Greece Debt Crisis: Scenario Planning For Future Global Impacts

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Includes: BAC, C, JPM, VOD
by: Bina ul Haq

Summary

Scenario planning is key for companies to prepare for potential shifts in the global business picture from the ongoing Greek crises.

Global financial firms such as Citigroup, Bank of America, and JPMorgan Chase and Company have already begun to reduce their exposure.

Companies with direct operations in Greece, such as Vodafone will need to consider these potential outcomes as the situation continues to evolve.

What is Risk? Risk = Probability x Impact or the total risk a business faces = Business Risk or "the possibility that human actions or events lead to consequences that have an impact on what humans value."

In this article, I will be providing a background to Greece's smouldering crises, the current global financial landscape and scenario planning based on the risk and uncertainties. ''Scenario planning is aimed at foresight in contexts of accelerated change, greater complexity and genuine uncertainty." (Pierre Wack, Harvard Business Review)

I would like us to think about the Greek situation. Was it 'predictable' based on reliable and relevant experience, known judgement patterns, and governed by 'risk'? Was it 'uncertain' and 'unpredictable' or 'wild', or was it 'feral', where human agency can make things worse, when we assume situations to be of the first type (tame) and respond with 'risk management' actions, which lead to something becoming 'undomesticated'.

If we were aware of these factors, took timely preventive measures and adopted appropriate frameworks then why is the matter still unresolved; where and what went wrong?

Companies with an exposure to these recurring and ongoing crises in Greece should be considering the impact of potential scenarios as the drama in Greece plays out. Among UK based companies with an exposure are Vodafone (NASDAQ:VOD), which purchased Greek telco Hellas Online last year. Major US and European banks have already begun to reduce their exposure with companies such as Citigroup (NYSE:C), Bank of America (NYSE:BAC) and JPMorgan Chase & Co. (NYSE:JPM) reducing theirs by almost half over the last three years, according to the Wall Street Journal.

In terms of the background, the initial sign of concern in Greece was reflected when George Papandreou took office as Prime Minister in October 2009 and established that the government had been understating its public debts for years. In a matter of two months, Fitch downgraded Greece's debt to BBB+, the lowest credit rating in Europe. As an immediate impact, the financial traders jumbled to work out the implications of a European Monetary Union that included members with economies as diverse as those of Greece and Germany.

In authenticity, the EMU was a very thin cover over deep economic, political and cultural categories. As Greece's economy has experienced a severe recession since the debt crisis began in 2010, the economy trembled to just over a quarter smaller at present than it was before the crisis. There had been financial aid provided to Greece by two international bailout programmes in 2010 and 2012, these provided a total of around €240 billion (£171 billion). These loans were provided on strict conditions structured to decrease the budget deficit and promote progress towards economic competitiveness. In contradiction to this background of ongoing severe economic and social issues, the radical left-wing Syriza party, which promised to reject the austerity measures that were part of these conditions, won the January 2015 election defeating the centre-right New Democracy party.

Greek banks are being kept on support through Emergency Liquidity Assistance (ELA) from European Central Bank funding. This is needed to replace a large outflow of deposits, as official data depicts private sector deposits falling by nearly 20%. Reports suggest outflows have continued since then and further accelerated in the week of 15-19 June as the end of the bailout programme approached. Given the situation, if emergency funding was switched off, if no agreement is reached or if Greece fails to pay the IMF on 30 June, Greece would likely need to impose capital controls to limit money leaving Greek banks. However, customers in Greece have been queuing up to collect money outside the banks and the ATMs are emptying, causing a bank run crisis.

With the Greek government short of money, there will be huge consequences from Greece defaulting, including economic and commercial impacts on state benefits, unpaid salaries, government fiscal deficits to run the country effectively and efficiently; most vital suppliers could not be paid with euros and instead Greece would issue IOUs (a form of parallel currency). This could result in a step towards Greece being expected to leave the Eurozone and introducing a new currency. As repercussions of a Greek exit from the Eurozone spread, Greece's economy may suffer a harsh recession and other Eurozone countries potentially will be exposed to the prospect of multi-billion euro losses based on Greek debt they hold in their books. It is vital to mention that the impact that the UK may endure will be through financial markets as reference to the "Grexit's" impact on the wider Eurozone economy.

Overall, the current financial environment requires attention based on the fact that after years of financial crises, the global banking sector is still struggling, although regulators around the world have set out to achieve essential transformations to strengthen the financial system. This includes several forums, such as the G20, the US's Financial Stability Oversight Council, UK's Financial Policy Committee and the European Systemic Risk Board. They all have keenly emphasized the review and alignment of large and cross border bank structures and business models.

At the same time that the Basel Committee set out new liquidity standards, the Financial Stability Board is working on suggestions for prudential supervision, and simultaneously in the United States, the Fed is working on proposals for greater supervision of large banks, with the details of the Volcker Rule discussed in great length.

Based on the above financial crises conditions, I do see the upcoming uncertainties and scenarios arising in the Financial sector.

  1. Financial crises have occurred in the past decade and left the financial market in a disaster, which has directly impacted the economy. Will these so-called black swan events be common in the future? This has been affecting mainly the developed world but there is no escape from it in the under developed markets in the future, if the trend follows in the same way.
  2. Regulatory environment has a leading role to play in the financial crisis. Numerous regulatory changes have been implemented or proposed, but the regulatory future remains unclear based on the current complications. In the future, it will be a world in which regulations are much more onerous. Basel III and the Capital Requirements process will remain in progress, while various jurisdictions are likely to impose different requirements, making the ground very difficult for banks that operate globally. Governance challenges are constantly changing and markets are shaken by volatility. Banks will streamline their product and service lines to meet new regulatory requirements and a vastly changed market and innovation environment.
  3. Lenders of last resort like central banks have stepped into shore up the financial system in several recent crises. Looking at the current situation, I assume this source of back-up funding will no longer be available in the future as there will be an increase in the number of institutions in a critical situation.
  4. Debt situation, such as growing government debt, is a serious issue in the United States and in Europe, where in many cases governments have shouldered private sector - including bank liabilities. The current situation will dramatically worsen and there will continue to be a need for coalitions to handle them.
  5. Economic shift in terms of the BRICs - Brazil, Russia, India, China, South Africa, and other growth markets are likely to account for a larger share of the world's economic activity, providing opportunities and challenges for banking. A shift in economic power will make this factor more significant in determining banks' prospects over the next decade.
  6. Globalization trend is advancing and companies now compete in a global market. While a global strategy can boost revenues, it can also put pressure on earnings and draw criticism from locals concerned about lost jobs and unfair competition. It will be a world with an ever-growing degree of globalization and market integration. The trend will start with pockets of protectionism and later turn towards protectionism around the world.
  7. Securitization market will depend on the time lines of newly designed regulations to encourage more standardization of these and other asset-backed securities while driving trading from OTC - Over the Counter markets to exchanges, without making the securitization business less profitable with equilibrium.
  8. Retirement environment is a fatal issue. Populations are aging in many developed countries, placing stress on government programs such as Social Security and Medical, alongside raising demand for retirement-oriented products and services. It is a blur how the government-funded services for senior citizens will be financially stretched, lest the systems collapse. There will continue to be reforms to address these issues.
  9. Degrees of competition faced by the banks like new competitors, including institutions in emerging markets and nonbank companies such as utilities, retailers, and mobile services providers. Such competition will be significant and the flow of competition from non-traditional banking providers around the world will impact market share and profitability. Enhanced expertise and product specialisation may assist the situation.
  10. Customer empowerment stance in the financial debt crises, institutions will embrace customer involvement, this may help tackle the bank run actions, which deteriorate the deposits position of the banks and leave them handicapped. I think the banks may need to improve transparency, and involve customers in the reviews and critiques of products and services, which may lessen consumers' adversarial attitude toward financial providers.
  11. Credit protection rights are of a great value during the financial crisis, as government bailouts have tended to protect creditors' rights, often protecting owners of bonds and debt-related securities, while leaving equity holders with deep losses. There can be an approach that in the future, creditors should share such losses as they share profit and reap the benefits. However, this situation weakens creditors' rights, so the focus needs to be on making the rights stronger, in general.
  12. Repositioning Risk Management will play an instrumental role, bearing in mind that the regulators, shareholders, lawmakers, customers, and the public had similar reactions to the financial crisis. New regulations and pressure from these stakeholders make it clear that risk management will be carried out as a top priority.
  13. Technology advances will allow the coverage of the major data reporting, flows, disasters and performance.
  14. Mergers, acquisitions and partnerships will increase, as they will be considered a quick fix for survival.

We must take the Greece case as a trendsetter in terms, to deal with other countries' upcoming issues, and certainly not to be surprised, as there will be drastic consequences from the Greek crises.

In this transformed landscape, it will have a global impact on businesses, therefore the banks must focus on two dynamic points: What lessons can banks and financial policy makers take from these challenging times, and how do they apply these lessons to drive future growth?

As an investor, look for banks and other institutions that are moving into emerging markets. These moves will call for a significant investment in these markets, a mix of retail and wholesale products as well as services tailored to each country.

Because it can take many years to develop business relationships, establish brands, and create relationships with regulators in emerging markets, banks and businesses should establish beachheads and launch joint ventures with domestic firms as soon as possible.

How do banks and financial policy makers rebuild trust? This, I leave for everyone to ponder and take a role in as a solution provider of this distorted situation.

We have to very carefully articulate the answers to these, as they will fluctuate greatly, depending upon the imminent macroeconomic and regulatory environments arising from the discussed key factors.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.