Retreating into their Shell… Credit and default risks in Europe worry oil giant

An article last week in the Times highlighted an aspect of risk management that must be getting more focus in many large multinational firms at the moment. Shell, the huge oil firm, are basically pulling their cash out of certain European banks and countries because of fears about the stability of those banks, countries and the Euro.

As the Times reported (behind its paywall),

“The oil group’s decision is a worrying new sign of capital flight from the eurozone, identified by Economists as a leading source of stress for European credit markets and businesses”.

In addition, they're reviewing credit terms and creditworthiness generally for their customers in Europe. “There’s been a shift in our willingness to take credit risk in Europe” said the Shell CFO, Simon Henry.

They’re also reviewing credit relationships in the supply chain. “Can banks that finance our suppliers continue to finance them?” asked Henry. Meanwhile, Roger Bayley, a KPMG partner and head of its euro crisis task force, said in the Times:

“Companies are getting a lot more vigilant, whether it’s no longer accepting letters of credit from certain financial institutions or seeking to shorten payment terms,” Mr Bayly said. “There are people considering exiting whole countries, especially in Southern Europe, or who have that as their contingency plan.”

All very sensible, but worrying with our macro-economic hats on. And another concern for procurement people, particularly those operating in the most at risk countries – probably Greece, Spain, Italy, Portugal? We tend to assume that suppliers always want our business – but of course that's not always true. How often are surprisingly expensive bids actually from firms who don't want the work, but don't want to upset the buyer by pulling out of the tender altogether?

But if our organisation is vulnerable, or just based in a country that is seen as vulnerable, we may see this as an increasing trend - more suppliers who simply don’t want to work with us or demand particular payment terms.

Suppliers may become more choosy as to who they do business with, which could lead to a “flight from quality” - firms who are already in vulnerable positions perhaps having to settle in turn for less impressive suppliers, who will take the risk.

Something else to consider in that risk assessment anyway...

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