To see the future of the West, study New Zealand’s and Zimbabwe's crises

How long can the worlds' gluttony for debt continue? Seemingly forever, until it cannot. That was the experience of New Zealand in the 1970s and early 1980s when government subsidies ruled the economy until the country went broke. 

(Summary: New Zealand radically liberalised the economy, suffered through terrible social and economic pain, and emerged as a modern, vibrant and growing economy. Growing debt cannot last forever, and when a country hits the wall, it can go the way of New Zealand through the pain and recovery, or the way of Zimbabwe to more debt and devaluation, inflation and longer pain with not gain. Europe and the US have this in their future, we just cannot guess when, and we cannot guess which choice they will make.)

Through the first half of the twentieth century, New Zealand’s close ties to England ensured a steady flow of lamb and milk products from the former colony to “blighty”, at economic terms that benefited both the UK and New Zealand. This ensured that the New Zealand agrarian and rural economy continued to grow, benefiting the entire country. This also allowed for subsidies on imported goods, and on good assembled in New Zealand from imported parts (such as automobiles).

That could not and did not last forever. 

When the UK joined the European Common Market, they were required to abandon their Commonwealth trading relationships and imposed the common European trading relations, which included protectionism for European economies. New Zealand suffered. But so did Australia.

After Britain had joined the EEC Australian butter exports dropped by more than 90 percent; the Australian apple trade declined from 86,000 tonnes in 1975 to just 27,000 tonnes in 1990. The economic consequences of Britain's European ambitions for Australia were severe.

New Zealand was hit even harder, with pre-EM exports to the UK accounting for up to 55% of all exports (1958 – 1960), with 90% of milk and butter going to the UK, and over 95% of lamb (and 80% of mutton). This export market had grown New Zealand sheep populations into the 60+ million sheep, or 15 sheep for every Kiwi.

The short story is that with the loss of the UK markets, the New Zealand government and the National Party (the conservative and party of rural and agricultural New Zealand) attempted to hold up farming and rural incomes through subsidies. Up to 40% of the value of a sheep was in subsidies.

The only problem was that the National government (the conservative party) was running deficits like crazy to fund the range of subsidies, and the deficits were doing exactly what should be expected, devaluing the currency and increasing national debt servicing costs. Inflation was high, and a wage and price freeze did nothing to alleviate the problem, and international pressure was undermining the value of the currency.

And they continued to build that debt, and pay the subsidies, until one day the money ran out, or more realistically, until National and the Prime Minister were told by Treasury that the money was going to run out. The crisis had arrived.

So, having kicked the can down the road as long as they could, heaping subsidy on subsidy, hoping that it would all fall apart under the “next” guy’s administration, they ran out of money. It was their problem.

What to do?

Well, Robert Muldoon did what any responsible politician and Prime Minister should do – he got drunk and while drunk, called a snap election, knowing full well that National would lose, and the problem would be Labour’s.

Not surprisingly, National lost, and Labour won. A multi-year devaluation of the currency, ballooning sovereign debt payments, rising unemployment, and a disconnection from urban New Zealand meant it was time for a change.

The only small problem was that the day after Labour won, NZ Treasury went to the new (soon to be installed) government and said “Sorry to tell you this, but there is no money for your programme. In fact, you might not even be able to make the sovereign debt payment that is due soon.”

The can had been kicked as far and as long as possible.

So began years of economic restructuring in New Zealand, with years of associated pain up and down society. With no subsidies, large numbers of farms became financially unsustainable, with bankruptcies and forced sales. There were stories of farmers committing suicide as the auctioneers arrived at the properties.

Automobile assembly plants closed with the loss of jobs. Imports rocketed in price, and taxes increased to nose-bleed levels. I remember 66% income tax over a (fairly low) level.

Labour had the courage to throw away their platform and enact wide-ranging economic reforms. The pain was incredible. 75,000 manufacturing jobs and over 20,000 jobs in the public sector were lost in the five years from 1987 - 1992. With the pain of liberalising the economy, employment began to grow again through the 1990s, and New Zealand became one of the most open economies in the OECD (from a position of being the least open of 24 OECD economies in 1984).

The sale of State Owned Enterprises resulted in both massive pain, exportation of profits from the privatised industries (such as Telecom NZ), but also the modernisation of industries that remained in government hands as businesses (such as NZ Post), most of which became profitable businesses returning an ongoing dividend stream to the Crown (NZ Government).

Unlike New Zealand, when Zimbabwe hit the wall of national debt, they kept printing money and borrowing, resulting in devaluation and inflation, and ultimately a ruined economy (with a little help from property confiscations and destruction of businesses). 

  

Looking at the chart above, national debt exploded to almost 140% of GDP, dropped, then peaked again at 147% of GDP before dropping again. Why did it drop? Without even minimum fiscal discipline, international lenders simply would not buy Zimbabwean national debt at any price, and maturing debt had to be repaid – with printed money. The cycle repeated, and debt to GDP has stabilised around 80%. 

What stopped the international community? When “the inflation rate reached a peak of 89.7 sextillion (10^21) percent” in 2008.

New Zealand, by contrast, managed to keep inflation, while high for a period, relatively under control, and the economic reforms and fiscal discipline provided the comfort required to manage international expectations of the value of the currency. Inflation peaked before Muldoon was forced out (by his own policies) and was brought under control by the Lange government.

The national debt was also brought under control and paid down, and while spending and borrowing have increased, debt to GSP ratio remains well under 30%; healthy by international standards, and simply low by OECD and “First World” standards. 

  

Where to the “West”?

Current debt levels in Europe and the United States are simply unsustainable. And yet the borrowing continues, and balanced budgets (forget about paying down debt) so not exist in any of the major European countries or the US. This cannot continue forever, and the real question is equally simple:

Will the “West” chose the New Zealand route of hard choices and “short term” (3 – 5 years) pain, or the Zimbabwean choice of continued printing of money, devaluation, and hyperinflation?

The following graphic shows the results of the choice made by New Zealand, and the choice made by Zimbabwe. The grey is 1994, blue is 2004, and green is 2014. Zimbabwe’s choice effectively destroyed their economy and they have lost more than a decade. New Zealand’s choice has, after a difficult period in the 1980s and early 1990s, resulted in a consistent and solid growth.

 'C' = Household consumption expenditure, 'G' = General government final consumption expenditure, 'I' = Gross capital formation, 'X' = Exports of goods and services, 'M' = Imports of goods and services

http://zyaneconomics.appspot.com/#/finmodel/

What New Zealand in the 1970s and early 1980s also shows us is that politicians will continue with their profligacy until they cannot. They will keep kicking the can down the road until they cannot. They will keep hoping that their policies can continue until the “next guy” has to deal with it.

We know this because it already happened, in New Zealand and then, to a lesser extent, in 2008, resulting in TARP and bailouts of industries that lasted for years in the US and across Europe. 

Unfortunately, the ammunition to replicate that kind of stimulus probably no longer exists, and as with Zimbabwe, the first period of money printing did not teach politicians that this was a major danger, but seems to have taught them that they can do it again, and again. Now the Fed (in the US) and the ECB (in Europe) face the problem of QT - Quantitative Tightening, a process as fraught with risk as the original QE. Growing economies do not like restrictions on the money supply.

So what choices will the politicians make next time? Whatever the answer, I suspect we will see the results before long.

Will the US become the new Greece?

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This continues my series of closer looks at the seven areas I think can bring the 103 (now 105?) month economic expansion in the US to an end. The previous articles are here (overview), here (interest rates), and here (Inflation).
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When considering "Budget Deficits" we are naturally looking at Government deficits, and not the overall global debt load, a load that in and of itself should scare almost anyone. In addition, government deficits are not a US-only problem, at least not US government debt alone. Governments around the world have spent the past decade amassing an ever growing pile of national debt. This has been an easy way to stimulate economies, placate masses, and generally take advantage of the ability to make new, cheap money, or to access pools of "cheap" money.

What happens when the markets' perception turns, and easy government money is viewed as a liability that will push down economic growth? The answer is Greece, where crushing debt, and without its own flexible, sovereign currency, coupled with no external forgiveness resulted in the destruction of the economy, in a self-reinforcing cycle of negative government policies and economic collapse.

How long can budget deficits continue to grow before the markets decide that US sovereign debt is no longer "risk free", or that there are other options for making a return greater (and at equal or lower risk) than government debt? When will there be a tipping point of belief that deficits and national debt payments actually do matter, with the expectation of a drag on economic growth by allocation of national budgets to interest payments, greater probability of a recession, ultimately resulting is loss of market confidence (and reduced resilience should a recession occur)?

Couple the growth of visible budget deficits with the fiscal gap of promised future expenditure, and the outlook is even worse (though perhaps a subject for a future article).

There is a fine balance between Sovereign debt as a safe-haven, and the returns on sovereign debt being strong enough to shift money from other markets - especially if such strength is due to an increase return (the occasional spikes in Spanish and other European debt as a good example), and therefore the future drain on government coffers to pay the interest. Once those interest payments are perceived as being high enough to impact the economic viability of the rest of the economy, we could see a general loss of faith and an associated flight to any "safe" none-market assets.

It is fairly easy to see the reason for concern. Currently 6% of the Federal budget is required to make payments on the interest on the national debt. This is interest only, at an average rate of 2.32% for January 2018, which on a national (Federal) debt of $21 Trillion. This should represent an annualised total debt servings cost of $481 Billion, with no associated reductions in the outstanding debt. In fact, US Federal debt will continue to grow, and with that growth, an even growing servicing cost.

Currently the Fed 10-Year treasury rate is hovering around 2.8%. This is a .5% increase over the past six months effectively matching the increase in the Fed discount rate.

So what happens if the Fed does deliver 3 rate hikes in 2018 (2 more)? If they increase at the .25% rate, we should see a Fed rate in the 2.75% range from the current 2.25% rate.

All things being equal, we should then see the actual rate of interest paid by the US Government rise by .75% to around 3.1%. This excludes any sovereign debt risk premium should China and Japan stop purchasing US sovereign debt, or if there is another downgrade of US debt.

So if we then look at the total that would be payable on the $20.7 Trillion debt, (but for simplicity staying at the current level even though this debt will rise to closer to 21.5 Trillion by the end of the year). The increase to 3.1% across the $20.7 Trillion debt would result in an annualised cost of $642 Billion, an increase of almost $160 Billion.

Markets will look at that increase, and see a combination of increased government spending to fund that debt, and a compounding level of debt expenditure. If the current debt load on the US budget is at 6%, every increase squeezes the amount of government spending available for non-debt servicing expenditure.

This at a time when economists are predicting that the US will begin running almost perpetual $1 trillion deficits. The interest component of the Federal budget is going to rise quickly. The tipping point will come not when the debt can no longer be serviced, as that realistically is too far in the future to be meaningful in terms of market reactions (years, not months). But it will be the tipping point of lost confidence that such deficits can deliver economic growth. And that point is either very soon, or may already have passed.

In their 2009 book “This Time Is Different” Reinhart and Rogoff state that national debt above 90% of GDP results in falling GDP growth. This number certainly caught the headlines, and for a while was presented as a Great Truth. Of course, there were then numbers of papers downplaying that Truth, and highlighting potential errors in their calculations.

Yet their premise stood up to critics, in as much as the 90% threshold does seem to signal a future decline in GDP growth due to debt servicing headwinds at the national level.

The United States is now well past that level, with the current (Federal) debt load of $21 trillion, and State and Local debt loads adding another $3 trillion, for a combined government debt load of $24 trillion. This against a GDP of approximately $19.5 trillion, the US is already running at well over 105% at the Federal debt level, with an additional 15% debt at the State and Local level.

This entire discussion ignores, though it should not, the fiscal gap, and therefore excludes the future bow wave of additional, already promised expenditure. It was this bow wave of pensions expenditure and social support expenditure that ensured Greece would only dig deeper into debt, regardless of bail-outs. 

Both the US and the UK face such a systemic problem - over promise of future expenditure that is not already considered in existing budget and deficit projections. In addition, these future promised expenditures are not limited to the Federal government budgets, and we already are seeing pressure on state and local level pension and entitlement programs.

At some stage there will be a loss of confidence that the combined debt load is manageable, and that the predicted negative impact on growth either has begun or will be felt in the near term.

When that happens, the “US will be the new Greece”. That will not be a pretty picture.

Stop talking about Austerity as you have no idea what that means

It is disgusting to hear the British and French bleat on about the horrors of Austerity, as if they actually had any idea of what they are talking about.

My friend Andrew Brice in Wellington, New Zealand has produced some simple but effective graphs that showing GDP growth across the world from 1994 to 2014. Looking at the graphs for somewhere like Greece, and you quickly see what Austerity really means.He is graphing World Bank data since 1994 on a range of economic data points for all countries. While not setting out to show "Austerity", the graphical presentation does provide some interesting information. His site can be found here.

I've selected four countries for the chart below: France, Greece, Spain and the United Kingdom.

Notice how the GDP points expand fairly uniformly for France and the UK. Each point on the spider diagram, for the three reference years, shows growth, indicating and reasonably balanced growing of the various key elements of GDP.

Not Greece, in which that growth virtually implodes for 4 of the five factors between 2004 and 2014. Only 'X' - Exports, continues to grow, and that at a slower rate than the previous decade. Household consumption, General government, Gross capital formation and Imports all collapsed. Gross Capital Formation is less than it was in 1994.

Spain looks only marginally better.

Yet for the UK and France, all five indicators continue to expand through the crisis and into the second decade of this century.

GDP growth graphs for http://zyaneconomics.appspot.com/#/finmodel/

In the UK and France, governments have attempted to bring spending under control, and in large measure have failed miserably.

Oxfam's report on Austerity in the UK is a wonderful example of not understanding reality. "Since 2010, austerity – primarily in the form of deep spending cuts with comparatively small increases in tax – has been the UK government’s dominant fiscal policy, with far fewer measures to stimulate the economy. The stated aim of austerity was to reduce the deficit in the UK to give confidence to the markets and therefore deliver growth to the economy. While austerity measures have had some impact on reducing the deficit, they have delivered little growth, and public debt has risen from 56.6 per cent of GDP in July 2009 to 90 per cent of GDP (£1.39 trillion) in 2013."

It is almost as if "Austerity" actually only means "we cannot have everything that we want". Economies just balance what is required to keep the lights on, tax rates that do not disincentive investment, balanced against social programmes that effectively avoid rioting and revolution. In which case Austerity has become the a rejection of a "give me mine" mentality.

Yet contrast that with 10 things the Greeks cannot do (from July 2015 at the height of the crisis). If you want to see real austerity, look at Greece. Could the UK or French governments survive cutting pensions by greater than 50%. Or unemployment higher than 25% (and 50% for under 26 year olds)? What would Oxfam say to 45% of pensioners living below the poverty level, and food consumption dropping by almost 30%?

United Kingdom

Looking at the GPD growth chart for the UK it is almost easy to see the source of discontent. Yet it needs to be remembered that the economy has continued to grow (once over the Global Financial Crisis - GFC - induced great recession) and is now larger then it was in 2008.

UK GDP Growth, 1994 - 2014
Note the continued expansion of all five elements

 
Personal income has (as of 2015) grown to exceed personal income, inflation adjusted, pre-GFC. It took a long to time recover, and certainly the average POME (Prisoner of Mother England, or is that short for Pomme de Terre?) has had a rough ride. But pensions have continued to be paid, the health service has continued to treat patients, and to expand the range of coverage and care provided. The economic effectiveness of that service may be up to question, but that is a factor of quality of provision, not total expenditure in GDP terms.

France

France is not significantly different, with growth across all five data points through the years. Yet France (and the French) are mired in a psychological paradigm that says that they are suffering, oh so horribly, from massive austerity. Each new president is elected on a promise of change, or in the case of Sarkozy, "rupture" with the past. Yet for twenty years, each new president has been met by strikes at the mere hint of market reform legislation, strikes lasting weeks and covering the entire country sometimes. Each president has caved. Even the French military has a better (much) record of refusing to surrender.

France GDP Growth, 1994 - 2014
Not bad for coming through the GFC

Yet looking at the image above, you would think that France has had fairly steady growth, especially when you consider that between 2004 and 2014 there was the GFC knocking their economy into deep recession, and their being in a Europe that has seen lackluster growth at best over the past half decade.

Greece

Turning to Greece, we see a very different graph, in which the only growth has been in exports. The years between 1994 and 2004 showed good growth, in line with the UK and France. Yet with the GFC and their debt crisis, loss of sovereignty and destruction of the social welfare system, the years 2004 and 2014 we can see what austerity really means.

Greek GDP Growth, 1994 - 2014

The collapse in Greek GDP growth has been across the board, with only exports growing past 2004 levels, and that only marginally. The other four indicators have all collapsed, with Gross capital formation falling to below 1994 levels.

Compare that to the GDP performance of Greece's four land-border neighbours; Albania, Bulgaria, Macedonia (well, okay, the Former Yugoslav Republic of Macedoia to give it the official name) and Turkey. All four have experienced consistent and continual GDP growth.

 These countries have come through revolutions, civil wars and military dictatorships, but have then spent 20 years growing. And growing. Meanwhile their Eurozone neighbour has suffered at the hands of creditors and "friendly" governments. "But it's all the Greeks fault, they are perfidious and profligate, and they borrowed the money". All true (well, except the perfidious). Yet looking at the rouges gallery of neighbours, can we really say that the Greeks are any worse?

Greek is in austerity. And this is real austerity; the kind that results from the markets losing faith, and the bankers engaging in as much Moral Hazard as the Greek government itself. Yet when the bill came due, the banks (as effectively representatives of other governments or the ECB and IMF) decided that only one side of the perfidious (and here I mean it) cabal would pay.

Summary

The United Kingdom and France should, to use the English colloquialism, "shut their pie-holes". They are not in austerity, and do not actually know that it means. They are living *slightly* above above their means, but continuing to borrow like drunken sailors.

True Austerity is Greece, and this is in their futures when the markets say "enough". Then we will see real austerity in those two countries, as government debt becomes unavoidable and unsustainable. Greece saw:

– 25%: Fall of gross domestic product
– 28%: Reduction in public sector employees
– 28.5%: Drop in food consumption
– 61%: Drop in average pension (833 euro)
– 45%: Number of pensioners living below the poverty line
– 26%: unemployment (50% at ages under 25)

This is the real face of austerity, and something the UK and France should really fear. Today's weak attempts to controls spending are only a start, and a poor one at that.

Risk Managers in Uncertain times

Over the past few weeks I have been thinking about the world as we move into 2016. Most of that thinking is not about daisies and pixey dust, but about the changes over the past few years, many of which seem to be leading either to crisis, trouble, or the slow boiling of the frogs. Personally I'm hoping for a few crises that will, although probably fairly terrible at the time, actually bring about some fundamental changes that will create real change and improvement, at least in the medium term.


What's a Risk Manager to do? Below I contrast "the Usual Suspects" that we are (or should be) watching every day as Risk Managers, and then "the Big Stuff" and implications for Risk Managers now.

We are going to see the world change through 2016 and 2017, potentially dramatically - and not necessarily positive change. That is my view. Of course, I could be very wrong, and we could see a world that "muddles along". At heart are our individual answers to the question "how do we best help our businesses manage the coming risk world?"

I am not confident, but that is my view.

So let me suggest, based on my view, the potential impacts on Risk Managers for the coming couple of years. Two years is a very short time in a world of potential regulatory change and economic cycles. Anything shorter than two years would fail to consider the potential impact of major business and economic cycles such as the current commodity depression, the US (and China) manufacturing recession, and the very serious systemic debt and migrant issues that Europe may or may not manage through the coming year.

The Usual Suspects:

Of course the world of Risk will be both immediate and longer term, local or specific as well as systemic and international. We'll start by reminding ourselves of some basic risks that have no direct link to the wider situation.

1. Cyber threats. This category of risk continues to be on the rise, and can be an existential threat to companies from a data-loss or damage perspective, while civil and regulatory sanctions continue to increase. This is a threat that has been growing, and increased access and growth in skill sets will increase the number of hackers and the breadth of tools and techniques they will use. Companies will be taken down by Cyber attacks. Companies can prepare for and attempt to limit the impact of Cyber attacks, but can do little to reduce the likelihood of such attacks (as exogenous threat likelihood is not subject to risk reduction activities on the part of the company). Reducing the impact requires planning, careful review of the potential threat (what are the data-crown jewels, and how are these protected?) and remediation where infrastructure is not adequately protected. Reputation damage limitation if an element of planned responses, and finally, consideration should be given to Cyber Insurance.

2. Fraud, Bribery and Corruption. If the economy continues to grow and unemployment continues to fall, there will be little impact on the likelihood of Fraud, internal or external, though of course these risks remain. However, if we see a degradation in economic conditions, this will probably lead to an increase in fraudulent activity, starting with external fraud and followed by an uptick in potential internal fraud. Of course, some fraud, bribery or corruption is simply due to greedy people, and has no linkage to economics. Exercise skepticism.

3. Solvency. For the insurance industry in Europe, this is the year Solvency II fully comes into effect, and insurers across the continent are getting their reporting houses in order. Yet the risk is not simply that companies may or may not be solvent, it is a question of the quality of internal processes supporting production and maintenance of the ORSA (Own Risk and Solvency Assessment). As risk managers we can learn from companies that have been through the process, such as the importance of the quality of documentation of the process, effectiveness of systems of control (nothing new there), and the ability to demonstrate how the ORSA contributes directly to business decision-making.

4. All Your Risks. Every risk on your Risk Register will remain as critical (or otherwise) through 2016 and 2017 as they are today. Some will increase in potential impact, many will eventuate in actual issues or problems. These risks will become incidents, and you will manage them through to resolution - or not. There will also be a host of issues and incidents that will result in you reviewing the Risk Register, and probably adding risks to the Register.

You can never go wrong keeping your eyes on the day-to-day risks, and ensuring that the business either has effective controls in place, or is building a control environment that can actually be monitored to indicate areas of existing or emerging risk.

Now for the Big Stuff:

A global correction may be underway, with no sign of a low for some time to come. Certainly there may be up days or weeks, but it appears that there is more likelihood of a longer down trend for the coming months. The questions now are "how far, how fast, how long, and how much stimulus"? There are no serious commentators calling for a near-term renewal of a global bull market. The IMF recently downgraded their expectations for global growth from 3.8 (July 2015 forecast) to 3.4 (January 20016) with developed economy growth downgraded from 2.4 to 2.1, the same level as 2015.

The US markets are down 15% from their highs (DJIA - 15,900 from 18,200 in 2015), and China is at 2014 levels (Shanghai is at 2750 from a high of 5100 in 2015). [as at 26 January 2016]  Where will they go?

Total global debt has continued to rise all through the supposed deleveraging after the Global Financial Crisis (GFC), increasing by $(US)57 Trillion since 2007 to almost 200 $(US) Trillion. The majority of this increase has been government debt, yet corporate debt (and personal debt) has also risen through that period. This also cannot continue without impact.

At the same time in developed countries we see a close to stagnation in growth in real incomes. Personal income in the UK has finally (May 2015) caught up with where it was before the GFC, and the strong employment growth has been reflected in falling unemployment and increased wages. The introduction of a "living wage" will also increase personal incomes (although some worry that imposed minimum wages reduce employment growth). All good news, but will the UK continue to grow as the rest of the world slows down, if the UK votes to leave the EU, or if markets continue to fall (the FTSE is now at 5800 from just over 7000 in 2015, and continues to fall). [as at 26 January 2016]

In the US, employment growth appears to be strong, at the same time that the labor participation rate continues to fall. The unemployment rate is around 5%, a level that is close enough to full employment that we should be seeing serious upward pressure on wages. Yet the continued fall in labor participation indicates that there remains a (growing) untapped pool of labor. The picture remains murky.

Recommendations for Risk Managers

The current economic situation is, in my view, as scary as it has been since the GFC. Fear has an impact on risk and companies' and individuals' perceptions of appropriate levels of acceptable risk. How do we translate this into meaningful decision-making by companies, and counsel from Risk Managers?

1. Risk Appetite. There should be no better time than now to review (or write) the Risk Appetite for the business. Risk Appetite will provide a construct for decision-making by management that is in line with the level of risk that is acceptable to the Board and through them the shareholders. Risk Appetite is not a single statement, but needs to be broken into key business activities or processes, and potentially high level business units / companies. When reviewing (or writing) the Risk Appetite, speak directly with the directors and in private companies, with the key shareholders.

2. Identify your Key Risk Indicators (KRIs). These are the indicators whose movement provides insight into the potential increase or decrease in the likelihood of the materialization of any particular risk. For example, this may include items such as average days receivables (expanding may indicate deteriorating customer business conditions), or less obvious indicators such as unplanned staff turnover rates (with falling unplanned turnover being a surrogate for a degrading jobs market for your employees).

3. Stress tests (EKRIs). Build the models, and then test them beyond what your CFO/Finance Director thinks are possible. Build in extremes such as cost of fuel for distribution networks, cost of capital, internal project huddle rates. Stress until the model breaks, then look at why the model broke. That will give you a strong indication of the most important factors to be watching on a daily basis - your External Key Risk Indicators (EKRIs). I know of a very large manufacturing company that failed to hedge fuel costs, resulting in significant business costs when oil did spike. While that may not be the case today, if cheap oil turns out to be transitory, will cost-reduction based profits evaporate?

4. Outside-In. Having built or reviewed the Risk Register, the KRIs and the EKRIs, how are the risks identified reflected in the Risk Registers and risk reporting? Is the current risk environment too inward looking, focusing on the specific risks, controls, actions and people that are within the organization and therefore "observable" to management? How strong is the monitoring of external factors, and how can this be built into risk reporting?

5. Regulation Watch. Times of crisis almost always breed new regulation, or changes to existing regulation. I'm not going to opine on the benefits or otherwise of regulation, but as Risk Managers we must ensure that our organizations has fully considered the potential impact of such changes. When SOx (Sarbanes Oxley) and the section 404 requirements were passed, who predicted $170/hour for bulk standard Internal Auditors spending thousands of hours documenting mundane financial reporting processes and identifying controls - followed then by the massive increases in compliance costs to test those controls? Something like this is in our collective futures.

These are a few of the considerations for Risk Managers today. Are these different from what Risk Managers should be doing or concerned with in good times or steady global growth? No. And that is the rub, and the message; times like today provide strong reminders of what we should be doing every day. The increased fear do however provide us with the energy to get this done.