Written paper Investigative study report: ‘What can management do to reduce the risk of trading in Europe over the next 12 months?’

The world stands at the edge of the new global economic shock that may be caused by the current European sovereign debt crisis. This is specifically bad, because this kind of economic and financial instability may harm the global economic recovery after the previous crisis that took place in 2008-2009.

This investigative study report aims to research the current financial and economic situation in the Eurozone (especially in the affected countries and define the policy measures that could reduce the risk of trading in Europe over the next 12 months.

Bullard (2010) indicates one of reasons of this situation may the response of European countries to credit crunch, when many states made a decision to increase deficit spending. Basically it means the increase of their debt as a percentage of GDP. The basic start conditions of these countries were different, and for some of them who initially was weaker than others, for these governments the debt were so huge that the question about their ability and willingness to repay in international financial markets has appeared. (Bullard, 2010)

Unfortunately, the return of the previous economic confidence to the countries with large volume of borrowing will be very complicated. Therefore, experts presume that the markets of these countries will be in trouble and unstable for a long period of time, possibly months or even years. In order to overcome this risky situation, it is recommended for governments to undertake the aggressive policies towards earning their new credibility. After it’s establishing they need to focus on its sustaining during a long period of time. Besides, according to Bullard’s opinion (2010) one of the reasons of economic growth under these complex economic circumstances may be a well-run fiscal consolidation.

Politicians, economists and central bankers continue their debates regarding the ways the European sovereign debt and connected to it banking crisis should be dealt with. After the careful research of a number of academic sources and media, a conclusion could be made that no one really knows how the Euro zone crisis will be resolved.

In accordance to the report prepared by the KPMG which the global firm that is known for its research and audit services: ”˜in short, either the North will have to bail out the South in some way, or there are likely to be defaults and possible Eurozone exits by one or more countries. Either way the outlook is not good with the least worst outcome being to continue to muddle through with significant austerity and, at best, weak growth.’ (KPMG report, 2011)

And it not just a theoretical concern, because it appear some substantial changes are happening. For instance, it is known that regulators of the banking sector have informed the banks they need to make contingency plans for the breakup of the Eurozone and some are at risk from the current instability in European capital markets. (KPMG report, 2011)

Additionally the stronger and additional rounds austerity measures were suggested in order to improve the situation, but it is clear that such regulations will have a dramatic influence over the government spending. Also, these measures will result in the changes of consumer behavior in the countries that are affected by the crisis.

The report prepared by the KPMG also points out that ”˜the likelihood of a downturn is increasing with key indicators such as purchasing managers index showing contracting activity.”˜ (KPMG report, 2011) Financial markets face instability and therefore ”˜deposits are moving towards safer havens as Euro deposits are reduced and transferred away from countries and banks perceived to be at higher risk'(KPMG report, 2011)

In addition it has to be mentioned there are well known risks related to this current crisis such the possibility of fraud and disruption that are likely to take place in the most affected countries. For instance, a large number of European companies need to implement the refinancing of their business activities to meet the challenges posed by crisis over the next 12 months, competing with financial institutions and governments for liquidity. (KPMG report, 2011) Thus, it is extremely important to do for boards and management teams of companies that somehow related to EU (for instance, through, operations or important suppliers). Governments of the EU members need to respond to the negative influences that were put on economy and finance sector as well and prepare their countries for the range of potential outcomes. (KPMG report, 2011)

What could be recommended to the companies’ management? Without a doubt,   companies should focus on the economy treasury and management of cash; besides constant audit of the market situation is required, as well as appropriate decision making process to make a quick and effective response when the situation changes,

In order to provide the full investigation of the researched issue this paper include the analysis of the financial crises theory, the facts about Eurozone debt crisis and methods of dealing with them