US worried by change over to euro dealing

Date: 26/06/1997

By Elizabeth Wise

WHILE few American traders would bet a dime on whether the single currency will come into force on time, they are determined not to lose millions if and when the euro replaces marks, francs and ecu.

In the United States' three largest foreign exchange trading centres, financiers are putting pressure on lawmakers to ensure that existing contracts in European currencies will be honoured when they are no longer legal tender.

In New York City, Chicago and Los Angeles, traders are also looking for answers to dozens of questions about the euro's implementation - and not getting much reassurance from EU officials.

European Monetary Institute representatives visiting New York try to reassure traders that debts owed in national currencies may be satisfied in euro. But Americans are not sure they want euro.

“While regulations on the euro are fairly clear, they do not say what happens if you get it wrong,” said Lawrence Darby of the New York law firm Howard, Darby and Levin.

“When a deutschemark to French franc transaction becomes a euro-to-euro transaction, one side will have more euro than the other. There will be a winner and a loser. In Europe, that may be fine, but in the US we have a tradition of losers going to court”, said lawyer Daniel Cunningham of Cravath, Swaine and Moore.

Another problem is that some contracts contain force majeure clauses allowing one side to terminate a contract in grave, unforeseen circumstances.

But the clauses are vague and, says Cunningham, traders should not expect New York judges to uphold European political decisions.

The proposed legislation is designed to counter the problem by establishing the euro as a “commercially reasonable substitute” for European monies. It also states that the substitution of euro for former currencies will not excuse partners from fulfilling their contracts.

The new measure - virtually identical in New York, Illinois and California - also decrees that the conversion rate from old to new money will be that set by the EU, and that one euro will be worth one ecu.

The Illinois state legislature has ratified the proposals, which Governor Jim Edgar must approve or veto by mid-July.

Jeff Lillien, a lawyer for the First National Bank of Chicago, where billions of dollars worth of contracts are settled every day in marks, francs and pounds, is among those who have pushed hard for the legislation. “It is a huge amount which is at risk. We need to eliminate the uncertainty within the trading community,” he said. “Traders need to know what they are doing when they enter into an ecu or a euro contract.”

With the global foreign exchange market worth 1 trillion ecu a day, currency traders are affected most. But billions of dollars worth of swaps and derivatives contracts are also executed daily under New York, Illinois or California law. Once the euro is introduced, disputes would therefore be arbitrated by the state courts.

New York traders also worry that they will miss out if their state law has no provision for euro contracts. “We are going to lose business to London if New York law is perceived to be unaccommodating,” explained one trader, who pointed out that most of the world's derivatives deals were conducted under UK or New York law.

If the legislation is passed in Illinois, it would be the first such move by an American state to cope with political or economic changes abroad. But it is precisely the unprecedented nature of the move to euro that requires a US reaction, believes Lillien. “Do you really know what the answer is going to be when you ask if a supranational currency replacing a sovereign currency is going to perform acceptably?” he asked.

Given the recent clash over French concerns about the stability pact and Germany's difficulties in meeting the Maastricht criteria for monetary union, many Americans are sceptical about the future of EMU.

“People in the legislature are already wondering why they should rush if the Europeans are not even rushing,” said a banker at the Bank of America in Los Angeles, adding wryly: “Illinois may get its euro legislation done before the EU does.”