Moving towards more competitive markets

Many in Ireland may feel the country is gripped by a frenzy of EMU overkill. But AIB's experience in recent months suggests that Irish business still has a considerable appetite for advice and direction on the subject. AIB has held 40 EMU presentations and seminars throughout the country, which were attended by over 5,000 business people. Demand for the seminars, which included expert panels set up to provide in depth expertise on euro-related banking issues, and the volume of enquiries have been far greater than we, as the organisers, had anticipated.

As a business itself, AIB has a strong sense of self interest in ensuring that its clients are well briefed on EMU and its implications. We want to ensure our clients thrive and prosper in the aftermath of EMU.

During the seminars we advised our customers to view the entire EMU process strategically, as well as operationally. We urged them to recognise that the move would spell much more than just the arrival of a single currency. In fact, it is another stage in the evolution of the European Single Market and part of an ongoing process toward more competitive markets.

The move to EMU will neither be entirely negative or positive. It presents all businesses with a challenge. Yes, it will open up new markets for Irish companies, but it will also open up Ireland to new foreign competitors. The comments, questions and analyses which came from the floor made for interesting listening during our EuroVision roadshow. On analysis we divided the companies involved into three categories. The first were those companies which planned to be ready in time for the very early days of the transition period. Larger companies, typically, were seen to be well into the process of preparing, on both a strategic and operational level. Many of these larger businesses have already appointed EMU managers and co-ordinators.

In addition, they are communicating with bankers and suppliers in a concerted effort to understand the process and all its implications. It is notable that they are also seeking out possible competitive advantages from the EMU process and identifying future niche markets for development.

The second group has committed to timely preparation but has not set about this yet. Generally these companies are less concerned with the strategic issues and are focusing only on operational readiness. The final group of companies is that which has no plans in place for the advent of EMU and the euro. That is not to say that these companies which are more relaxed are wrong. If they have given the process due consideration and concluded that it will not put them at a disadvantage, then it is sensible to wait. However, if they have neglected to consider EMU and its implications for their businesses, then they may find themselves in some serious difficulty.

But just what EMU issues caused concern at the seminars? Naturally, the primary areas of concern which arose were those that had an immediate impact. Exchange rates and interest rates, both in the lead up to and post 1999, were a key topic of discussion. Many companies on floating rates wondered when should they fix, what was the long-term outlook for interest rates and just how low interest rates could possibly go.

We had good news to offer, with our view that short-term rates may fall to between 4.75 and 5 per cent at entry to EMU, but with the proviso that Europe would then be in an upward interest rate cycle. We urged them to start thinking now about managing their interest rate risk in the medium term.

When it came to exchange rates, customers wondered when Britain would join, should Ireland join without its island neighbour, would there be euro bank accounts and from what point would these be available? We advised them that euro bank accounts would be available at AIB from January 1st, 1999. We also expressed the view that some British companies would move to receiving/paying in euros, even if Britain did not join. It is logical to expect this if they are doing significant business with continental companies. By operating in euros, there would be opportunities for them to net their euro payable and receivables - at once saving costs and reducing risks.

Anecdotally, we are aware of some larger British firms which are planning along these lines. We encouraged all customers to raise this issue with their British trading counterparts well in advance and suggested that they might offer a price incentive by way of encouragement. This would make a lot of sense if their exchange rate risk could be eliminated.

There was a feeling Ireland was being cheated a little out of the currency benefits of a single currency, due to the weight of our foreign trade in sterling and the US dollar. A small number of those involved substantially in continental trade would benefit hugely. But for many other Irish Corporate Treasurers, life would not be very different unless Britain came on board.

Another concern expressed time and again was that of technology. Many companies were already in the throes of addressing the 2000 problem and commented on the increasing pressure facing their information technology resources. One customer, a corporate treasurer, contemplating the demand for computer skills, remarked that now may be the correct time for him to consider a career change.

Customers expressed concern about the future of their savings and investments. Others asked if they needed to file dual accounts or worried as to the legal standing of contracts that refer to Irish pounds. We were able to set their minds at ease on most of these issues. However, at the end of the day there are still as many questions as answers on the subject of EMU and this, it seems, will be the way for some time yet.

Donal Forde is head of Corporate and Commercial Treasury at AIB Capital Markets.