COMTEMPORARY MANAGEMENT ISSUES

Contemporary management issues



Contemporary management issues

In this paper, I am writing as a line manager, and presenting the impact on the company about defaulting on Greece repayments by Governments. From this, economy would become unstable. Providing, the details what other companies are thinking about this. In this, I will also include the ethics for this. Consider one of the basic functions of a financial sector, financial intermediation. Financial intermediation is the process in which an organization gathers funds from those who do not have immediate, productive use for it and channels these funds to those who can use it productively.

Banks, the most important financial intermediary, take in deposits and then use these funds to make loans to individuals, businesses, and governments. Traditionally, the banks earn income from the interest rate spread (i.e., the difference between the interest paid to their depositors and the interest earned on loans). Like any firm, they seek to ensure revenues cover their costs. Their costs include not only the interest paid on deposits but also the costs of screening, monitoring, and enforcing loan agreements with borrowers; the costs of providing additional services to clients; overhead expenses; and so on. Banks also incur losses from overdue loans. To deal with the risk of overdue loans the interest rates charged to borrowers reflect the level of credit risk (i.e., the risk that the borrower will not pay back the loan).

Consider the two types of credit risk associated with business loans. First, credit risk arises because there is uncertainty about the income the borrower generate from its activities. The borrower may not pay back the loan because of a bad outcome of those activities; for example, demand for a redesigned product may not be as large as expected. The higher probability of a bad outcome, the higher the probability the borrower will be unable to make its payments and default and the lower the expected income from the loan. Banks charge a higher interest rate to reflect this credit risk.

Second, credit risk stems from asymmetric information because the borrower's actions are not completely observable. The borrower always knows more about his or her activities than the bank and may engage in behaviours that would negatively affect the bank. A government's ability to sell bonds depends on creditors' faith that the bonds will be repaid and on the creditors' financial capacity to buy the bonds. Creditors' faith depends on the economy's ability to generate future tax revenue, which depends on the economic growth rate. Creditors' financial capacity depends on their incomes and saving.

Because saving cannot grow faster than the economy in the long run, creditors' financial capacity to buy bonds is limited by the economy's long-run growth rate. Therefore, if Gross Debt grows faster than the economy in the long run, the economy's ability to generate tax revenue to service debt, and creditor's capacity to buy new debt, falls short of the government's liabilities. If the public understands that the Gross Debt continually grows faster ...