The New Normal, Part I
The summer’s volatile capital markets, fueled by fears of contagion in larger Eurozone member states and a double-dip recession in the United States, may have more of an impact on the satellite sector than the “great recession” of 2008-2009. The satellite industry weathered that economic crisis well, with healthy revenues, profitability, activity and employment, but what pundits are calling “the new normal,” an era of low growth, low interest rates, slashed government spending, higher unemployment and hoarded cash on corporate balance sheets, may take a greater toll this time around. How well is the space business positioned to weather a new normal like this?
Starting with the initial Greek sovereign debt crisis in spring 2010, the Eurozone, comprised of 17 of the 27 European Union member states, has been under continual pressure. A group of member states led by the Eurozone’s two biggest economies, Germany and France, arranged a bailout fund for Greece and Ireland to help those countries avoid default on their sovereign debt. European banks held most of this sovereign debt and a default could have jeopardized their existence. The Greek fund was extended this past summer and the fiscal austerity measures required of the Greek government were eased.
The Greek and Irish sovereign debt problems had different causes. In Greece’s case, the cause was fiscal irresponsibility — a government and its people living beyond their means through excessive spending on social benefits in excess of tax revenues. The situation fostered an unsustainable debt to Gross Domestic Product ratio. In the case of Ireland, the cause was a “bubble” in property and other sectors, brought on by growth fueled by low corporate tax rates and other incentives. While the Eurozone bailouts of Greece and Ireland were sustainable, they caused stress particularly in Germany and the Netherlands, which have a tradition of fiscal conservatism and oppose responsibility for maintaining the fiscal lifestyles of more profligate southern European member states. These countries and their allies, while heavily invested in the Euro’s continued existence, do not want the European Union to become a “transfer union,” in which member states with surpluses will be constantly called on to support the member states that run deficits.
Now, the sovereign debt contagion has spread to the much larger economies of Italy and Spain. Italy’s sovereign debt problem is similar to Greece’s, while Spain, which experienced an extraordinary real estate bubble in the last 20 years, is more akin to Ireland’s situation. The sovereign debt of France also has come into question. Regardless of political will, this level of Eurozone contagion may be too much for the stronger fiscal states to combat. The bailed-out countries themselves are reconsidering their participation in the Eurozone for the fiscal austerity their bailouts require and the political unrest that it generates. The expanding contagion and the wavering will and ability of both the Eurozone’s strong and weak members is enough to call the continued existence of the euro, and the Eurozone itself, into question.
The United States’ problems are similar to the situation in Greece, without the immediacy of crisis. The United States and its voters talk the talk of fiscal prudence and austerity, but live on an array of benefits that exceed tax revenues. The facts that even August’s downgrading of U.S. creditworthiness by Standard and Poor’s had little effect on U.S. Treasury bonds as an investor safe haven, if anything lowering yields; that the U.S. Treasury, unlike any individual Eurozone country, can print money to pay debt, particularly in an environment of little or no inflationary pressure; and the nearly unprecedented acrimony between the Democratic and Republican parties, all conspire to keep the U.S. sovereign debt crisis from being addressed.
The United States is in a moment in which the center of political discourse has moved sharply to the right, like the marker on a tug-of-war rope. Little distinction is made in the halls of Congress or the White House between government spending and government investment, which will lead to slashed budgets for aerospace and defense activities, research and development and other government-led activities that have traditionally been indispensable for economic growth.
The satellite business is going to have to confront the new normal. The sector is already substantially consolidated and a low margin market across most subsectors, especially downstream from FSS and MSS operators, so it cannot confront these new economic realities with traditional deal making. This is a moment for entrepreneurial thinking, both by established players and new market entrants. New technology and public-private partnerships will play a role as well. We will discuss some likely plays next month.
Owen D. Kurtin is a practicing attorney in New York City and a founder and principal of private investment firm The Vinland Group LLC. He may be reached at firstname.lastname@example.org.