June 2010 Global Currency Chaos

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Topic "European Debt and Global Currency Chaos: Understanding and Managing the Risk" …

Topic "European Debt and Global Currency Chaos: Understanding and Managing the Risk"

The growing foreign debt problems in Europe, combined with a variety of dramatic global economic and political upheavals, has led to unprecedented global currency volatility and growing economic uncertainty. As economists contemplate the prospect of a break-up of the euro, an unpegging of the Chinese renminbi to the U.S. dollar, and the possibility of a second global economic crisis (centered this time in Europe), what should companies do to understand their exposure and protect corporate value from foreign currency risk?

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  • 1. Copyright 2010 FiREapps.
  • 2. AGENDA
    Introduction
    Wolfgang Koester, CEO, FIREapps
    The Euro Crisis: how did we get here?
    Professor John Mathis, Thunderbird School of Global Management
    FX Impact on Corporations
    Wolfgang Koester
    Your Corporation: how this impacts You
    Corey Edens, Chief Product Officer, FiREapps
    - 2 -
  • 3. CONGRATULATIONS!
    Your company survived the biggest economic
    downturn since the great depression.
    - 3 -
  • 4. YOU MADE CUTS
    … and are doing more with less
    - 4 -
  • 5. THEN ALONG COMES
    THE EURO CRISIS
    - 5 -
  • 6. NOW WHAT?
    - 6 -
  • 7. THE EURO CRISIS
    How did we get here?
    Dr. F. John Mathis, Thunderbird School of Global Management
    - 7 -
  • 8. JANUARY 1, 1999: BIRTH OF THE EURO AND EMU
    Fundamental structural issues with the euro set the stage for today’s crisis
    Conflicts
    Monetary vs. Fiscal Policy
    European Central Bank (ECB) has responsibility for monetary policy;
    individual central banks retained fiscal policy responsibilities
    Problem
    No authority to:
    • Tax
    • Spend
    • Enforce actions/impose penalties for non-compliance
    - 8 -
  • 9. ACTIONS SPEAK LOUDER THAN WORDS
    Original Euro Zone Member Breaches
    Source: 2009 CIA World Fact Book
    - 9 -
  • 10. WHERE DID WE COME FROM?
    A Bumpy ride… euro’s limitations are stressed, but the euro survived.
    April 2009 Greek crisis pushes the euro to a breaking point.
    7/15/08 - Euro sets record high of $1.6038 after U.S. government support for Fannie Mae & Freddie Mac fails to quell concerns about wider U.S. financial stability.
    10/31/07 - Euro climbs above $1.45, for first time. U.S. Fed announces a 25 basis point cut in its key interest rate to 4.5%.
    Oct 2009- US headlines discuss ‘demise of the US Dollar’ as a world currency
    Dec 2008- ECB Expected to lower interest rates by 50 bhp
    April 2009- Greek debt crisis turns speculation to Euro decline and break-up
    Oct 2008- ‘Flight to safety:’ US dollar rallies as financial crisis goes global
    - 10 -
  • 11. THE TURNING POINT:
    SEPTEMBER, 2008
    - 11 -
  • 12. 2008 EUROPE STARTED FACING THE BIGGEST GDP DECLINE SINCE THE GREAT DEPRESSION
    Original Euro Zone Member Breaches
    Source: Association for Finance Professionals, May 2009
    - 12 -
  • 13. EURO GOVERNMENTS STEP IN TO STABILIZE THE FINANCIAL SECTOR, INCREASING DEBT
    Original Euro Zone Member Breaches
    “Less than half of the total amounts committed [to stimulus] had been effectively used”
    – ECB, April 2010
    Source: European Central Bank, OCP N109, April 2010
    - 13 -
  • 14. GREEK’S DEFICIT AND DEBT FORCE THE
    EUROZONE TO TAKE ACTION
    Original Euro Zone Member Breaches
    Source: Association for Finance Professionals, March-April 2009
    - 14 -
  • 15. PIGS* IN DEBT:
    A TANGLED WEB THAT TRAPS ALL OF EUROPE
    Original Euro Zone Member Breaches
    * Portugal, Spain, Italy, Ireland, Greece
    Source: New York Times, May 1, 2010
    - 15 -
  • 16. FRANCE, GERMANY & THE UK CARRY THE LOAD
    - 16 -
  • 17. RESULTING IN DEBT AND DEFICITS ACROSS THE EURO ZONE
    Original Euro Zone Member Breaches
    Euro deficit limit: 3% ● Euro debt to GDP limit: 60%
    - 17 -
  • 18. EVEN THE ECB SEES IT
    GETTING WORSE
    “The euro zone deficit will climb to 7%
    in 2010”
    “…by then, all euro countries will exceed the 3% deficit limit”
    Source: European Central Bank, OCP N109, April 2010
    - 18 -
  • 19. A VICIOUS CYCLE OF GROWING DEBT AND DECLINING GDP, EXACERBATED BY GROWING LIABILITIES
    Original Euro Zone Member Breaches
    - 19 -
  • 20. KEY THEMES
    ECB hasno authority
    EU Membershavedifferent agendas
    European? Yes. Union? No.
    No commonPurpose/Identity/Language/Culture
    Increasing debt becomes avicious cycle
    - 20 -
  • 21. OUR TAKE
    ECB lacks authority to solve the problemToo late toaddress structure when thehouse is on fire
    • Creating a federalized fiscal union in Sept 08 would have addressed this issue
    Only thestrongest countries can address thestructural issues bypulling out of the euro
    • Lacking the ability to eject PIGS
    Trigger Event forStructural Euro Change
    • Greek non-compliance in 12-18 months
    • 22. Spain bailout deemed too expensive
    • 23.
    - 21 -
  • 24. THE EUROPEAN PROBLEM IS
    BECOMING GLOBAL
    - 22 -
  • 25. GLOBAL EXAMPLES…
    Original Euro Zone Member Breaches
    … May 2010 Thai Bhat falls to 8-month low
    Debate over Chinese Yuan peg continues…
    - 23 -
  • 26. INCREASED VOLATILITY & SUDDEN CURRENCY SHIFTS ARE THE NEW NORM
    Original Euro Zone Member Breaches
    USD Volatility DEC 2007 – May 2010
    - 24 -
  • 27. FX IMPACT ON CORPORATIONS
    Where are we now?
    Wolfgang Koester, CEO, FiREapps
    - 25 -
  • 28. FX IMPACTS CORPORATE FINANCIAL
    PERFORMANCE THROUGHTOUT
    THE INCOME STATEMENT
    - 26 -
  • 29. MULTINATIONALS ARE INCREASINGLY SUSTAINING
    EPS IMPACTS DUE TO FX VOLATILITY
    Companies reporting unexpected FX gains or losses in Q1 are signaling
    + Lack of risk management expertise
    + Less predictable margins
    + Less predictable net income
    = Lack of EPS predictability, resulting in decreased shareholder value
    Q2 earnings releases report significant FX impacts
    • Corporate stocks already starting to devalue
    - 27 -
  • 30. THE MARKET IS ALREADY REACTING
    Stock down 14% on Q2 guidance due to declining euro despite strong Q1 revenue and profit growth
    Other suspects
    - 28 -
  • 31. MOST HAVE REPORTED MATERIAL FX IMPACTS
    Original Euro Zone Member Breaches
    59% of companies surveyed experienced a material FX gain/loss in 2009* (45% increase)
    *2010 FiREapps/SunGard FX Exposure Management Practices Survey
    - 29 -
  • 32. THEY DON’T KNOW WHAT THEY DON’T KNOW
    Original Euro Zone Member Breaches
    *2010 FiREapps/SunGard FX Exposure Management Practices Survey
    - 30 -
  • 33. YOUR CORPORATION
    How This Impacts You
    Corey Edens, Chief Product Officer, FiREapps
    - 31 -
  • 34. UPS & DOWNS ALWAYS OCCUR
    Original Euro Zone Member Breaches
    - 32 -
  • 35. THIS IS DIFFERENT
    Original Euro Zone Member Breaches
    - 33 -
  • 36. X
    THERE IS NO LONGER A “FREE PASS” FOR
    UNANTICIPATED FX IMPACTS
    Original Euro Zone Member Breaches
    - 34 -
  • 37. FX WILL HAVE A SIGNIFICANTLY GREATER IMPACT ONCORPORATE FINANCIAL PERFORMANCE THAN IT HAS IN THE PAST
    …meaning that corporate risk managers have to
    work smarter and harder
    - 35 -
  • 38. MAINTAINING CURRENT COURSE
    …is ill-advised
    - 36 -
  • 39. SOLUTION: UNDERSTAND YOUR TRUE ECONOMIC AND ACCOUNTING EXPOSURE
    - 37 -
  • 40. MOTHERHOOD & APPLE PIE:
    THE STANDARD EXPOSURE MANAGEMENT PROCESS
    - 38 -
  • 41. KEYS TO SUCCESS:
    WORKING SMARTER REQUIRES AN ENGINE (NOT A PADDLE)
    Look at past results
    Double your worst Quarterly FX lossin the last two years
    Is that result acceptable?
    If so, there’s no need for concern
    Otherwise
    Dig in to understand above-the-line and below-the-line exposures
    Take definitive action to protect yourself
    Structural
    Operational
    Financially (e.g. derivatives)
    Process Automationenables companies to reduce the cost and risk of foreign exchange
    Data
    Process
    Analytics
    - 39 -
  • 42. KEY TAKEAWAYS
    We’re entering a new era of FX unpredictability
    Theold rules no longer apply
    The old tools (systems and processes)aren’t good enough
    Tosurvive, companies must understand their
    FX exposure&manage their risk
    Complete data, timely analysis & transparent processes
    Takedefinitive action
    Structural, operational and financial
    - 40 -
  • 43. - 41 -