Scenarios for Greece’s Impending Default

Greece is out of money. As the country’s time to reach negotiations with creditors expires, executives should consider four potential scenarios for Greece and enact contingency plans for their eurozone businesses accordingly.

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Act now to protect your business from Greek default

Regardless of the scenario for Greece, the implications for executives is clear: be prepared. Companies already should have dusted off contingency plans for Greece. Immediate actions should include:

  • Manage expectations for performance in Greece and throughout Europe. Forecasts are optimistic. Make sure that corporate understands the likelihood of business planning uncertainty for the next one to three years. Even a nascent recovery will be slow to create jobs, weakening demand potential
  • Remove assets from Greece now, while you can. Greek default scenarios will result in seizure of some productive assets. Move or reallocate those assets where possible to avoid writing them down.
  • Be in touch with partners and customers. Even the most secure local companies and consumers could struggle as high borrowing costs and increasingly endangered cash deposits limit their ability to reach new customers in the country
  • Plan to hold receivables for longer. Where demand exists, customers – particularly the Greek government – are unlikely to pay on time. Prepare your business for much slower receivables even if the country comes out of crisis

 

Scenarios for Greece

Scenario A: Greece receives a significant debt write-off from creditors (5 percent probability)

Scenario: Greece’s creditors conclude that the country’s debt levels are unsustainable, and agree to accept substantial write-offs on the principal value of existing loans. With lower debt, Greece can spend more – or at least not cut spending as deeply. Creditors would require substantial structural reforms, particularly to labor and tax practices.

  • Impact on the Greek economy: Positive. This is the most positive scenario for Greece in the short and long term. The reversal of hardline austerity would be seen as a victory for Greek politics and would quickly restore consumer and business confidence. Greece would still face 12 to 18 months of adjustment from the economic deterioration that has taken place over the past six months, but a relatively quick recovering following that is more likely.
  • Impact on the eurozone: Positive, but with high political risk. Solving the Greece problem would be positive for eurozone business planning confidence in the short term. However, longer-term questions would arise as anti-austerity parties in other eurozone countries might seek similar treatment. Extending Greece’s terms to other governments could be economically untenable. Eurozone neighbors could absorb a big write-down of Greek debt, but they wouldn’t be able to do the same for Spain and certainly not Italy. Eurozone businesses would continue to struggle with uncertainty about the economic environment, and particularly government spending trajectories.
  • Implications for Multinational CompaniesGreater predictability will support demand in Greece. Without the headwind of Greece’s crisis on eurozone growth, companies could see a moderate uptick in demand in the next one to two years. If other crisis countries began to speak out against the austerity policies applied in their own countries, the benefits of improving Greece’s debt sustainability could be lost and broad eurozone uncertainty would be is renewed.

Scenario B: Greece does not default, and stays in eurozone (30 percent probability)

Scenario: Greece and its creditors reach an agreement to extend debt payment terms and renew the country’s bailout program. Greece finds a way to pay its debts through a combination of technical draw-downs on its IMF accounts, draining public coffers, and instituting a deposit freeze. Crisis is avoided in the short term, but the country’s debt load remains largely unsustainable. Substantial capital outflows as a result of the crisis make recovery slower. The political situation in Greece remains volatile.

  • Impact on the Greek economy: Negative. While Greece avoids default, its economy remains prone to small-scale crises that emerge every couple of years. It takes 12 to 18 months for Greece to regain its economic momentum from mid-2014 and frequent economic disruptions are likely.
  • Impact on eurozone economy: Negative. Europe’s broader economic environment would face long-term stagnation in this scenario. Anti-austerity sentiment across Europe will remain unaddressed, obscuring the business planning environment throughout the eurozone as businesses worry it could again disrupt policy-making and causing a drag on the economic recovery for the next several years.
  • Implications for Multinational CompaniesDemand for most sectors in Greece will remain weak. Greek economic weakness and broader political uncertainty will act as a headwind on eurozone economic growth for at least three to five years. Companies should manage expectations for any recovery in the market, and expect receivables timelines to expand as the government struggles to pay providers for the services rendered to Greek citizens.

Scenario C: Greece defaults, but doesn’t leave the euro (40 percent probability)

Scenario: Greece cannot make its debt payments, and signals to the European Commission, European Central Bank (ECB), and IMF that it will default on its loans. The country’s financial system is frozen and taken under conservatorship until Greece and its creditors arrive at a more sustainable compromise. This would likely involve more favorable austerity measures and the extension of debt terms in exchange for labor and tax reforms.

  • Impact on Greek economy: Moderate. Unless Greece and its creditors could convince financial markets that this scenario is qualitatively different from the results of Scenario B, the economy is unlikely to improve in the next five years. Greece would avoid short-term crisis and put its economy back on track for recovery, but the economy would require 12 to 18 months of rather painful adjustment. Anti-austerity sentiment would remain strong and likely bring about mini-crises along the way, obscuring business planning.
  • Impact on eurozone economy: Negative. Unless the Greek economy and citizens portray their new arrangement as sustainable, Greece will continue to be a drag on broader European growth. Many regional and local banks in eurozone countries, such as Germany, hold substantial amounts of Greek sovereign and business (such as shipping) debt. As that debt is written off, those banks are required to keep additional capital and thus lend less to local businesses and customers. Political developments in countries such as Spain will draw excessive financial market attention, putting other southern European debtor economies at risk of following Greece’s path and endangering eurozone stability.
  • Implications for Multinational CompaniesCompanies should anticipate restricted access to banking services for days and perhaps weeks as negotiations over Greece’s debt restructuring take place. Any assets within the country will be frozen, which could render partners and customers insolvent. Companies should consult their partners and customers now to understand how they will react in the event of a default, and support those plans where it can to sustain partnership in the event of an acceleration in the economy.

Scenario D: Greece defaults and leaves the euro (25 percent probability)

Scenario: Greece defaults, and creditors cannot reach a last-minute agreement to keep the country within eurozone bounds. Greece leaves the eurozone. The country’s financial system is frozen while a new currency is printed.

  • Impact on Greek economy: Very negative in short term, positive in long term. Immediately after leaving the eurozone, Greek assets are re-denominated in a new local currency rather than in euro terms. In the first six to 12 months, private debt becomes unsustainable as businesses must pay euro-denominated loans with more lower-valued local currency. In the long term, Greece is relieved of its debt burden and can focus on growth. If the country can use the alleviation of debt payments to focus on labor and tax collection reforms, its economy is likely to thrive. If it does not reform, the country faces a renewal of debt crisis down the road.
  • Impact on eurozone economy: Unstable in the short term, moderate in the long term. As Greece leaves the euro, its neighbors’ political opposition to SYRIZA and vocal support of euro area economic policies could contain the economic contagion caused by political uncertainty in 2012. Policy firewalls established since that time could ease fears and uncertainties around the currency area’s ability to withstand a new economic crisis. However, any financial market panic could result in the pricing of another country out of the eurozone, most likely Spain. As in Scenario C, banks will struggle with debt write-offs and thus lend less to local businesses and customers, muting economic growth and potential.
  • Implications for Multinational CompaniesAssets and sales in the country should be considered a lost cause for the next six months as the country falls into acute recession. Assets and deposits will be frozen, and the government is likely to enter a highly protectionist phase which could result in a compliance crackdown on multinationals. Re-denomination of local assets and business practices into the new Greek currency will result in heavy losses, as well as costs for local companies and multinationals as they transition points of sale. Receivables terms are likely to extend indefinitely, as the government and local businesses struggle to pay euro-denominated contracts in a devalued local currency. Any multinationals with local employees should be transparent and proactive in their plans to avoid heavy turnover. After a transition of 12 to 18 months, companies could benefit from an expansion in Greek government services and tenders, as well as a pickup in local demand.

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