07 February 2015

Greece - a Grexit, Eurogeddon, or a big Yawn?

Get ready for Grexit. Or not.

1. A Greek exit may not happen.
2. Greek exit from the Eurozone will not destroy the Euro.
3. A Grexit will not be unprecedented.
4. The "playbook" for exiting a currency union already exists.
5. If, finally, it does happen, it will be controlled, and fast.

But, just in case, you should be considering carefully the potential impact on your business.

So here we are, again

On Sunday the 25th of January the Greeks went to the polls in a snap election that saw Syriza (a left wing part that barely registered in the voting five years ago) win 39% percent of the vote, and with that the right to form a government. This they have done in a remarkably short period of time.

Of course, with Syriza's win and forming of a government, a Grexit is neither a certainty, nor is will it happen immediately. Negotiations with Brussels and more importantly Berlin (even though the Greeks have said they will not negotiate with the Germans) will take weeks, with plenty of bluff and noise from all quarters. We can expect negotiations to break down two or three times, and eventually a very rapid dissolution, probably over the course of a weekend.

Is there a plan?

From late 2011 through the middle of 2012 when a Grexit seemed about to happen, central bankers, national finance ministries across Europe held "Non-meetings" with "Non-Papers" in unlisted conference rooms, thus ensuring that any participant could put hand on heart and say they had been to no meetings, and seen no papers, and that all was well and calm. We suspect that "Non-meeting" invitations have "not been sent" again, and "Non-Papers" are being dusted off and reviewed to confirm their continued relevance.

We would like to say that much has changed since 2011/2012, but realistically the only significant change has been a continually increasing total national debt burdens across of the Eurozone. The only other change has been the continued burden of austerity on the Greek people and economy, with little hope for any realistic prospects for improvement in the near term.

Greek unemployment in the younger cohort has since grown to as high as 60%, total employment continues to fall, incomes continue to fall, and the prospects are that this trend will continue. The Greek people have now lived through years of pain, and see only years of pain in front of them.

The Playbook already exist

Currency dissolutions are not new, and while they can be messy, though they can be handled quickly and effectively. Playbooks already exist, which call for a series of steps to take place very quickly, usually when the markets and banks are closed. So expect to see a breaking news flash on a Saturday afternoon saying that the Greek government has passed a number of new laws, including creation of the New Drachma pegged one for one to the Euro.

Also expect in those laws there to be:

1. Closure of the banking system for a week (at least)
2. Closure of the markets for a week (at least)
3. A requirement to have all Euro notes stamped (or hole-punched) at bank (that will be open for this purpose only) within a week
4. For contracts to be re-denominated in New Drachmas
5. For all national debt in the form of bond to be convertible at a rate of 1 New Drachma = 1 Euro

This is just a quick list. Search the internet and you will find a number of playbooks in much greater detail.

The next two years

Expect the New Drachma to devalue and a rocket pace. Of course this will be difficult to see in practice, as the only purchasers of New Drachmas will be those that are actually required to provide payments in New Drachmas in the immediate term. Virtually all others, including those with payments due, will defer payments by a week or two (at least) to get some idea of where the New Drachma will settle.

Imports to Greece will stop. 

Exporters will attempt to demand Euros for their exports, and will be in for protracted discussions / arguments with their customers over the terms of trade, and the currency in force.

Of course, there will be cheap - really cheap - holidays to Greece. Europe, and the US, will flood into Greece and the Greek Islands in a tourism boom never before seen. Exports will become very competitive. Greek olives and wine will be very affordable, and will bring "hard currency" into the country (along with the tourism sector).

Of course, that does not alone make an economy, but it will be a start, and a good start with a greatly deflated New Drachma. 

But no one should be deceived, it will come at a terrible cost in terms of Greek standards of living. These will continue to drop for another couple of years. No more BMWs for Greece, at least not for a number of years. And then, one day, there will be a positive GDP number, followed by more positive numbers, and finally, a growing and productive Greece.

Do you have a plan?

Of course, if it does happen, there will be some serious consequences for businesses across Europe and the UK. The implications could be considerable, including at a minimum the re-pricing of products and services in new currencies at a fixed conversion rate established at exit (with the potential for  a rapid devaluation of the new currency), potential liquidity issues, and sudden exposures to currency transactions between corporate entities that currently share the same currency. We would not be surprised, should any country exit the Euro, to find currency controls introduced in an attempt to limit the flow of capital out of the country. 

Cyprus taught people that cash is king, and we should expect to see runs on banks in Greece long before any actual Grexit.

This will not be TEOTWAWKI (The End Of The World As We Know It), nor will it be a ‘Big Yawn’?  Nobody knows right now, but we think it is worth running your business through a review to assess the impact you might face.

We recommend companies:

  • Expect confusion and disruption for a period, but do not let this become all consuming, it shall pass
  • Treat a potential Grexit as a Business Continuity event, and run a BCP exercise to confirm gaps and applicability of any plans
  • Confirm that your CMT (Crisis Management Team) is appropraite for this type of crisis
  • Shift where possible liquid assets out of jurisdictions with daily sweeps, ensuring that your specific capital control risk is minimised
  • Identify the risk of write-downs in currency denominated assets, following devaluations
  • Test processes for re-denomination or re-pricing of products and services
  • Engage your legal counsel to ensure that contracts will survive an exit, or at least confirm te potential contractual impact of an exit, reviewing legal agreements to ensure continuity post any such change
  • Speak with counter-parties to plan smooth transitions to any new currency
  • Consider potential impacts of currency controls

Most importantly, consider your longer range options, including potentially shifting production of services capacity into Greece (or other exiting country) post the initial systemic shock. So, following a period of instability and currency fluctuation and probable significant devaluation, look to develop in a much cheaper labour market. Harvesting the upside is going to take time, planning and preparation.

And if nothing happens?

If there is no Grexit, you have lost nothing by dusting off your plans, running contingency exercises, reviewing contracts, and generally reconsidering your strategic risks. Greece will continue to deteriorate, and may actually become an attractive location for sourcing lower costs production or services.