Didier Le Menestrel

Achilles' Heel

What do Greece and Azerbaijan have in common? In addition to a population of around 10m citizens each, both countries have found themselves with the same junk bond rating (actually BB+) at Standard and Poor’s.

The situation in Azerbaijan is apparently more enviable since its rating has a positive outlook attached despite a combined plan of €110bn from the IMF and the European Union and a drastic austerity cure, while Greece’s outlook remains negative for S&P. With GDP four times higher, the quality of the Greek signature in euros is apparently entirely comparable with that of Azerbaijan in its currency, the manat. The image of old Europe currently peddled by international experts and the media is clearly not in the least bit flattering!

The current liquidity crisis in Greece is a furious reminder of that which affected banks as of 2007 and companies as of 2008. Market contamination is rapid and difficult to prevent, with bad memories still too fresh in the minds of investors. This crisis is only similar to the previous ones in that it is financial and influences investor confidence (or mistrust). Behaviour patterns are again becoming herd-like and self propelling: The less others would like to loan, the more I refuse to do so. The paradox has reached a peak since a Greek two-year euro-bond now carries a 15% coupon while that of its big German brother, which has (almost) pledged to guarantee it, has a 0.6% yield.

The budgetary measures implemented by Greece are nevertheless severe. Apart from the highly-amusing tax on illegal construction work (€1.5bn, which is already a lot for houses that do not officially exist), tax increases and spending cuts are set to take a lasting toll on momentum in Greek GDP.
But irrespective of the measures taken in the short term, investor awareness has been brutal and the plunge in potential growth is threatening the entire Euro Zone and for the majority of regions (first and foremost of which France), budgetary and hence fiscal adjustments lie ahead.
What a surprise to discover just today that European countries will have to evolve in a backdrop of sluggish growth. They know this and have been warning us about it for a long time. For the past 10 years, average growth in the Euro Zone has stood at less than 2% a year, whereas the rest of the world has been galloping at a pace of around 4%…

As such, nothing new for our companies, which have been prepared for a long time. Seeking growth where it can be found is the main concern of clairvoyant company leaders. A good example of this is the spectacular success of SOCIETE d’EMBOUTISSAGE de BOURGOGNE, more widely known as SEB. After relocating the lion’s share of its costs, SEB has now relocated its end markets. France now only accounts for 20% of sales and Western Europe as a whole, now barely 40% while Q1 2010 sales at SEB exceeded their record high after rocketing 12%. This testifies to a successful transformation for the pressure cooker maker which continues to steam ahead (doubling in EBIT margin over 10 years) in its bid to conquer new markets and constantly post fresh growth.
This strategy to make adjustments and mobilise capital employed remains the prerogative for companies, while states unfortunately remain dependent on the citizens that accept to live in them! It seems easier to adapt production means than to collect the taxes necessary for balancing budgets…

In our Letter at the start of the year, we quoted Jean Monnet: “Man only accepts change when necessary and only sees necessity in a crisis”. We bet that this crisis will have the welcome effect of prompting states to live within their means… and let us rejoice that we can continue to entrust our savings to companies that have managed to adapt and make the most of restored global growth.