For the last 20 years, the ECB in Europe has fought for price stability with its only tool, interest rates. And thanks to this, until 2020 the trick did its job, with cumulative inflation over 20 years making the value of 1Euro in 2020 = 1.39Euros in 2022. However, after the controversial recovery plan for COVID, injecting 800 billion Euros into the economy, things went out of control…. The Euro lost 16% of its value in just 2 years (almost half of what it lost during the first 20 years of the European currency’s history).
Add to this combo a war with European involvement, a massive drop in the value of the Euro against the USD of 27% in just one year down to 0.9535, an energy crisis with costs doubling or even tripling in just 6 months, and global logistical chaos with shipping prices multiplying by a factor of 5, then yes….. You have the treasurer’s worst nightmare. Oops yeah sorry, if your treasury also involves crypto, Im surprised you haven’t jumped off the balcony yet…. The largest cryptocurrencies lost 65% of their value, collapsing Exchanges, bankrupting staking providers, losing stablecoin peg, and sending thousands of crypto businesses into extinction.
For the corporate treasurer, these events made last year probably the most challenging episode in the last 80 years since the end of World War II.
So when suddenly the world is paralysed by a pandemic, the world transport of goods is jammed and there is a bottleneck, there is a massive injection of capital from the ECB and FED, companies get these huge amounts of capital in the form of loans at a ridiculously low interest rate, suddenly prices skyrocket with an energy crisis added, and the ECB decides to raise interest rates abruptly in 7 months from 0 to 3% (this story is not over yet… we will probably see 4.5-5%), you are in a perfect storm
With a world economy with the highest debt ratio of businesses, and households, such a sharp rise in interest rates will suffocate households, and quickly reduce consumption. And for companies, the interest paid on their debt is rising by 150% in a very short time, while consumption has rapidly declined, which translates directly into lower sales volumes.
What to do next?
- Outsource: Try to reduce fixed costs as much as possible, and make them variable and scalable when things are less messy (in a couple of years’ time).
- Implement remote working: Let’s progress towards a flexible way of working that will save European companies hundreds of millions. By switching to a remote working policy, the size of offices could probably be reduced by 90%, as well as rental costs, utility bills, company cars and fuel bills.
- Cloud-based operations: Forget about powerful computers, servers, and buying software licenses for each of your employees. Today SaaS is the new digital business model, paying small monthly fees for actual usage.
- Leasing: free up cash by leasing your fleet, office equipment, machinery or even aircraft. Giving treasury flexible operational capabilities to adapt to tight cash flow scenarios.
- Merge and optimise: by merging your company with a strategic and reliable partner, you could make substantial savings thanks to horizontal and vertical integration, as well as a single administrative centre.
And last, but really the most important leveraging tool for the traditional or crypto treasurer: HEDGING. Financial markets have never been more accessible, even for small businesses, providing tools to hedge most of the variable risks of the market. The treasurer can hedge exchange rate volatility (for each invoice, for each business unit, for a basket of currencies, or even for the net currency exposure of the balance sheet), interest rate fluctuations (by signing an interest rate swap, from floating to fixed), energy costs, commodities, and even inflation.
Understanding the inputs that impact the treasury, and the tools available to help the treasurer and CFO, is crucial to avoid disaster in today’s challenging situations for finance departments and corporate liquidity.
