Small Biz Big View

Well who would have thought a few years ago terms like CDO’s, shadow banks and credit default swaps would become normal pub and dinner party conversations. Well now we are talking about PIGS, PIIGS and PIIGGS (depending on how nervous we are). If life was a movie then this would be Financial Crisis II: Just when you thought your 401k was safe.

What is all the fuss? Basically Portugal, Ireland, Greece and Spain (Italy and Great Britain for some) have too much debt in respect of their GDP. Greece being the biggest offender with more than 120% being predicted for their 2010 Debt:GDP ratio. With this resulting in their bonds being downgraded to junk status the IMF and EU has had to do a $140 billion plus bail-out. The concern being like Bear Stearns this may be the beginning of a wave.

How does this affect us? Well here our a few thoughts;

1. The traditional view of ensuring an economic recovery takes hold is that spending is provided by government to support the delicate economy, this may be done in conjunction with targeted cuts. Well Greece and most like the rest of the PIIGGS group are going to have to cut expenditure way beyond what would be considering healthy for supporting a transitioning economy. The PIIGGS group accounts for over 11% of Global GDP, with the inter-connectivity of the world what hurts over in europe hurts to some extent everywhere.
2. It comes back to the banking sector again. Banks have combined exposure of over a $1 trillion to Portugal, Ireland, Greece and Spain. Its not as though banks need encouragement currently to tighten their credit.
3. For US exporting businesses these are likely to be soft markets for some time.
4. But on the upside the Mediterranean is looking like a cheaper holiday destination by the day.

For small business this is worth keeping an eye on for the following reasons;

• If an exporter then you need to pay attention to debtor credit risk and currency risk more. The chances of a bad debt or fluctuation in exchange rates affecting your profit margin has just increased.
• If you do export and use tools such as credit insurance and / or factoring to aid you, you may want to talk to your providers. It is likely that ‘country risk’ in these markets are rising increasing the cost of credit insurance etc. Now would be a time to look at your pricing to see if it factors in the potential for connected cost rises.
• If you don’t export then the impact may still be felt. It is likely that the continuation of these type of crises will mean conservative approaches to credit / lending will be taken by banks for some years. This will mean more consideration of alternative financing sourcing will be a task for many business owners.

On a lighter note, here are some things (courtesy of Reuters)  the Greeks are looking to consider cutting because of the crisis, makes you wonder how it took so long;

• SPOILED SPINSTERS - Tens of thousands of unmarried or divorced daughters of civil servants collect their dead parents’ pensions, weighing on a social security system experts say will collapse in 15 years unless it is overhauled. mAbout 40,000 women benefit from the allowance at an annual cost of around €550-million, according to economic website capital.gr.
• CHRISTMAS PRESENTS – Some civil servants are paid extra for using a computer. Some get a bonus for speaking a foreign language and others for arriving at work on time, while many foresters get a bonus for working outdoors. All Greek public and private sector workers get 14 salaries a year, a structure aimed at keeping basic monthly salaries, and the pensions that are based on them, low. Half a month’s extra salary is paid at Easter and another half during the summer. The 14th salary is paid to civil servants at Christmas when the whole economy is geared to consuming it; taxis, restaurants and hairdressers are legally allowed to charge extra as “a Christmas present”
• FREE FLIGHTS – Unions foiled government attempts to sell debt-ridden Olympic Airways for decades, costing Greek taxpayers millions while employees enjoyed generous benefits – their family members could fly around the world for free. Olympic was sold in 2008, but only after the state lavishly compensated or re-hired about 4,600 employees. Many blocked Athens’ thoroughfares recently because they had not received all their severance money.
• TURKEY - Tensions with arch-rival Turkey have kept Greek military spending well above that of other EU members, reaching €14-billion, or 6 per cent of GDP, in 2007 and 2009. But nearly 80 per cent of Defence Ministry spending goes on administrative costs and payments of army staff. The government has said it will gradually reduce costs and spending on arms purchases will be contained to €1.8-billion (0.7 per cent of GDP) this year.

It would appear that one does not need to be wary of Greeks bearing gifts for some years to come.