Jan 26

Talk with U.S. Ambassador to Austria on Obama’s First Year

By Ivo Sokolov Economics and Business, Politics No Comments »

It was a great pleasure to attend and be part of the discussion with H.E. William C. Eacho, III held at Webster University Vienna this evening.

Just over a year ago former U.S. ambasador David Girard-diCarlo gave a similarly eloquent speech, albeit then scripted and prepared for a much bigger audience at the Vienna University of Economics and Business. It’s now quite intriguing for me to compare the opinions and worldviews of the two U.S. diplomats — a republican and a democrat. One was a major contributor to the campaigns of Bush and McCain and the other — one of Obama’s biggest fundraisers.

The overall atmosphere of the two ambassador talks does however mark a stark contrast. I can easily recall the gloomy, pessimistic sentiment of November 2008 — Lehman had just collapsed, AIG was bailed out hastily and GM’s executives were having a hard time convincing the U.S. government to rescue them out as well. Global credit markets had frozen almost altogether and Girard-diCarlo made then the remark that had they not saved AIG, most big European banks would have failed within 12-24 hours. This talk was held immediately after Obama got elected; nonetheless the international image of the U.S. was then still at an all-time bottom low. Although Obama’s motto for change was “yes we can”, at that time as a non-american I was convinced that change was not just optional: “no, you must”.

Fast forward to January 2010, worst case scenarios for severe global unemployment, extreme euro-dollar volatility and a second Great Depression have fortunately turned out wrong. It can be argued as to whether only the coordinated government efforts were to blame for restoring confidence and reopening the credit markets, yet the fact remains that all could have gone much worse. In times like these even the monetarists turn Keynesian. Thus, I can’t help but agree with most of the points that Ambassador Eacho made, this time as an U.S. ambassador with a palpable and visible degree of sincere optimism. Appraising the first year of Obama’s administration, here are some of the points that were made during the discussion, the way I understood them:

– the U.S. brand is back again and U.S. goods and exports in general will regain some of the image loss they had suffered during the last two republican presidential terms. Of course, I expect that to be more tangible in some of the clearly less U.S.-friendly parts of the world.

– the importance of free trade and the reassuring confirmation that if markets are kept open and protectionism is restrained from, the global economy will be along the path of natural recovery in no time.

– fiscal discipline is paramount and the bail outs of AIG, GM, etc. were one time exceptions to prevent bigger failure. A good example was given with the first bail out of Chrysler (in 1980 by U.S. president Jimmy Carter), whereby the company had its management changed (with Lee Iacoca as CEO) and in 3 years every cent was repaid. I understand that although clear GM mismanagement (both poor industrial relations management as well as an obsolete product line) had indeed brought the company down, stepping in by the U.S. government was fully justified and failing to do so would have resulted in enormous welfare payments costs as well as bankruptcy spillovers in related industries.

– the U.S. foreign policy format has changed from one of purely unilateral decisions to a cooperative, partner’s opinion seeking approach. The now changed perceived image of the U.S. in Europe is a clear indication of that. And as the ambassador emphasized, the success of the G20 summit proved to be a turning point in the financial crisis. In addition, a bi-partisan approach to deal with the major issues at hand is about to be undertaken in the U.S. as well (after the recent republican win).

– liberal democracy as the universal principle for worldwide politics — yes, but not at any cost and not without the proper institutions in place first. Simply allowing people to vote then calling that a democracy is a necessary but not a sufficient condition for establishing a modern civilized state. The supremacy of law, protection of property rights and in essence strong government institutions are a basic prerequisite for democracy.

– among all ongoing discussions on the change in the U.S. medical care system, the biggest argument is actually the better cost effectiveness, notwithstanding a system where the government has a bigger involvement. This is actually quite illogical at first, however the data shows that the U.S. medical spending is about 15-16% of GDP, Austria’s on the other hand (which has excellent medical care) is around 10-11% and other highly industrialized European countries are even at 8-9% of GDP for heath care. In addition, better labor mobility and preservation of demographics for certain states, given the presence of universal health care, is an argument that can even get the votes of some republican senators for enacting the universal health care legislation.

It was also great to be able to chat about the imminent regulatory changes in the banking sector and whether or not the U.S. will again resort to historic policies of splitting universal banks in commerical and investment banks (as was done in the 1930s). Ambassador Eacho shared my view that the rating agencies should be reformed and that they have too much power on their hands now. Something that has been left apparently overlooked during the first year of Obama’s administration due to other things being more urgent. I do however agree that Europe has to take its share in such reforms as well; not only in talks with the big three rating agenies, but also more importantly by agreeing on international accounting standards (especially for the banking industry). That way capital ratios, balance sheet data, etc. could be better cross-evaluated and compared between European and U.S. banks.

All in all, it was a great event and I would like to thank Webster University Vienna and H.E. Ambassador Eacho for the opportunity to discuss these issues.

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Jan 16

The Euro in Bulgaria in sight

By Ivo Sokolov Economics and Business, Politics No Comments »

Welcome to the first post in 2010! After having my blog (WordPress 2.8) hacked, I am happy to be reporting online again. I feel sorry for the poor soul that took the time to bring this website down for a couple of days, yet nevertheless I feel somewhat honored by the attention that I am receiving.

I would first like to comment on a Wall Street Journal article from Jan, 12th. I hold the concerns of Bulgaria’s prime minister Boyko Borisov that public debt surges in Greece (and to a lesser extent elsewhere in Old Europe) would have repercussions for Bulgaria’s euro-zone for very well grounded. The realistic achievement of a balanced budget in 2010 would be a huge success amidst a pile-up of political and public policy disappointments of the government led by Borisov. This success alone may however not suffice for a euro-zone membership. I am a big proponent of an early euro-zone entry, but still, the overall costs of integrating Bulgaria at this time may be higher than expected. The EU/ECB will have to carefully sort out whether the benefits for the added stability in Bulgaria would outweight midterm costs and lead to stability loss for the euro-zone as a whole.

Below I am posting an excerpt from a seminar paper that I wrote as an undergraduate which dealt with Bulgaria’s currency board on the way to the euro-zone:

…
Mundell (1961) et al formulated labor mobility, the degree of openness and economy diversification as the basic requirements for participation in a single currency area. [..] According to his analysis single currency areas rely on similar levels of price stability where a single monetary policy would theoretically suffice for all. His work had helped lead to the creation of the Euro, which according to him is “a great step forward” and “a catalyst for international monetary reform”. However, some of the requirements for a single currency area to work (such as the common U.S. Dollar for all 50 states) that Mundell has postulated such as labor mobility and indirectly language barriers and housing markets flexibility do not yet fully apply for the newest EU-members such as Bulgaria. Hence, even in basic theory, notwithstanding all common sense reasons and the positive public opinion to join the EMU, some contra-arguments exist in regard of the ability of the newly joined the EU “immature” Bulgarian economy to fight asymmetric shocks. Still, there is an overwhelming amount of positive effects that make the adopting of the single European currency unambiguously attractive, especially in a credit crisis with inherent refinancing problems.
…
Summarized in theory, benefits of euro-zone integration include the elimination of exchange transaction costs and exchange rate volatility, removal of payment obstacles to trade, prevention of competitive devaluation and speculation, prevention of extremely high interest rates that hinder economic growth when countering a currency speculation attack. [..]
…

I remember that in April 2009 the Financial Times quoted a non-disclosed IMF report, urging for unilateral euroization because “to countries in the EU, euroization offers the largest benefits in terms of resolving the foreign currency debt overhang, removing uncertainty and restoring confidence”. This assessment certainly still holds true and I hope that the severe public spending slashes actually do help put Bulgaria in ERMII soon enough.

Talking about spending cuts, I fully support Simeon Djankov’s actions for many reasons. Bulgaria’s economy has to be painfully restructured to rely much less on government spending — government projects, orders and the like. Apart from infrastructure projects the government should not be the main contractor and provider of business that companies are on the lookout for. And yes, taxes are low but I can’t help but quote Milton Friedman here that “if you receive more revenue by cutting taxes, you aren’t cutting taxes enough”. Thus, if Djankov is cutting spending while keeping taxes low — well, he can’t do much wrong. The whole polemic of an ultra large intra-company indebtedness that circulates in the media in Bulgaria is in my opinion overrated and things will eventually settle back to normal.

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Dec 09

Greece high on deficit, got downgraded, now what?

By Ivo Sokolov Economics and Business, Politics 6 Comments »

Emil A. Georgiev wrote a comment in my blog that I think entails a new post in reponse. He said:

I believe the Emirates will make it, but what do you think about Greece – a member of the Eurozone?

Yes, Greece’s budget deficit, rating downgrades and potential problems with their sovereign debt rollover are somewhat alarming. The problem is not that they do not have the money to repay that debt (of course they don’t) — the problem is that they are supposed to refinance themselves from the market. And as the market lends only to prudent borrowers, at a 12,6% deficit Greece may not be considered an eligible one.

Yet when it comes to a Western European, Eurozone country make no mistake — that debt will be underwritten no matter what. On the one hand, the effects of a potential Eurozone sovereign default will definitely be Lehman-like, i.e. the systemic relevance of that sovereign default is paramount. On the other hand, the surplus liquidity that the ECB seems to be slowly and deliberately retracting (e.g. their announcements on the ‘enhanced credit measures’ from last week) can and will be channeled elsewhere when needed. They do not even have to go great lengths to inflate away that debt.

In the end of the day, no one will allow a small and highly leveraged country of such systemic relevance to go under. Not only Greek’s government, but also the whole Euro currency union is only as good as its credibility. The rating agencies’ response and ultimately the higher cost of borrowing will have to be sadly borne by the whole Greek nation. Putting a higher price tag on future borrowing for the whole Greek economy out of rating/market necessity will act more disciplinary than any legal constraints Brussels might impose on Greece. After all, if they had been following the Eurozone 3% GDP deficit guidline figures, they wouldn’t be in the mess they are today. I do expect though that there will be significant pressure on Greece to cut its public spending, should the EU/ECB really step in to bail out the Hellenic Republic of Greece.

By the way, what this also re-translates to is that Bulgaria’s aspirations to ERM II could be put to a halt for the forseeable future. Joining the EU once is a good deed, but entering the monetary union now might actually go far beyond the official Maastricht criteria. Thus, even if we consider that in a semi-deflationary environment Bulgaria meets all three criteria with a balanced budget (close but under the 3% mark), low inflation (to be in the top 3 lowest EU-wide if I recall correctly; seems somewhat achievable now) and low public debt (Bulgaria’s is way below the maximum of 60% of GDP required), Bulgaria might still not make it to the Eurozone out of political and country risk reasons. Even without the infrastructure and social expenditures of Greece.

In a nutshell, Greece will not default. As the saying goes, if you do not repay a € 1.000,- debt you have a problem; if you do not replay a € 10 million debt, the bank has a problem. In this case this bank is the ECB and the responsible account manager is the EU. They will surely get a hold of the situation, yet the “little Dubai” effect and the bad aftertaste of a popped property price bubble will continue to linger not only on Bulgaria and Greece, but also on any country that leveraged itself mostly through property sales, rather than industrial output in the recent years (such as Spain).

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Dec 02

S&P upgrades Bulgaria’s outlook to stable

By Ivo Sokolov Economics and Business No Comments »

Ok here’s some good news. Yesterday Standard & Poor’s confirmed Bulgaria’s BBB foreign currency long term debt rating but upgraded its outlook to stable.

The measures taken by the government to cut expenses and increase revenues as well as next year’s budget were taken into account for the revision of the rating outlook. The government plans a budget deficit of 0,7% but many analysts seem to conclude that a deficit of 1,2-1,3% for 2010 is more realistic.

Parallel to the rating revisions, it’s interesting to follow the CDS on Buglaria’s sovereign debt. I just looked it up in my Bloomberg terminal at work and made a chart:

For anyone interested, below are the FC/LT debt ratings that S&P has assigned to the Republic of Bulgaria since 1998 (source: Bloomberg):

Rating Watch Date Effective
BBB 10/30/2008
BBB+ *- 10/23/2008
BBB+   10/26/2006
BBB   10/27/2005
BBB-   6/24/2004
BB+   5/22/2003
BB   10/ 7/2002
BB-   11/ 7/2001
B+   5/10/2000
B   11/23/1998
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Dec 02

A weekly update: Dubai, Eastern Europe and the BG story

By Ivo Sokolov Economics and Business 2 Comments »

After last week’s standstill — note to self: try to write at least one post per week. So here are 3 interesting topics that caught my attention last week. Hmm, that actually ain’t a bad idea — if nothing special comes up, I will try to write a weekly update on something plus “The BG Story”. The BG Story will come as an additional bonus for all my fellow Bulgarian friends that have started following my blog. Alright, here goes.

Dubai: will we see a double-dip fincancial crisis due to Dubai’s debt issues?

A valid question I suppose raised by many immediately after last week’s debt moratorium on Dubai World’s debt in regard to its subsidiary Nakheel. Nakheel is Dubai government’s real estate development vehicle that bravely invested in outrageously lavish projects such as the Palm Islands (a showcase of unnecessary land reclamation) and the Nakheel Tower — the would-be world’s tallest skyscraper, whose construction was already put on hold in January this year.

All in all, the proposed extension of maturity of the US-$ 59 billion worth of debt until May 2010 triggered luckily no massive, Lehman-II-style global sell off. I’d venture to guess a couple of reasons for that:

  • First and foremost, everyone should have been aware by now that Dubai’s construction boom and property bubble have come to a halt and a much needed reality check was due. The imminent correction due — decline of buyers and inevitable tightening of cashflow — is anything but a surprise for anyone invested in those real estate projects.
  • $59 billion is peanuts compared to the thousands of billions of real estate debt that the collective American household had accumulated for many years before the credit crunch eventually struck
  • The banks and Sovereign Wealth Funds of the Emirates should have enough cash on their hands (some sources quote a total for Saudi Arabia and Abu Dhabi of US-$ 1200 billion) to provide support for Dubai’s debt
  • Although Dubai’s government initial reaction was somewhat surprising, I think they did the right thing by not announcing that Nakheel’s debt will be underwritten right away. Why? Because, although later on Abu Dhabi’s central bank confirmed it would step up to help, they are setting a good example for prudent behavior to prevent future build up of bail-out candidates.

After reading a couple of articles I understand why analysts seem to conclude that Dubai’s debt issues will continue to cast a grim shadow on global markets until the end of the year and maybe beyond. However, in the end of the day I don’t think that will trigger anything Lehman-like.

Der Standard: Eastern Europe to see the slowest economic growth

Not surprisingly the press in Austria follows eagerly anything CEE/SEE related. In the past two weeks two alarming articles came up in Der Standard. EBRD’s chief economist Erik Berglöf estimated that the region will underperform significantly compared to the rest of the world in terms of economic growth.

In yet another Der Standard article Roland Berger’s CEE expert Vladimir Preveden holds that Eastern Europe will lose popularity as an economic destination. Some countries such as Poland, the Czech Republic, Slovenia and Slovakia  are likely to develop very differently “post-crisis” than region peers such as Hungary, Bulgaria or Romania. Structural reforms in those countries can only be brought about by either continious pressure from Brussels or by the IMF. Latvia’s standby agreement comes to mind.

In sum those countires are now at a sustainable strategic disadvantage. As Preveden points out, they also have very serious issues to deal with — accelerated ageing of the population together with steady brain drain and westward immigration.

The different, i.e. lower industrial profile of those countries renders them very dependent on foreign investments. Now, even though these are all risks that foreign investors were even pre-crisis well aware of, their “worst-case” scenario has certainly happened. The imbalances that were built after years of unsustainable growth, overinvestment in dubious short-term projects and relative underinvestment in local industrial development will continue to put pressure and dampen growth even after Western Europe recovers and beyond. Contrary to some SEE analyses that I read earlier this year, the common opinion now seems to be that SEE will not lead, but lag in terms of rebound growth.

The BG Story: FIBank downgraded by Moody’s, stops cooperation with them

Here’s an interesting official blog post in Capital.bg. FIBank’s response to being downgraded by Moody’s struck me as very “typical”, although breaking up with the agency might make good sense in their situation on cost grounds alone. I strongly agree with the way the blog article was written and I was not surprised at all by the way FIBank’s Marketing/PR director responded in the comments below. All in all, I consider this a clear case of poorly handled PR job by FIBank. There is no point in discussing the rating downgrade itself; it was long due.

unnecessary
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Nov 21

Unconventional monetary policies: thinking of exit strategies

By Ivo Sokolov Economics and Business, Politics 1 Comment »

Today an interesting BIS working paper (292) was released. Anyone remotely interested in economics is probably by now aware that central banks all over the world have gone to great lengths to loosen monetary policy, not only by lowering interest rate levels. Otherwise technical terms such as ‘quantitative easing’, ‘credit easing’, ‘bank reserves policy’ (bank reserves do play a very special role, see the article) are thus commonly circulated in popular media and have almost gone mainstream. While it may be a stretch to call these measures unconventional, the extensive usage at central banks of means other than the interest rate as the main transmission channel of monetary policy has prompted many observers to label those measures creative money printing. Now that is something far more captivating to the general public than the dorky ‘quantitative easing’.

This new paper from BIS tries to classify and appraise the unconventional measures under the broad term balance sheet policies in order to differentiate them from conventional interest rate policies. They define the decoupling principle as paramount for our understanding of that differentiation — i.e. they stipulate that size and structure of a central bank’s balance sheet is independent of the interest rate policy that the central bank pursues.

This is particularly important as central banks need not unwind their balance sheets immediately after changing their interest rate policy, should the economy begin to recover and zero interest rates need to be abandoned. Similarly, the authors hold that specific separate exit strategies for the unconventional measures are necessary. As long as central banks have the same tools at their disposal as they had when creating these measures they can execute differently timed, decoupled policy exits.

I think that we will indeed see significant political pressures towards delays in cutting back on balance sheet policies. This relates merely to the fact, as highlighted by BIS, that central banks have certainly lost much autonomy from their governments and they have essentially taken a variety of further financial risks, including credit, market, exchange etc. Conflicting interests between the central bank and the goverment are hence very plausible. E.g. the government would like to inflate away its increased debt (think of the U.S.), but the central bank might want to get a hold of inflation at the same time (as soon as this becomes an issue).

Exit strategies will need to be well communicated in terms of intent and desired effect, so that their purpose is properly understood by the market, to render them effective. Technically, quantitative easing measures could be easily withdrawn just as liquidity facilities could no longer be extended. Higher collateral haircuts could be applied, etc. This should keep in control potential inflationary issues (at least in the short run; the longer run is more problematic and is explained in the aforementioned article). That is, if hopefully western economies start recovering faster and accelerated credit extension starts taking place, central banks will have the tools to prevent disproportionate and inflationary increase in the actual money supply in the wider economy. As I’ve seen in my current line of work, the ECB has started to pull out some liquidity facilities and has began to filter out eligible collaretal for refinancing much more carefully.

In the end of the day, central banks have also learned plenty. They will try to steer clear out of new imbalances.

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Nov 18

The Economist: Debates on Cloud Computing

By Ivo Sokolov Economics and Business, IT 2 Comments »

I just came across The Economist’s debate on cloud computing. Stephen Elop, President of Microsoft’s Business Division and Marc Benioff, CEO of Salesforce outline their conflicting views on the future development of cloud computing. After a short scroll, I hold Benioff’s comments for clearly the more biased. I respect what Salesforce has achieved but Benioff’s views are still somewhat utopian. Elop on the other hand manages to deliver a much more realistic and less biased point of view. I am eager to see how Microsoft will realign or reshape their Azure strategy in general. I’m starting to think that some experts have prematurely underestimated Microsoft as the cloud losers.

All in all it’s great to follow these ongoing discussions. I’m especially interested in whether the outlooks I conceived in early 2009 (in my second bachelor’s thesis on cloud computing) will prove to be true in 1 or 2 years’ time. My personal opinion is that this technology is certainly not the “breakthrough” it is marketed to be. Rather, it’s a logical evolutionary step for virtualization combined with better utilization of existing computing capacities. Yet cloud services and cloud technology do make a lot of sense for a variety of business tasks and maybe even more technical tasks. But I guess I’m still skeptical because the cloud hype has to run its natural course first. Eventually, more mature solutions will settle in.

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Nov 17

Gartner: IT spending will underperform in CEE. Thoughts on Bulgaria’s IT industry

By Ivo Sokolov Economics and Business, IT 1 Comment »

It surprises me very little that Gartner’s assesment on software spending in CEE/SEE is very negative. Eastern Europe will be the slowest emerging market region in terms of IT spending growth, come 2010. Total growth is expected to be 4% compared to 17,7% for Latin America.

Let’s have a brief look at Bulgaria for a moment.

It is a Gartner -”C” country with IT spending-peers such as the mighty high-tech powerhorses BiH, Macedonia, Montenegro, Albania and Kosovo. However, my observation is that the

overinvestment in IT

in the case of Bulgaria prior to the crisis was in fact second only to the housing boom in terms of growth and overall hype. Although of course generally positive (for the economy, workforce, etc.), structurally it now turns out to be weaker than originally thought and its

sustainability is seriously questioned.

Why? Because as Gartner points out, it was driven to a large extent by the financial services industry and cyclical demand rather than by organic expansion and export-development of the local IT companies. This is a very bold, stir-the-pot generalization and I know. But there is a serious

lack of strong local IT companies

(I know of less than a dozen such) with strong own product portfolios and stable cross-border client base. Let alone established brands.

Maybe now that the overly inflated IT-labor market has cooled down it is time for the bigger bulgarian IT companies to

rethink their strategy.

They already know that they rely too much on perpetually project-based, outsourcing contractual work. E.g. now that local banks aren’t spending they got a problem. While it is still okay to be an outsourcing company, they should probably figure out they need to better reinforce or establish their new own product lines to become

regionally and internationally competitive.

This is a banal and obvious statement and it’s easier said than done. I would argue however that it is now strategically more significant than ever before. How are companies going to achieve that? If you think about it, the only production factor at software houses are their people. From the

HR perspective,

now that skills retention is no longer the biggest concern (attrition rates have gone down dramatically) they need to strategically invest to further develop their own teams. Yes it would probably show on the bottom line and yes it is a recession. Yet they need to either get way better, or in the short-to-medium run get eaten by cheaper, better trained and well organized Indian or Brazilian outsourcing companies that, according to Gartner, will not see drops in demand for their services.

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Nov 16

Bulgaria’s fiscal reserve in action! Gloomy prospects for Bulgaria’s CBA

By Ivo Sokolov Economics and Business, Politics 1 Comment »

It is deeply frustrating to see the dire, very risky and potentially disastrous measures that are being taken to revive lending and restore confidence in Bulgaria’s economy. Yes, things do not look good.

Simeon Djankov, the ex-top World Bank economist, now finance minister told FT yesterday that they (because it’s not only his call here) have indeed decided on the unpopular measure of

allocating € 511m of the fiscal reserve (12%) for short-term deposits

at Bulgaria’s commercial banks. At least only at the foreign owned ones which to my knowledge hold more than 80% of the market share.

Now why is this so problematic? Virtually everyone else seems to have loose monetary policy today. However, this is an attempt at loosening monetary policy where monetary policy is by definition and by law extremely limited. The purpose of a currency board arrangement (CBA), especially in Bulgaria’s case, is clearly to prevent such

discretionary central banking practices

that affect domestic lending. Not only would that distort equilibrium in the banking sector, but it would also negatively impact the credibility of the currency board. The currency board is only as good as its credibility. Yes, it may successfully be argued that in the current crisis, economically this monetary loosening measure makes sense. And true, Bulgaria’s new government has done some drastic fiscal cuts in a frantic mid-year budgetary rescue mission. These cuts could have been better executed (more targeted) but have nonetheless helped restore some kind of confidence in the country, as reflected in the significantly tightened CDS-spreads. In sum it’s a very risky undertaking and I surely hope that Djankov manages to execute it properly.

But still, I think that the symbolic value of 1 bn BGN is only a trial version of what could potentially bubble up to something much bigger that would, and most probably will, result in a

controlled currency devaluation

if the crisis continues to persist in 2010. This is exactly the Plan-B strategy that Djankov has in mind. My bet goes for a 20% devaluation in late spring of 2010, i.e.

2,34 BGN for 1 EUR.

I expect many CEE/SEE analysts to start coming up with similar expectations and guesstimates so let us follow the newsflow closely and keep our deposit cash away from Buglarian banks in the meantime.

If anyone is interested as to why and how fiscal reserve operations do damage to the currency board I remember coming across a 2003 article by Prof Steve Hanke (one of the initial authors of Bulgaria’s currency board arrangement) that explains just that.

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Nov 15

“Best Global Brands” – Lessons re-learned

By Ivo Sokolov Economics and Business 1 Comment »

Two weeks ago, we were discussing in our global marketing class a Brandchannel article from Sept 2008 on BusinesWeek’s Best Global Brands. Now the question was

whether or not these lessons still hold true

in 2009. Surely, the ongoing global financial crisis has brought about paradigm shifts in virtually all businesses and industries. Inevitably, market dislocation caused a lot of business models as well as brands to collapse. Major companies (e.g. GM), small countries (Iceland) and whole industries (e.g. investment banking) were challenged. Other enterprises that were not merely successful, but also had sustainable strategies prior to the crisis found themselves in a better position but arguably all of them had to rethink and redefine their business mix and align their marketing mix to the new reality. Essentially, all of the lessons mentioned in the article are general principles that still hold true. However, the crisis has in my opinion put emphasis on some of their aspects which I have listed below.

Lesson #1: Brand Engagement is Crucial

Strong branding has proven to be very useful in the crisis, bringing further value added. Large companies, especially banks that have established themselves as system-relevant have enjoyed survival by the means of state aid. As an example this shows that having strong branding and a well-communicated strategy has helped very much shape the image of importance needed to qualify for state aid (in addition to objective criteria such as balance sheet size).

Arguably, what Jim Thompson refers to as “the proper training of employees so they embrace and live corporate brand attributes” was less relevant in my view. It was the original business strategy that had failed, not the employees that carried it out. Moreover, the employees have nothing but succeeded in following these wrong policies (e.g. extending credit to unqualified borrowers), regardless of obvious incompatibility with brand culture etc.

Lesson #2: Luxury Brands Adjust to the Tides of the Global Economy

Luxury brands are in a segment more resilient to recessions and market disruptions because their average consumer is affluent and thus likely to remain largely unaffected, hence still continue to consume. Yet, the global crisis has highlighted that paramount to being crisis-proof is proper management. Some luxury brands such as Versace and Zenith (watches) have found themselves in financial trouble, despite their premium status. BMW, on the other hand has seen much less volatility in their sales in a much more troublesome sector. This illustrates that luxury brands are adjusting differently so that this lesson is not always true.

Lesson #3: Know Thyself and Build Trust in Others

Communication policies and openness have proven especially true in times of economic uncertainty. Naturally the “going green” mania has been tuned down recently (although it has not completely gone out of fashion yet) due to more serious issues that need communicating in times of crises. Such as the core businesses values that the customer needs to be reminded of.

Lesson #4: Brands are Defining Borders in the Global Economy

Much as in lesson #1, some strong brands have managed to become system-relevant on a country level (or relevant for whole regions, e.g CEE/SEE/CIS). Thus they have seen additional benefits from their relatively well communicated internationalism. This lesson is still very much valid.

Lesson #5: Technology Continues to Empower the Consumer

Social networking on the Internet and the democratizing of consumer response to brand/company wrongdoings is certainly to the benefit of the consumers. Yet it could also be to the benefit of the company (as in the case of Apple), thereby having a multiplication effect on either sides. Still, this lesson is very true and the trend towards more recognition of that phenomenon from the company’s perspective is likely to continue.

Is there a lesson #6 and is a lesson no longer necessary?

A “back to basics” lesson has to be added. Companies currently reorganize, rethink and redefine their corporate strategies stressing on what they do best. The non-profitable or non-strategic business has to be

divested, deleveraged and deconsolidated

and that is likely to affect the brand as a whole. Therefore my lesson #6 is “focus on what you do best and brand it accordingly”. Pending consolidation and forthcoming M&A activity in many markets it is a good advice for any business to concentrate on core fields of expertise, to take care of its core customers and to reinforce its core cash flow drivers. All of that should be mirrored in an updated brand strategy.

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