Timberlands

INBM 203

TRADE FINANCE

Case Study 2

Sharpening risk management strategies for the eurozone

By Economist Intelligence Unit

February 21st, 2013

The eurozone may be the biggest drag on global growth, but it’s also a critical market for many international companies. The eurozone is the world’s second-largest economy, accounting for 17% of global GDP in 2012. Companies around the world have substantial exposure to the region through trade, finance and foreign direct investment.

Although the risk of a break-up of the eurozone has eased markedly since the European Central Bank announced a sovereign-bond buying program in mid-2012, demand in much of the euro area remains weak. The sovereign debt and financial sector crises of the past three years have squeezed credit markets and fuelled political instability.

With unemployment in double digits in the EU as a whole, and several European countries (Italy, Spain, Ireland, Portugal and Greece) in deep multi-year recessions, many companies in North America are rethinking their risk exposures.

First and foremost, the euro crisis is leading companies to consider whether they should be shifting towards emerging markets and away from the more established Western markets, particularly Europe, according to Bill Murphy, national leader for financial risk and regulatory management at KPMG.

As importantly, the crisis has increased the emphasis on risk management. “More specifically,” says Murphy, “companies are looking beyond their own credit facilities to those of their customers and suppliers.” Put another way, firms operating in the eurozone are making sure they understand who has the ultimate obligation for paying for shipments. “For example, if they’re selling to a European manufacturer, they’re beginning to look at who that company’s customers are to determine whether there’s an indirect credit risk further down the chain that would limit their customers’ ability to pay,” he says.

Similarly, companies are...