Topic "European Debt and Global Currency Chaos: Understanding and Managing the Risk"
The growing foreign debt problems in Europe, combined with a variety of dramatic global economic and political upheavals, has led to unprecedented global currency volatility and growing economic uncertainty. As economists contemplate the prospect of a break-up of the euro, an unpegging of the Chinese renminbi to the U.S. dollar, and the possibility of a second global economic crisis (centered this time in Europe), what should companies do to understand their exposure and protect corporate value from foreign currency risk?
2. AGENDA Introduction Wolfgang Koester, CEO, FIREapps The Euro Crisis: how did we get here? Professor John Mathis, Thunderbird School of Global Management FX Impact on Corporations Wolfgang Koester Your Corporation: how this impacts You Corey Edens, Chief Product Officer, FiREapps - 2 -
3. CONGRATULATIONS! Your company survived the biggest economic downturn since the great depression. - 3 -
7. THE EURO CRISIS How did we get here? Dr. F. John Mathis, Thunderbird School of Global Management - 7 -
8. JANUARY 1, 1999: BIRTH OF THE EURO AND EMU Fundamental structural issues with the euro set the stage for today’s crisis Conflicts Monetary vs. Fiscal Policy European Central Bank (ECB) has responsibility for monetary policy; individual central banks retained fiscal policy responsibilities Problem No authority to: • Tax • Spend • Enforce actions/impose penalties for non-compliance - 8 -
9. ACTIONS SPEAK LOUDER THAN WORDS Original Euro Zone Member Breaches Source: 2009 CIA World Fact Book - 9 -
10. WHERE DID WE COME FROM? A Bumpy ride… euro’s limitations are stressed, but the euro survived. April 2009 Greek crisis pushes the euro to a breaking point. 7/15/08 - Euro sets record high of $1.6038 after U.S. government support for Fannie Mae & Freddie Mac fails to quell concerns about wider U.S. financial stability. 10/31/07 - Euro climbs above $1.45, for first time. U.S. Fed announces a 25 basis point cut in its key interest rate to 4.5%. Oct 2009- US headlines discuss ‘demise of the US Dollar’ as a world currency Dec 2008- ECB Expected to lower interest rates by 50 bhp April 2009- Greek debt crisis turns speculation to Euro decline and break-up Oct 2008- ‘Flight to safety:’ US dollar rallies as financial crisis goes global - 10 -
12. 2008 EUROPE STARTED FACING THE BIGGEST GDP DECLINE SINCE THE GREAT DEPRESSION Original Euro Zone Member Breaches Source: Association for Finance Professionals, May 2009 - 12 -
13. EURO GOVERNMENTS STEP IN TO STABILIZE THE FINANCIAL SECTOR, INCREASING DEBT Original Euro Zone Member Breaches “Less than half of the total amounts committed [to stimulus] had been effectively used” – ECB, April 2010 Source: European Central Bank, OCP N109, April 2010 - 13 -
14. GREEK’S DEFICIT AND DEBT FORCE THE EUROZONE TO TAKE ACTION Original Euro Zone Member Breaches Source: Association for Finance Professionals, March-April 2009 - 14 -
15. PIGS* IN DEBT: A TANGLED WEB THAT TRAPS ALL OF EUROPE Original Euro Zone Member Breaches * Portugal, Spain, Italy, Ireland, Greece Source: New York Times, May 1, 2010 - 15 -
17. RESULTING IN DEBT AND DEFICITS ACROSS THE EURO ZONE Original Euro Zone Member Breaches Euro deficit limit: 3% ● Euro debt to GDP limit: 60% - 17 -
18. EVEN THE ECB SEES IT GETTING WORSE “The euro zone deficit will climb to 7% in 2010” “…by then, all euro countries will exceed the 3% deficit limit” Source: European Central Bank, OCP N109, April 2010 - 18 -
19. A VICIOUS CYCLE OF GROWING DEBT AND DECLINING GDP, EXACERBATED BY GROWING LIABILITIES Original Euro Zone Member Breaches - 19 -
25. GLOBAL EXAMPLES… Original Euro Zone Member Breaches … May 2010 Thai Bhat falls to 8-month low Debate over Chinese Yuan peg continues… - 23 -
26. INCREASED VOLATILITY & SUDDEN CURRENCY SHIFTS ARE THE NEW NORM Original Euro Zone Member Breaches USD Volatility DEC 2007 – May 2010 - 24 -
27. FX IMPACT ON CORPORATIONS Where are we now? Wolfgang Koester, CEO, FiREapps - 25 -
28. FX IMPACTS CORPORATE FINANCIAL PERFORMANCE THROUGHTOUT THE INCOME STATEMENT - 26 -
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30. THE MARKET IS ALREADY REACTING Stock down 14% on Q2 guidance due to declining euro despite strong Q1 revenue and profit growth Other suspects - 28 -
31. MOST HAVE REPORTED MATERIAL FX IMPACTS Original Euro Zone Member Breaches 59% of companies surveyed experienced a material FX gain/loss in 2009* (45% increase) *2010 FiREapps/SunGard FX Exposure Management Practices Survey - 29 -
32. THEY DON’T KNOW WHAT THEY DON’T KNOW Original Euro Zone Member Breaches *2010 FiREapps/SunGard FX Exposure Management Practices Survey - 30 -
33. YOUR CORPORATION How This Impacts You Corey Edens, Chief Product Officer, FiREapps - 31 -
34. UPS & DOWNS ALWAYS OCCUR Original Euro Zone Member Breaches - 32 -
36. X THERE IS NO LONGER A “FREE PASS” FOR UNANTICIPATED FX IMPACTS Original Euro Zone Member Breaches - 34 -
37. FX WILL HAVE A SIGNIFICANTLY GREATER IMPACT ONCORPORATE FINANCIAL PERFORMANCE THAN IT HAS IN THE PAST …meaning that corporate risk managers have to work smarter and harder - 35 -
41. KEYS TO SUCCESS: WORKING SMARTER REQUIRES AN ENGINE (NOT A PADDLE) Look at past results Double your worst Quarterly FX lossin the last two years Is that result acceptable? If so, there’s no need for concern Otherwise Dig in to understand above-the-line and below-the-line exposures Take definitive action to protect yourself Structural Operational Financially (e.g. derivatives) Process Automationenables companies to reduce the cost and risk of foreign exchange Data Process Analytics - 39 -
42. KEY TAKEAWAYS We’re entering a new era of FX unpredictability Theold rules no longer apply The old tools (systems and processes)aren’t good enough Tosurvive, companies must understand their FX exposure&manage their risk Complete data, timely analysis & transparent processes Takedefinitive action Structural, operational and financial - 40 -
