A breakup of the euro and a possible double-dip recession have UK CFOs tightening their wallets and shying away from risk, a new study shows.
According to Deloitte’s CFO Survey for the fourth quarter of 2011, UK CFOs agree that a breakup of the euro is the top concern for 2012. CFOs feel there is a 37 percent chance one or more countries will exit the currency this year. These fears likely increased Wednesday as Greece warned it would have to leave the euro within the next three months if it does not receive another bailout.
Moreover, UK corporates are concerned that a euro breakup could spawn another credit crunch and drive major swings in asset prices and exchange rates. The current eurozone crisis has already led to the sharpest decline in credit availability in the UK since 2008, CFOs said.
Given the pessimistic outlook over the euro, CFOs see a 54 percent chance of the UK falling into a double-dip recession. Sixty-four percent expect this recession or slowdown to last more than a year. Revenues and profit margins are projected to decline.
At best, the future looks uncertain for the UK, with 56 percent of CFOs rating the level of uncertainty for their businesses as “high” or “very high.” Said one respondent: “Everyone is waiting for something very bad to happen.”
UK CFOs are weathering the potential storm by strengthening their balance sheets. Eighty-seven percent agree that it is a bad time to be taking on new risks. The survey noted that CFOs are starting off 2012 in direct contrast to how they began 2011: instead of expanding into new markets and increasing capital spending, they are instead cutting costs and increasing cash flow. However, UK corporates with a strong international interest are more open to taking on risk.
CFOs are also more wary of the three main forms of external finance. Bond issuance and bank borrowing are still favored, though less so than at the start of 2011. Equity issuance, however, has fallen far out of favor; it is even less popular than it was in early 2009.
On a more positive note, 48 percent of CFOs do see potential in the current market, such as opportunities to acquire undervalued assets, the ability to expand market share amid weaker competition, and better chances to make overdue changes internally. Additionally, some CFOs feel that they can develop new offerings to meet new sources of demand created by a difficult environment.