The Eurozone Crisis and Influence of the US - Case Study Example

? Should US Corporations leave Greece now? In the current scenario 27 member s of the European Union (EU) shares a common economic and monetary union (EMU) with the euro as their single currency of exchange. Conjecturing upon the gross domestic product (GDP) as well as the shares of the global trade and investment in comparison with that of the United States, these countries play a significant role in the global economy affecting the global economy as well as US economic and political interests in varied ways. The uncertainty posed about the future of the Euro zone initiated in the year 2010 with the sovereign debt crisis in Greece. The spillover effects subsequently swept down to the countries like Ireland, Portugal, Spain, and Italy and also the financial positions of these countries destabilized. With the threat of default the markets started in claiming exaggerated interest rates against their bonds. This grave concern entailed enormous risks and uncertainties enthralled to the banking system of Europe and simultaneously the viability of the euro. The staggered growth in the Euro zone with mild recessionary forecasts in 2012 leads to the enhanced problems in the banking systems. One of the significant causes of the crisis results from the loopholes in the architecture of the currency union along with the fact that EMU provides a provision for a common central banking structure. The weak enforcement of the dynamic fiscal discipline resulted in the rising of the public debt in some of the Euro zone countries. Trapped in the euro, the individual members find it difficult in inflating their way out of the huge public debt or make an endeavor in devaluing their currency in order to make their exports more competitive in the trading platform (Ahearn et al, 2012). The paper will seek the problems faced by the US corporations in Greece in accordance with the euro zone debt crisis and will focus on the case study approach involving analysis which will direct towards the policy implication paradigm which will state that whether the US corporations along with their joint ventures will withdraw from Greece or not. Adverse signaling starting with Greece and the present situation The Euro zone crisis began in early 2010 at a juncture when the financial markets were jeopardized with its herald in Greece. Fears generated and signaled that the default in Greece was an adverse indicator for other Euro zone countries. There was delayed response from the stabilization policies for the renewal of the crisis period. Extended negotiations resulted in the intervention of the International Monetary Fund (IMF) in 2010 in supplying a fund of €110 billion loan for Greece along with a wider stabilization fund booster for the other Euro Zone countries for the requirement of the loans. In a quite recent European Union (EU) summit on December 8-9, 2011, the leaders of the European Union declared a jolt of new policy measures which included fiscal compact as well as bilateral lines of credit from the European countries to the IMF for addressing the critical position of the Euro Zone Crisis (Ahearn et al, 2012, p.1). Threats for the US corporations A very serious concern which crept up among the United States (US) is that the aftermath of a sovereign debt by Greece or the massive collapse of any European financial institutions was forecasted with the wave of credit freeze-ups in to the US resulting in the devastations in the US stock market and the economy. Another additional concern of the United States is regarding the staggering down of the Euro zone economy with the depreciation of the euro which will in turn affect the exports of the United States and hence the earnings of the companies of the US companies (Ahearn et al, 2012, p. 3) . Possible frontiers of the Euro zone crisis The Euro zone crisis is thought to have severe effects on the US economic and political interests in varied ways. One of the major concerns in the US is that a sovereign default by Greece or the breakdown of the financial institutions could in turn effect throughout the globe in a way which the US subprime crisis impacted in 2008. At the point of time when the economy of the United States is destabilized, then another jolt of credit freeze ups in the European banking sector will lead to the weakening of the US financial organizations and will trap the US economy into recessionary spirals. The staggered growth in the Euro zone may also lead to the adverse effects on the exports and the sales of the US companies. The Obama administration, Federal Reserve and Congress have been engaged in the monitoring process and the working towards an orderly resolution of the crisis (Ahearn et al, 2012, p. 2). Credit risks in Greece Apart from the political and macroeconomic upheavals the poor commercial environment of Greece is also a serious problem. From the data of February 2012 from D & B’s sales and Marketing Team, the risk of credit is extremely high in Greece. Owing to the complications to the access to finance with a gloomy macroeconomic outlook as well as several factors it has been encountered that nine out 88,559 companies enjoyed a minimized risks of credit and on the other hand 7870 enterprises face a low credit risk. The trend is significantly worse than in Portugal where the magnitude of the shares of the companies were valued at around 4.3% and 25.7% respectively (A D&B Special Report, 2012, p. 18) . Minimizing risks by the US corporations and Citi bank The US banks and other financial institutions are accelerating in a rapid pace in order make sustainable changes in the endeavor to the reintroduction of the former currency, the drachma. The ex ante principles which should be adapted in order to resolve the problem includes scenario planning, reviewing contracts and also leading to the determination of the obligations in the case of exit of Greece from the euro zone. Analysts are also in the assumption that the elevated expectations which Greece will leave the Euro zone after the elections will continue down the austerity path prescribed by the lenders. The executives of the Morgan Stanley ran through the planning tasks which they call cable top exercises in the course of the preparations for the potential Greek exit. Such kind of exercises is similar to the stress tests and the firm’s contingency team has run through its collateral obligations and exposure to Greece. It has also initiated in the system of testing, inclusion of the currency redenomination and conversion for minimizing the possible impact (Banks Prepare for Possible Greek Exit from Euro Zone, 2012). The Citibank in Greece employs around more than 1200 people and operates through two core Greek corporate and shipping offices along with a solid Customer banking network serving over 700,000 customers. The bank has long been able to keep its reputation as a trusted advisor throughout the juncture of the macroeconomic turmoil. The institutional group of clients has committed resources for the development of efficient and innovative solutions in addressing the needs of the government in the advisory, capital markets, management, market risks hedging, trade and transaction efficiencies space and so on. Along with that the bank’s domestic interactions with the Greek state has been rigorously engaged in the fetching the interests of the foreign investors in Greece leveraging Government’s strategic investor plans (Business Profile, n.d.). The case study in the paper after the conclusion will focus on this particular bank and its related operations in regard to the declining economic condition of Greece. Conclusion The Euro zone crisis has entailed decline in the construction of the currency union. There have been efforts in taking the currency union to a stabilized and sustainable regime. The United States connected with the euro zone politically and economically has also faced great trouble in its performance. The deepening crisis has directed towards more robust proposals like the issuance of the euro bonds and greater attraction of budgetary resources for establishing stronger fiscal foundation for the monetary union. Given that the European Monetary Union (EMU) is a primal symbol of European integration the leaders and the pioneers are highly motivated in keeping the EMU intact. The ECB has also demonstrated their willingness in order to help the members through the purchase of their bonds in the secondary market as well as provision of low interest loans to the banks of Euro zone for maintaining their financial stability. The rescue programs adapted by the financial institutions like IMF has focused on the structural and fiscal reforms of the product and the labor markets in order achieve market confidence which is directed towards the notion of strengthening the euro in the future (Ahearn et al, 2012, pp. 24-25) . One of the major policies which the US could adapt is the direct intervention of the Federal Reserve Board which posses the full authenticity in the provision of the foreign central banks with an unlimited amount of dollars for an equivalent number of currency. The federal government for the protection of its financial systems could also deliver short term loans to the commercial banks (Ahearn et al, 2012, p. 24). The US administration also has to emphasize on the strict policy implementation of the European officials dealing with the debt crisis. A case study Citi bank, one of the largest American banks in the United States marks its longest presence in the Greek market of any foreign bank with its establishment in the year 1964. It is also considered as the largest foreign bank in Greece. The earnings of the profit for the bank were at a value of $10.6 billion in 2010, or $0.35 per share. The figures rose up from a net loss of around net loss of $1.6 billion, or $0.80 per share, in 2009. Although the revenues were slightly down but it rose by an amount of around $86.6 billion in 2010 from $91.1 billion in 2009. This can be held responsible for the continuous shrinking of the Citi Holdings in terms of both dollar and as a share of the company’s balance sheet. The net income graph of the company given below can be shown to reflect this fact in a more distinct way as follows: Fig.1. Net income of Citi bank group in the time period of 2007-2010 (Citi 2010 Annual Report, 2011) Major focus The bank concentrated on the policy of increasing the share of the emerging market flows which includes capital trade and flows. The focus also stressed on policies of capturing larger share of the capital trade and flows from into and especially into the emerging markets. The plans adapted for the future incorporates the regime for the improvement of the client coverage models, addition and the movement of the key talent to and within the key markets as well as investment in infrastructure and capital for the priority markets. Targets has been also on occupying the numero uno position of ideas and content, provision of the best in class corporate and investment banking capabilities, connection with the customers, attraction and development as well as the retaining of the best talent and also on the promotion of the financial inclusion (Citi Annual Report, 2011, pp. 6-7). Hedging techniques and outcomes The bank applies the derivatives in connection with its activities of risk management in order to neutralize risk. The Citi group may engage them in the issue of the fixed rate long term debt and then enter into the regime of a receive-fixed, pay-variable rate interest rate swaps and the conversion of the interest payments on a net variable basis. This strategy helps in the minimization of the cost of interests in certain yield curve environments. The techniques of derivatives can be also used in order to control and manage risks inherent in specific groups of on balance sheet assets and liabilities which also include investments, loans and deposit liabilities as well as other interest sensitive assets and liabilities. (Citi Annual Report, 2011, p.250). In the platform of the Regional Consumer banking business, continuous investment in future growth has been encountered and strengthening of the mobile banking capacities has been also enhanced in Greece and have expanded on the implementation of an integrated customer platform (Citi Annual Report, 2011, p.11). Besides the assistance package, there have been uncertainties regarding the market disruptions in the Euro zone including the enhanced cost of funding. Future assurances of assistance packages may or may not be available for stabilization. Again market conditions over the last few years have been involving unprecedented dislocations and also focus on the limitations in the usage of historical data for the management of risks enhancing predictions for massive losses. With the concentration of the risk, the bank may suffer losses even at a circumstance when the economic and market conditions are generally in favor for the competitors of the Citi group. Again the company depends upon and has commitment on various third party agencies for the performance of their operations. Again the inability of the group in the reduction of the credit risk through selling during periods of market dislocations can adversely affect the result of the operations with the decrease in the fair value of the positions and also the loss of revenues associated with the selling of the securities or the loans (Citi Annual Report, 2011, p. 79). Future predictions The elections and the current trends are on the verge of predictions that the Greece will be leaving the euro zone in 2013 and the immediate impact of the new currency will be an immediate fall in the value by 60 percent. It could result in the urge for the government for printing more notes for covering its spending. The citi further adds that the new currency of Greece will immediately depreciate by 50 to 60 percent for the next five years. It is also expected that it could rebound by 4 percent to 5 per cent in the time span of 2015-2016 when the gains in the competitiveness of the costs could result in the revival of the exports with special stress on tourism (Greece to Exit Euro, New Currency to Fall 60%: Citi, 2012). Again also some claims that the ex-Greece euro will be much stronger in comparison with Greece with euro. This positive scenario would develop a platform in which the premium of risks on the other euro countries is largely determined by the fear of contagion from an exit of Greece from euro zone. Once the flight of the Greek exit takes place without any damage, the spreads will narrow down and the euro would unite (Citi on Potential Greek Euro Exit, 2012). Recommendations The citi group largely depends on the third party and other financial institutes for the operations of their financial systems. The reliance upon this should be minimized and the internal structure of the bank should be strengthened to the utmost. Protection of the assets of the clients should be other foremost policies of the bank at this critical juncture. There should be imposition of the guarantee of the confidentiality of the transactions and assets of the customer and disclosing it to the third parties should be strictly prohibited. Again in this jeopardized economic condition there is no time for the assets that produce less or no income and the homes fall in this category. People will be more concerned for the covering the life expenses at this point of time. Policies should be based on the durability of the expenditure policies of the public. In order to make profits, the group may also adapt hedging techniques like currency swap policy which using the mixture of fixed and floating exchange rate regime for incurring profit. References Ahearn et al, (2012), The Future of the Euro zone and U.S. Interests, retrieved on June 22, 2012 from: http://www.fas.org/sgp/crs/row/R41411.pdf A D&B Special Report, (2012), retrieved on June 22, 2012 from: http://www.dnbcountryrisk.com/FreeSamples/ICI/ICI_04.12.pdf Business Profile, (n.d.), retrieved on June 22, 2012 from: http://www.citibank.com/greece/consumer/en/profile.htm Citi 2010 Annual Report, (2011), retrieved on June 22, 2012 from: http://www.citigroup.com/citi/investor/quarterly/2011/ar10c_en.pdf Citi on Potential Greek Euro Exit, (2012), retrieved on June 22, 2012 from: http://www.charliefell.com/index.php/articles/2-general/533-citi-on-potential-greek-euro-exit Greece to Exit Euro, New Currency to Fall 60%: Citi, (2012), retrieved on June 22, 2012 from: http://finance.yahoo.com/news/greece-exit-euro-currency-fall-135021358.html Read More