UK Chief Financial Officers positive despite Grexit risks

A resounding No vote in the Greek referendum will intensify its financial crisis and takes the country closer to leaving the euro. Pressure on banks from withdrawals will mount - holding savings in cash is a free form of insurance against the risk that Greece leaves the single currency.

Unless the European Central Bank (ECB) switches tack and steps up the level of support the Greek banks will run out of money. The financial crisis will be toxic for Greek growth. History demonstrates that shortages of money or liquidity destroy confidence and kill activity.

The Greek government's gamble is that a No vote in a referendum would force its creditors to make more concessions. We should know soon whether that gamble has paid off. If it hasn't Greece will be out of the single currency.

That would be traumatic for Greece.

The effect on the rest of the euro area would be damaging but, in our view, transient and manageable. The euro area recovery has accelerated since the start of the year and the ECB has built important firewalls against the spread of financial contagion. If events in Greece looked likely to dent growth elsewhere the ECB could respond by easing monetary policy.

Deloitte's latest survey of UK Chief Financial Officers, released this morning, sheds light on the reaction of the UK's largest businesses to the Greek crisis. The survey took place between 12th and 29th June as the crisis intensified.

Despite growing Grexit risks UK corporate risk appetite has risen, with 59% of CFOs saying now is a good time to take risk, up from a two year low of 51% recorded in the previous quarter, before the General Election. Our index of corporate expansion has also risen sharply, to the highest level in four years. Perceptions of uncertainty, which rose in the run up to the election, have fallen back.

It is indicative of the shift in mood that after years of easy monetary policy CFOs are contemplating the prospect of higher interest rates. Indeed, CFOs rank interest rates rises in the US and UK, along with euro area weakness, as the two main risks facing their businesses.

The election of a majority Conservative government has turned a referendum on membership of the European Union from a possibility to certainty. 74% of CFOs believe that it is in the interests of UK business for the UK to remain within the EU while 2% disagree. CFOs are more relaxed about holding an EU referendum than they were before the election, perhaps because they believe the vote will endorse continued membership (A ComRes poll last month reported that 58% of voters support the UK remaining a member of the EU with 31% against).

CFOs are positive about prospects for the government's renegotiation of Britain's relationship with the EU. Indeed, a majority of CFOs expect positive results in each of the seven priority areas identified by the Government. Certainly the results of the renegotiation seem set to have a significant effect on corporate attitudes to the EU. 23% of CFOs say that their judgement about membership will depend on the results of the discussions with the EU.

CFOs became more cautious towards the end of 2014 and in early 2015, partly in response to perception of growing policy and political uncertainties at home. These effects have unwound and, despite events in Greece, CFOs enter the second half of the year in expansionary-mode.