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.

It is expected that around a 100bps rise in rates over the next year, possibly more, will continue thereafter. This does not seem too large but small businesses need to take note.

Many small businesses use credit cards in their mix of finance, they will already have seen those rise significantly since the Credit CARD Act of 2009 came into effect in February with credit card companies raising rates ahead of this while they could. Business owners have already seen increasing costs or lack of equity in accessing homes / properties and 30 year mortgages are predicted to rise 50bps in coming months. So this is not a surprise.

But cheap loans have been for some time part of the landscape. How many businesses have assumed the cost of cheap finance into their business model. On a prime + 6% loan a 1% rise may not seem a lot, but that is more than a 10% increase in financing costs with more to come. It would be timely to revisit assumptions in business models to see how the coming years could impact your business.

Yes there is a but, at least two of them, AIG and the car industry, which should take the shine of the above turning it into a projected overall loss of $117 bn. Still in the new world where we bandy around billions with impunity, thats much better than what we thought last year.

So with this extra money lieing around (or a smaller money pit depending on your life view) this must mean for small business the credit crunch is going to get easier. Well if it does, it does not look like it will be with Washington’s assistance. The US Chamber of Commerce announced it has just organized 200,000 letters being sent to politicians regarding the Hill’s response to the financial meltdown, the Consumer Financial Protection Agency. Yes, it would seem that politicians response to deal with a tumor in the head is to cut off a leg. Worth checking this legislation and new proposed agency out, it looks like it could lead to restricted ability for lenders to finance small business and those who finance small businesses.

For those in small businesses or involved in small business lending this is a space well worth watching and maybe adding to the Chambers’ 200,000 letters.

1. A team that is effective together
2. Accurate monthly financial reports
3. A sales culture that finds revenue
4. A sales prospect system
5. Customers who pay on time << I can’t overemphasize this one – you only make profit on what you collect not on billing.
6. Excellent service ensures repeat customers
7. Large gross margins
8. Low fixed costs
9. A sense of humor for when things go badly wrong << I can attest to this one

A great list, especially covering the need to still stay focused on the progressive side of the business, namely sales and service. Any more anyone would add?

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