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Risk in Context

Greece’s Financial Troubles Could Disrupt Credit Insurance Market

Posted by Evan Freely June 30, 2015

The looming threat of sovereign default in Greece could lead to private sector insolvencies as the European Central Bank cuts off liquidity funding. Greece could even be forced to exit the European Union’s (EU) common currency zone. So what does this mean if you have operations or trading partners in Greece?

Short-Term Credit Insurance

Bracing for a spike in domestic bankruptcies, credit insurers — which provide balance sheet and cash-flow protection to companies in the event of non-payment by customers — have taken steps over the last year to limit their exposures to Greece. Generally, companies with customers in Greece will find it increasingly difficult to purchase credit insurance.

Creditors are reviewing the credit limits of Greek-domiciled customers. Credit could be reduced or eliminated, although there may be exceptions among global companies with operating subsidiaries. These reviews will likely impede trade activity between Greece and its international trading partners.

Medium and Long-Term Insurance

Lenders and commodity traders involved with structured trade finance transactions will also find it difficult to find insurance to cover counterparties in Greece. Without structured credit insurance, trade financiers will have to self-insure — placing a significant amount of their margins at risk. Or, they may simply opt out of transactions involving Greece.

The reduction in credit will place a significant stress on the local banking system’s ability to finance transactions. There will likely not be sufficient liquidity or capital in the system to support activity. And access to international markets for project financing and long-needed investment in infrastructure will remain cut off.

Political Risk

Greece has been in economic turmoil for several years, marked by periods of civil unrest and violent demonstrations. If Greece exits the European common currency zone, the economic effects of reintroducing its own significantly devalued currency will likely be severe. Political violence, capital controls, and other risks could threaten the assets, operations, and people of multinational companies.

Contagion Risk

If Greece defaults and then exits the Eurozone, it will likely spur more questions about the health of other EU members that have struggled economically in recent years. The danger for Eurozone members has long been the threat of a larger European country also rejecting fiscal reforms and austerity, creating a contagion effect. However, many experts believe that the European Central Bank’s actions over the last year should protect the EU against this risk.

Businesses selling goods or services to customers in Greece should continue to monitor developments there, including capital controls set by the Greek government that could adversely affect customers’ ability to pay in a timely manner. Risk managers should also be ready to quickly report to insurers any claims or events that could trigger their insurance policies — and be ready to answer the inevitable questions from their boards and shareholders.

Related to:  Political Risk , Trade Credit

Evan Freely

Evan Freely is a managing director and Global Practice leader for Marsh’s Political Risk and Trade Credit Group. Evan joined Marsh in 2008 following seven years as the head of the Americas within a major broker’s Financial Solutions Division. Based in New York, Evan also specializes in providing political risk and credit insurance expertise to financial institutions and large corporations.