Treasury Today Country Profiles in association with Citi
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April 2010

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Editorial

Beware country risk

Last month’s announcement of an EU support mechanism to bankroll the Greek government out of its mess should it need it, ought not obscure the big issues which face treasurers on what to do with their Greek exposures – whether you produce goods there, source them or sell them. Greece took the opportunity of the ensuing positive sentiment to issue €5 billion of seven-year government bonds, but the response was lukewarm-to-poor and the risk of contagion to Portugal is still very real, which in turn may mean problems for any company dealing with what is variously called the PIIGS (Portugal, Ireland, Italy, Greece, Spain) or, for old-timers, the olive oil belt. But PIIGS aside, even the AAA rated UK is looking at a downgrade if a strong fiscal plan is not put into place post-election.

Should corporate treasurers really care that countries are being downgraded? In a word, yes. Any country will be anxious to keep their ratings high to achieve favourable borrowing rates. In order to do that they will have to employ severe measures to rein in debt and deal with very large current account deficits. Tax increases are likely and although they may not directly impact corporates, they will impact demand.

Currency volatility is also likely to rear its head as concerns for these countries are still very real, despite any IMF bailout or EU support. The whole problem has raised niggling doubts on the euro again, and although it is unlikely that any country were to leave euro membership, companies should always be prepared for that eventuality. Two years ago, no corporate treasurer would have predicted that governments would let Lehman fail, but they did. What would be the consequences to business be if a country were to cede euro membership?

Most importantly, the real questions lie in the risk of a credit event further down the chain. Local banks and in turn, companies could be impacted by liquidity problems, changing interest rates, and even potential currency controls.

So check again your real exposure to all these countries. Look carefully at what your bank credit lines are and who your banks may be exposed to. And check yet again, the enforceability of contracts and retention of title of your goods within the contractual context. Who owns the produce of a Mediterranean vineyard or the photocopier you sent there? It’s not a long way from Reading or Lyon to Naples but there are lots of ports and ships along the way.