How a crumbling Greek financial system could affect risk managers, by James Bray

Greece’s crippling debts and the consequences of a second bailout will be felt across Europe but the immediate impact will be on those companies most exposed to the Greek market, according to risk management analysts.

Businesses with a significant presence in Greece, for example, could see their assets devalued causing cash-flow and solvency problems in the future.

Risk managers need to understand how the situation in Greece could affect their own company's assets, Greek suppliers and subsidiaries as well as the equity markets in general.

“It’s not just the direct linkages. It’s about understanding the interconnectivity by which other players are exposed to those markets,” explained Mike Finlay, CEO of risk advisor RiskBusiness.

Ishan Bhaskar, a global economist at Exclusive Analysis added that “bondholders are facing the most direct risk." But other companies operating in Greece could also be faced with "significant tax increases as a result of austerity measures”.

The Greek government has spent beyond its means for years relying on borrowing to fund its public services. It is now faced with crippling debts that it cannot repay without support from other countires.

Cross-border lending has led to a build up of large exposures to Greek debt in several European banks particularly in Germany, where the government is keen to help Greece avoid default because it could compromise the German banking sector.

This means that European banks that hold Greek debt are potentially on the hook for significant losses making them more risk averse. For large businesses this could cause difficulties securing loans from banks, hampering commerce.

But it's also likely to have an impact on the risk appetite of insurance companies, according to one source. “If banks and (re)insurance companies have financial interests (bonds, stocks etc.) in Greece then it may have consequences on their risk appetite which normally ends up in higher premiums, increases in deductibles and an adjustment of conditions,” said Joop Nijssen, senior vice president of Marine & Energy at BWS.

Risk managers may have to factor in possible loan and insurance rate hikes into their own plans.

A default in Greece could hurt the Euro and have a significant effect on exchange rates. This could cause a rush of funds into Swiss Francs and English Sterling while the value of the Euro falls, according to Finlay.

While volatile currency markets affect companies throughout Europe, the effects could be positive for some and negative for others.

For some experts a second bailout already constitutes a default. “[Rating agency] Fitch will declare the country to be in default if commercial banks agree to roll their loans over, as EU finance ministers are planning,” reported The Guardian.

But Bhaskar thinks there's a big difference between a bailout and an outright default (where Greece refuses to pay its debts). He believes an outright default represents a much more serious risk as it would seriously dent confidence in the Euro. Restructuring Greece's debt will limit the negative effects of Greece's precarious position, he said.

However, there are some potential opportunities for business. Bhaskar noted: “Within Greece the governments will push for more privatizations, sectors like airports, utilities, energy companies and tourism.”

This could open the door for expansion for some companies in Greece. These business opportunities need to be weighed up against the risk of social unrest and discontent, which is already plaguing the streets of Athens. Unrest in Greece is likely to continue as austerity measures are pushed through.

Neither are the risks confined to Greece. At this point the threat of the Greek crisis spreading to other European periphery economies, like Spain, is great. Prudent risk managers should monitor the indicators and limit their exposures in these tricky markets. Most of all, risk managers need to be prepared for yet more market volatility.

Greece- Key points for risk managers

-Understand the interconnectivity of Greek risk
-Monitor exchange rate risk
-Probable corporate tax rises in Greece
-Possible effect on insurance market, leading to higher prices
-But will privatisations lead to opportunity in Greece?
-Big threat of continued civil unrest