Am I Greedy?

Why don't the investors write down all the debt to PIIGS? Just solve the euro crisis in one go? Some believe the investors are too greedy. They mean we must let the public servants in PIIGS get their salaries. It is only money after all. Why are the investors so heartless?

Maybe we must separate the money dealers (popular: "the investors") from the money owners, which mostly are us. We hire the money dealers to invest and manage our savings in funds.

When we say the investors are greedy, they correctly are greedy under our management and with our money. All my life I've been working hard, saving for retirement and for a rainy day. If I would be reluctant to loose my savings on a sovereign default forcing me to work until 70. Would that make me greedy?

Size of Cash Cushions

Airbag on bike

The size of the cash cushions vary between companies dependent on the conditions under which they do business. Here are some factors:

1. Cash generation capabilities. This factor hits both ways. A company generating much cash automatically develops a large cushion. On the other hand a company with very slim margins may require to borrow money to create a cushion for contingency.
2. Highly leveraged balance sheets requiring using cash to repay debt, meaning that the cushions rarely gets significant size. Large amount of debt usually also creates a high burden of interest rate payments.
   
   
3. Cash forecasting accuracy. The more accurately the less need for a safety margin in cash holdings.
   
   
4. Risk for game changers forcing sudden need for major product and market investments. This is typically the case for the technological and telecom markets for instance.
   
   
5. Trust in commitment for the corporate’s banking relations. In situations of preparations for market distress corporates tend to store cash and maybe even perform opportunistic borrowings to achieve cash reserves..
   
   
6. Merger and acquisition strategy requires headroom.
   
   
7. Amount of trapped cash in especially growing markets such as Brazil, Russia, India and China. The trapped cash can only be used locally and can be substantial amounts. It is important to adjust for the trapped cash when performing corporate analysis.

Airbag for chic bikers

The present economic uncertainties increase the need for cash cushions and this is a systemic shift of the corporate treasury's strategies. I believe this strategy will remain for a considerable time. We saw the same shift from high leverage to low leverage and building up of cash cushions after the Great Depression. It was only abandoned at the rise of the corporate raiders in the 1970-ties when the corporates increased the debt leverage to defend themselves from takeovers. It has not been possible to find an actual best practice ratio of cash holdings in relation to assets or similar key figures. 

Mobile Collections Far From Ubiquitous (found everywhere)

Before summer I was contacted by one peer in the food retail business and he wanted input on what's happening in the world of mobile and card collections. For his company cash collections are still a big thing with lots of disadvantages. He wondered how other companies are doing in this space so I sent out a survey to the peer network. The survey question was:

A card anyone?

"For many peers cash collections are still cumbersome and the present solutions present lots of disadvantages. Do you have an idea how to move customers to plastic or mobile payments? Can you expect cost savings in doing so, or may you find hidden traps?"

I usually receive many answers but this time very few, which made me draw the conclusion that mobile and plastic collections are very early on its development curve. Maybe even more early than we anticipated. It turns out that this peer is usually an early adopter and very few has started to explore this opportunity (September 2011). Here is the conclusion I came to when reading the answers:

How mobile are the payments?

With new technology providing better solutions for collections and purchasing, new vendors enter the market. One example is purchasing cards for B2B relations. However they are still very expensive for the suppliers and therefore mostly applicable for the SME segment. In B2C on the other hand we can see a shift towards providing customers to pay with credit cards, which many times are incentivized through discounts, in order to change customer behavior. For the selling company receiving payments through mobiles or card payments result in fewer DSO (Days-Sales-Outstanding) and thus reduces working capital that has to be off-set by the seller’s margin, being shared with the mobile network or the card issuer. A special concern with mobile and card payments is security on several layers, e.g. stolen cards and keeping customer payment data secure from improper use. 

Please send your comments to build a repository/database of treasury knowledge and views

This blog has more and more readers from all parts of the globe, which is very encouraging. I try to divide the topics so the blog becomes very generic about corporate treasury as such, and how corporate treasury participates in society. Corporate treasury has always fascinated me since it is like a company in itself. It has a separate IT platform, although integrated. It participates in the whole money flow of the company, the sometimes called financial supply chain and it is very strategic to the company. With a continuously larger readership I invite you to participate in commenting and developing the posts and the information. This blog spot has the opportunity of becoming a center point for developing the treasury profession globally. The mobile and card collection is such a topic where it would be very interesting to get a discussion going. So please comment away.

Lack of Political Leadership in Europe

In leadership one basic rule is not to hide problems everyone anyway sees. It is to solve those problems that are the true essence of leadership. There is no way Germany, Netherlands, France, Finland, and a few other countries can take on the responsibility to fund PIIGS out of their self created misery. No way whatsoever. Especially when a large part of  the PIIGS population is not prepared to, what could only be described as, normal austerity. EUR positions itself for losers and no country with a strong economy would ever like to join.

The only outcome I personally can see is that PIIGS have to be disentangled from the EMU. Either forced by the financial markets in an uncontrolled volatile way or in a much more controlled way by the leaders of Europe. Maybe such plans are already being made however many signs are pointing to that this massive cover up will continue until the bitter end.  

Time is running out and time requires strong leadership. Maybe they are too concerned by the huge credit losses and the consequences for the banking system but that is already too late. They have already occurred. 

One way could be splitting into two EUR, one for better run countries, one for PIIGS. It is clear however that this time we must be prudent on the convergence criteria. This time the leaders have to shoulder the leadership role.

This discussion will continue in the peer group in our London meeting in September. 

Financial Markets vs Politics is a Sound Balance of Power

Who forces PIIGS to shape up and get serious, the political system in the EU or the financial markets? If the politicians would control the financial markets they would continue pouring money on PIIGS and to anyone who would vote for them. Without any questions asked. Money that would be taken from our future pensions and our children's welfare. Of course politicians and bureaucrats are furious that their actions are 24/7 measured by an independant financial market they do not control. 

We achieve power balance when the competing forces are equally strong and when each party does its utmost to survive and prosper. In the free markets competitors are forced to continuously improve customer offerings and lower the costs. In monopolies they don't. The monopolies have no incentives to improve, only to exploit its position. A very unfavorable situation for the customers indeed.

It is the same for politics. One can not give them full authority. There has to be a counter balance. This balance is the financial markets that constantly provide health checks on political discipline. So why do so many politicians and bureaucrats want to regulate the financial markets? Well, they say: "The financial markets create an unhealthy volatility". Unhealthy for whom? One recent example was banning short selling in some European countries.

"But he is naked"

The PIIGS problem proves the need for the financial markets to put politics on a constant beauty parade. Locking very badly managed countries together with better managed countries within one single currency created a situation where the badly run didn't have the FX and interest rates adjusted by free markets to force the politicians to introduce serious and professional economic policies. Instead the EUR lockup gave politicians in PIIGS a window of 12 years to continue being irresponsible and serve its own purposes of re-election. The political system was not potent enough to force obedience to the rules they themselves had set-up.

Lessons learnt:

1. Why do the politicians and bureaucrats scream for regulation? Everyone is acting in his or hers self interest more or less. They want reduced competition.

2. Regulation only postpones market corrections. Either we have a free floating rate with constant adjustments or forced appreciations and depreciations. The end result is the same.

3. Political leadership needs a whip to stay sharp and bright. The financial markets punished the USA with a credit downgrade after severe lack of political leadership. The EUR is under extreme pressure since the European leadership has proven unable to harmonize the continents policies and implement sufficient financial discipline..

A power balance is required for democracy. Free elections are not sufficient by itself. We need a power balance forcing the political system to act responsibly and in the best interest of society.

Export Unemployment

All countries want to export unemployment, but to where? It was definitely a very bold move by the SNB (Swiss National Bank) to introduce a semi peg to the EUR today. One thing is clear; the financial market is a power balance to the political world. The financial markets force transparency and political discipline. One must ask why some scream for regulation of the financial markets. Maybe their intention is to give the politicians free reigns to act in their own best interests? Power struggles are not always a bad thing.

What happens with the EUR now? Is the EUR + CHF suddenly a safe haven? Will the Swiss salvage the PIIGS?

The very best FX hedging technique I'ver ever come across was introduced by a CEO of a very large multinational company. He intended to put the factories on wheels.

"All Predictions Lead to Catastrophe..."

"...so why predict?" one clever peer so wisely said today. In the next peer group meeting in end September we will spend time on finding all possible scenarios of how the global economy will develop. We will not shy away from low probability scenarios or even those that may be considered black swans. We will be assisted by a very well reputed chief economist to understand the different scenarios in this very complex economic situation. We will use the scenarios and adapt them to our special conditions, and stress test each scenario for contingency planning. "The role for the corporate treasurer is to prepare rather than predict".