Cash & Liquidity Management
Published  6 MIN READ
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Greece Sneezes, Europe Catches Cold? Avoiding Contagion in Corporate Liquidity & Risk Management

by Mark Beard, Liquidity and  Investments Head, EMEA, and Hugo Parry-Wingfield, Liquidity and  Investments Market Manager, EMEA, Citi Global Transaction Services

The Greek government’s inability to repay part of its EUR300bn in May has resulted in a European crisis as the EU and IMF were compelled to construct a bailout package of EUR110bn over three years, the largest financial rescue package in history. The effects are likely to be both long-lasting and to extend far beyond Greece. Not only has Greece been forced to implement harsh austerity measures, seen a cut in credit rating and a sharp decline in investor confidence, but the country’s funding difficulties are proving contagious across other countries with similar funding deficits such as Italy, Spain, Portugal and Ireland. While it may be tempting to believe that companies without significant activities in these countries will be largely immune to the crisis, this is not the case. The degree of exposure to the so-called ‘PIIGS’ countries (Portugal, Ireland, Italy, Greece, Spain) amongst foreign banks, and the impact that the crisis has had on euro volatility, means that all companies need to review their risk, irrespective of whether they have direct activities in these countries.

Sovereign and counterparty risk

The emergence of sovereign risk

The 2008-9 crisis emphasised the importance of counterparty risk, and according to a PricewaterhouseCoopers study published in May 2010, 80% of treasurers are now actively engaged in managing counterparty risk, compared with fewer than 40% before the crisis. However, the current European crisis also illustrates the significance of sovereign risk. This is generally an indirect risk; after all, with some exceptions, most corporations do not have long-term exposures to foreign government debt. However, the downgrading of Greece’s credit rating to ‘junk’ status, an affliction that could also hit other vulnerable countries, will have an impact on the credit rating of counterparty banks domiciled in the relevant country. Furthermore, a number of banks have been reported as having significant exposure to PIIGS economies. While it is difficult for treasurers to determine which banks are most affected, it is important to review the company’s panel of banks to ensure that it is sufficiently diversified.