How to survive volatility in the Eurozone
February 23, 2015
The possibility of a Greek exit from the eurozone, or a Grexit as it’s been dubbed, has looked increasingly likely in the last few weeks after the country voted in an anti-austerity party in recent elections.
The country is currently seeking to renegotiate the terms of its EU bailout. If it fails to reach an agreement, Greece will effectively default on its sovereign debt and be forced to leave the euro. There are concerns this could destabilise the eurozone if other countries, such as Portugal, Ireland, Cyprus and Spain, take the same position and look to renegotiate their own terms with creditors.
Whatever the outcome of the negotiations, if you’re a manufacturing and engineering business that trades with Greece, or you have operations in other unstable EU countries, you need to have plans in place to protect your interests.
While it’s impossible to fully insulate your business from all risks, here’s some practical steps for how you can look to mitigate any potential impacts.
Identify potential supply chain problems
If companies in your supply chain are exposed to problems in countries at risk of exiting the euro, this may cause you an issue further down the line. If this is the case you might need to consider finding new suppliers, or holding extra stock until you are able to determine your next move. Over dependency on one supplier is not good in any situation, but if that supplier is in a financially and politically unstable country this is major risk for your business.
Review contracts and consult your lawyers
Businesses in a country exiting the euro will be left in legal and financial limbo. Some of their contracts will be governed by local law, and could be converted into a new currency, but foreign law contracts, such as those with your business, would remain in euros. However, many of these could end up in legal disputes and you may not get paid at all. If you receive a payment in a local currency, it will probably be worth substantially less than receipt in euros due to currency devaluation. This is an issue you should look at closely with your legal advisers to assess any potential impacts.
Broaden your export horizons
In the same way financial and social unrest in a foreign jurisdiction can hit suppliers, it could be disastrous if the majority of your export customers are based there. Companies in countries exiting the euro will likely owe big debts in euros to foreign lenders leaving them facing bankruptcy. This could cause problems in the wider eurozone as businesses cut investment and consumers cut back their own spending. With talk of the eurozone potentially being pushed into recession, it’s sensible not to have all your eggs in one basket. Examine whether there are opportunities to open up new markets further afield, perhaps in emerging economies in the Far East and Americas.
Put a plan in place
As always, preparedness is the key to dealing with any potential crisis. Consider a range of potential impacts and put contingency plans in place for dealing with these threats. For example, prepare different cashflow forecasts that take into consideration the impact of losing a major export customer, or consider how you will fulfil orders if it takes longer to get paid by customers. This is all part of sound risk-management which is a good habit to get into anyway.
While the constant headlines about eurozone exits and sovereign debt defaults can be unsettling, it’s important to remember not to panic. Monitor the situation, but don’t let it affect your thinking more than it ought to, or force you into irrational decisions. As I’ve always said, the decisions you take need to be based on your own management information and conditions within your own sector, which may render the eurozone situation insignificant.
Ginni Cooper is a director and head of the at Chiks.