61% of the Greek population rejected terms of an international bailout and the country is in a desperate state; running seriously low on cash reserves, and now running out of food supplies and prescription drugs, the future of Greece’s economy is uncertain.
But you shouldn’t just view this as a passive onlooker. As George Osborne rightly pointed out last week, this situation will undeniably have an impact on the European economy; the UK is not exempt from feeling the force of this situation. That means that your business has to be prepared to face any possible outcome.
Planning for multiple outcomes
No one thought that there would be a referendum, and even fewer people thought that there would be an overwhelming ‘no’ majority vote. Even if you don’t have direct operations in Greece, it doesn’t mean that you won’t be affected, as Osborne rightly warned. Some senior European figures are urging for a last minute deal between the EU and Greece, with French President Hollande being the biggest advocate. However, a Grexit from the EU is currently just as likely as a last-minute deal. The future of the country hangs in the balance, and businesses should be preparing for each outcome. If Greece was to leave the Eurozone, this could result in a halt on long-term funding and the country will likely resort to printing their own currency, the drachma.
The currency markets have already responded to this uncertain time with the value of the euro against the pound having falling 11% on this time last year. This is where businesses that export need to be particularly careful: currency fluctuations can have a direct impact on a business’ profit. If you do not take sensible precautions, you could see your margins hit as you convert back to GBP. Risk management techniques must be put into place as a matter of urgency to ensure that you are not caught out – keep a close eye on the live market rates and utilise the expertise of your CFO to hedge against this FX risk.
There is also the chance that the euro could fall below parity resulting in a significant impact on global markets. Even if this doesn’t happen, just the possibility is enough to prove that it’s best practice to plan for a ‘worst case scenario’. Your FX strategy must consider the amount of risk that you are able to absorb without significantly denting your profits. Of course, this will vary depending on your profit margins, the profitability of your business and your individual appetite for risk. A strategy that is underpinned by these elements will ensure that you are prepared for any outcome, however small or large.
Although there will be some benefits to this situation – a low euro rate means that imports from euro nations will be much cheaper whilst the currency stays low. However, as the unfolding events have shown, relying on this cost-saving measure would be a poor decision as a long-term business strategy.
It’s not just close to home
If your business has operations outside of the Eurozone, it is still worth noting that destinations further afield have also been affected by the Greek situation. In any case, the developments are highly likely to reinforce the weakness of emerging market currencies. As such, the ringgit of Malaysia, the zloty of Poland and the lira of Turkey have all seen the effects this week, so it’s vital that businesses don’t become complacent to the extent of the potential damage this saga has had, and will continue to cause.
In the most extreme case, it may be wise to consider limiting your exposure to the euro – as long as this won’t significantly affect profit margins. Conducting any new business in USD or GBP for the time being would help to mitigate against the risk of the falling euro.
It’s clear that there are plenty more decisions left to be made around the future of Greece, and it’s there’s going to be plenty more to-ing and fro-ing before Greece reaches anywhere near stability. In the meantime, there is significant risk of market volatility causing serious problems for your profits so putting in place a strong FX strategy is of the highest importance to ensure you can ride out the next waves of the Greek crisis.