From ominous rumblings in Iran to a full-blown crisis in the Eurozone, two potentially mega political-economic risks are brewing in the trade credit arena: trade disruption and a lack of availability of credit.
Mass Trade Disruption
Aside from the impact on world oil prices, Iran’s threat to close the Straits of Hormuz, one of the most strategically important choke points for traded seaborne oil, could create significant disruptions to trade in the region.
In addition to normal asset risks that the closing of the Straits would cause, we need to take into consideration the myriad other risks that globalization throws into the business mix. With just-in-time manufacturing and dependence on single suppliers (as outlined in Tom Teixeira’s post above), disruptions to the supply chain due to political events like blocking the Straits of Hormuz can cause unexpected expenses, loss of revenue and contractual penalties, that companies, especially those in the oil industry, need to plan for.
Corporate Defaults Set to Rise
With S&P recently announcing a swathe of downgrades, the European sovereign debt crisis is set to deepen further.Whilst these recent downgrades may have already been factored into credit spreads for banks, it could trigger a contagion amongst others.
European banks—which hold billions of euros worth of Greek, Italian and other sovereign debt–face increasing liquidity issues. In a move to strengthen their balance sheets and prevent a large-scale banking meltdown, banks are being forced to meet tighter capital requirements.
The European Banking Authority has set until the end of June 2012 for European banks to attain core tier-one capital ratios. There are a number of ways banks can increase their capital, such as undertaking a rights issue, withholding dividends, converting debt instruments into equity, reducing risk-weighted assets and so forth. However, the easiest way to reduce assets is to simply deleverage. Whilst regulators are keen to avoid a scale back in lending, the impact–particularly on SMEs—could lead to credit lines being withdrawn or non-renewed resulting in corporate defaults as cash flows dry up.
|This post was part of the special feature about What Risks Will Emerge in 2012? published January 24, 2012. The feature also covered emerging risks in these other fields:|
Power & Utilities
Supply Chain Interruption