US companies buying from the southern Euro-zone states could be forgiven for looking at the unfolding debacle on the continent with glee, not from wishing their suppliers any ill will but simply because as the Euro crashes against the US dollar their purchase prices in dollars tumble with it. But before US companies ramp up buying and order the new corporate limo, spare a thought for the medium to longer-term consequences.
All is not well in corporate Europe in spite of most attention being focused on sovereign or state debt. Greek, Portuguese and Italian companies have been under performing the European average in the first-quarter earnings season reported in the FT as problems with public finances and lack of competitiveness take a toll on corporate profitability. A major regional Spanish bank failed to come to agreement on a possible merger over the weekend and the government had to rush out an announcement that Cordoba-based Cajasur can draw Ã¢â€šÂ¬550m ($660m) immediately from the state’s Fund for Orderly Bank Restructuring according to the Telegraph just to keep it afloat. Where they are others follow. The problems in Spain, although worse mirror those in other European markets where bank debts are even more of a problem than sovereign state debts. In fact much of the uproar over the recent E750bn (near $1,000bn) emergency fund has been that it is largely to insulate French and German banks from having to reschedule Greek and other southern state debts. The fund is directly insulating north European banks against the consequences of default in the south. Like the US CDO crisis, the tax payer is stepping in to prevent bank failure.
In fact an FT report goes further to cast doubt on the solvency of many European banks. International Monetary Fund estimates suggest that the Euro-zone is well behind the US in terms of writing off bad assets even before the Greek crisis. The article quotes credible reports suggesting that the underlying situation of the German Landesbanken is even worse than previously thought. Last year, a story made the rounds in Germany, according to which a worst-case estimate would require write-offs in the region of Ã¢â€šÂ¬800bn about a third of Germany’s annual GDP. The author rhetorically makes the suggestion that if you were to add this to Germany’s public debt, you might jump to the conclusion that Greece should bail out Germany of course he wasn’t being serious but it graphically hints at the scale of the problem facing Europe’s banks.
Southern Europe is destined for a period of severe fiscal tightening, poor domestic and regional growth possibly recession for some southern states, banks trying to rebuild their balance sheets as they quietly write off debts and in some countries the rise of labor unrest and social disruption. Producers may find it harder to raise money from their banks to fund their businesses and the corporate bond market has already frozen up as a source of much needed capital according to this report.
Does this sound like cause for celebration? US consumers dependent on European suppliers would be well advised to dig a little deeper into their supply chain and establish with some degree of clarity just how sound that structure is. In most cases well-established firms will weather the storm and the lower Euro will certainly help, but there are going to be casualties.