Growing uncertainty surrounding the Greek debt crisis is prompting governments and global financial institutions to draw up contingency plans for a possible ‘Grexit’, or Greek exit, from the euro. Regardless of the election results on 17 June, the massive scale of the fiscal adjustments to be taken by the new Greek government might simply be too much to sustain. Food manufacturers, therefore, should start to prepare their own contingency plans as a back-up for a potential ‘Grexit’.
Quantifying the impact of Greek debt on European economies
In order to gauge the impact of a potential ‘Grexit’ on European economies, different financial research agencies have attempted to quantify how much Greece owes to its creditors. In sovereign bonds alone, Greece is estimated to owe around €92.4 billion to EuroZone countries. Click to tweet! This is the addition of €53 billion effectively paid by EuroZone countries in bilateral loans agreed in the first bailout and €39.4 billion from the first instalment of payments channelled through the European Financial Stability Facility (EFSF). This second payment was agreed after the signature of the second bailout agreement between EuroZone countries and Greece in March 2012.
The International Monetary Fund (IMF) would be another financial institution affected by a ‘Grexit’. The IMF has so far given Greece loans worth €21.8 billion. They comprise €20.1 billion paid as part of the first bailout agreement and €1.65 billion paid as a first instalment of the €28 billion loan facility agreed for the second bailout.
In addition, exposure to Greek debt comes through bonds held by the European Central Bank (ECB). The ECB has been buying Greek bonds through the Securities Markets Programme (SMP). These bond purchases aimed to provide EuroZone banks with short-term liquidity. According to estimates from financial research agency Global Economic Analysis, ECB’s total exposure to Greek bonds is estimated at around €165 billion. This comprises direct purchases of Greek sovereign debt (portfolio-1) and collaterals linked to loans taken through an online platform that intertwines all EuroZone national banks’ imbalances (target 2). Research published recently by the German newspaper Der Spiegel shows a slightly lower figure for the combination of collaterals and direct purchases.
Another layer of debt is accounted for by private Greek bond holders, which include mostly European banks. As part of the second bailout agreement, private creditors agreed a 54% haircut off the face value of their bonds. A total amount of €197 billion worth of debt – out of a total of €205 billion – was swapped for longer-term bonds, with a maturity of between 11-30 years and lower average yields. Factoring in the 54% haircut in face value, the debt held by private investors totals €90.6 billion.
Contagion to the periphery could worsen slump in output
Adding the different layers of debt outlined, the total volume of Greek debt would be close to the €370 billion mark. Click to tweet! Assuming around 90% of this amount is held by EuroZone banks, firms and financial institutions, total liabilities in the EuroZone would be close to €335 billion. According to Euromonitor International’s Countries & Consumers database, this represents around 1.8% of the EuroZone’s projected GDP in 2012. The impact of a disorderly default, however, could be far worse if contagion spreads to larger economies like Spain and Italy. The Bank of England, for instance, estimated recently that such impact could reach 5% of the EuroZone’s output if contagion spread to peripheral economies.
Food manufacturers: Taking a leaf out of the 2009 crisis
Despite gloomy predictions with regard to the impact of a ‘Grexit’ on food sales, past crises have shown that demand for food can prove quite resilient to the economic cycle.
In 2009, GDP in Western Europe declined by 4.2% in real terms, according to Euromonitor International’s Countries & Consumers database. This decline took place at the height of the financial crisis that followed the collapse of investment firm Lehman Brothers. Interestingly, retail volume sales of packaged food in this region rose by 1.2%. Three consumer trends – cocooning, health and demand for indulgence – explain the positive performance of packaged food sales in the face of severe economic contraction.
Low consumer confidence and dwindling disposable income typically result in a slump in consumer expenditure. That said, the slump can take different forms. In 2009, for instance, Western consumers decided to cut their expenditure on dining out at premium restaurants. Instead, they spent more time dining at home – cocooning – often inviting guests. As a result, demand for some premium food categories increased in Western Europe. Chilled/fresh pasta and chilled soup, for instance, saw retail volume sales rise by more than 4% each in 2009.
Demand for indulgence food benefited from impulse purchases. Stressed Western European consumers, often worried about losing their jobs, turned to food products that provided immediate comfort at a relatively low price. In Western Europe, categories like artisanal ice cream saw retail volume sales grow by 8% in 2009. In Spain, sweet and savoury snacks rose by 3.4% in retail volume in the face of a real 3.7% decline in GDP and soaring unemployment.
Health continued to drive Western European consumers’ decisions despite economic woes. This is because most consumers regarded being healthy – and a reduction in sick leave absence – as a bonus in terms of keeping their jobs. In 2009, retail volume sales of fresh-cut fruits in Western Europe rose by 8%, while energy and nutrition bars saw retail volume sales increase by almost 5%.
Thriving in a ‘Grexit’ recession: A possible mission
There is little doubt that a Greek debt-driven recession would pose challenges to the food industry, especially in EuroZone countries. Cash-strapped consumers would try even harder to maximise the value of their cash, turning in many cases to retail brands. That said, the consumer trends that drove demand for premium food categories in 2009 are, if anything, more prevalent. Food manufacturers’ contingency plans should not revolve exclusively around volume at the expense of value. Brands making a case for added value will continue to succeed in a recessionary environment. Premium prices will continue to be paid for food lines offering indulgence, convenient meal solutions to consume at home and healthy snacks that provide immediate comfort. Preparing now for what may come in the future might make the difference between thriving in a recession and falling into oblivion as a result of it.