Any bears with solutions?
What happens on the day sovereign defaults are declared? — and how does a small firm that relies on TTs from Europe/USA survive the turbulence?
Scenario: A small $50 million dollar company with business in SE Asian countries but its sales are primarily in Europe and N America— The expenses are in the Asian countries but the income is earned in Germany and USA. The company is optimized for “globalization” , i.e., the parent of the various companies in the countries is in Singapore, the invoices are sent from Sing to clients in the developed countries, but TTs used to fund the various country operations are sent directly from Sing, Germany, and USA direct to the countries. In this era of JIT inventory and funding, the countries only have week or less of cash on hand.
In a competitive industry, such as tourism or garments or outsourcing, the funding is the lifeblood of the business; things grind to a halt within days if no new cash … the company goes out of business if there is no back-up plan. The staff leave if they don’t get paid, vendors who have given credit demand payment immediately, then halt all credit if payment problems persist — creditors all talk, this leads to a cascade in credit contraction.
Two questions: (1)what happens in the event of default or clustered defaults among EUR sovereigns? (2)how to survive?
1 – in the event of sovereign defaults, — concern with Europe at this time … will they close the banks? It seems that sovereign defaults don’t happen so often so it’s hard to prognosticate. Nevertheless, it seems that the banks need to close so that nationalization of one form or another can take place, so that bonds/collateral can be marked down, and new management appointed to the dead carcasses// and maybe a devaluation if smaller scale sovereign debt crashes are an indicator of what is to come(Argentina).
2- how does one(or the company) survive assuming it’s not the end of the world, that one form of fiat will prevail at least temporarily, and life will go on? I would suggest having 21 days’ of USD cash on hand, a list of competitors’ clients to approach and sign assuming the competitor can’t service its clients … what else?
Any other thoughts or scenarios on how this would play out for a small company? A lot of this is linear thinking, anyone care to take us to complexity theory … or go quantum?
Below is background from Bix Weir’s site:
In euro zone crisis, firms plan for the unthinkable
“The chief executive of a European company with annual revenues of more than $10 billion a year told Reuters during a recent visit to London that his board had discussed how to handle a euro zone collapse but that it had proved a very short meeting. Other than ensuring their cash deposits were in the safest possible banks and relying on the broad international nature of their business, executives quickly concluded there was little more they could do.”
“Treasury department teams are shifting money to safe havens and rehearsing rapid-action scenarios.” Budgets for 2012 are being looked at again. And outside consultants are being brought in to advise on exposure to peripheral Europe – Greece, Ireland, Spain, Portugal and Italy.”
“Central bank data shows a decline in deposits from banks in weaker euro zone countries. Separating data on corporate deposits from personal bank accounts data is nigh on impossible, but anecdotal evidence points to corporations moving euro accounts to safe havens. Some big firms such as engineering group Siemens and carmakers BMW, Daimler and Volkswagen, are licensed to deposit funds with the European Central Bank, the safest of all safe havens in the euro zone.”
“Similar caution emanated from companies in other industry sectors.”
“Simon Henry, chief financial officer of oil company Royal Dutch Shell, said as a consequence of Europe’s debt crisis it was taking extra care in investing its $20 billion cash pile. “It’s with secure counterparties (WHO’S SECURE??) and its short term,” Henry said.”
“The chairman of another company in Britain’s FTSE 100 index of leading firms said the shortage of AAA rated banks was complicating life. British firms don’t have access to the ECB because Britain is outside the euro zone.”