copyright 2010 fireapps.. agenda introduction –wolfgang koester, ceo, fireapps the euro crisis:...
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Copyright 2010 FiREapps.
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
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CONGRATULATIONS! Your company survived the biggest economic downturn since the great depression.
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YOU MADE CUTS
… and are doing more with less
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THEN ALONG COMESTHE EURO CRISIS
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NOW WHAT?
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THE EURO CRISIS
How did we get here?Dr. F. John Mathis, Thunderbird School of Global Management
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JANUARY 1, 1999: BIRTH OF THE EURO AND EMU
Fundamental structural issues with the euro set the stage for today’s crisis
ConflictsMonetary 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
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ACTIONS SPEAK LOUDER THAN WORDS
Original Euro Zone Member BreachesCountry Past breach periods
for deficitPast breach periods for debt
Austria 2003-09
Germany 2003-06 2003-09
France 2003-04 2003-09
Italy 2003-09 2003-09
Luxembourg
Netherlands 2004-05
Belgium 2003-09
Spain 2008
Portugal 2002; 2005-06 2005-09
Finland 2005-2007
Ireland 2008
Greece 2003-08 2003-09Source: 2009 CIA World Fact Book
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WHERE DID WE COME FROM?
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%.
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.
Oct 2009- US headlines discuss ‘demise of the US Dollar’ as a world currency
April 2009- Greek debt crisis turns speculation to Euro decline and break-upOct 2008- ‘Flight to safety:’ US
dollar rallies as financial crisis goes global
Dec 2008- ECB Expected to lower interest rates by 50 bhp
A Bumpy ride… euro’s limitations are stressed, but the euro survived.April 2009 Greek crisis pushes the euro to a breaking point.
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THE TURNING POINT:SEPTEMBER, 2008
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Original Euro Zone Member Breaches
2008 EUROPE STARTED FACING THE BIGGEST GDP DECLINE SINCE THE GREAT DEPRESSION
Source: Association for Finance Professionals, May 2009
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Original Euro Zone Member Breaches
EURO GOVERNMENTS STEP IN TO STABILIZE THE FINANCIAL SECTOR, INCREASING DEBT
“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
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Original Euro Zone Member Breaches
GREEK’S DEFICIT AND DEBT FORCE THEEUROZONE TO TAKE ACTION
Source: Association for Finance Professionals, March-April 2009
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Original Euro Zone Member Breaches
PIIGS* IN DEBT:A TANGLED WEB THAT TRAPS ALL OF EUROPE
Source: New York Times, May 1, 2010
* Portugal, Italy, Ireland, Greece and Spain
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Original Euro Zone Member Breaches
RESULTING IN DEBT AND DEFICITS ACROSS THE EURO ZONE
Euro deficit limit: 3% ● Euro debt to GDP limit: 60%
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“The euro zone deficit will climb to 7% in 2010”
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“…by then, all euro countries will exceed the 3% deficit limit”
EVEN THE ECB SEES IT GETTING WORSE
Source: European Central Bank, OCP N109, April 2010
Original Euro Zone Member Breaches
A VICIOUS CYCLE OF GROWING DEBT AND DECLINING GDP, EXACERBATED BY GROWING LIABILITIES
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KEY THEMES
ECB has no authority
EU Members have different agendas
European? Yes. Union? No.No common Purpose/Identity/Language/Culture
Increasing debt becomes a vicious cycle
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OUR TAKE
ECB lacks authority to solve the problemToo late to address structure when the house is on fire
• Creating a federalized fiscal union in Sept 08 would have addressed this issue
Only the strongest countries can address the
structural issues by pulling out of the euro• Lacking the ability to eject PIGS
Trigger Event for Structural Euro Change • Greek non-compliance in 12-18 months
• Spain bailout deemed too expensive
• …
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THE EUROPEAN PROBLEM ISBECOMING GLOBAL
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Original Euro Zone Member Breaches
GLOBAL EXAMPLES…
Debate over Chinese Yuan peg continues…
… May 2010 Thai Bhat falls to 8-month low
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Original Euro Zone Member Breaches
INCREASED VOLATILITY & SUDDEN CURRENCY SHIFTS ARE THE NEW NORM
USD Volatility DEC 2007 – May 2010
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FX IMPACT ON CORPORATIONS
Where are we now?Wolfgang Koester, CEO, FiREapps
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FX IMPACTS CORPORATE FINANCIALPERFORMANCE THROUGHTOUTTHE INCOME STATEMENT
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MULTINATIONALS ARE INCREASINGLY SUSTAININGEPS 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
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THE MARKET IS ALREADY REACTING
Stock down 14% on Q2 guidance due to declining euro despite strong Q1 revenue and profit growth
Other suspects
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Original Euro Zone Member Breaches
MOST HAVE REPORTED MATERIAL FX IMPACTS
*2010 FiREapps/SunGard FX Exposure Management Practices Survey
59% of companies surveyed experienced a material FX gain/loss in 2009* (45% increase)
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Original Euro Zone Member Breaches
THEY DON’T KNOW WHAT THEY DON’T KNOW
*2010 FiREapps/SunGard FX Exposure Management Practices Survey
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YOUR CORPORATION
How This Impacts YouCorey Edens, Chief Product Officer, FiREapps
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Original Euro Zone Member Breaches
UPS & DOWNS ALWAYS OCCUR
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Original Euro Zone Member Breaches
THIS IS DIFFERENT
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Original Euro Zone Member Breaches
THERE IS NO LONGER A “FREE PASS” FORUNANTICIPATED FX IMPACTS
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FX WILL HAVE A SIGNIFICANTLY GREATER IMPACT ONCORPORATE FINANCIAL PERFORMANCE THAN IT HAS IN THE PAST
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…meaning that corporate risk managers have to work smarter and harder
MAINTAINING CURRENT COURSE
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…is ill-advised
SOLUTION: UNDERSTAND YOUR TRUE ECONOMIC AND ACCOUNTING EXPOSURE
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Income Statement
Revenue
COGS
Operating Expense
Operating Income
Other Income/Expenses
FX Gain/Loss
Net Income
EPS
MOTHERHOOD & APPLE PIE:THE STANDARD EXPOSURE MANAGEMENT PROCESS
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KEYS TO SUCCESS:WORKING SMARTER REQUIRES AN ENGINE (NOT A PADDLE)
Process Automation enables companies to reduce the cost and risk of foreign exchange
Data Process Analytics
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Look at past results– Double your worst Quarterly FX loss in 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)
KEY TAKEAWAYS
We’re entering a new era of FX unpredictabilityThe old rules no longer applyThe old tools (systems and processes) aren’t good
enoughTo survive, companies must understand their
FX exposure & manage their risk• Complete data, timely analysis & transparent processes
Take definitive action • Structural, operational and financial
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