[Video] Who is Best Positioned as Iran Sanctions Near End?

FSG’s MENA Practice Leader, Matthew Spivack, sat down with the hosts of Bloomberg’s “Countdown” Monday morning to talk risks, opportunities, and who will profit from a potential lifting of economic sanctions against Iran. View the video below and read more on investment opportunity in a post-sanctions Iran here.

Erdogan victory shouldn’t overshadow MNC priorities in Turkey

On Sunday, Turkey completed the second of the three milestone elections on the country’s political agenda between 2014 and 2015. Recep Tayyip Erdogan’s victory did not surprise anyone and is not likely to have a major impact on the Turkish market. In the meantime, currency volatility and persistent inflation are emerging as the real sources of concern for companies operating in Turkey. So, what should executives do?

1. Don’t count on political stability until the parliamentary election in June 2015. Erdogan’s victory supports stability for now, but political tensions could rise leading up to the June 2015 Parliamentary Election. Companies should keep track of three factors to anticipate whether the business climate will be hurt by political instability: 1) Who the Prime Minister will be, 2) Whether Erdogan will try to change the constitution before the June 2015 elections, and 3) What the new AKP and the new government in June 2015 will look like.

  • Watch who the new PM will be to anticipate the balance of power between the cabinet and the president: If Abdullah Gul makes a strong claim to the AKP and challenges Erdogan’s desires to control the party from afar, this could lead to a political crisis. If a passive member of the AKP is brought to the head, this may mean that Erdogan will continue to retain authority over the party.
  • Monitor how quickly Erdogan will move to increase his powers: Executives need to be aware that rapid and bold efforts may lead to heightened instability before the parliamentary elections. Currently, the AKP does not have the majority in parliament to change the constitution and expand the powers of the president. While the leading opposition parties CHP and MHP will oppose an Erdogan power grab, monitor whether Erdogan is able to gain support from pro-Kurdish parties in parliament to make amendments to the constitution.
  • Understand that the upcoming parliamentary elections have two implications for businesses: 1) Erdogan will be able to consolidate his power easier if AKP wins majority seat in parliament, which is required to change the constitution; and 2) New policies may be implemented as the AKP will replace 70 MPs including well respected Deputy PM for economy Ali Babacan.  Companies may be faced with opportunities for establishing fresh relations with the government or with new challenges.

2. Focus on what really matters to your business.

  • Plan for continued volatility in the Turkish Lira: Due to its dependency on foreign capital inflows, especially short term portfolio investments to finance its growing trade deficit, Turkey is especially susceptible to currency volatility. Domestic developments such as the December 17 corruption probe or the March 2014 local elections have proven that the lira can rapidly fluctuate with each event that alters perceptions of political stability in the country.  Executives must also watch regional developments especially in Iraq and Ukraine, as the Turkish lira has been highly reactive to the events in those countries. On August 6th, Turkey’s currency depreciated to reach TRY 2,17 against the USD, its highest since March 2014, when aversion over Ukraine increased risk perceptions in emerging markets including Turkey. Meanwhile, the Turkish Lira had depreciated by 1% on June 11th when Islamic State militants kidnapped 49 Turkish citizens in Iraq.

Suggested actions: 1) Prepare for fluctuations in costs due to weaker lira  when importing intermediary goods to Turkey, and 2) Expect a fall in the demand for final imports as the currency depreciates in the short term

  • Expect persistent inflation and high interest rates: Persistent inflation is a leading concern for economists and businessmen as July’s annual consumer price index (CPI) reached 9.32%. After a peak of 9.38% in April, the central bank has been expecting a downward trend from June onwards, to culminate in a 7.6% end of year inflation. However, the July CPI defied the downward trend of May and June, increasing worries of sustained inflation in the Turkish market.  As the high price of food and basic goods put pressure on household budgets, consumer spending levels may show slight decreases. MNCs can expect high borrowing costs and a slight slowdown in consumer demand as interest rates are likely to stay high in the next few months to combat persistently high inflation.

Suggested actions: 1) Consider lower priced products and services as consumers face lower purchasing power of the lira and higher interest rates, and 2) Track the effects of inflation on business demand, as the failure of lower interest rates to manage inflation in the last two months may be a sign of higher production costs

Pre-election coverage was detailed in our Turkey Quarterly Market Review, available on the client portal. Not a client? Contact us for more information.

Côte d’Ivoire: an Elephantine Opportunity

Cote d'Ivoire Elephant Crest
Côte d’Ivoire is Francophone West Africa’s largest economy.

Côte d’Ivoire is once again open for business. After a brief civil war in 2010-2011 that all but halted the economy, the country is witnessing a large stream of FDI targeted at a wide variety of sectors. The government is pushing Côte d’Ivoire, and especially its economic capital Abidjan, to become a hub for the wider French-speaking region.  Côte d’Ivoire was once Francophone West Africa’s most prosperous country, and it is poised to reclaim its title as the region’s economic powerhouse. This is due to a variety of reasons:

  • GDP Growth: Côte d’Ivoire is one of Sub-Saharan Africa’s fastest-growing economies, with GDP growth expected to reach 8.5% YOY in 2014. Its strong economic performance is driven by infrastructure developments, exploration in the mining, oil, and gas sectors, and growth in the telecom, banking, and consumer goods industries.
  • Stable macroeconomic environment: Unlike many Sub-Saharan African countries, Côte d’Ivoire displays low inflation, relatively low interest rates, and little currency volatility. The CFA Franc, also used in seven other French-speaking West African countries, is pegged to the euro and partially held in the French treasury. Companies therefore benefit from low exchange rate risk and transactions costs.
  • Business reforms: The government is aggressively promoting Côte d’Ivoire as a preferred destination for investment in West Africa. It has passed a series of reforms that increase transparency, decrease bureaucratic delays, digitize registries, and improve accessibility to relevant information. Moreover, major infrastructure projects will further open up the country to trade and promote new distribution channels as private consumption increases.

Although the country is on the right track to reconstruction, it still faces several challenges to reaching its goal of becoming an emerging economy with a robust middle class and an open market by 2030:

The 2010-2011 civil war erupted at the onset of presidential elections pitting Laurent Gbagbo against Alassane Ouattara.
The 2010-2011 civil war erupted at the onset of presidential elections pitting Laurent Gbagbo against Alassane Ouattara.
  • Political risk: Society in Côte d’Ivoire remains divided in the wake of the 2010-2011 civil war, which erupted when then-president Lauren Gbagbo refused to concede to president-elect and current incumbent Alassane Ouattara. The conflict around Gbagbo’s refusal to give power was the culmination of years of tensions between adherents to opposing political parties and the legal status of Ivoirians of foreign descent. Now that Gbagbo is indicted at the ICC and Ouattara is expected to re-run for president, uncertainty prevails over the security situation ahead of the October 2015 presidential election. The common sentiment on the ground is to avoid war at all costs, but the process of reconciliation has been slow, old wounds remain, and skirmishes are likely.
  • Wealth gap: Poverty is acute and the gap between wealthy and poor is very wide. The middle class remains small and concentrated in Abidjan. Government policies that target small and medium enterprises (SMEs), the agriculture sector, and value-added industries are vital to bridging the wealth gap and encouraging inclusive growth.

As such, Côte d’Ivoire is most attractive when taken in context. It is part of the West African Economic and Monetary Union (WAEMU), a common monetary, legal, and interbank market of eight French-speaking countries: Mali, Niger, Benin, Togo, Burkina Faso, Guinea Bissau, Senegal and Côte d’Ivoire. As the wealthiest, most developed country in this group, Côte d’Ivoire is an attractive hub for companies seeking to tap into less accessible, yet rapidly growing Francophone countries.  As more companies such as Standard Bank, Carrefour, and Accor Hotels enter Abidjan, a wider range of business infrastructure will become available and boost Abidjan’s attractiveness.

Côte d’Ivoire is a long-term game. While wealth is not widespread and politics are sensitive, Côte d’Ivoire has the macroeconomic fundamentals, business reforms, and infrastructure projects to become the first stop for companies entering Francophone West Africa.


FSG clients can access our full report, “Market Spotlight: Cote D’Ivoire,” on the client portal.  Not a client? Contact us for more information.

The glory and pitfalls of the Nigerian entrepreneurial spirit

The streets of Nigeria’s business capital, Lagos, buzz with activity. Vendors making their way through cars stuck in traffic sell everything from newspapers to chewing gum to light bulbs. Shop owners are lovingly displaying products in front of their little stalls. In the city’s vast markets, one could walk for hours among the different sections dedicated to pharmaceutical products, cosmetics, alcoholic beverages, or fabrics. When visiting the city’s various business districts, Nigerians in sharp suits are busy closing the next deal. Everyone is selling something. Or as my driver put it, they are “chasing the money.”

Market in Lagos, Nigeria
Market in Lagos, Nigeria | Wikimedia Commons

The dynamic commercial activity is living evidence of the country’s vast consumer opportunity. It seems that for every person who is selling, there are several others buying. Rarely in any western country would one see 20 to 30 Mercedes Benz trucks, newly purchased by a local business, driving in line to reach their final destination.

At the heart of all this lies Nigerians’ desire for upward social mobility, the driving force of Nigeria’s entrepreneurial spirit.

Never Satisfied

Never Satisfied

The “Never Satisfied” docked on Victoria Island, Nigeria

From what I have learned and seen on the ground, Nigerians are tremendously positive about the future. Many strive to become the country’s next Aliko Dangote – Africa’s richest man. Dangote’s wealth is visible when passing his large yacht docking on Victoria Island. A slightly smaller, but still considerably sized, boat in close proximity is called Never Satisfied. The name, in my opinion, summarizes the Nigerian desire for success.

This eagerness for more is reflected in the priorities of Nigerian workers – be they employees or entrepreneurs. Generating as much money as possible is a top priority.

“Contrary to other African countries, employees are less motivated by non-financial incentives such as private healthcare. They will always much rather opt for a higher salary,” a local recruiter explains. “This comes down to the fact that people are used to fending for themselves. They don’t expect social services from the government. Because, even when social services are provided, they are frequently insufficient and of low quality.”

For example, most Nigerians with which I spoke agree that since the government introduced free education, the educational system has deteriorated dramatically.

Social Responsibility

The Nigerian search for money is not only about increasing individual wealth, but it also stems from a broader sense of responsibility to the wider family and community.

“I have to provide for about 30–40 people,” the CEO of one of the country’s largest investment firms points out.

When Dangote sets up a new cement plant in a small town, the company will make sure that those living there will be employed at the factory or receive training. Other companies have given ownership shares to local leaders, not only to engage the community, but also as a way to protect their investment.

Displaying Success

The fact that a few strong members of society take responsibility for others also means they are proud of their achievements and eager to share them – something that is both socially accepted and expected of them. This tendency can be observed, for example, in the offices of successful local business people. Pictures of a company’s leader shaking hands with influential politicians from around the world typically decorate waiting rooms. Magazine covers featuring the leader, whether male or female, are prominently displayed, as are entire books containing tribute after tribute to the person.

“When I first walked into the office of a local official, I was greeted by a life-sized photograph of him sporting a full uniform and a pair of very cool sunglasses,” a European diplomat told me.

The Importance of Vision

As eager as Nigerians are to succeed here and now, they also understand that their labour could take years to bear fruit as the country’s development accelerates.

“The opportunity is long term. Often western businesses don’t understand that. Yes, we have many opportunities, but they will only be materialized once we solve our problems with power supply or invest in the entire agricultural supply chain, for example. But these things will take decades to evolve,” a business owner in the industrial sector explains.

As Nigeria’s entrepreneurs build their business empires, their lack of satisfaction with the current state of the country will be a driving force for Nigeria’s development. What Nigeria needs is not merely an entrepreneurial spirit. It needs leaders with a long-term vision that reflects the country’s development requirements. And most importantly, it needs leaders who will never be satisfied with less, not just in terms of the size of their boats, but in relation to upward social mobility for their communities and their country.

In the meantime, western brands catering to the expensive tastes of Nigeria’s elite will be the main benefactors of the country’s desire for more.


Anna Rosenberg is Head of Sub-Saharan Africa Research at Frontier Strategy Group. Anna is currently on a research trip to Nigeria and Ghana, meeting representatives from local and international businesses, journalists and government officials. Follow Anna on twitter @anna_rosenberg

Four things MNC executives need to know about the latest sanctions against Russia

In what has been the harshest Western response to Russia’s involvement in the Ukraine crisis, the EU today imposed broad – so called Level 3 – sanctions against Russia. The US is likely to follow suit shortly.

European Parliament in Brussels (Image: Reuters)
European Parliament in Brussels (Image: Reuters)
Four things MNCs need to know about the implications of these sanctions:

1. Credit costs will increase considerably and lending will become more restricted.

The sanctions will restrict the ability of majority state-owned Russian banks to conduct long-term borrowing on European financial markets. Russia’s biggest banks – Sberbank and VTB – will both be affected, in addition to a host of smaller banks, including ones already targeted by US sanctions. Sberbank alone holds 29.0% of Russian banking sector assets and accounts for 50.0% of retail and 32.0% of commercial lending. Shut out of EU and (likely) US financial markets, these banks will see their funding costs increase considerably. In response, they are likely to reduce new lending to both businesses and consumers and increase interest rates. Importantly, however, these banks will be able to continue processing financial transactions in US dollars and euro.

2. Sanctions will have a considerable impact on investment.

Investment in Russia is already contracting – it decreased by close to 5.0% in Q1 2014. Faced with weaker demand, higher financing costs, and political uncertainty, businesses in Russia will be more likely to postpone investments and put long-term plans on hold until the situation stabilizes.

3. The Russian government may create operational problems for Western MNCs.

Russian government discussions about import substitution and re-orienting trade toward Asia have been going on since the annexation of Crimea earlier this year. The new sanctions give proponents of such ideas a strong argument for more aggressive measures to restrict Western MNCs from the market, particularly companies that sell to the government. MNCs should be prepared for a range of Russian government responses, from slightly more onerous inspections to the outright expropriation of foreign assets, although the latter is not highly likely.

4. Companies should have a plan in place that accounts for a deteriorating operating environment:

Most MNCs’s Russia plans built in 2013 or even early 2014 are likely no longer reflective of the reality on the ground. Companies need to reassess the regulatory, operational, and economic environment in which their business will be operating in the coming months and prepare their business accordingly. FSG clients can read suggested actions on building such a plan here.

Nigeria: Insecurity and its impact on business

Despite ongoing violence in Nigeria, opinions about the country’s security challenges and what they mean for investors differ widely among local entrepreneurs and international business leaders.

Some executives, whether in Lagos or other commercial centers like Abuja or Port Harcourt, say they aren’t concerned. They believe business will continue as usual and that the threat from militant group Boko Haram will subside after the elections in February next year.

Boko Haram is generally believed to be sponsored by a few political forces who are keen on influencing election results. The group’s terrorist activity has increased dramatically since the election of President Goodluck Jonathan, the country’s first Southern and Christian president, and some believe that Boko Haram was able to emerge because traditional power structures were disrupted in many of the northern states when the central power shifted to the South.

Other business leaders are deeply troubled, not only by the rising violence but by its underlying dynamics.

“We don’t understand why Nigerians are blowing themselves up for a cause. It simply isn’t part of the Nigerian psyche,” a senior manager of a consumer goods company told me.

The head of marketing at a Nigerian bank echoed these sentiments, before adding: “The dynamics here are changing. Everything is getting more expensive because most of our food comes from the north, prices have been going up and what the average Nigerian earns is simply not enough anymore. I fear this may impact the balance here in Lagos, particularly as we get more refugees from the north. Our infrastructure can’t cope with it.”

Business Impact

The volatile state of Nigerian security has also lead to varied experiences among business leaders. As the owner of a distribution company explained: “In our annual sales meetings, one of our local representatives stood up and pronounced huge losses due to the instability in the North. In response, another representative exclaimed that his major customer sits in Borno state!”

Consumer goods companies tend to be the businesses that suffer most, selling low value, high volume products in the populous yet poor northern states. State-imposed curfews mean less people are going out to buy things, and many traders in neighboring Niger, Chad and Cameroon have ceased buying their products in bulk from Northern Nigeria.

Still, businesses operating in affected areas are developing creative ways to address the challenges.

We just had to adapt to the environment. When Boko Haram destroyed the mobile phone masts, we couldn’t call our local representatives anymore. So we just invested in VoIP (Voice Over Internet Protocoll) technology, which is a little more expensive, but now we can communicate frequently with our local representatives, and business is flourishing,” the CEO of an FMCG distribution company told me.

A Common Enemy

While the threat resulting from Boko Haram is still geographically contained around the Northern and central states, the country’s commercial capital has been spared. It is believed that those funding Boko Haram have business interests in Lagos they do not want to be undermined.

Many business have refocused their attention to safer and more prosperous parts of the country to capture the abundant commercial opportunities Nigeria has to offer, but there is till concern that what led to the rise of Boko Haram is not just political maneuverings but real socioeconomic grievances which if left unaddressed could incite insecurity in more stable places.

Some business leaders stress the need for the government to take action. But as Nigeria enters what is only its fourth electoral cycle, others are more patient. They believe that more time is needed for democratic processes to mature and for the disrupted traditional structures to be corrected, calming the power struggles that lie at the heart of the Boko Haram threat.

And still a few try to look at the situation with a typically positive Nigerian attitude:

“In history, the unifying factors of nation states have often been the existence of a common enemy. We have that now, and it could help us focus less on what divides us as tribes and regions, but what unites us as a country.”


Anna Rosenberg is Head of Sub-Saharan Africa Research at Frontier Strategy Group, a Washington headquartered information services provider advising multinationals on doing business in emerging markets. Anna is currently on a research trip to Nigeria and Ghana, meeting representatives from local and international businesses, journalists and government officials. Follow Anna on twitter @anna_rosenberg

*This article is Part 1 of an ongoing series, originally published in conjunction with How We Made it in Africa.

Multinationals must build contingency plans for Russia

European foreign minister
European foreign ministers gathered in Brussels on Tuesday. Associated Press

The EU has decided to impose more sanctions on Russia. For now, these fall short of the so-called Level 3 sanctions that could be against whole sectors of Russia’s economy and crucially, its banking sector. However, the international fallout from the downing of flight MH17 and the growing tensions between Russia and the West mean that Level 3 sanctions are increasingly a possibility.

For an MNC executive, this means that it’s time to plan. Level 3 sanctions would dampen Russian growth further, reducing demand across industries; they would cause significant problems for customers and distributors to access finance, affecting operations; and are likely to be met with Russian retaliation that could make it more difficult for MNCs (especially American ones) to do business in Russia. All of this will have an impact on a company’s customers, finance, supply chain, people, and marketing strategy and MNCs should be building step-by-step play books on how to respond to spillover across their Russia operations.

martinachart2This is not to say that MNCs should be pulling out of Russia. In fact, planning is so important because of the significant role that Russia plays in many MNCs’ EMEA and even global portfolios. Companies that have stuck with Russia through crises have historically reaped significant benefits and this could be an opportunity for MNCs to strengthen partner and customer relationships and to make low-cost investments.

Meanwhile, larger strategic questions are looming in the background for EMEA and global leadership teams. With the likely opening of Iran for business, a Russia that is increasingly closing in on itself could lose out in the competition for corporate investments.

For a full report on Russia contingency planning, FSG clients can click here. A full report on preparing for a post-sanctions Iran is also available.

Preparing Your Business for Post-Sanctions Iran [Infographic]

Iran_Infographic_PostSanctions

International negotiations involving Iran’s nuclear program were extended until November 24, which is good news for Western multinationals. Senior executives should use this extra time to lay out plans for entering or expanding in the Iranian market. Today, FSG released a report for our clients that outlines actions to take in order to prepare for major challenges and capitalize on huge opportunities in post-sanctions Iran.

Many companies are preparing to enter or expand in post-sanctions Iran, and 40% of FSG clients surveyed already view it as a priority market. A comprehensive nuclear deal and the subsequent opening of the Iranian market would represent the biggest shake-up to the MENA portfolio since the Arab Spring erupted between late 2010 and early 2011. Iran’s population is the second largest in MENA, and its oil and gas reserves are the 4th and 2nd largest in the world, respectively.

Before committing significant resources to overcome operational challenges in Iran, senior executives must first determine whether their organizations are even willing to take the risk by reassessing market potentialsanctions exposure, and indirect vulnerabilities, such as reputational risk. Iran’s opportunities will not outweigh the risks for every company. However, pharmaceuticals, medical devices, and consumer goods companies are especially likely to prioritize post-sanctions Iran given its attractive demographics and future spending power.

For companies focused on entering or expanding in post-sanctions Iran, it is imperative to prepare for the top three challenges identified by FSG clients in a recent poll: a lack of access to bank services, compliance risk, and difficulties in becoming a first mover ahead of competition. FSG clients can read our report on post-sanctions Iran to learn about actions for overcoming these challenges and many others.


FSG Poll Results

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What the Latest Sanctions Against Russia Mean for MNCs

The latest rounds of EU and US sanctions against Russia fall short of imposing restrictions on entire industries, but they do have a number of hidden spillover effects for Western multinationals operating in the market. Beyond the obvious impact on MNCs selling to the energy and defense companies directly targeted by sanctions, a broader set of MNCs operating in Russia should be concerned about the banks that have been included in the sanctions list.

Impact on MNCs:

MNCs selling business goods and services are most likely to be indirectly affected by the sanctions, because some of their customers may face a higher cost of credit. Beyond businesses that directly work with the sanctioned banks, Russia’s financial market as a whole is likely to see more expensive credit as more international banks try to restrict new lending out of cautiousness. In the long term, higher lending costs contribute to the contraction in domestic investment, which will prolong Russia’s economic stagnation and reduce demand across all industries.

Actions for executives:

Executives whose business may be affected should speak with their local teams and identify key customers who may work with the sanctioned banks. Such customers may face the risk of rising borrowing costs, particularly if their credit lines need to be rolled over in the near future.

Three consequences of the new round of sanctions:

  1. They could reduce demand from small and medium enterprises.

Both the European Bank for Reconstruction and Development (which the EU will ask to halt new lending in Russia) and VEB, a bank sanctioned by the US, lend extensively to small and medium businesses. A cut in their lending will result in reduced investment and demand for B2B goods and services at a time when investment activity is already deeply depressed.

Chart: VEB will be prohibited from borrowing at maturities longer than 90 days on US capital markets

  1. Multiple industries could be see more expensive credit.

VEB and Gazprombank, the two banks the US sanctioned, lend extensively to the corporate sector, including industries such as oil and gas, metallurgy, machine-building, chemicals, and others. 40% of VEB’s lending in 2013 was for infrastructure. Interest rates for corporate customers of both banks are likely to increase, hitting multiple industries at once.

  1. Lending in Belarus could also be hurt.

Subsidiaries of VEB and Gazprombank hold almost 10% of the Belarussian banking market and are largely dependent on parent-bank financing. Their lending activity and cost of credit is likely to be negatively affected by the US sanctions, affecting some MNCs’ corporate customers in Belarus.

Understanding how the new US sanctions work:

The banks sanctioned by the US – VEB and Gazprombank – are among the largest in Russia. They lend primarily to corporate customers across multiple industries and much of their portfolios consist of long-term loans. To finance these loans, they need to borrow at long maturities on international financial markets, which is exactly the kind of borrowing that US sanctions have restricted. Their alternative sources of long-term capital are notably more expensive and would require them to increase lending interest rates, hurting the businesses to which they lend. Because of the size of these banks, increases of their interest rates are likely to have a spillover effect across the Russian banking sector as a whole.

View the video below to see FSG’s Martina Bozadzhieva discuss investing in Ukraine and Russia on CNBC yesterday.

Trouble in Portugal reminds us that the eurozone’s woes are far from over

Executives should be wary of headlines for recovery in Western Europe, and prepared for the heavy downside that Europe’s fragile political and economic order could experience. Although news media highlight positive aggregate growth (the eurozone is forecast to grow 1.2% YOY in 2014), Western Europe remains plagued with high public debt loads and thus highly susceptible to volatility in financial markets.

In our latest Western Europe outlook, we warn senior executives about the impact that unrest at banks or in politics could have across European markets and MNCs’ performance in the region. Specifically, any uptick in political risk could manifest itself in higher borrowing costs for the government in question and across southern Europe. The increase in borrowing costs could also make business in those markets more expensive and would destabilize local governments as their cost of high debt loads rises, reducing confidence and the production and jobs growth that would spur Europe to recovery.

Photo: Banco Espirito SantoImage: Bloomberg News

In the most acute case of the European sovereign debt crisis in recent months, Banco Espirito Santo International SA, a Portuguese bank, delayed payments on some securities, following a warning in May that its parent company faced a “serious financial situation” that “could be damaging”. While southern European government bond yields have remained fairly stable, their decline, sustained since summer 2012, is unlikely to continue. European stocks saw a broad decline, notably 1.90% for Italy’s FTSE MIB and 1.98% for Spain’s IBEX 35. Portugal’s PSI 20 took the worst hit, sinking 4.18% on the news. The biggest question now is whether the delays will result in government involvement, which could spark a much more serious financial market reaction and increase borrowing costs across Europe.

That European banks have not been in the news does not imply that they are healthy, or even improving. As they undergo stress tests, European banks are pulling capital onto their balance sheets, leaving less resources available to lend to businesses. Bank lending to non-financial corporations has declined an average of 2.9% YOY in the first five months of the year. In fact, credit contractions in 2013 and 2014 are the worst since the crisis began. What’s more, Moody’s downgraded 82 European banks in May in response to a new EU law that makes banks mutually responsible for risks in the event of another crisis. The majority of these banks were not southern European, but rather from creditor nations such as Germany (12), France (10), and Austria (8), highlighting the breadth at which Europe’s banking crisis has sustained its reach.

In response to this broad European macroeconomic trend, companies can monitor a few important indicators of change:

  • Loan growth: credit growth would imply positive trends in supply and demand for the funds that fuel consumption and production growth
  • Unemployment: gauge which economies are most at risk for austerity fatigue and thus political unrest
  • Bond yields: an increases could indicate market perceptions of increased political risk
  • Results of bank stress tests in Q4 2014: while disruptive, any major bank failures will help companies to identify which countries’ recoveries are likely to lag behind

FSG clients can find out what this means for their business and how to respond in our latest Western Europe regional outlook, and in our Western Europe team’s recent blog posts and podcasts.