The PIIGS Economies: Too Big a Risk for Corporates?

Continuing political and economic uncertainty in four of the five PIIGS economies – Ireland emerged from recession in 2013 – have convinced many companies they are too risky to invest in, and led to them moving cash overseas to maintain their liquidity. Yet reports suggest that the high-risk status of these countries will lead investors to attain a higher investment yield than that offered from investing in their richer northern neighbours within the EU.  

Liquidity and Risk

Travers Lorcan, investment manager at pharmaceuticals multinational Johnson and Johnson comments: “I am not aware of any corporates that maintain investment positions in the PIIGS countries, because the trends of the past few years have been similar to our approach where the focus of investments has been on sovereign liquidity funds and direct investment exposures to government issuance from Germany, France, the Netherlands, Finland and Austria.”

Lorcan says that following the 2008 financial crisis, most companies avoided taking on additional risk particularly as a currency meltdown was anticipated – much as now with the renewed prospect of a ‘Grexit’. His views are supported by Remco de Vries, head of treasury operations at information services group Experian. He believes the “only possible candidates for companies that still invest in these countries would be large domestic businesses whose banking infrastructure would not easily allow them to bring funds outside of their countries – I’m thinking about co-operatives and the like.” Yet he adds that some of those co-operatives have merged to become international businesses in their own right.

The PIIGS’ governments have “struggled to support liquidity because they have found it hard to access the capital markets themselves,” says Naresh Aggarwal, a senior manager at PwC. “So what they have done is to make efforts to ensure their own suppliers are paid on time – helping to accelerate the flow of funds into the financial system.” Their domestic and often government-owned banks have also been pushed to lend to corporates, and local businesses have sought to maintain as much short-term liquidity as possible.

Caspar van Grafhorst, senior investment analyst for credit at NN Investment Partners (formerly ING Investment Management), offers an example:  “Spanish banks were forced to use ECB collateralised funding programmes to generate liquidity and were heavy users of the long-term refinancing operation (LTRO) initiative,” he says. “Most of the liquidity was used for investing in sovereign bonds to generate income for their profit and loss accounts and so liquidity has been widely available.”

“In fact current levels of liquidity are higher than they have been for 15 years and that is although this is partly a reflection of the current low level of interest rates across the eurozone,” adds Aggarwal. In his view, liquidity has been boosted by the introduction of positive working capital measures and borrowings.

According to Alvaro Barez, head of transaction banking at Banco Bilbao Vizcaya Argentaria’s (BBVA) corporate and investment banking division, companies implemented various initiatives during the financial crisis in order to maintain liquidity. “Firstly, liquidity and its management have been given more emphasis than at times of lower tension, which has led to the strengthening of teams, procedures and policies; secondly, they have sought additional sources of liquidity, which were…for the better internal management of working capital as a way of unearthing liquidity.”

The downside of this, says Barez, is that many capital expenditure programmes have slowed down. This has affected several countries as they have attracted lower investment levels and companies have focused on day-to-day management of their liquidity. Some firms have also sought loans from overseas banks.

Suzanne Janse van Rensburg, Bank of America Merrill Lynch’s head of liquidity and investments for global transaction services, advises companies both in and outside of the PIIGS to manage their liquidity through cash flow forecasting. This requires them to have liquidity management structures in place through physical cash concentrations and they need to consider the physical movement of cash in and out of a country to get the most from their cash. They can then create bespoke liquidity structures, enabling them to function better in certain jurisdictions when managing risk. This also requires having counterparty limits in place and conducting regular audits.

A longer version of this article appears in the latest edition of Global Treasury Briefing.

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