- 13
- JUL
- 2011
Greece and Italy: how stalled capital flows disrupt the supply chain
Author: Jonathan Webb - Categories: Economy & Current Affairs, Working Capital
Italy has become the new victim of negative speculation on the global financial markets. But, as the economy is 'too big to bail' the repercussions of sustained doubt within the world's third-largest debt market could have a significant impact on the global supply chain.
I have recently returned from Greece and, although the average experience of business there does not reflect the fever-pitch dramas of the media's portrayal of Athens's turbulent streets, there is a sense of unease. Shops are closing down, jobs are being lost and fears for the country's future cloud most issues.
The tide of international speculation appears to have finally moved to Italy. Given the interests of those that hold credit default swaps - a form of insurance that provides compensation should a loan default - it perhaps seems inevitable that those countries with dangerously high deficits might suffer by continuing to attract negative press as malicious rumours are spread across the market.
Moves to restrict the practice of 'naked shorting' (selling a credit default swap without owning the bond) have been slow. Italy is beginning to crack down on the practice, but not before its economy suffers amid new round of negative speculation.
Given that this practice may continue to destabilise EU economies, where does this leave procurement?
Although Portuguese bonds have been downgraded to 'junk' (the lowest possible rating), government debt is seen as the benchmark for the entire money market. Indeed, many buy government bonds chiefly because they are associated with zero risk. The possibility of a default is almost unthinkable, but if it does occur, the repercussions for the entire domestic capital system will be severe.
The drying up of the flow of money may, at worst, lead to another 'Lehman Brothers', for the world economy. However, even if it is contained, it will prevent many local suppliers from accessing the capital that many require to power business plans.
Now that Italy has moved from Europe's core to its periphery, many economies in the Mediterranean region face the prospect of substantial insolvencies. There is the further threat of persistently tightened access to credit within these economies in the future, which will call into question the reliability of companies in these countries.
The tide of capital concerns could sweep across major industries, most noticeably the manufacturing centres of the north. Part availability could become an issue within key sectors, as suppliers struggle to obtain the credit to sustain businesses.
Buyers should revisit their category plans and embed this new risk into their scenario planning. The most concerning threat is the flipping of EU countries from core to peripheral. Even France, whose bond market has historically mirrored movements in Germany, may even come under similar pressure in the future. Procurement must be quick to respond to this rapidly moving market.
