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PwC - Eurozone Sovereign Debt Crisis


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Minimizing surprises despite Eurozone uncertainties
The Eurozone is at a pivotal crossroads and will likely emerge from the ongoing crisis looking quite different from the one we know today. Because the world is so interconnected, most companies will be affected in some way, regardless of how this crisis unfolds.

The Eurozone crisis has created risks—and new opportunities—so businesses must prepare to navigate the different outcomes that may unfold. The run-up to the spring Greek elections and EU Summit demonstrated how quickly scenarios once nearly unthinkable in the European debt crisis can become realistic. Political developments, economic news, and approaching debt redemptions can trigger fears of a sovereign debt default or a Eurozone exit that could materialize over the course of a weekend. Learn more at http://pwc.to/OEskCz

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PwC - Eurozone Sovereign Debt Crisis

  1. 1. Home At a glance 01 02 03 04 Upcoming 10Minutes How PwC can help     10Minutes on the Eurozone sovereign debt crisis July 2012 Minimizing surprises Over the past several months, the Eurozone crisis has heated up, bringing the world’s Are companies prepared? 1. Fewer than 25% of 1,500 global executives despite Eurozone attention back to the area’s troubled economy. Europe now sits at a pivotal crossroads and will surveyed in May1 had a contingency uncertainties likely emerge from the ongoing crisis looking plan for a Eurozone break-up. But 71% believed that a break-up could have a quite different from the region we know today. “somewhat” or “very” significant impact Highlights The run-up to the spring Greek elections and on their business. The Eurozone sovereign debt crisis, regardless of EU Summit demonstrated how quickly nearly Only about 20% of North American the ultimate outcome, is likely to have significant unthinkable scenarios in the Eurozone crisis consequences for many businesses. and Latin American executives had can become realistic. Political developments, contingency plans in place for a Eurozone economic news, and approaching debt Businesses need to reconsider their corporate break-up. redemptions can trigger fears of sovereign strategy and operations to navigate a changing set debt defaults or Eurozone exits that could Large companies remain vulnerable: of risks and opportunities. materialize over the course of a weekend. Globally, half of the companies with more Increased euro volatility and tight liquidity will require than $10bn in annual revenue did not Because the world is so interconnected, agility in financial management and reporting. have a solid plan in place for a Eurozone most companies will be affected in some break-up. way, regardless of how this crisis unfolds. Companies should build buffers and adaptability for Eurozone consequences. PwC’s 15th Annual Global CEO Survey 2. The Federal Reserve and other authorities found that more than half of corporate have expressed concerns that companies leaders say their business already has been should reduce their exposure to European affected financially by the Eurozone debt financial institutions.2 situation. Yet only 45% of CEOs say the crisis has triggered changes to strategy, risk management, or operational planning. Given the pace of change and the level of volatility, companies should focus on preparing to navigate ongoing uncertainty and drastic changes in the global environment. 1 Sarah O’Connor, “Businesses fail to prepare for end of euro,” Financial Times, May 18, 2012. 2 Brian Blackstone, “Q&A: Philadelphia Fed President Charles Plosser,” WSJ.com, May 28, 2012.
  2. 2. Home At a glance 01 02 03 04 Upcoming 10Minutes How PwC can help     At a glance Imbalances have led to two Eurozones Unwinding the imbalances will require deep changes throughout the Eurozone for a prolonged period. During the euro era, Northern Eurozone countries have run …and countries’ debts have grown to unsustainable levels. trade surpluses while others have run trade deficits… Trade balances (% of GDP) 2011 government debts & deficits (% of GDP) Debt 180% 10% Greece Netherlands 150% Germany 5% Italy Ireland 120% Portugal 0% France Ireland France Germany 90% Italy Spain Spain Netherlands -5% Portugal 60% Axes represent 1997 Stability & Tr Tr ad ad Growth Pact limits e Greece e su -10% 30% de rp fic lu it s co co un un tri tri es es 0% -15% ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 0% 3% 6% 9% 12% 15% Deficit Source: Haver Analytics Source: OECD
  3. 3. Home At a glance 02 03 04 Upcoming 10Minutes How PwC can help    01 A new real-world test The Eurozone crisis was caused in part by fundamentally different sovereign countries sharing Holding the Eurozone together—European leadership’s current intention—would still likely of business resilience a currency. Differences in labor costs, for example, made some countries, such as Greece and Italy, less drive a European economic slowdown through 2013. But the limited success to date of actions competitive in global trade, which led to trade and aimed at holding the Eurozone together has made budget deficits. They were able to finance the deficits at least a partial break-up a realistic possibility. at low interest rates made possible by a perception Such a break-up could cause major disruptions as that they were no riskier than stronger Eurozone well as a deep recession across the Eurozone that countries. In effect, Germany and other countries could persist for years. financed the deficits through trade surpluses. Beyond Eurozone borders These deficits reached unsustainable levels by 2010. Credit markets tightened, but the deficit countries A disorderly resolution would weigh down continued to borrow at increasing interest rates, businesses around the world and force slow growth rather than take drastic actions. in the US through 2014. Exports to the Eurozone would plummet, while concerned businesses and The resolution to the Eurozone crisis will need consumers would cut big-ticket expenses. to go beyond fixing today’s urgent issues and provide enduring solutions to the fundamental Financial markets are also likely to drive the crisis underlying imbalances. around the world. How so? One possibility is that Four scenarios dominated by uncertainty and high volatility lenders would pull back indiscriminately, leading Actual change in Eurozone GDP and projections for the four potential How the crisis could unfold in the near-term to a global credit crunch. Another possibility is that scenarios (S1–S4) 4% The short-term and long-term economic capital would flee to safe havens, leading to a credit performances of Eurozone countries hinge on how glut with its own destabilizing effects.4 Eurozone GDP growth well political leaders and finance ministers can A new breed of crisis calling for broader response 2% agree on debt-reduction paths, as well as how the populace reacts to austerity conditions and other Focusing on only one or two likely outcomes requirements for assistance. PwC economists see probably won’t provide the resilience needed to S1 0% the following range of most likely scenarios:3 cope with what actually does transpire. Rather, ’08 ’09 ’10 ’11 ’12 ’13 S3 companies need to prepare for the potential Scenario 1: Successive phases of fiscal and consequences of a wide range of events, including S2 S4 monetary action hold the Eurozone together a Eurozone break-up, by taking stock of exposures -2% Scenario 2: A sequence of managed defaults and crafting a blueprint for more than one future. Scenario 3: Greece exits but contagion avoided -4% Scenario 4: More countries exit Eurozone and a 3 PwC, “Now what’s next for the Eurozone?” June 2012. new currency bloc forms 4 Brian Blackstone, “Q&A: Philadelphia Fed President Charles Plosser,” Source: PwC UK economics group, June 2012. WSJ.com, May 28, 2012.
  4. 4. Home At a glance 01 03 04 Upcoming 10Minutes How PwC can help    02 Your strategies and When establishing their business strategies and operations, companies have typically planned on a Companies should also watch for opportunities. Are lower-cost sources emerging from the Eurozone? operations in a stable Eurozone. Now, they must re-evaluate their plans, considering the volatility and risks created by Technology new light the crisis. A sudden change in currency, should Greece or another country leave the Eurozone, could stress Business model and structure information-technology systems. In 2009, sales by US subsidiaries in Greece, Spain, Specifically, IT departments must ensure that Reacting to turmoil in the Eurozone Italy, Ireland, and Portugal topped $460bn, out of systems would function seamlessly if there was a The impact of the crisis and response to it vary by industry a $2.1 trillion European Union total.5 change in currency. Some companies, for example, Companies need to determine which circumstances have found that without significant planning, Banking and capital markets 66 73 put their revenue most at risk. European sales and their systems would not support employee payroll Asset management 54 72 distribution centers are likely to lose customers processes after a currency disruption. Metals 53 65 and find increased competition for remaining Chemicals 61 customers. They should assess how long they can Human Resources 52 Technology 37 60 survive suppressed sales in the Eurozone. And if The crisis will force some companies to restructure Insurance 57 60 they decide that it’s prudent to exit some countries, their businesses. They will need to prepare to deal Automotive 43 57 how can the lost revenue be replaced? appropriately with compensation, as well as any 56 Business & professional services 40 Already, for example, companies have accelerated headcount reductions or redeployments. 56 All industries 45 Communications 55 plans for shifting European operations to promising HR departments need to determine how talent 50 Pharmaceuticals & life sciences 54 emerging markets. will be retained in countries destabilized by the 45 Construction/engineering 43 53 As companies shift their focus, they may cause Eurozone crisis and how any labor unrest will be Forestry, paper & packaging 47 53 competition and costs to increase outside the handled. HR also needs to develop models to cope Industrial manufacturing 47 51 Eurozone and make emerging markets and safe with differing labor demands across countries. Consumer goods 40 50 havens more crowded. Companies need to think 47 Crisis/incident management Healthcare 34 long-term about where attractive investments will Hospitality & leisure 31 45 come from—inside and outside the Eurozone. Companies should prepare for massive social Entertainment & media 29 44 disturbances—strikes, infrastructure outages, and Transportation/logistics 37 42 Procurement violent street actions—that would likely accompany Retail 40 39 Many businesses rely on sourcing from Eurozone any Eurozone exit or messy break-up. Continuity 0 25 50 75 countries to reduce costs or to be close to the plans, which may involve physical and cyber Percent of CEOs responding Percent of CEOs responding that the Eurocrisis customer. They need to assess where distressed security, need to be tested and refined. that the Eurocrisis directly has triggered specific changes to their strategy, affected their company financially risk management or operational planning vendors can cause supply chains to break down and if they can move rapidly to alternative vendors. 5 “Operations of U.S. Multinational Companies in the United States and Source: PwC, 15th Annual Global CEO Survey, 2012. Abroad,” Survey of Current Business, BEA, November 2011.
  5. 5. Home At a glance 01 02 04 Upcoming 10Minutes How PwC can help    03 Financing, reporting, In PwC’s 15th Annual Global CEO Survey, more than half—58%—of the respondents said they consider Finance managers also need to address increased reporting requirements that account for impairment and contracting exchange rate volatility a threat to their business. or uncertainty in valuations caused by Eurozone upheaval. Regulators such as the SEC are asking during unprecedented Indeed, the euro is the world’s most abundant currency based on the value of banknotes and for specific, disaggregated disclosures and reports volatility coins in circulation.6 Its destabilization could send financial shock waves. on how firms are managing and mitigating Eurozone exposure.7 Finance teams will need to develop a new paradigm Treasury and finance to plan for the future. Should companies borrow in Companies need to determine how dependent they the Eurozone? How do they know when they should are on the euro. They can start with analyzing the lend in the Eurozone? Will safe-haven countries Currency volatility has fundamentally changed, liquidity of their euro assets and how concentrated experience a credit freeze or flood? and so must business they are in distressed countries. Some companies Euro/US dollar volatility* are making “daily sweeps” to remove cash from Legal, contracting, and tax vulnerable Eurozone countries. Many sales, supply, employment, and other 20% Companies may also want to use derivatives or contracts are based on existing EU law and the other means to hedge against income declines or premise of a stable currency. They may become fluctuations caused by exchange rate volatility that unenforceable or have terms that become 16% impact the value of euro revenue. unreasonable if the euro fails to stabilize. New volatility level Many scenarios would likely squeeze credit in the To minimize problems, companies should consider Eurozone. Already in the first quarter of 2012, the impact of converting the denomination of euro 12% a major European bank reduced its exposure to contracts to a stable currency. Prior volatility level Spanish, Italian, Portuguese, Irish, and Greek debt Tax implications of the crisis could prove quite by 16% and cut back on lending in these countries. thorny. Tax and treasury officers should coordinate 8% The impact of a credit squeeze could be aggravated closely to monitor contract changes, hedging by operations, as distressed suppliers and customers programs, foreign currency gains and losses, strain the company’s working capital. and other developments such as write-offs of 4% investments or loans, repatriation of cash, and early debt refinancing. 0% ’05 ’06 ’07 ’08 ’09 ’10 ’11 *Implied currency volatility based on options trading data. 6 “Cash in hand,” www.economist.com, April 2, 2012. Source: Bloomberg. 7 PwC, “The Quarter Close – Q1 2012,” March 22, 2012.
  6. 6. Home At a glance 01 02 03 04 Upcoming 10Minutes How PwC can help    04 Prepare for more The future of the Eurozone, including the resolution of the immediate sovereign debt crises, depends on Create a blueprint for resilience The team can develop an action plan by: than one future the interactions among political leaders, financial markets, and citizens being asked to make personal 1. Converting the Eurozone macro scenarios sacrifices. That means uncertainties and unknown into a set of most significant outcomes for the dependencies abound. business (for example, severe liquidity crunch, loss of supplier, plummeting sales, or even the Assemble a cross-functional team opportunity to acquire a weakened company). Since 2008, companies have learned that preparing 2. Preparing a plan to mitigate negative for uncertainty is about focusing on the consequences consequences and capitalize on opportunities. of business disruptions. They must bring risk discussions to a more strategic and integrated level, 3. Assessing immediate needs for buffers or shock rather than leave them solely in the domain of absorbers, such as moving to more liquid assets or risk managers. diversifying funding sources and suppliers. That means companies need to assemble a cross- 4. Determining how to increase the organization’s functional team of managers who will be poised adaptive capacity (for example, increasing to respond to the many potential disruptions and collaboration among the cross-functional stresses caused by emerging Eurozone events. team members or more closely monitoring Be ready to answer these questions from the board: Discussions should occur among managers in key suppliers). 1. How broad are the risks that we are considering? strategy, finance, operations, risk management, Considering broader risks allows companies to navigate 5. Communicating commitment to the plan and its treasury, tax, business continuity management, strategy through more potential consequences. payoff to stakeholders. IT, HR, and legal departments. It may even be appropriate to include partners, suppliers, and other 6. Assigning responsibilities and walking through 2. What risk scenarios have we considered to test our plans? Scenario analysis with board input can external resources. plans to ensure they can be put in action. clarify the impact of various risks. Teams that do this will be a crucial resource for 3. Have we mapped our risks to key performance building the resilience needed not just to manage and value measures? Common metrics for risk and the risks, but also to craft a longer-term plan performance can help prioritize action plans and gain that captures the opportunities in the Eurozone buy-in. that emerges.8 Source: Armoghan Mohammed and Richard Sykes, “Sharpening strategic risk management,” Resilience – Winning with risk, PwC, Vol. 1, No. 1 June 2012: 14-17. 8 PwC, “Prospering in an era of uncertainty – The case for resilience,” May 2012.
  7. 7. Home At a glance 01 02 03 04 How PwC can help     Upcoming Toward a more flexible supply chain Volatility has become a fact of life in today’s business Pinpointing potential in China’s health reform 10Minutes topics landscape. Yet, after years of global expansion, With the approval of the 12th Five-Year Plan, China’s many companies’ supply chains are brittle, unable health care industry is—and will continue to be— to respond to frequent fluctuations in demand flush with investment opportunities. and supply. This 10Minutes explores strategies Stronger infrastructure, expanded insurance companies can deploy to make their supply chains coverage and reformed public hospitals mean more agile and adaptable. private and foreign investors can partner with the Beyond outsourcing and shared services— country more readily than ever. This 10Minutes to real business value explores the current and future options for business in the open, decentralized health care field of China. Operations, traditionally seen as spenders rather than contributors, have cut costs heroically in the last several years to protect margins. But in the face of slow-growth prospects and volatile economies, companies are asking operations leaders for even more. Along with greater savings, can operations deliver flexibility, scalability, and innovation? 10Minutes discusses transformations in business services and why a move to a global business services model may be the answer.
  8. 8. Home At a glance 01 02 03 04 Upcoming 10Minutes     How PwC To have a deeper discussion about managing the Eurozone crisis, please contact: 10Minutes are now available in can help Ed Heitin 60 seconds. Partner Download the FREE 10Minutes app. +1 646 471 3366 Learn more through videos, interactive edward.j.heitin@us.pwc.com graphics, slideshows, and podcasts. Henri Leveque Partner +1 678 419 3100 h.a.leveque@us.pwc.com Amie Thuener Managing Director +1 408 534 2496 amie.n.thuener@us.pwc.com Shyam Venkat Principal +1 646 471 8296 shyam.venkat@us.pwc.com Tell us how you like 10Minutes and what topics you would like to hear more about. Just send an email to: 10Minutes@us.pwc.com. © 2012 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved. PwC refers to the US member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. This publication is printed on Domtar Cougar 10Minutes® is a trademark of PwC US. stock, containing 10% post consumer waste fiber. It is certified by the Forest Stewardship PwC US helps organizations and individuals create the value they’re looking for. We’re a member of the PwC network of firms with 169,000 people Council (FSC), and a premier member of the in more than 158 countries. We’re committed to delivering quality in assurance, tax and advisory services. Tell us what matters to you and find out Domtar EarthChoice family. more by visiting us at www.pwc.com/us. BS-12-0478
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