Risk Management

Europe’s Debt Crisis: Apparently, It’s All Your Fault

Scorn is being heaped upon corporations for the crime of having some cash but showing little desire to do anything with it.
Andrew SawersApril 24, 2012

It started as a debt crisis — so obviously the solution was to get rid of the debt and start “living within our means.” But while companies have spent the past few years reciting the “cash is king” mantra, others now seem to want a revolution to topple the monetary monarch.

Opprobrium is being heaped upon the corporate sector for the crime of having some cash but showing little inclination to do anything with it. Corporates in the euro zone are said to be sitting on 2 trillion euros ($2.6 trillion), with another £750 billion (about 920 billion euros or $1.2 trillion) parked in U.K. corporate-treasury coffers. And plenty of people are unhappy about that.

The past few days have seen the corporate sector being attacked from several quarters. The Centre for European Reform, a highly respected think tank, recently said economic recovery in Europe “is being held back by the unprecedented weakness of business investment. . . . Until investment recovers, public finances will remain weak” — which is an interesting line of causation.

The U.K.-based ITEM Club, an independent forecasting group, recently claimed: “The corporate sector is accumulating cash at an astonishing and accelerating pace and acting as a major drag on the rest of the economy, keeping it close to stall speed. It is hard to see any strong revival in the economy until companies start to release this cash by spending more on acquisitions, investment or dividends.”

Royal Bank of Scotland group chief economist Andrew McLaughlin noted recently in a speech, “What the [U.K.] government is trying to say is, ‘We are relying on you [corporates] because you’ve got money and no one else has.’”

Such arguments are being propounded in the United States as well. But sometimes the U.S. terminology is a little more blunt: when Apple CFO Peter Oppenheimer said recently that “the current tax laws provide a considerable economic disincentive to U.S. companies that might otherwise repatriate the substantial amount of foreign cash they have,” his words were dismissed by one writer as “un-American.”

U.S. corporations have about $1.4 trillion (1.1 trillion euros) they can’t bring home without paying a punitive tax. More to the point, wherever in the world cash is currently sitting, it seems to be staying put and not being spent.

Thanks to the state of the financial system and quantitative easing, companies are earning very little on their huge cash piles. In many ways, they’d actually be a lot happier if they could invest it in something that had half a chance of making a decent return with no more than moderate risk. (Actually, they’d probably make a better return by betting the corporate stash on a horse, or perhaps one of the larger lottery prizes that have hit the news in the past few weeks.) As one CFO put it recently, the problem is that if you cut his treasury staff in half like a stick of rock candy, it would say “capital preservation” all the way through.

But if a lack of the requisite level of confidence is stopping corporates from investing, it’s not terribly clear why that’s the fault of the world’s corporates. The International Monetary Fund seemed to get things the right way round when it said in its recent World Economic Outlook that “[g]reater confidence and waning supply-side disruptions could also foster a more forceful rebound in global durables consumption and investment, helped by generally healthy corporate balance sheets and less costly capital.”

The IMF aside, expect more calls for companies to spend their cash — and to be criticized if they choose not to. The barn door has been left wide open, but the horse is going to be blamed for not bolting.

Andrew Sawers is editor of CFO European Briefing, a CFO online publication.