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Greece has been in recession for past seven years and has already partially defaulted. Greece already has a sovereign debt crisis. The Markets are already in turmoil with bond yields very high, and stock markets falling. Greece already has bank runs. Multinationals are not keeping money in Greek banks.
Due to unemployment of 23% and youth unemployment of 53%, there already is a political backlash, with growth of extremism on both left and right of political spectrum. Recent opinion polls suggest that a new Greek government will be dominated by parties rejecting the Toika-led adjustment programme.
The Greek euro exit is the speculated self-abdication – or dismissal – of Greece from the Eurozone. This is known as Grexit, a slang term introduced in 2012 in world business trading. It is a portmanteau combining the words Greek Euro Area exit. The term was introduced by Citigroup’s Chief Analysts Willem Hendrik Buiter and Ebrahim Rahbari on 6 February 2012.
Deutsche Bank’s economics team sees, however, the potential for an alternative path. This alternative idea facilitates running a Greek parallel currency to the Euro, which Deutsche Bank dubs Geuro to represent government issued IoUs to meet current payment obligations . This would enable, in Deutsche Bank’s view, Greece to engineer exchange rate devaluation without formally exiting the EMU (Economic and Monetary Union of the European Union).
The Greek Euro Exit scenario (“Grexit”)
Compared to the hard struggle trying to recover while remaining in the Euro zone, a faster and more sustainable recover could happen if Greece decides to leave the Euro zone. Greece would begin to recover much faster if it is decoupled from the Euro, defaulted and devalued. The two biggest sectors of the Greek economy are shipping and tourism. Both could benefit hugely from a competitive devaluation.
“Plan Z” is the name given to a plan to enable Greece to withdraw from the Eurozone in the event of Greek bank collapse. It was drawn up by officials at the European Commission (Brussels), the European Central Bank (Frankfurt) and the IMF (Washington). Those officials were headed by Jörg Asmussen (member of the executive board of the European Central Bank), Thomas Wieser (Euro working group), Poul Thomsen (IMF) and Marco Buti (European Commission).
In order to prevent premature disclosure no single document was created, no emails were exchanged, and no Greece officials were informed. The plan was based on the 2003 introduction of new dinars into Iraq by the Americans and would have required rebuilding the Greek economy and banking system from the beginning, including isolating Greek banks by disconnecting them from the Target 2 system, closing ATMs and imposing capital and currency controls.
The implementation of Grexit would have to occur “within days or even hours of the decision being made” due to the high volatility that would result. It would have to be timed at one of the public holidays in Greece. In the long-term, Greece would see an improvement in domestic demand. Demand for imports would fall due to higher cost. Greece would benefit from higher exports and (if political situation stabilizes) an inflow of tourism. Furthermore, Greece would no longer feel it is following dictates of EU (i.e. Germany) and would have greater economic and political independence.
The parallel currency scenario (“Geuro”)
Due to political pressure Greece might be unlikely to formally leave the euro, nor are the other euro area countries likely to abandon Greece entirely. The path of least resistance could be the stop of financial assistance to the Greek government and the continuation of payments for debt service and the stabilization of the Greek banks in a European “Bad Bank”.
In this case, a Greek parallel currency to the euro, the Geuro, could emerge when the government issues IoUs to meet current payment obligations. This would also allow Greece to engineer exchange rate devaluation without formally exiting EMU (see chart below). Initially there would be a large depreciation, but at the same time Greek authorities would reclaim some semblance of control to stabilize or even strengthen over time their own Geuro against the Euro. In fact this would leave the door open to a return to the Euro at some point.
Emerging markets offer plenty of opportunities for investors. By opening themselves to international trade, the structure of these markets is dramatically altered. Foreign and local investments flood the economy with the aim of gaining enormous returns. A massive reallocation takes place and demand explodes.
As a result of these disruptions, the number of mergers and acquisitions grows exponentially. Under these circumstances, it becomes of crucial importance to understand the nature of companies in emerging markets. Such companies share many of the following characteristics:
1. Unreliable market measures:
When valuing publicly traded companies, we draw liberally from market-based measures of risk. To illustrate, we use betas, estimated by regressing stock returns against a market index, to estimate costs of equity and corporate bond ratings and interest rates to estimate the cost of debt. In many emerging markets, both these measures can be rendered less useful, if financial markets are not liquid and companies borrow from banks.
2. Currency volatility:
In many emerging markets, the local currency is volatile. This is the case in terms of what it buys of foreign currencies (exchange rates), as well as in its own purchasing power (inflation). In some emerging market economies, the exchange rate for foreign currencies is fixed. This is creating the illusion of stability, but there are significant shifts every time the currency is devalued or revalued. Furthermore, when computing risk free rates, the absence of long-term default free bonds in a currency denies us one of the basic inputs into valuation: the riskfree rate.
3. Country risk:
There is substantial growth in emerging market economies, but this growth is accompanied by significant macro economic risk. Hence, the prospects of an emerging market company will depend as much on how the country in which it operates does as it does on the company’s own decisions. Put another way, even the best run companies in an emerging economy will find themselves hurt badly if that economy collapses, politically or economically.
4. Corporate governance:
Many emerging market companies used to be family-owned businesses and while they might have made the transition to being publicly traded companies, the families retain control through a variety of devices – shares with different voting rights, pyramid holdings and cross holdings across companies. In addition, investors who challenge management at these companies often find themselves stymied by legal restrictions and absence of access to capital. As a consequence, changing the management at an emerging market company is far more difficult than at a developed market company.
5. Discontinuous risk:
The previously mentioned country risk referred to the greater volatility in emerging market economies and the effect that has on companies operating in these economies. In some emerging markets, there is an added layer of risk that can cause sudden and significant changes in a firm’s fortunes. Included here would be the threat of nationalization or terrorism. While the probability of these events may be small, the consequences are so dramatic that we ignore them at our own peril.
6. Information gaps and accounting differences:
It is not unusual for significant and material information about earnings, reinvestment and debt to be withheld in some emerging markets, making it more arduous to value firms in these markets. On top of the information gaps are differences in accounting standards that can make it difficult to compare numbers for emerging market companies with developed market firms.
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