The Greek government provides risk assessment and management as a legal obligation for outdoor organizations conducting activities in their country. According to Barrow (2000), risk assessment and crisis management is a kind of growing importance to all kinds of businesses. Changes in business environment affect the profits and asset ownership of a country leading to country risk. For this reason, investors particularly avoid from investing in the country. Greek as a country has been exposed to their country risk where investors have doubted the possibility of the country to manage investments. This study assignment provides an analysis of country risk that faced by investors in Greek over its crisis, a history of previous crises and reasons for the crises.
The body of the study assignment will explains the elements of country risk in connection to the Greek crisis. It will emphasize on government takeover and explains ways of reducing exposure to accommodate the takeovers. The recommendation part finally gives the result and opinion regarding investing in Greek in the current situation.
Analysis
Country risk definition
Country risk is a collection of risks elements related with investing in a foreign country in which outdoor investors should take it into consideration while investing abroad their home countries (Bouchet, 2003). Accourding to (referance) country risk is an attributed to changes in the business environment that negatively affects the operating profits of a country and the value of its assets. This results to risk on the part of investors who already invested or those who intend to invest in such countries who suffered from some kind of crises. This risk refers to risks affecting all kinds of companies within these countries. Changes in currency interest controls and other rules and regulations which affect on the economy scale, stability and devaluation are some the financial features that can cause country crisis by affecting the operations of companies. Government takeover is the most severe country risk that companies are exposed to.
There are many factors to assess the country risk assessment in which foreign investors indicate in their feasibility study as it is essential to evaluate the country risk, Deceanu, Pintea, Thalassions and Zampeta has provide a study in their journal that the country risk study over Greece is that Greece issue is the sovereign debt . Although most analyst agrees that the Political and economic risk are the main factors in country risk assessment, other factors have their influence to the foreign investors risk assessment.
Brief about Greece crisis
The recent Greek crisis draws its roots from previous years. Panaritis (2011) states that, Greece work up to the reality facing its economy in 2010 after experiencing rejection, bargain and dejection. The wars and conflicts that the country got involved in from 1912 all the way to the 1974 conflict between Cyprus and Turkey contributed to its current crisis. As governments were concentrating on the political aspects, the economy was abandoned and kept on worsening. After the 1945, a period of economic disaster and inadequate attention on the economic sector which then leads to a poor government decided to sort alternative ways to recover its citizen's lives. Welfare policies basing on high salaries were implemented and workers' salary adjustments effected.
Some of Greece citizens however migrated to the U.S which affected the country's Gross Domestic Product. In 1970s, the country's annual growth rate shoot to 6% recording a success and recorded an 8% yearly growth with low inflation rates (Panaritis, 2011). Production also increased to almost 10% yearly. The 2009 Crisis is the recent one in Greece which led to risk of confidence on the part of investors. However, it is considered as a challenge to initiate new policies and economic turns. The severity extended to 2010 in the financial market, affecting bonds and suppressing the private capital market.
Reasons for crisis related to Country risk Factors.
Extraordinary Government Expenditures leads to High Debt Risk which is considered as a Financial Risk
The Greece crisis resulted from a number of factors. Government spending is concerning one of the main causes of the Greece crisis. GDP is an economy health measurement. It indicates the growth of any economy and investors mainly concern about it to study the business environment while investing abroad. The below table sourced from Hellenic Statistical Authority, shows the GDP in compared with the Country Surplus/deficit, total debts, Expenditure and Revenue. The country recorded a positive growth annually from 1999 to 2007 (see appendix 2) as a result of the incremental in the flow of foreign capital from investors to the country (Athanassiou, 2009). However, the economy had fall down again in its GDP as well as in other economic indicators that primarily influence on the investors decision to invest in.
The decline in the Gross Domestic Product was a consequence of the government extraordinary in spending which leads to recording decline in the GDP since 2008 as the country also recorded tolerable of the government deficits. This was negatively followed by economic downturn caused by Greece spending which always was exceeding its annual budget.
Despite all, Greece has recorded historically four times falling deficits in pay its debts obligations. This statically was on 1827, 1843, 1893 and 1932 (Fouskas and Dimoulas, 2012, p.9). Moreover, counties has exposed to Creek debts failure in both private and public sector as it has reach $ 407 billion as the below bar charts. Countries in Euro zone and the International Monetary Fund were always the in the head to cut off the high Greece debts. Consequently, they disagreed to write down a massive billion amount of its loans to Greek as Greek reported its budget for the year 2013 which "involves 9.4 billion Euros of spending cuts" (BBC, 2012)(Strupczewski Breidhardt, A. and Paravantes,M, 2012).
Source: BIS July 2012. Etstat. Available from: http://www.bbc.co.uk/news/business-13798000
Indeed, Greek total debt 407 US Dollars as stated in July 2012 (BBC, 2012). Greek has a statistical number from the year 1998 to 2008 as reported in Fouskas and Dimoulas Annual Journal in 2012. The below calculation represents the level on loan, expenditure and the amount received from other countries which conclude that Greek has experience the high debt crisis before the actual time series of the global financial crisis in 2007-2008 as prior mentioned(see appendix 1).
The above issue indicates a high level of risk measurement to investor's seeker to open their business in Greek. Although countries all over the world were interest in Greece Crisis and its current position within the Euro zone in order to move parallel with Euro countries and other would prefer to take off the Greek's membership from the Euro Union. On the other hand, International Monetary Fund and Euro zone countries had disapprove to expend further two year for Greece to meet its deficits and reduce the debts in parallel to meet its budget requirement that involve a new borrowing budget from IMF and Euro Zone Countries in order to push up the Euro economy which recently face a Europe Crisis in other countries rather than Greece (Strupczewski, Breidhardt and Paravantes, 2012).
High Debt Crisis Leads to a substantial level of Corruption considered as a Political and Financial Risk
Greece corruption is a public issue that Greece citizen are suffer from as well as Euro zone members and Greece in and out door investors. The government tax fabrication, unemployment and the corruption is another problem that the Greece economy faced and thus investors worldwide worried about it. Setting taxes below the expected levels in the recent decades has encouraged the current Greece Corruption as many of the citizen refuse to pay it. The government has imposed to increase the taxes over wages and pensioners in parallel with the reduction in overall wages level, increase the tax ranks and increase up the pensioner's age to restructure the regulation and the rules over the country to maximize the revenue (Stamouli, 2012). Due to Greece corruption, foreign investors are concerned about what is in the Greece as much as they concern on their business (Anonymous, 2012). A copyrighted report survey conducted by the Transparency International Greece and distributed among individual in Greece. The survey was aimed to focus on the corruption level in Greece. The finding of the survey the last year (2011) state that the corruption percentage of 13 is the total corruption in Greece in the private and public sector as well as the diagram shows below. Also, it is reported in BBC business news that "Greece's global ranking fell from 80th in 2011 to 94th in 2012, reflecting the country's continuing economic turmoil and widespread tax evasion" (BBC, 2012). In addition, the high level of unemployment, as clear shown in the graph below, which has predicted by analysts that the jobless level could even move up further and thus added to "the fact that the jobless rate is a lagging indicator of broader economic activity, unemployment may not have reached its peak yet"(The Telegraph, 2012).
Source: Eurostat. Available from: http://epp.eurostat.ec.europa.eu/statistics_explained/index.php?title=File:Unemployment_rates_2011.png&filetimestamp=20120502060702
Furthermore, Greece debt crisis and its corruption had cause a series of problem to European Union as it was and still present a greater position (social economic upheavals) and according to a national survey conducted in 2011 to rate the corruption on Greece, it is reported that about 554 Million Euro had cost Greece to a petty corruption which actually was 78 million euro less than 2010(Transparency International, 2012).
No Statistical Information over the country's assets leads to Lack of Transparency as a Political and Financial Risk
Adding to the above, the country has a history of misreporting the official statistics of the country's economy. Transparency to investors is how is the information rate of degree to be reliable for the investors to invest in such country and other investors have the aspect of Transparency to state "inadequate economic data, hidden weaknesses in financial systems, and a lack of clarity about government policies and policy formulation contributed to a loss of confidence that ultimately threatened to undermine global stability"(Gelos and Jin Wei, 2002) For example, the country paid banks such as the Goldman Sachs bank millions to conceal the country's borrowing levels since 2001. This was discovered after nine years, in 2010. The Yen and dollar cross currency swap of Greece currency was the most noted where faulty exchange rates were used by Goldman Sachs bank. According to Bakouris, a Chair of Transparency International's Greek Chapter," The Greek crisis will only end when the crisis of values ends, and that will only happen when Greek leaders take the lead in making transparency the norm in Greek government and society"(Bakories, 2012).
Inflation, Interest Rate and exchange Rate
The revision of Greece debt levels in 2009 by George Papandreou government from 5% to 12.7% of the Gross Domestic Product (GDP) is also a reason for the current crisis in the country. The 2009 deficit was then increased in the next year to 130% from 113% of the GDP. These extreme upward statistics were as a result of the previous faulty statistical estimates that led to Euro stat conducting detailed audits on the country's accounts since 2006 to 2009 for reliability. The government offered its five year bond for subscription and despite the crisis, there was a four times over subscription. About 70% Greece government bonds in 2010 were of foreigners and loans were used to pay matured bonds and finance the continued budget deficits.
Intolerable and fast growing ratio of debt to GDP ratio is also a reason behind the Greece crisis. The debt ratio of the Greek government started accelerating in the period between 1981 and 1996, where it increased to 100% from the previous 22%. The years were characterized by high inflation rates, numerous devaluations of currency, higher interest rates and slow growths in the GDP. The hard drachma policy resolved the 1996 to 1999 crisis and brought the economy to stability. The 2008 to foreseen 2003 high debt ratio against the GDP has finally catalyzed the budget deficits increasing the impact of the crisis. Financial market interest rates are shooting to cater for the increasing risks. Investors will therefore evade investing and thus increase the level of the debt.
Country risk in Greece crisis
Certified credit institutions assume the country risk other than customary credit risk when they practice international lending. Country risk involves financial risks, political risk factors and economy risks which threaten the investors internally and externally.
The Greek government is currently facing country risk as result of the ` debt ratios that it has experienced over the years. According to AMCM (2008) study, budget deficits can result in a country's financial risks such as high inflation rates and GDP and influence government regulations and legal decisions. The country experienced a lower than expected growth rate in GDP in the year 2008. The World Bank report of 2012 indicated a GDP deflator of 1.64 % annually in 2011. Interests rates in the financial markets and yield on bonds appreciated, which led to the suffocation the capital markets in the country.
The Greek government currencies become unstable as a result of the crisis. Slodkowski (2012) reported that the Euro fell four times below the US dollar which was not expected. The government changed its policies as it geared towards achieving. The security of employees and assets was threatened by the increasing debts and the value of assets deteriorating. Political and social instability out-faced the value of the rule of law and encouraged theft of intellectual property like the case of Goldman Sachs bank.
The government was exposed to high government risks as a result of the debt crisis. The EU Commission estimated the debt levels of Greece to further rise to 198% in 2012 in case the policies were not reinforced in its report on the Economic Adjustment Programme for Greece. According to the European commission (2012), the country has experienced high debt ratios since 1993. The Greek government has recorded wasteful spending of its revenues leading to incapacitation in meeting its foreign debts (Fotopolous, 1992). Monetary instability and failure to control the exchange rate system has also been a problem in the Greek economy. This has led to the currency being overvalued and corruption in the treasury systems (Wills, 2010).
Strategies in which companies can reduce the exposure to host government takeover
The crisis affected the government political and economical environment. Investors' attitudes in Greece changed in conjunction with the consumption behaviors. The government was hiding the country's debt status from its people, and this prompted to ignorance in consumption despite the real situation. According to Willis (2010), corruption increased and the country started to experience bureaucracy.
The most severe country risk is the takeovers. Governments can takeover the management of private companies if they are at risk of collapsing. The private investors therefore end up losing their own businesses. Government influences led to the closure of Coca-Cola, HBC Company and the Burger king business. The Coca- Cola Hellenic has chosen to move abroad as the company fed up from the high taxation on it revenue with no stability in Greek neither politically nor ecumenically environment (Lucas and Kontogiannis, 2011). The Coca-Cola Hellenic Company closed down its operations in the Thessaloniki and Patras regions in April 2012 in order to reorganize it operations due to the increasing costs that it incurred. This is attributed to the Greek government stand on investment and the 10% increasing taxes on beverages which reduced sales by 12% every year in 2011. This was the case since the hit of the 2009 Greek crisis. Burger King Company renounced its operations in Getting Britain Working program as a result of the governments' divisive schemes. The public considered the operations as exploitation of the youngsters.
Nevertheless, there are some strategies to reduce government host exposed to takeover the businesses mentioned by as followed:
Obtain insurance over the business.
The best way for investors worldwide to save their businesses from takeover is to cover the business with insurance. Insurance coverage will reduce government host as well as the risk.
Having a loan from Local Greece banks.
The second strategy is to borrow fund from Greece banks in order to have a route for the company to not be taken over by the hostage government. Greece bank offers small businesses a sufficient fund for the investors to start their businesses with substantial interest rate for maximizing the bank profit. Investors can also enter the Greece Stock Exchange Markets to enhance its local position as the company will grow up and open a new line that host government will not take over the business.
Find out an exclusive business, supplier and/or technology.
To have a special supplier, making a unique supplier or a technology is to build up an exclusive business line with less or no competitors. Such technology as
Employing Greece citizen.
In Greece, the level of unemployment is may increase the level of corruption as the country is facing this issue. Government with expose to takeover business would find it difficult to do so as it will increase the unemployment rate and raise social problems in the Greece Society. The companies can also display social interests by employing nationals since Greek laws on labor are more favorable.
Reduce the cash flow representation.
To reflect a lower cash flow in yours businesses can be useful for protect it from the takeover. This way is limited as the company should follow the country government rules and regulations.
Recommendation
Because of the instability of the government, corruption in its operations and the country risks that it is exposed to, investing in the country is more risky than expected benefits. However, with insurance cover and other exposure control measures, investing is projected to be beneficial if the country can control over its debts.
Conclusion
A country's financial crisis exposes businesses to financial, political and economic risks that if not controlled can lead to liquidation. The risk of these companies being taken over by the government or alteration of its operations as a result of government interference is the most severe risk. However, the exposures can be controlled. Investors need to study the risks in a given country to determine viability to invest.
