Advisers strike low-key note as clients' eurozone event preparations quietly unfold. Alex Novarese reports

From a legal perspective, the spectre of countries exiting the euro is starting to look like the opposite of the Bribery Act. The anti-corruption law was last year greeted with a marketing onslaught from the legal community – in comparison, the vast, complex and downright scary implications of countries vacating the single currency had until recently gone largely unremarked.

Slaughter and May corporate partner Charles Randell describes this curious dynamic: "It's been a bit strange because people have been aware of the risks regarding the issue for a while, but as there has been a reluctance at official level in Europe to acknowledge it that has meant there has been far less open discussion. That is changing now."

Indeed, it is. Since October, law firm briefing notes have started to trickle out on how clients should prepare for a major event within the euro as it became apparent that outcomes recently regarded as unthinkable were swiftly becoming possible, or even likely. Other indications included Edwards Wildman Palmer banking partner Charles Proctor – one of the first senior lawyers to publicly focus on the issue – becoming a semi-regular fixture in the Financial Times' Alphaville column.

Meanwhile, in November a briefing note from Nomura caused a stir after grading the investment risk of eurozone obligations according to their governing law – thereby introducing bankers to some obscure legal Latin. And senior lawyers began to report increasingly urgent calls from major clients drawing up contingency plans.

The previous reticence to address the topic was understandable. Despite being robustly built to address concerns that the creation of the single currency could prejudice existing financial contracts, political considerations meant that there was no legal mechanism for a member state to withdraw from the euro.

While comparisons have been made to Argentina's move from a dollar-based economy to a free-floating peso and the break-up of the Czechoslovakian currency union in 1993, advisers agree that a collapse of a major international currency operating on this scale would be without real legal precedent.

As Linklaters partner Benedict James comments: "The legal issues are unbelievably complex. This is unique in that the currency dropped by one country will still exist as the currency of other countries. You have people talking about lex monetae [the legal principle that countries have monetary sovereignty], but the euro involved giving up that sovereignty; so you have two leges monetae to choose between, that of the exiting country and that of the eurozone."

Despite such challenges, lawyers report that many large clients have now put a substantial amount of effort into assessing and managing their legal risks. This is most advanced among banks, which have recently come under pressure from regulators to factor a major eurozone event into their contingency planning. But many large corporates with exposure to the riskier eurozone economies have also taken considerable steps.

Clients can take some comfort that advisers agree there is considerable scope to quantify the risks in the likelier scenarios (barring a disorderly break-up of the euro). Most concern is focused on euro obligations in the riskiest member states like Greece that are structured under local law. For obvious reasons, these have the highest 'redenomination risk' – market jargon for the unwelcome prospect of your expected euros morphing into drachmas of an uncertain quantity.

Then there's the small matter of huge post-conversion foreign exchange exposure (not to mention the risk that the whole process pushes your counterparty into insolvency). Also problematic are the majority of sovereign bonds of southern European states, since most are governed under local law (in contrast, many corporate bonds use English or New York law).

At the other end of the spectrum are derivatives backed by International Swaps and Derivatives Association (ISDA) master agreements, which are regarded as relatively robust, not only because they are typically governed under English or New York law, but because they are the most contractually specific. Somewhere in the middle are general term note programmes structured under English or New York contract law and debt backed by Loan Market Association (LMA) documentation, though some lawyers argue the latter camp could have more rigorous provisions.

Also highly significant would be the manner of a member state's exit from the euro. While any exit technically breaches European Union law, a non-consensual departure raises the possibility that foreign courts would see the departing state as being in outright breach of European law and refuse to recognise a new currency.

On one hand, that means obligations would be treated by the foreign courts as remaining in euros but, on the other, enforcing any judgment locally in such a scenario would be a challenge, to put it mildly. In essence, a non-consensual unilateral exit – particularly if a state also leaves the EU – substantially increases the legal risks and uncertainties regarding any relevant euro contract.

"ISDA and LMA agreements would be under English law and the courts would generally treat [the obligations] as remaining in euros, but the question remains of how you enforce that," says Edwards Wildman's Proctor. "There is a sense that English law will only get you so far."

Despite the huge range of potential risks and outcomes, advisers agree there is considerable value to clients in assessing their legal position and drawing up contingency plans. Top of the list are checking the governing law of your contracts and, if possible, moving the place of payment on obligations to 'core' eurozone states.

Lawyers also stress the need to check the (often vague) definition of 'euro' in contracts to avoid the issue being batted back to courts for interpretation and a general tightening up of provisions in new contracts. Some lawyers see measures to beef up security on assets outside a risky euro state as the most practical remedial steps. "It's important to get the hygiene right," says Linklaters' James. "It's a massive amount of work but it is worth doing. It will get you a lot further than doing nothing at all."

charles-randell-slaughtersKnown unknowns

Obviously, given the chaos that would be unleashed by a disorderly euro break-up, there remains a limit to what can be achieved or planned for. It is the scale of the event that has led legal advisers to adopt a somewhat uncharacteristically matter-of-fact tone. Randell (pictured), part of a discreet group of partners Slaughters has covering the issue, sums up the mood: "We were very concerned about treating this like the Millennium Bug – it's easy for lawyers to drum up hysteria."

Such sentiments mean focusing less on the legally esoteric and more on likely outcomes. The bottom line is that most banking advisers expect (and hope for) a managed, consensual exit of Greece later this year or, slightly less likely, for Greece to scrape along painfully in the euro, and are tailoring their advice to such known unknowns. The general view – supported by falling credit insurance spreads and bond yields – is that other 'peripheral' member states like Ireland or Portugal are probably staying in, leaving Greece as a special case. (As Legal Week went to press, 11th-hour haggling over Greece's proposed bond swap could yet shift that equation.)

"Clients are not asking for 50-page position letters in general," says Baker & McKenzie banking partner Bernard Sharp. "They regard this as part of the risk of doing business – like a natural disaster – and are trying to work out how they manage it."

This commendably pragmatic response is perhaps best demonstrated by one partner interviewed for this piece. Becoming last year convinced a swift Greece exit was on the cards, he got 6/1 odds for a punt on a departure before Christmas. Fingers crossed.

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