GREECE: WHAT SHOULD COMPANIES DO TO MINIMIZE THEIR EXPOSURE?

  • Should Grexit become a reality, it will obviously cause turmoil for any organization that has operations in Greece.
  • Should Greece be forced to exit the Eurozone, the new currency (let’s call it the New Drachma (ND), for the sake of argument) will likely see a significant and prolonged fall in value due an overall lack of confidence in the currency. Greek banks would likely have difficulty themselves making loans due to their own lack of liquidity, and the Central Bank will have difficulty maintaining its position as a backstop, as its own lack of creditworthiness would make the issuing of sovereign debt an expensive process.
  • The most critical (and obvious) process to put in place would be to minimize the cash balance in Greece by moving these Euros into an in-house bank or non-Greek company via an intercompany loan structure (of course,companies should already be doing this). Also, existing Euro hedges that incorporate Greek exposures should be reviewed and adjusted to exclude Greek components.
  • Once the New drachma (ND) is established, companies would certainly be wise to minimize their holdings in the new currency, which would likely be extremely volatile for months at the least. While an effective hedging programme would certainly help mitigate against this volatility, the New Drachma (ND) will be expensive immediately upon a potential exit. This coupled with illiquidity in the market will mean high spreads leading to expensive hedging costs. This would increase pressure on corporate treasury teams to accurately project cash flows, as the cost of missing on forecasts would be significant.
  • A Greek exit from the euro will herald an almost complete breakdown of business operations. Greek companies will struggle to repay euro denominated debt as the domestic currency will depreciate sharply. Exporters to the country should consider taking appropriate action early (e.g. tightening credit terms to ‘Cash in Advance’) to reduce payment risks.
  • Depending on their degree of risk aversion, investors and traders should consider withdrawing completely from the Greek market. If acceptable alternatives can be found, companies should switch to suppliers outside Greece in order to make their supply chains more resilient.
  • Given the close trade and financial links between all European countries, regardless of whether they are inside or outside the euro zone, customers should monitor the development in Greece and the whole euro zone vigilantly. However, a more fundamental issue for many international organizations would be whether doing business in Greece is worth the risk that it poses.

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