André A. L. Swings
Ceneral Manager Kredietbank, Brussels
WHY BANKERS PROMOTE THE ECU
The interests of a banker and his client are not necessarily opposed. Indeed, they can only be so if a short-term view, policy or practice is adopted. In the long term, their interests are the same, namely to share a gain resulting from creative co-operation whereby the client sets out his financial problems frankly and in confidence, and the banker and client together look for the best solution to them.
In a short term view, a market - the foreign exchange market, say - is divided up : in Europe into many sub-markets per national currency; in Belgium. - no, not into a Flemish and a Walloon sub-market - into an official or regulated and a free or financial market. A switch from one sub-market to the other, insofar as this is possible and permissible, not only gives rise to an exchange transaction and the calculation of exchange rate differentials, value days, commissions, fees and other costs - VAT aside - but also requires the client to maintain a no less costly administrative system. Furthermore, not just the one client, but the clientele as a whole is coming under pressure from ever increasing competition on a global scale, in which certain "heavyweights" (American, Japanese) benefit from. economies of scale, uniformity and simplicity, not to mention identity, and this last in monetary terms also.
The longer-term view, on the other hand, proposes pragmatic co-operation in the quest for European unification - this, too, at the monetary level - among other things via the gradual promotion of the ECU, the European currency-in-the-making, at all possible levels. The above-mentioned short-term advantages, i.e. the various sources of income for the banker, then gradually diminish, while the work that is involved for the banker becomes unnecessary. Principally, however, both banker and client are enabled to survive the cold blast of world competition, to tap new sources of income and to make new profits from products which, at the start of their life cycle, usually give their initiators an attractive level of return.
It is in this spirit that I, as a banker, want to promote
the ECU here, too.
CORPORATE FINANCIAL AND COMMERCIAL USE OF THE ECU
At the start of this symposium about the use of the ECU in your business, 1 attempted to summarize what the symposium deals with and what it does not - It does not therefore deal with the official use of the ECU, i.-e. in the operation of the European Monetary System or of the European institutions, but with the private use of the ECU, not by the man in the street - who, especially in the Benelux, is already pretty familiar with it - but by businesses.
These last have already been making extensive use of the ECU since the beginning of the Eighties, both in the various countries within the EC and in those outside it. Interest linked transactions - such as the different forms of deposit and credit and the various types of bond loans (1) - as well as service transactions - such as payment and exchange operations - have been and indeed are being increasingly expressed in ECU.
These are all "financial" transactions, in the broad sense of the word. With a few exceptions, they are all isolated transactions and not systematically integrated into corporate policy. Here and there, they are regularly repeated, though without being interconnected. They all represent partial utilization of the ECU in the handling and solution of specific problems in specific circumstances.
An ECU time deposit is sometimes opened "Just to give it a try", and sometimes for the wrong reasons, for example because the interest paid on it is higher than that for the local or another currency - as if not every currency is accorded the interest rate its "creditworthiness" indicates.
An ECU advance is taken up in order to finance a certain export transaction. If the transaction is expressed in ECU, financing in this currency is an obvious step. But the step is still often taken, even if transaction itself is not expressed in ECU; this occurs naturally and particularly at times when the ECU interest rate is lower than that for the local or another currency, the contract currency, for instance. In the meantime, the exchange risk (limited, certainly) that has been run is ignored and trust put in a happy outcome.
A still better example of partial ECU use in financial transactions is usually represented by the issue of ECU bond loans, especially the so-called ECU eurobonds.
Whereas, for example, dollar bonds are normally issued because dollars are required to finance investment or other assets in the American currency, a like practice in respect of ECU bonds is far from being adopted. Some sell their ECU proceeds against another currency that they require and remain with an exchange risk position that they can or cannot justify by the interest saving. Others, such as Rank Xerox (UK), sell them against the respective ECU components in proportion to their share in the ECU basket. Thus, via long-term fixed rate ECU, they acquire long-term fixed-rate DEM, NLG, BEF and GBP - which would be possible to do anyway - as well as long-term fixed-rate FRF, ITL, DKK, IEP and even GRD - which are not so easy to acquire directly. While this no doubt solves certain problems, others both real and potential are also created at the same time. One very real problem is that market interest rates for component currencies will in time form a basket whose composition is other than that of the ECU basket, and thus cannot simply be applied to pay the interest on the ECU loan. Another problem - potential this time - is that posed by a change in the definition or composition of the ECU itself, something that is likely to happen every five years.
The recent development of an international market in which long(er)-term interest rate and/or currency obligations in respect of loans and credits are swapped has boosted mainly the ostensible, indirect, or partial use of the ECU, as so far few opportunities have presented themselves for the commercial use of the ECU. It is to this commercial use that I turn now.
I said that most financial ECU transactions were isolated events and not systematically integrated into corporate strategy. One exception to this is Fiat. Everyone knows that Fiat is an Italian car market, but it is less generally known that the Fiat Group comprises more than 400 companies, 150 of which in Italy and the rest spread over nearly 50 countries. In 1985 net turnover amounted to the equivalent of ECU 20 billion. 73 % of production was in Italy, which also accounted for 53 % of sales. Thus 47 % of turnover was accounted for by sales abroad to the 250 subsidiaries, with which there is usually a one-way relationship, i.e. that the Italian parent company sells to its foreign subsidiaries, but does not buy from them.
In principle, foreign subsidiaries are invoiced in their local currency and thus run no exchange risk. This risk is centralized and managed in Turin. The exchange risk in the ECU component currencies is at present managed and hedged against by systematic borrowing of ECU rather than of the component currencies separately, for example. But that is as far as Fiat goes in the systematic use of the ECU, which once again is doubtless purely financial, but in any case a simple and additional means for the partial management of (specific) exchange risks, namely exchange risk positions in ECU component currencies.
Various insurance companies have also taken major initiatives towards a more integrated use of the ECU. The first was Assicurazioni Generali di Trieste which some years ago already began to contract insurance policies denominated in ECU, thus necessitating investment of the premiums in ECU bonds and other ECU assets. The example of A.G. di Trieste has in the meantime been followed by other insurers such as Union des Assurances de Paris (UAP) in France and Assurantieconcern De Stad Rotterdam in the Netherlands, while the Verenigde Provinciën in Belgium, together with Le Foyer in Luxemburg have contracted travel insurance with Eurocard, whereby cardholders are insured for ECU 200 000 each.
A particularly interesting example of institutionalized, multilateral, and both international and domestic commercial use of the ECU is presented by CIMACOREM (Conférence Internationale Madagascar, Les Comores, Réunion et Maurice), a shipping line conference with its secretariat in Paris, with the following affiliates : Compagnie Générale Maritime, Navale & Commerciale Havraise Péninsulaire, Scandinavian East Africa Line, Société Nationale Malgache de Transport Maritime, Hapag-Lloyd and Société Navale Caennaise. What is remarkable here is that CICACOREM began to use the ECU as early as August 1977, i.-e- before the end of 1978 when the ECU was officially created as an essential component of the European Monetary System (EMS).
What actually existed in 1977 was the European Unit of Account, defined by the European authorities as a basket of the nine currencies of the EC Member States and to be officially renamed the ECU in December 1978. It was this European Unit of Account that CIMACOREM introduced in August 1977 to replace the Swiss and French francs in denominating its members’ freight tariffs, this being done to limit the exchange risk.
In the meantime, CIMACOREM no longer makes mention of the European Unit of Account, speaking only of the ÉCU, though actually using it solely as a unit of account. In concrete terms, this means that shippers know that freight tariffs are expressed in ECU, but that payment has to be made in one or other national currency, conversion being at a rate taken once a month from the foreign exchange market by the conference secretariat, and each time notified to members and remaining in force for a month.
In fact, CIMCOREM does with the ECU what in shipping circles is generally done with such other currencies as the USD and DEM in which freight tariffs are at present expressed : i.e. that prices are also always converted into and paid in local currency at periodically fixed exchange rates. In principle, 1 can only rejoice at this, because the ECU is treated in the same way as any other currency. Just this, however : other currencies are always local somewhere, but the ECU is not and therefore has always to be converted - not the case for the USD and the DEH.
That ECU freight tariffs in Antwerp, Gent and Zeebrugge - you will note my objective exhaustiveness, my discreet impartiality - are converted into and paid in BEF by a Belgian client appears to me to be defensible for practical reasons. However, I would prefer that conversion not be at a rate fixed just once a month, but each time at the daily rate in force, for example, the mean rate that in Belgium has been officially quoted since 3 September 1984, so answering much more closely to economic reality.
But how do, say, Belgian forwarders handle transactions with their clients abroad ? Probably, they allow each to pay in his own local currency - as does Fiat - so that they are faced with various exchange risk positions which unlike Fiat and due to their greater size they are unable partially to cover by drawing down ECU loans.
CIMCOREM can thus go a step further towards more integrated commercial use of the ECU by permitting those of its clients wishing to do so - certainly those abroad - actually to make payment in ECU, which today is a viable option, equally good as payment in another foreign currency.
Further examples of more or less integrated use of the ECU are cited in the Kredietbanks Weekly Bulletin no 16 of 17 April this year, which could not leave unmentioned Compagnie de Saint-Gobain - a pioneer in this respect - and Asystel - a more recent trail-blazer. Moreover, besides the Swiss Eurofima and the French Lesieur, mention has also to be made of the annual ECC Tennis Tournament in Antwerp : since last year, players and sponsors have systematically contracted in ECU and have actually been paid in this currency, a policy and practice that will be expanded in the future.
That the subscription price for this symposium was expressed in ECU goes without saying, as does the fact that the balance sheet and the profit-and-loss account of both the Kredietbank and Crédit Général have for a number of years been likewise expressed. That this example has now been followed by Ippa, another Belgian financial institution, is gladdening. That a foreign subscription to our Weekly Bulletin costs (only) ECU 18 is interesting. But these are only symbolic gestures that, and this is my hope, will help to pave the way towards a more systematic, integrated, structural, financial and commercial use of the ECU throughout the EC.
Of course, this cannot happen overnight in an existing,
big enterprise. It has to be achieved by a step-by-step process, one that
ripens the minds. Indeed, the process has only just begun in my own bank.
To illustrate this, I would like to cite a step that was taken in January
1986, when our Executive Committee decided not only that any KB staff member
travelling in Europe for the Bank take ECU traveller's cheques with him,
but also that they be tried out and that the resulting experience be reported
back to the product manager concerned, with a view to possible action.
Nevertheless, that, too, is only a symbolic gesture, but one that may not
THE CRUCIAL STEP : PRICING IN ECU
In my opinion, the most important and crucial step to be taken for there to be any sort of a breakthrough in the commercial use of the ECU is for prices to be quoted in ECU. This, too, can happen on occasion, for example, when the counterparty so requests. Moreover, the ECU can be suggested to the counterparty as an alternative to a hard contract currency which he may jib at. However, there can also be systematic use of published or unpublished ECU price lists, either exclusively (as in the case of Asystel) or in tandem with price lists in other currencies.
It is especially in respect of intra-European transactions for goods and services that pricing in ECU would appear to be an obvious step, and this because of the currency's reasonable level of inbuilt stability and its European character - both the consequence of its simple, de facto basket formula - which make lt. an interesting compromise currency, whereby two Europeans, from two EC member states, move away from exclusive use of their respective currencies towards the partial USE of these with all other EC currencies.
I would like to make the point that "intra-European transaction" is capable of very wide interpretation and can also be taken to mean any sale of a good or service in Gent to non-Belgian, whether or not European, visitor to Flanders Technology International. And if in 1989 FTI wants to be really "international - in the broadest sense of the work and thus monetarily, too - its entrance prices will have to be denominated not just in BEF but ... yes ...! in ECU also.
In concrete terms, this would mean that in places attracting many foreign tourists certain goods and services could be priced in ECU, as well as in the local currency and moreover, as well as in the other currencies in which they are priced, viz. the currencies of the countries where the majority of tourists usually hail from.
In this way, the choice of contract currency is the customer's choice, by which nothing else can be meant, nor any other consequence be, than that the greater facility of payment will more easily and more rapidly lead to more business. And in this way the door is opened for the Ecu even to be used for domestic transactions. Indeed, a French-speaking client in Gent is not necessarily a Frenchman, he could be Walloon, ... or even someone from Gent itself.
But perhaps we are running too far ahead of European monetary unification, and regard and treat the ECU first and foremost as the EC's common Eurocurrency for real intra-European commercial intercourse, traditional import and export transactions, which currently confronts practically every European participant with a tangle of currencies, currency financing, foreign exchange positions, exchange rates, foreign exchange administration, etc., whereby, despite progressive convergence of economic policy in the various countries, tensions regularly arise between the different currencies, which can occasionally lead to exchange rate realignment, revaluation or devaluation, that in turn occasions externally imposed adjustment to prices expressed in them.
It is obvious that having a price in the domestic market's local currency and a price in a reasonably stable international or Eurocurrency – i. - e. the ECU - can do much to simplify the management problem, with all such consequent benefits as cost-saving - as illustrated in the above-mentioned Weekly Bulletin article - and the reduced necessity for regular readjustment of prices (at least those enforced by external factors). It was this consideration that proved to be a decisive factor in CIMACOREM's decision in 1977 to make the switch from the French and Swiss francs to the ECU.
I see no reason whatsoever for there not to be consistent pricing in ECU, i.e. for there not to be actual contracting, invoicing, financing and payment in ECU. Whoever does see a reason, be it temporary or local, can always make a start with prospecting and negotiating on the basis of ECU prices, falling back in later stages of the process, as CIMACOREM does, on the respective national currencies. This appears to me to be, at any rate, a cautious step in the right direction.
Once contracting in ECU begins and it is seen that there are no local or temporary obstacles, real or imagined, the way is indeed open to systematic use of the ECU in the various subsequent phases of each commercial transaction. Just as it is logical and normal that a DEM contract should give rise to a DM invoice, so it is equally logical and normal that an ECU contract be followed by invoicing in ECU. And as it is logical and normal that a USD should lead to financing in USD, it is equally so that an ECU invoice give rise to ECU financing; financing in another currency is by no means excluded, of course, but does not appear to me to be the most obvious solution.
The same goes for an NLG invoice being paid in NLG and an ECU invoice being paid in ECU (payment in another currency is naturally feasible, but would be highly unusual). And after completion of this ECU cycle the way is obviously open for continuous repetition of it, and for the growth of an ECU market whose potential, at least measured by the number of EC inhabitants', is greater than that of the USA and Japan together.
Isn’t it amazing to see that the private use of the ECU has become quite familiar via a host of mostly partial and purely financial, "ad hoc" applications, and then to hear it argued that a real, all-round breakthrough in its use can only materialize via the systematic quotation in ECU of goods and services ? Indeed, in this world, in our society, in (economic) life, development processes by no means always follow a strictly logical pattern.
Could it be that, despite this partial and "ad hoc" character, the ECU's private use has become so successful, thanks to this currency's built-in stability and its genuinely European nature, that it hasn't really been difficult - because worthwhile - to promote it? Therefore it would seem that we have now reached the critical point at which we must start to reflect on the way in which to consolidate what has already been achieved and to lay the foundations for a real breakthrough. In any case, he "that hath eyes to see and ears to hear" sees and hears that new attempts at such a breakthrough are continuously being made.
Eurocontrol, the European organization which controls traffic in European airspace, in return for which it imposes levies per ton-kilometer flown on the different airlines, is considering collecting these levies in ECU with effect from, 1988 (they are currently expressed in USD).
Another genuinely European project is the organization of a European lottery within the framework of an annual drive entitled "Europe for Children", the proceeds of which in 1988 will go to the fight against polio. This drive is planned to culminate in a 4-hour Eurovision transmission on Christmas 1988, on which occasion ECU-denominated lottery tickets will be sold in all EC countries.
The Kredietbank has just taken a decision aimed mainly at the effective democratization of the use of the ECU and at facilitating the payment of small amounts in this currency (for the above-mentioned lottery tickets, for example) by waiving the costs normally charged for all payments in foreign exchange.
While this brings us back to the periphery of the ECU's commercial use, it will have become clear to you that, in this "constant motion" in the ECU's private use, there is no area - be it at the periphery, at the core or somewhere in between - that can or may be neglected.
In this way, however, we are also gradually evolving towards
a situation where, for a growing number of companies, especially in the
Europe of the EC, the ECU is the number one foreign currency or, if not,
together with the USD and the JPY, one of the few really important foreign
currencies which are regularly traded and for which a broad, liquid market
ULTIMATE DEVELOPMENT : SHARE CAPITAL IN ECU
However, it will also have become clear that this gradual, pragmatic development of the ECU's private use by businesses - starting via various "ad hoc" applications and breaking through via systematic quotation in ECU or otherwise - cannot but ultimately lead to a situation where even a company's stockholders' equity is expressed in ECU, where that company’s shares, if they have a nominal value at all, are denominated in ECU.
You know and 1 know that this is not permitted in Belgium, nor indeed in other countries where the law requires a company's share capital to be expressed in national currency. But it is permitted in Luxemburg, in Britain and under certain conditions and circumstances in Italy and perhaps in other countries as well. And where it is not permitted today, tomorrow it may be.
It was learned meanwhile that the first Luxemburg holding company, controlling a diversified group of commercial operating companies in Belgium and elsewhere, and after converting its dollar-based capital into ECU based capital, is having its shares quotes in ECU with effect from October 51, 1987 at the Luxemburg stock exchange, while preparing a further issue of ECU-denominated shares, which is also to be listed at the Luxemburg stock exchange. Filco-City 7 thus has indeed made history as the pioneer in that respect, following closely behind the already numerous SICAVs that are investing their shareholders' funds in ECU instruments, have their "capital variable" expressed in ECU and also their shares listed as a matter of course in ECU at the Luxemburg stock exchange.
With its capital base expressed in ECU, your company will
have reached the bedrock upon which it can base the further development
of a totally integrated use of the ECU, via systematic price quotation
in this currency in even such peripheral a domain as for example a European
lottery. If your company is lucky enough to carry off the ECU 1 million
jackpot at that, the decision to go all out for the ECU is certain never
to be reversed.