Since late December 2011 when the ECB's 3-year long-term refinancing operations (LTRO's) was introduced media, public, investor and business attention has shifted away from the risk of a country leaving the Euro and towards other risks such as those posed by high oil prices. However, recent rumblings from Italy and Spain suggest we may be coming out of the eye of the storm. Are businesses prepared for the risk?
Towards the end of last year many companies looked at hedging their exposure to the European debt crisis spreading with many buying options that paid out on a slide in the euro towards parity against the dollar. As investor confidence has rebounded since the start of 2011 the prices of some of these hedging contracts have dropped markedly. As a measure of the implied chance put on a country leaving the Euro this chart shows the return to confidence seen since end 2011.
In a survey carried out in early March by currency hedging software firm FiREapps, a poll of 400 companies revealed a split in terms of business that are engaged in trying to manage the risk posed by the European debt crisis and those that are not. For instance one-third said they would not rush into contingency planning against risks posed by the crisis, including 12% who said they don't intend to do anything about it and 19% who haven't started yet. While looking forward over the next 18 months only half planned to increase their risk management efforts.
Are businesses being too complacent about the risks as attention has turned elsewhere? In the past week, Spain has been paralysed by strikers protesting against their governments austerity budget, Portugal's economy is now forecast to contract by 3.4% in 2012 (worse than previous estimates) and the Greek prime minister raised the prospect of a third bailout. Spain and Italy in particular saw a sharp increase in their borrowing costs this week as traders bet that Friday's Copenhagen summit would yet again fail to result in adequate support for the Eurozone.
In reality Eurozone ministers agreed to increase the Eurozone's bailout fund to €800bn in the hope of erecting a firewall strong enough to contain the sovereign debt crisis, placate the markets and encourage IMF members to commit a similar sum to emergency reserves. However, amid calls to erect the “mother of all firewalls” ministers ditched earlier proposals to keep a further €240bn in reserve for the next two years and surely represents another attempt to do the minimum necessary to kick a solution to the sovereign debt crisis further into the future. As outlined by Roubini economist Megan Greene “the current lull does not indicate that the Eurozone is in the clear, but rather it is simply in the eye of the storm, and more drama inevitably awaits”.
If correct now is not the time for businesses to be sitting back and taking a wait and see approach to the crisis. The Association of Corporate Treasurers (ACT) have produced a useful guide of the potential risks, what the outcome could be and what you can do to start mitigating that risk today.
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