The financial climate in Greece has not been pretty for some time, and the recent elections have seemed to just increase the ugliness. Here’s how I see Greece’s four alternatives to handle this mess:
1. Exit from the Euro
Since the recent election, this has been the widely expected answer, and I also believe that based on the mounting pressure on the banking system, this is the likely scenario. The longer Greece waits to do this, the greater the potential impact on Greece and the global economy. We are already seeing a run on banks and this pressure will only continue to mount.
2. Repudiation of the Bailout
Greece can keep the euro if they repudiate the bailout. This seems highly unlikely, though. If Greece did go this route, it would be a political timebomb, as this is asking Greece to do something that would deeply strain its relationship with the rest of Europe.
3. Renegotiating of the Austerity Package
France and the Netherlands are moving away from austerity, and this is likely to get less support. The only reason this is possible is if Germany becomes very scared and would consider Greece pulling out of the euro the last final nail in the euro coffin.
4. Repent and Stick to the Bailout
This is very unpopular, but from a purely economic standpoint, this is probably the way Greece should go. Telling banks that they don’t want more money is not a smart move when it is needed. However, emotions are high when it comes to taking more money, and that is definitely a strong factor. The original 2010 bailout already had to be augmented by another €138 billion (possibly the value of Facebook!!) this year.
So, an exit is the likeliest of scenarios. If Greece goes this route, they must move swiftly to reinstate the drachma. This means quickly allowing the market to re-price Greek goods and services in order to compete in the international marketplace and accelerate their economy.
So, why should corporate treasurers care about this? Because the euro drama in Greece impacts FX volatility, and the euro instability that is bubbling up in other euro member countries will impact financial results as well. Treasurers need to be prepared by understanding individual euro member country exposures within Europe and related to all currencies. We all should remind ourselves of what Pericles said: “The key is not to predict the future, but to prepare for it.”
— Wolfgang Koester
Wolfgang Koester is the CEO of FiREapps, the leading provider of foreign currency exposure management software, based in Scottsdale, AZ. He has managed risk for Fortune 100 companies as well as governments, including G-10s, since 1986. To learn more about FiREapps, go to www.fireapps.com.