IMF’s Greek memo confirms VUCA world has arrived

VUCAaThe good news was that the Eurozone leaders did realise, at the last moment, that Sunday was a “moment of truth” for the currency union and for Europe.  They spent 17 hours negotiating through the night as a result.  But reports suggest it wasn’t an easy time:

  • The BBC carried live reports of arguments between key players and shouting matches
  • At one point German Finance Minister , Wolfgang Schäuble apparently shouted “I’m not stupid” at the Governor of the European Central Bank, Mario Draghi
  • One participant described the meeting as being like “a kindergarten – the emotions have completely taken over

And since the meeting, a new IMF report has warned that ”Greece will need debt relief far beyond what euro zone partners have been prepared to consider, due to the devastation of its economy and banks in the last two weeks:

“The dramatic deterioration in debt sustainability points to the need for debt relief on a scale that would need to go well beyond what has been under consideration to date – and what has been proposed by the ESM,” the IMF said, referring to the European Stability Mechanism bailout fund.

“European countries would have to give Greece a 30-year grace period on servicing all its European debt, including new loans, and a very dramatic maturity extension, or else make explicit annual fiscal transfers to the Greek budget or accept “deep upfront haircuts” on their loans to Athens, the report said, adding.

“Greece’s debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far.”

It thus looks as though this may well be another of those “one step forwards, two steps back moments“.

I fear we will see many more of these moments in the future, as our leaders are finally forced to confront the problems of the real world – and can no longer pretend everything has been solved by printing money.  As we wrote in chapter 11 of Boom, Gloom and the New Normal:

“The transition to the New Normal is a sea-change for the global economy. Its full impact will take years, if not decades, to become clear. Meanwhile, the world will face much greater uncertainty, as conflicting views of the world play out on a day-to-day basis. Companies therefore need to plan for a VUCA environment: Volatility, Uncertainty, Complexity and Ambiguity will be the order of the day.”

The Greek crisis thus highlights the insight of Unilever CEO, Paul Polman:

I use the term VUCA to describe the world – Volatile, Uncertain, Complex and ambiguous.  It is very difficult for people to get a total picture.”

  • Volatility.  Nobody, including the key players, had forecast the twists and turns of the crisis over the past few months.  Crisis Eurozone summits followed each other in quick succession, Greece held a referendum on a week’s notice.  And we still don’t know if a final deal can be agreed.
  • Uncertainty.  The focus on the drama now shifts back to Athens.  Will the Syriza government gain approval for the package?  Will it survive as a government, or be replaced by different leaders?  Will there be new elections in the autumn?  We simply cannot know the answers to these critical questions
  • Complexity.  The Greek crisis was supposed to have been settled in 2010, and then in 2012.  Each time the bailout figure was higher, and now a 3rd bailout of €86bn ($95bn) is discussed.  But nobody really believes this will finally put Greece back on the road to economic sustainability
  • Ambiguity.  After all this time, there is no agreement within the Eurozone on objectives.  Greece wants to “end austerity”, Germany wants Greece to cut spending and increase taxes, other countries (poorer than Greece) don’t understand why they should handover yet more cash to Greece

And Greece is only a very small economy, its GDP was just $238bn last year.  What will happen when it becomes clear that one or more G20 countries cannot pay their bills?  As I wrote in my 2014 – 2016 Budget Outlook:

“The key is for each company to develop its own VUCA for success:

  • “Volatility.  Developing a road-map requires Vision
  • “Uncertainty.  A strategic Understanding of the changes underway is essential
  • “Complexity.  The planning process requires Clarity over implementation
  • “Ambiguity.  Unforeseen events will place a premium on Agility

“Nobody said business was meant to be easy.  But companies who take on the challenge of today’s VUCA world will be increasingly successful as we move through the 2014 – 2016 budget period.”


Budgeting for a VUCA world


“I use the term VUCA to describe the world – volatile, uncertain, complex and ambiguous. It is very difficult for people to get a total picture.”   Paul Polman, Unilever CEO

The title for the 2013 Budget Outlook chooses itself.  If the CEO of Unilever, one of the world’s great companies, can’t get a “total picture”, then what hope is there for the rest of us?  Of course, we might get lucky and come up with the winning numbers in the lottery.  But that is not the approach most companies would want to take.

The range of genuine uncertainties is unprecedented:

  • Financial markets.  Central banks and policymakers have so far added $33tn of stimulus – nearly half the size of the global economy.  It is the biggest financial experiment in history by a very long way.   Therefore we cannot have any confidence that we know what happens next.  Do they keep adding more stimulus forever?  Do they try to ‘taper’ and stop the money printing, as the US Federal Reserve has suggested?  Or ????
  • Debt bubbles.  The only central banker to forewarn of the financial crisis in 2007 was William White, then BIS chief economist (the central banks’ bank).  Ominously, he warned last month that “This looks like to me like 2007 all over again, but even worse…And we have added a whole new problem with bubbles in emerging markets that are ending in a boom-bust cycle”
  • Oil and commodity markets.   It is clear that the blog is now not the only one to believe that central bank liquidity has caused these markets to lose their power of price discovery.  Today’s consensus assumption of $100/bbl oil forever is in fact the least likely option.  Whilst Ed Morse, commodities head at Citi, has just published a detailed outlook titled ‘The end of OPEC’ 
  • The Four Butterflies.  The Eurozone crisis; US political dysfunction over the debt/budget issues; rising interest rates; China’s new economic policies.  All are now flapping their wings very hard, as the blog feared back in August.  Each has the potential to deliver a cold winter on their own.  And now there is the spying scandal, causing further mistrust between Western leaders
  • Demographics.  Although still largely unrecognised, the world’s ageing populations are the real cause of today’s New Normal and its changing demand patterns.  Sadly, out of touch policymakers still seriously argue that demographics don’t impact the economy.  And the longer this core issue is ignored, the more problems it stores up for individuals, companies and countries for the future

How can companies possibly deal with this long, but by no means complete, list of major uncertainties?  Should they simply throw up their hands in despair, and stick with a consensus forecast that they know will be wrong?

This may seem tempting.  And indeed, it has been the default policy until recently.  But today, the balance of risk and reward is starting to change.  Staying with the status quo is more painful than adopting a New Normal-based approach.  After all, how many more times can you explain to your boss that your budget has not been delivered?  And how many more times can your management tell shareholders that key targets continue to be missed?

Thus in different ways, and at different times, companies are starting to look at the world from new angles.  Instead of relying on growth forecasts based on ratios to IMF forecasts of GDP, they are instead thinking about the potential needs of people at different income levels, and at different ages.  And they are starting to find that it might not be so difficult after all to make the transition.  It might even be that it is the first step, that is the most difficult.

This is certainly the blog’s experience as it continues to work with Boards and ExCos and management teams around the world on these super-critical issues.  The release of energy, when reality is acknowledged, goes a long way towards putting that critical first step in place.  The key, the blog has found, is for each company to then develop its own VUCA for success:

  • Volatility.  Developing a road-map requires Vision
  • Uncertainty.  A strategic Understanding of the changes underway is essential
  • Complexity.  The planning process requires Clarity over implementation
  • Ambiguity.  Unforeseen events will place a premium on Agility

Nobody said business was meant to be easy.  But companies who take on the challenge of today’s VUCA world will be increasingly successful as we move through the 2014 – 2016 budget period.