Published: April 01, 2013
With the majority of its revenues derived from sales in the Greek market, and most of its 11,000-strong workforce based in Greece, the Eurozone crisis and potential for Greece’s exit from the euro has been a discomfiting time for Greek food company Vivartia. Consequently, the company has had to make specific plans on how to manage a possible Greek exit, and the potential impact on financing, revenues and growth. Although the risk is now less severe than the period of ‘red alert’ in May/ June 2012, Vivartia remains vigilant and conscientious in its contingency plans.
At Vivartia, we have recognised for some time that effective risk management and contingency planning against a wide range of risks was critical to our business, particularly in the face of political and economic instability. The prospect of Greek government loan default and secession from the euro first hit the headlines in November 2011 and acted as a trigger to assess the group’s ability to deal with major market shocks. As part of this process, we identified some important areas in which our contingency plans were lacking, so treasury was tasked to develop a robust risk management and contingency plan, termed the ‘Business Continuation Project’.
Having obtained this mandate from senior management, we put together a task force in February 2012 to consider various crisis scenarios (including a potential Greek default and euro secession, or indeed any other event that could trigger a major economic and market impact) evaluate the risk factors and propose possible solutions.
Within two months, we had a crisis framework in place. A ‘red team’ comprising the CEO, CFO and representatives from HR, Legal, Treasury, Production, IT, Procurement and Logistics formed a senior management group that in the event of a crisis, would have access to specific control rooms that would act as group headquarters and take all managerial decisions. Regular meetings were scheduled across this team to assess and categorise emerging risks in terms of Vivartia’s degree of preparedness, and agree contingency plans.
By May 2012, the prospect of Greek default and euro secession was at its highest. Politicians, economists, bank leaders and commentators were increasingly contemplating a euro without Greece as a member, exacerbated by the inconclusive result during the first round of Greek elections. A range of outcomes were contemplated, including redenomination into a new currency, New Greek Drachma (NGD), exit from the euro without default, and the parallel use of two currencies. While planning for an unknown and unprecedented event inevitably results in speculation, what was clear was that any possible outcome would have extreme ramifications.
We initially approached the topic to discuss security of infrastructure, but this process triggered a variety of additional discussion topics, such as working capital and supply chain management. For example, credit insurers have imposed lower limits on companies exporting to Greece, so we have had to identify alternative sources of supply in some cases.[[[PAGE]]]
The most considerable risks to which we were subject related to liquidity, credit and denomination risk. For example:
We recognised that while it was clearly important to ensure the security of cash, wholesale transfer of cash from the Greek banks to accounts overseas would cause the banking system to collapse and create myriad further problems. This would conflict strongly with our basic business strategy as one of the major Greek conglomerates whose advertising emphasises the ’Greekness’ of our brands and continuing doing business in Greece. Consequently, we took a more balanced approach. We left some cash in subsidiaries outside Greece as opposed to centralising it. For the cash held centrally by treasury, we held all our cash balances with local banks in Greece and if there were indications (according to standards set by us) of a triggering event, then we would transfer 50% of our cash to our accounts in London. Such a level was never reached, therefore no cash was transferred abroad. This allowed us to balance our risk without taking significant actions that could have caused a negative market impact.
Redenomination to a new currency, such as NGD would bring a variety of challenges. For example, we would need a structure for cash pool header accounts outside of Greece, and potentially have to expand the range of currencies in which we collect cash. We also needed to review loan documentation, and contracts with customers, suppliers and financial institutions to assess the impact of redenomination. It would be likely that those under Greek law would be redenominated, while those under English law would not, leading to a variety of new risks.
We anticipated that working capital levels could reduce, and we would need to monitor customer credit profiles, payment history and credit limits more regularly. We might need to provide customer incentives to encourage earlier payment, freeing up credit limits and supporting our working capital position.
We prioritised our payment obligations, in case of a default, to be first to employees, then to suppliers and then to the government. In the event of cash limitations or restrictions, we would reinstate older payment methods such as the use of promissory notes, post-dated cheques or fax payment orders instead of electronic payments if necessary.
A major market event that resulted in one or more countries leaving the euro would create considerable uncertainty over existing financing contracts: for example, would contracts denominated in euro still be valid and enforceable or would these need to be redenominated? Debt facilities would be cancelled and credit would no longer be available. The risk of supplier delivery default, customer payment default and bank failure would be high, and interest rate inflation extremely volatile. While these risks are extremely difficult to address, particularly due to their systemic nature, we recognise that reducing our financing exposure to foreign banks is helpful, as existing debt with local banks is more likely to be redenominated.[[[PAGE]]]
Similarly, we revisited our FX hedging policies to assess how effective these would be in a secession crisis. Our group exposure to euro would no longer be hedged as these positions would remain in euro while our base currency would be redenominated to NGD. Euro derivatives might also be redenominated, with the resulting mismatch in assets and liabilities creating significant FX exposures; similarly, we would not be able to obtain hedge accounting treatment. We had no derivatives exposure to local banks, and we had to consider whether to unwind our derivatives with foreign banks: the cost of unwinding $67m in contracts would be the $2.7m mark-to-market value, compared with $2.7m multiplied by the devaluation rate in case of euro exit.
While financial risks were amongst our primary considerations when planning our Business Continuation Project, there was a wide range of other issues to consider, from everyday things that we just take for granted, some technical, such as electricity, internet and phone availability, data back-up and others practical such as physical access to our offices, and others more complex related to legal and reputational risk relating to unenforceability of contracts, offshore payments and potential penalties for regulatory breach. We also needed to consider both physical and financial supply chain issues and the potential for supplier or customer default, increased cost of raw materials, reduction in sales volume and trade disruption due to trade tariffs and exchange controls.
It is extremely important for every company that they do not take their suppliers or customers for granted, so it is vital to find a balance between managing working capital on one hand, without compromising the supply chain on the other. In our case this was even more difficult due to the large size of our group and the fact that most of our suppliers and clients are medium-sized enterprises that faced even more pressure. This is an issue not only relevant to Greece, but securing the supply chain should be a priority for all companies as part of their business continuity planning.
While companies in Greece are more likely to plan for potential euro exit than those headquartered in other European countries, the effects would ricochet across the region, so every company would need to be prepared. Furthermore, some of the issues with which we have been dealing are common to companies across the Eurozone, irrespective of a potential euro exit. For example, many foreign banks have exited from Greece, necessitating a review in banking relationships, but the same is also true in countries such as Italy. Basel III creates more challenges and complexities for bank lending than before the 2008-9 financial crisis, but again, this is a global issue. Managing counterparty risk and ensuring security of cash, whilst generating an above-inflation yield is a challenge for all corporate treasurers, and it has become very clear that there is no such thing as zero risk.
While the risk of Greece exiting the euro and introducing a new currency seems to be today as a far away event and less immediate than in May/ June 2012, it remains neither impossible nor highly improbable. If a major market event were to occur, such as a country’s exit from the euro, the impact could be immediate, although it would be unrealistic to think that full separation could happen overnight; in reality, a transition period of a few months would be more likely. However, treasurers in all countries and in all companies need to be prepared for market shocks of any type, of which a euro exit is just one.
At Vivartia, we continue to expend considerable effort to ensure that we are well-prepared for such an eventuality and sufficiently well-organised to steer the business through a transitional period, and minimise the most extreme impact on our suppliers, customers and employees. In reality, while this transition period would be difficult, we also recognise that there would ultimately be benefits. For example, devaluation would be good for Greek exports and tourism, which are areas highly correlated to Vivartia’s activities. Similarly, the reduction in wage costs, so long as this is accompanied by structural reforms and economic liberalisation, would enable the group to recover rapidly from the crisis.
Our Business Continuity Project has been a key initiative that helped us revisit the basic fundamentals of our business operations, but it is important not to focus only on this, and divert attention away from the business itself. Furthermore, it is a project like any other in that it is prompted by a variety of internal and external drivers, but then it needs to come to an end. As well as assessing our business risks, for example, and determining how best to manage these, we are also focused on growing and diversifying our revenues. We are in the final stages of launching a joint venture in Dubai and we are starting to export to the Middle East. Similarly, we are investigating a potential project in the United States. We are also seeking to expand our revenues in markets such as Russia, the Baltic countries, the Balkans and North Africa. There remain enormous opportunities both within and beyond Greece and we are keen to leverage Vivartia’s ongoing growth potential. The possibility of a crisis helps to refine business thinking, fully utilise the company’s assets and ensure every activity is both essential and as efficient as possible. This is a basis for a well-run business irrespective of the economic conditions. What is key is not to anticipate what could happen, but to be prepared for whatever happens.
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