battles are also heating up over who will be in control of the euro-based money transfer system. That's bad news for the new European Central Bank, whose Target bank-clearing system is already beset by new rivals, including Germany's Bundesbank. The ECB has been forced to slash its fees on the system even before the euro has arrived.
The coming weeks pose huge imponderables for investors. Some market analysts fear that the uncertainty will cause equity trading to dry up in mid-December and revive again only in mid-January, once the dust has settled. Euro-based debt and currency markets, on the other hand, are expected to explode in early January, partly fueled by heavy foreign buying. Some economists predict heavy demand for euros in Asia by investors hungry to escape near-zero interest rates at home and diversify their heavy stakes in the dollar. Indeed, Nomura quickly sold out three euro-convertible bond funds it has launched in Japan since July.
If the optimists are right about the euro, Jan. 4 will bring unprecedented opportunities for investors and the banks that serve them. A deeper, more sophisticated market could finally give Europe's financial institutions the global competitiveness they have sought. But only those poised to capitalize on the many changes will thrive. Big Bang Weekend is only the first of a long range of tough tests.
By Thane Peterson in Amsterdam, with Margaret Popper in Madrid, Andrew Osterland in Chicago, and Brian Bremner in Tokyo
Updated Dec. 3, 1998 by bwwebmaster
Copyright 1998, Bloomberg L.P.