Country Risk Factor Applied to Greece - Case Study Example

Name Institution Title: Country Risk Factor Applied to Greece Course Code Date Country Risk Factor Applied to Greece Executive summary The Greek government provides risk assessment and management as a legal obligation for organizations conducting outdoor activities. According to Barrow (2000), risk assessment and crisis management is of growing importance to all kinds of businesses. Changes in business environment affect the profits and asset ownership of a country leading to country risk. For this reason, investors shy away from investing in the country. Greek as a country has been exposed to country risk where investors have doubted the viability of the country to manage investments. The study provides an analysis of debt crisis that faced Greek, a history of previous crises and reasons for the crises. The body of the study also explains the element of country risk in connection to the Greek crisis. It emphasizes on government takeover and explains ways of reducing exposure to accommodate the takeovers. The recommendation part finally gives the result and opinion from an investor’s point of view regarding investing in Greek in the current situation. Analysis Country risk definition Country risk is attributed to changes in the business environment that negatively affects the operating profits of a country and the value of its assets. This results to risk on the part of investors who invest or intend to invest in the victim country. This risk refers to risks affecting all kinds of companies within the country. Changes in currency controls and regulations, stability and devaluation are the financial features that can cause country crisis by affecting the operations of companies. Government takeover is the most severe country risk that companies are exposed to. History of Greece crisis The recent Greek crisis draws its roots from previous years. Panaritis (2011) states that, Greece work up to the reality facing its economy in 2010 after experiencing rejection, bargain and dejection. The wars and conflicts that the country got involved in from 1912 all the way to the 1974 conflict between Cyprus and Turkey contributed to its current crisis. As governments were concentrating on the political aspects, the economy was neglected and kept on deteriorating. After the 1945 period of economic tragedy, and inadequate attention on the economic sector, the then poor government decided to sort alternative ways to recover its people’s lives. Welfare policies basing on salaries were implemented and workers’ salary adjustments effected. Some of Greece citizens however migrated to the U.S which affected the country’s Gross Domestic Product. In 1970s, the country’s annual growth rate shoot to 6% recording a success and recorded an 8% yearly growth with low inflation rates (Panaritis, 2011). Production also increased to almost 10% yearly. The 2009 Crisis is the recent one in Greece which led to risk of confidence on the part of investors. However, it is considered as a challenge to initiate new policies and economic turns. The severity extended to 2010 in the financial market, affecting bonds and suppressing the private capital market. Reasons for crisis The Greece crisis resulted from a number of factors. Government spending is one of the causes of the Greece crisis. The country recorded a positive growth of 4.2% annually from 2000 to 2007 because of the increased flow of foreign capital from investors. However, the government displayed extravagance in spending, recording budget deficits since after the 1960 to 1973 era. 1974 to 1980 period recorded tolerable deficits of less than 3% Gross Domestic Product. The tolerable era was followed by an era of unsound budget deficits from 1981 to date and a projection of the next two years indicates a more than 3% deficit of the GDP. The economic downturn as a result of excess spending extended causing the capital market to freeze in the year 2010. The government tax prevarication and corruption is another problem that the Greece economy faced. Setting taxes below expected levels in the recent decades has stimulated the current crisis. The costs of avoiding tax in 2010 were estimated at more than twenty billion annually. The country also has a history of misreporting the official statistics of the country’s economy. The country paid banks such as the Goldman Sachs bank millions to conceal the country’s borrowing levels since 2001. This was discovered after nine years, in 2010. The Yen and dollar cross currency swap of Greece currency was the most noted where faulty exchange rates were used by Goldman Sachs bank. The revision of Greece debt levels in 2009 by George Papandreou government from 5% to 12.7% of the Gross Domestic Product (GDP) is also a reason for the current crisis in the country. The 2009 deficit was then increased in the next year to 130% from 113% of the GDP. These extreme upward statistics were as a result of the previous faulty statistical estimates that led to Eurostat conducting detailed audits on the country’s accounts since 2006 to 2009 for reliability. The government offered its five year bond for subscription and despite the crisis, there was a four times over subscription. About 70% Greece government bonds in 2010 were of foreigners and loans were used to pay matured bonds and finance the continued budget deficits. Intolerable and fast growing ratio of debt to GDP ratio is also a reason behind the Greece crisis. The debt ratio of the Greek government started accelerating in the period between 1981 and 1996, where it increased to 100% from the previous 22%. The years were characterized by high inflation rates, numerous devaluations of currency, higher interest rates and slow growths in the GDP. The hard drachma policy resolved the 1996 to 1999 crisis and brought the economy to stability. The 2008 to foreseen 2003 high debt ratio against the GDP has finally catalyzed the budget deficits increasing the impact of the crisis. Financial market interest rates are shooting to cater for the increasing risks. investors will therefore evade investing and thus increase the level of the debt. Country risk in Greece crisis Certified credit institutions assume the country risk other than customary credit risk when they practice international lending. Country risk involves financial risks which threaten the treasury, political risk factors and economy risks. The Greek government is currently facing country risk as result of the unsustainable debt ratios that it has experienced over the years. According to AMCM (2008) study, budget deficits can result in a country’s financial risks such as high inflation rates and GDP and influence government regulations and legal decisions. The country experienced a lower than expected growth rate in GDP in the year 2008. The World Bank report of 2012 indicated a GDP deflator of 1.64 %annually in 2011. Interests rates in the financial markets and yield on bonds appreciated, which led to the suffocation the capital markets in the country. The Greek government currencies become unstable as a result of the crisis. Slodkowski (2012) reported that the Euro fell four times below the US dollar which was not expected. The government changed its policies as it geared towards achieving. The security of employees and assets was threatened by the increasing debts and the value of assets deteriorating. Political and social instability out-faced the value of the rule of law and encouraged theft of intellectual property like the case of Goldman Sachs bank. The government was exposed to high government risks as a result of the debt crisis. The EU Commission estimated the debt levels of Greece to further rise to 198% in 2012 in case the policies were not reinforced in its report on the Economic Adjustment Programme for Greece. According to the European commission (2012), the country has experienced high debt ratios since 1993. The Greek government has recorded wasteful spending of its revenues leading to incapacitation in meeting its foreign debts (Fotopolous, 1992). Monetary instability and failure to control the exchange rate system has also been a problem in the Greek economy. This has led to the currency being overvalued and corruption in the treasury systems (Wills, 2010). The crisis affected the government politically. Consumers’ attitudes in Greece changed basing on their consumption behaviors. The government was hiding the country’s debt status from its people, and this prompted to ignorance in consumption despite the real situation. According to Willis (2010), corruption increased and the country started to experience bureaucracy. The most severe country risk is takeovers. Governments can takeover the management of private companies if they are at risk of collapsing. The private investors therefore end up loosing their businesses. Government influences led to the closure of Coca-Cola HBC Company and the Burger king business. The coca-cola Hellenic Company closed down its operations in the Thessaloniki and Patras regions in April 2012 in order to reorganize it operations due to the increasing costs that it incurred. This is attributed to the Greek government stand on investment and the 10% increasing taxes on beverages which reduced sales by 12% every year in 2011. This was the case sine the hit of the 2009 Greek crisis. Burger King Company renounced its operations in Getting Britain Working program as a result of the governments’ divisive schemes. The public considered the operations as exploitation of the youngsters. However, companies can reduce the exposure to government takeovers by acquiring insurance covers over their business. This ensures compensation and revival for the sinking companies and avoids takeovers. Borrowing form the Greek banks ensures that country-boundaries growth is maintained and the government revenue is boosted. The companies can also display social interests by employing nationals since Greek laws on labor are more favorable. Recommendation Because of the instability of the government, corruption in its operations and the country risks that it is exposed to, investing in the country is more risky than expected benefits. However, with insurance cover and other exposure control measures, investing is projected to be beneficial. Conclusion A country’s financial crisis exposes businesses to financial, political and economic risks that if not controlled can lead to liquidation. The risk of these companies being taken over by the government or alteration of its operations as a result of government interference is the most severe risk. However, the exposures can be controlled. Investors need to study the risks in a given country to determine viability to invest. References Barrow, C. (2000). 8 Risk assessment and crisis management. Panaritis (2011). The historical roots of Greece’s Debt crisis. The globalist. AMCM (2008). Guideline on management of country risk. DSB/AMCM. Slodkowski, (2012). FOREX-Greek instability weighs on euro, risk currencies. EU Commission (2011). The Economic Adjustment Programme for Greece. European Commission.  Ibrahim, J.H. (2012). Sovereign Credit Risk in the Eurozone. World Economics. vol. 13(1), pages 123-136, March Higgins, M & Klitgaard, T (2011). Saving Imbalances and the Euro Area Sovereign Debt Crisis.Current Issues in Economics and Finance. Federal Reserve Bank of New York) 17 (5). Retrieved 5 April 2012 < http://slashtheseats.com/rrpedia/Greek_Bond_Crisis>.  Matlock, G (2010). Peripheral euro zone government bond spreads widen. Reuters.  Takis Fotopoulos (1992). Economic restructuring and the debt problem: the Greek case. International Review of Applied Economics, Volume 6, pp. 38-64. Wills, A (2010). Rehn: No other state will need a bail-out. EU Commission. . < http://euobserver.com/9/30015 (retrieved May 15, 2010)> Read More