Likely Eurozone scenarios to help businesses plan ahead

Following yesterday’s close-run Greek elections and with ongoing concerns over the sustainability of Spanish and Italian borrowing costs, PwC is urging Milton Keynes and South Midlands companies with business links to the Eurozone to plan ahead to shield themselves from the potential fall-out from the ongoing debt crisis.

In a report entitled ‘Where next for the Eurozone?’, the firm sets out four possible scenarios for the outcome of the crisis in a bid to assist businesses in planning ahead amid the economic uncertainty.

Scenario 1 is based on successive phases of fiscal and monetary action holding together the Euro area and enabling a slow return to growth later this year and into 2013, despite occasional flare-ups caused by underlying structural competitiveness issues and fiscal adjustment problems.

Scenario 2 is based on a sequence of managed defaults reducing bank capital and lending, where a programme of debt restructuring would be agreed or forced on highly indebted countries. Eurozone leaders would agree to a package of partial bank recapitalisation and support measures to prevent contagion but would be unable to prevent a prolonged Eurozone recession.

Scenario 3 is that Greece leaves the Eurozone, followed by a sharp decline in its economy and a rapid depreciation of its new currency and an inflation spike. Contagion to other countries is minimised and currency union remains intact through a programme of monetary expansion, fiscal transfers and further Eurozone integration. The loss would have an impact on overall Eurozone confidence however with growth remaining negative in 2012 and only returning in 2013.

Scenario 4 is that following Greece’s exit from the Euro, contagion spreads rapidly and there is a Franco-German acknowledgement that the existing Eurozone is unsustainable, thus paving the way for a new, smaller and more tightly regulated currency bloc. The ‘new-euro’ would benefit from a boom in domestic demand while economies on the outside would suffer.

The consequences of the situation in the Eurozone will directly impact the strategies of many organisations. PwC has highlighted four areas of Eurozone business that Milton Keynes and South Midlands companies need to consider:

• Currency & commodities – as the crisis evolves there is likely to be increased volatility in currency markets with a Euro depreciation of around 20% possible. Businesses should take into account how this could affect their pricing, hedging and procurement strategies. They should also review how currency changes in other countries could impact on existing business and employment contracts.
• Market strategy– a raft of recent indicators show that the ongoing crisis is having a negative impact on business confidence. Businesses should consider how they could mitigate the effects of continued weakening in the European economy by shifting their focus beyond EU markets and how this might alter their focus on in and outbound operations.
• Liquidity and credit risk – given that a significant component of the crisis relates to vulnerabilities in the European banking system, exposures to banks that may be in difficulty need to be monitored and managed as cash and other financial assets may become trapped. Businesses need to undertake extra due diligence to look behind financing arrangements where a vulnerable bank may be involved.
• Contingency planning – further unforeseen systemic shocks could occur with relatively little warning meaning organisations will need to be fleet of foot to mitigate potential negative effects. Those companies with the best contingency plans in place, with agreed actions and appropriate delegated authority are the ones that will emerge in best shape.

PwC’s ‘Where next for the Eurozone?’ report and a supporting webcast is available to download for free from http://pwc.blogs.com/midlands/2012/06/now-whats-next-for-the-eurozone.html.

Contact details
Email: Mike Robinson
Tel: +44 (0) 1908 353093