Friday, July 02, 2010
Hesitation Drives the Cost of Crises Higher

Practical Turnaround Managers track early warning signs and take action at the first sign of trouble because they know that this approach significantly reduces the cost and improves the likelihood of the turnaround efforts’ success. The recent European debt crisis provides a valuable reminder that this edict holds true regardless of whether the distressed entity is a mid-market company or a sovereign nation. European leaders, representatives from the U.S. Treasury and IMF officials now concede that the cost of staving off Greece’s “near-meltdown” and the ensuing chaos in other European countries increased from approximately $35B in early January 2010 to approximately $140B six months later.

The Washington Post’s Howard Schneider and Anthony Faiola filed the story on June 16, 2010, noting that American officials and the IMF warned their European counterparts as early as November 2009 that the financial problems “had to be addressed quickly.” Yet, just like so many corporate managers, Europe’s politicians did not want to take unpopular decisions, so they adopted a “minimalist approach” and put off the actions necessary for the turnaround. By the time they finally addressed it, the crisis was in “full swing.”

France’s Finance Minister Christine Lagarde noted that if the consortium ultimately providing the rescue package had addressed it “right from the start, I think that we would have been able to prevent it from snowballing the way that it did.” Schneider and Faiola write that the “experience raises questions . . . that with the right information and tools, financial leaders can forestall problems before they become too serious.” An IMF official states that “a small, manageable problem six months ago transformed into a huge, oversized problem,” and that, while the initial cost of $30-35 billion seemed daunting, it was “a great bargain compared with the ultimate price.”   

You really have to wonder how someone can become a leader of the world's financial system without already knowing these essential truths.  You can be smarter than a finance minister. Track the early warning signs. Take immediate action at the first sign of trouble.  Wishful thinking -- also known as crossing your fingers and hoping for the best -- is not the best strategy.

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