Risk Management

Greek Tragedy Unfolds

Greece's sovereign-debt crisis is spilling over to other countries and markets. What does it mean for CFOs?
Kate O'SullivanMay 7, 2010

With the euro falling to a 14-month low and rioting in Greece claiming three lives this week, the Greek debt crisis seems far from over. Last week’s announcement of a €110 billion rescue package, nearly three times the size of the original bailout proposal, did little to calm fears about Greece’s fiscal health. Skittish investors have been fleeing to safety, driving the U.S. stock market down dramatically on Thursday.

Meanwhile, anxiety about the economic condition of Mediterranean neighbors Spain and Portugal is growing; last week, Standard and Poor’s downgraded the debt of both countries. “As the crisis has evolved, it’s turned into significantly more than a Greek crisis,” says Richard Marston, a professor of finance and economics and director of the Weiss Center for International Financial Research at the Wharton School. “The natural question is, if one country has problems, what other countries are at risk?”

At 13.6% of gross domestic product, according to Eurostat, the Greek budget deficit far exceeds the European Union’s official limit of 3%. Spain’s deficit is close behind, at 11.2% of GDP. Ireland’s deficit is even bigger (14.3% of GDP), but unlike Greece, Ireland has quickly adjusted its budget and passed an aggressive cost-cutting package, which is expected to reduce its deficit by next year.

The lengthy process of developing the joint EU-International Monetary Fund rescue package has deepened anxiety about the region. “Because the decision making was drawn out, and understandably so, the crisis has worsened,” says Marston. “If the Europeans had acted decisively at the very beginning, they could have snuffed it out.” Finding a solution acceptable to all 16 eurozone nations has proved no easy task, however, particularly as politicians in Germany, the region’s strongest economy, face an upcoming election and may find a bailout of Greece and other eurozone economies a tough sell to voters.

Mauro Guillen, a professor of international management at Wharton, says there is no official playbook for the sovereign debt crisis facing the euro nations. “When the euro was created 10 years ago, there were no provisions for situations like this,” he says. “The countries didn’t agree as to what they would do if something like this happened. In hindsight, that seems like a failure, but now it’s too late.”

To U.S. finance chiefs, exposure to the European markets suddenly looks much riskier than it did even a few months ago. “CFOs have to worry about whether they have more euro downside risk than they thought,” says Marston. “It’s already fallen significantly from $1.50 as late as December 2009, and further downside can’t be ruled out.” Receivables in at-risk eurozone nations also merit a closer look, he adds.

Dealmaking in Europe takes on a new level of risk, too, which finance executives will have to price in as they consider acquisitions in the region. And, of course, as the euro weakens against the dollar, U.S. exports will get more expensive in Europe, which could affect sales at U.S. companies.

John Leahy, finance chief at iRobot, a publicly traded robotics company that rapidly expanded its European presence in the past year, says his business is not yet feeling any impact from the crisis, but he is monitoring the situation closely. “Our network of distributors will surely be pressured if the euro is depressed for a significant period of time, given that they pay U.S. dollars for the product, but bill their customers in euros,” he says.

Greek lawmakers voted on Thursday to accept the bailout as well as an unpopular package of budget changes involving reductions in wages for civil servants, pension cuts, and tax hikes. On Friday Germany’s parliament passed a bill supporting the bailout, and leaders from the eurozone countries were slated to convene in Brussels later in the day to approve the final loan package.