Optimism among CFOs backslides to the level of 2010

June 30, 2011

The shaky prospects for the US economy and the unrelenting severity of the debt crisis in Europe have dampened positive spirits over the last quarter. In addition, two thirds of Europe’s CFOs regard restructuring of Greece’s national debt as inevitable. European CFOs’ optimism about their own company’s fortunes holds steady, as evidenced by rising investment and more staff on permanent contracts. These are the findings of the latest survey of CFOs carried out by Tilburg University and Duke University.

Worldwide, optimism about the economy has dropped to the same level as one year ago. While 56% of American CFOs remained optimistic about the US economy in the preceding quarter, the latest survey sees this number plunge to below 27%. The US economy has yet to show signs of the improvement that was still being expected in the previous two quarters. In Asia too, the number of optimists has fallen considerably to a total of 57%. In Europe only 28% of financial directors say they are still optimistic about the economy. High oil prices remain a problem in Europe (over 70% of the CFOs say they are negatively impacted by the higher oil prices), while the debt crisis continues to make itself felt in most companies. Europe’s CFOs are therefore the most worried about global financial stability, the credit markets and interest rates.

Restructuring of Greek national debt inevitable

While European policymakers and ministers seem to be doing all they can to prevent Greece defaulting on its loans, or the appearance thereof, over 60% of European CFOs indicate that the restructuring of the Greek national debt is most definitely a realistic scenario. The same question asked about Portugal and Ireland produces percentages of 44% and 37% respectively.

Almost 75% or the financial directors think Greece should be given more time to pay off its debts, along with a possible lowering of interest rates. But even with such measures in place, two thirds of the CFOs are convinced that a far-reaching form of restructuring is inevitable. Over half opt for a haircut, which involves private creditors (mainly banks, pension funds and insurers) bearing part of the burden and creditors receiving less than they originally lent. Around 40% of the CFOs surveyed believe that Spain’s financial exposure to Greece represents a major risk. They expect that Spain will need a bailout if Greece is no longer able to meet its financial obligations.

30% chance of a new recession

The debt crisis has led to stringent austerity measures being imposed on Spain, Greece, Ireland and Portugal, measures which are bound to inhibit economic growth. As a result, the CFOs estimate that there is at least a 30% chance that Europe will be hit by a new recession within the next two years. The probability of an economic depression in one of Europe’s member states is even estimated at 48%.

Investment and employment on the rise

Around 40% of Europe’s CFOs are optimistic about the prospects for their own company. This means that, in the second quarter of 2011, the level of optimism has remained steady in comparison with the preceding quarter at 63 (on a scale of 100). This mood is reflected by such trends as a rise in investment and offering staff a permanent contract.

Over 50% of the financial directors say their company is investing once again, though much of this is replacement investment, and 20% of the companies indicate that they are currently recruiting staff. While expectations in the preceding quarters pointed to a decrease or marginal increase in the number of permanent contracts, the current forecast is a 3.6% rise in the coming 12 months. Nevertheless, attracting and holding on to qualified personnel remains one of the primary concerns of the European CFO. This points to a probable mismatch on the job market. The extensive supply of labor does not seem to be satisfying the demand expressed by companies for workers with specialist knowledge and expertise. In an effort to cope with this imbalance in job-market relations, companies will ultimately have to invest. Over half the companies surveyed say that, by 2012, they will have brought their investment in personnel development back up to prerecession level.

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Quaterly Report of Q1 2011, CFO Survey (2011)

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