This week I spent two days at the Association of Corporate Treasurers’ annual conference. Treasurers, as you may or may not be aware, are custodians of the considerable cash piles that companies have built up over the past few years. UK companies alone are sitting on a pile of £752bn. And in a low-interest rate environment, that’s a considerable amount of money doing, well, nothing.
The public is generally baffled by companies’ refusal to stimulate economic growth by spending again. We think: ‘What’s the problem? They say they don’t like sitting on cash, it’s bad working capital management, they would rather be investing, acquiring etc, but still they zealously guard their cash. We don’t understand.’
But having listened to some of the biggest names in the treasury world this week, I think I do understand. Quite simply, they don’t trust banks. ‘So what?’ I hear you say. ‘I don’t trust banks either. No one trusts banks these days!’ No, I mean, they really, really don’t trust banks. They don’t trust that any bank will necessarily be here tomorrow and if it is still here, whether it will be willing, or indeed able, to lend to them.
And it’s not just banks they mistrust. They also mistrust governments in the Eurozone (Germany excepting), credit rating agencies and they probably also mistrust their auditors (although we didn’t get into that).
As far as treasurers are concerned, Europe remains in deadly danger and that is a major problem for them. If a European country defaults, the impact on European banks will be colossal and credit, which is already tight, will be scarcer to come by than ever. As Vodafone treasury director Neil Garrod put it: ‘To sit here and think we are out of the woods is plain crazy.’
We non-treasurers may like to think that the crisis passed with Greece, but the truth is there is trouble brewing in Spain and possibly Italy as well. European monetary union is starting to look increasingly unsustainable in the light of high unemployment in southern European countries. And if a country crashes out of the Eurozone, the economic consequences will be severe.
So, for now, companies are watching and waiting. They are holding their euros in German bank accounts and buying the safest assets they can possibly find such as US Treasury bills. I asked one speaker at the conference whether his company would consider buying European debt for its greater yield and a low tide of laughter rippled round the room.
It is impossible to overstate how little confidence the world’s greatest companies have in the infrastructure that once supported them. Banks, rating agencies, governments – corporates have lost faith with them all. And they have become self-reliant because they know that in the event of a Eurozone collapse, they will have to fund themselves. Referring to cash piles, Vodafone’s Garrod said: ‘That money will get spent eventually. It will subsidise going to the bank loan market.’
Quite simply, companies know that they need to buffer themselves against the economic shocks that may be coming down the line. Because if they don’t, no one else will. In the words of Rio Tinto’s global corporate finance chief Jonathan Slade: ‘I don’t remember too many companies going bankrupt because they had too much cash. It’s a relatively cheap insurance premium.’