An Application of Quantitative Methods in Managerial Decision Making Involving the Impact of Greece's Exit from the European Union

AN APPLICATION OF QUANTITATIVE METHODS IN MANAGERIAL DECISION MAKING INVOLVING THE IMPACT OF GREECE'S EXIT FROM THE EUROPEAN UNION

A Term Paper

Presented to the Department of Management

By

September 14, 2012

TABLE OF CONTENTS

Chapter

1. INTRODUCTION.......................................................................... 3

Overview of the problem...................................................... 3

Review of Prior Research.................................................... 7

Purpose........................................................................... 9

2. METHODOLOGY......................................................................... 9

3. DISCUSSION.............................................................................. 10

Limitations of Model............................................................ 12

4. SUMMARY.................................................................................. 13

WORKS CITED...................................................................................... 14

APPENDIX........................................................................................... 15

Introduction

I am employed by one of the oldest Fiduciary asset managers for individuals in the Ultra High Net Worth space in the financial services industry. Within the asset allocations that our clients have established include exposure to both domestic United States equities and fixed income as well as to international investments in those same spaces. With the economic crisis that began to unravel in 2007, our clients have a keen interest in the outlook and decision making that occurs by policy makers, both in the United States as well as globally. Of particular interest to our clients are the issues and challenges that are currently being faced in Europe and specifically the impact that Greece has had within the Eurozone. As of this writing there is much consternation and hand-wringing around whether Greece will remain in the Euro, what impact that will have on European markets and what the ramifications are for each of the European Union members. This paper will attempt to derive a model to determine what outcome that each can expect from a potential Greek exit from the Euro.

Overview of Problem

The current crisis of confidence that is occurring within the European Union is creating a financial dilemma that is having a severe impact of the ability for countries in the Euro Zone to refinance their sovereign debt. Starting about 20 or so years ago, the major European countries set the ground work for a common currency with the establishment of the Maastricht Treaty in 1992. The first step occurred in 1999 and was designed for business transactions. The major second step was for each participating currency to "swap" their currency and exchange each of them into Euros. The initial countries that participated in the Euro were; Austria, Belgium, Netherlands, Finland, France, Germany, Ireland, Italy, Luxembourg, Portugal, and Spain. Greece joined as a Euro country in 2001 and others followed; in 2007 Slovenia, 2008, Cypress and Malta, 2009 Slovakia and 2011 saw Estonia join. Two countries, Denmark and the United Kingdom, have an opt-out clause in the Maastricht Treaty and this exempts them from participating. Latvia is scheduled to adopt the Euro on January 1, 2014, followed by Romania, which is slated to enter on January 1, 2015. Each other country in the European Union is required to participate once they meet the conditions that are necessary for adopting the single currency. The remaining eligible members of the European Union, Bulgaria, the Czech Republic, Hungary and Lithuania currently have no target date for entry. In order to be considered for entry, each respective country must meet and fulfill several economic and legal requirements known as 'convergence criteria'.

According to the Economic and Financial Affairs Counsel of the European Commission, the

convergence criteria are formally defined as a set of macroeconomic indicators which measure:

* Price stability, to show inflation is controlled;

* Soundness and sustainability of public finances, through limits on government borrowing and national debt to avoid excessive deficit;

* Exchange-rate stability, through participation in the Exchange Rate Mechanism (ERM II) for at least two years without strong deviations from the ERM II central rate;

* Long-term interest rates, to assess the durability of the convergence achieved by fulfilling the other criteria. (EFACounsel)

These criteria are measured through many economic and financial data points. Price stability is measured by the Consumer Price Inflation rate (CPI) and cannot be more than 1.5 percentage points above the three best performing Member States. Soundness of public finances is measured with each nation's government debt as a percentage of GDP. Sustainability of public finances is viewed as a percentage of government debt to overall GDP. This is supposed to be not more than 60 percent. The exchange rate stability is looked at from the standpoint of how much it deviates from a central rate, which measures strong deviations from the ERM II rate. And finally the durability of convergence is a measure that looks at the long term interest rate for each member nation's sovereign debt and is not to be more than 2 percentage points above the rate of the three best performing Member States. (EFACounsel)

According to the International Monetary Fund, Greece is among the most indebted countries in all of Europe