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Are public debts sustainable?
| 19-02-2018 | treasuryXL |
Any forecast is open to different interpretations, especially one that looks 15 years into the future. At the end of 2017, 15 of the 28 countries within the EU (in other words more than 50%) have Government debt that exceeded 60% of GDP. The average ratio for all 28 countries – on the basis of the sum of all Government debt and all GDP – is 83%. Let us focus on those 15 countries who, currently, do not meet the criteria. The figures for this article have been taken from the following website – debtclocks.eu
This shows the countries – ranked by the current Debt to GDP ratios – from high to low. 3 countries have been highlighted in yellow as their figures have been originally shown in their own currencies. For the sake of comparison these figures have been converted into EUR.
Assumptions
Results
The top 7 countries have debt ratios around 100% or higher of GDP at the end of 2017. The constant annual growth rates that they would have to achieve under the scenario shown above are all greater than 3% per annum.
Annual growth rate since 1996 for the EU have averaged 1.7% – before the financial crisis there was an annual growth of 2.5%. For the last 10 years since the crisis, the average annual growth rate within the whole EU is just 0.8%. Even in 2017, the growth was just 2.5% – back at the same level as before the crisis. The data for this part came from tradingeconomics.com
It would be appear to be presumptuous to expect future annual GDP growth to consistently exceed the current long term trend. Of course this is a scenario relying on only 1 factor – namely growth in GDP to meet the 60% criteria – whilst ignoring any other possible factors.
Conclusion
As constant growth, as shown above is, not realistic, then other factors will have to come into play if the long term scenario relating to debt criteria is to be achieved. If not through growth, then either through increases in Government receipts (more taxes or selling of national assets) or decreases in Government expenditure (less subsidies, pensions, smaller investments).
Or……………..through fiscal union leading to transfers from the “richer” countries.
Next we will look at the history of fiscal transfer within the EU.
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IFRS 16 – a new lease of life
| 16-02-2018 | Lionel Pavey |
Impact
There will be no more off balance sheet constructions. The balance sheet of a company will grow, as all leases are included. This would lead to a growth in both assets and liabilities. Furthermore, there will be no distinction between an operating lease and a financial lease as happens now. Under the new regulations a lease contract will be split between the right of use of the asset and the service component costs (including interest expenses) that will now appear as an expense on the profit and loss statement. For businesses that have traditionally relied on lease contracts – aircraft, shipping, heavy industry – there will be a noticeable impact.
Consequences for lessee
This will lead to considerable changes in the standard financial ratios and metrics that a business uses – EBITDA, interest coverage ratio, net income, operating profit, earnings per share, return on equity etc. By placing all lease contracts on the balance sheet, a further effect could be felt on borrowing costs, bank covenant compliance and even credit ratings. There will also be more costs and work involved in complying and maintaining the regulations. It will lead to an increase in debt on the balance sheet. The changes could be so large that some businesses will reconsider if an asset should be leased or purchased outright. This could lead to major reviews and renegotiations of existing contracts.
Whilst this is a change that impacts on the accounting side of a business, the knock-on effects will be visible to a treasury department. It will be necessary to collaborate internally and project the impact on existing bank covenants, other lending facilities and the financial metrics that are used.
Lionel Pavey
Cash Management and Treasury Specialist
GDPR and its effects on the bottom line
| 15-02-2018 | treasuryXL |
At present, large companies like Facebook and Google collate data about their users. Mainly, this data is used to present advertising to the individual based on the analysis of the data showing where they have clicked onto etc. The scope of GDPR is very large and such large companies would not be able to deny access to their users if they decide to opt out of data use.
GDPR defines a principle of purpose limitation, This states that personal data must only be collected for specified, explicit and legitimate purposes and not furthered processed in a manner that is incompatible with those purposes. This could impact on the revenue stream of such companies.
Google receives approximately 33% of their revenue from Europe. Deutsche bank concluded that if 30% of European users opted out of data sharing, this could affect revenue by 2%. Google and Facebook receive around 75% of all online advertisement spending.
At the same time, research suggests that a quarter of a billion users of news site readers have already installed ad-blockers.
The effects on revenue for websites that actively use data supplied by the actions of their users is difficult to quantify, but it will have an impact. Companies will have to look closely at their projected revenue from online advertising and ask if the figures are too optimistic in the light of this legislation.
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