The document summarizes the ongoing eurozone debt crisis, its triggers, and implications for US corporations. It began in 2010 when Greece's budget deficit was revealed to be much larger than estimated, exceeding the EU limit of 3% of GDP. Since then, sovereign debt issues have spread to other eurozone nations as markets question their ability to repay debts. Greece, Portugal, and Ireland have received bailouts from the ECB, EC, and IMF. While reform efforts are increasing, significant risks remain for US companies operating in Europe. The document outlines four possible future scenarios for the eurozone to help guide corporate contingency planning.

1. fs viewpoint www.pwc.com/fsi
02 08 15 28
May 2012
Understanding Potential Implications for What companies
the crisis scenarios US corporations are doing now
Breaking Up is Hard to Do:
The Eurozone Crisis—Possible
Implications and Contingency
Planning for US Companies

2. Understanding the crisis

3. Eurozone crisis The current eurozone debt crisis, while building Reform momentum is growing as political
up over time, was triggered in April 2010 when leaders face up to this moment after more
Eurostat, the Europe Union (EU) statistical than two years of procrastination and wishful
authority, revealed that Greece’s 2009 budget thinking. Arguably, some of the largest
deficit was €32.3 billion, or 13.6% of its gross financing hurdles in the most at-risk countries
domestic product (GDP). In 2009, Greece had have been overcome, with yields on both short-
estimated its deficit for 2009 would come in at and long-term debt significantly lower than at
3.7% of GDP. The EU’s limit is 3%.¹ the end of 2011, and consumer and industrial
confidence beginning to improve. Nevertheless,
Global markets have since responded to the
significant operational risks remain for US
magnitude of sovereign debt in other eurozone
firms operating in the eurozone. Contingency
countries as investors question the ability of
planning can help mitigate the risk, and the
these countries to repay their debts.²
strategies adopted by US firms will depend on
Greece, Portugal, and Ireland have requested likely market conditions. In this publication,
financial assistance from the European Central PwC will outline four possible scenarios for
Bank (ECB), the European Commission (EC), the eurozone’s future that can help guide US
and the International Monetary Fund (IMF) to corporate decision-making.
finance debt repayment. There has also been
a stream of European summits to resolve the
crisis. Consumer and industrial confidence
Consumer and Industrial Confidence
Growing market pressure and significant
20
tranches of sovereign debt due for refinancing 10
hint at a possible resolution to the current 0
phase of the crisis. However, there is no silver -10
bullet—any solution will necessarily play out -20
over time, step by step, via fiscal austerity to pay -30
down debt. In addition, deep structural reforms -40
will be necessary to restore competitiveness and -50
boost long-term growth.
2000 - Jan
2001 - Jan
2002 - Jan
2003 - Jan
2004 - Jan
2005 - Jan
2006 - Jan
2007 - Jan
2008 - Jan
2009 - Jan
2010 - Jan
2011 - Jan
2012 - Jan
1 harles Forelle, “EU Sees Wider Greek Deficit, Roiling Markets;
C
Bonds Fall as Investors View Bailout and Default as Givens,” The
Wall Street Journal, April 23, 2010.
2 The eurozone consists of the following 17 European Union member
countries who have adopted the euro (European Monetary Union):
the 11 original members—Austria, Belgium, Finland, France, Industrial confidence Consumer confidence
Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, indicator, SA % balance indicator, SA % balance
Spain—and Greece (from January 2001), Slovenia (from January Source: Haver Analytics
2007), Cyprus and Malta (from January 2008), Slovakia (from
January 2009) and Estonia (from January 2011).
Understanding the crisis 3

4. Eurozone crisis In March 2012, The Economist reported, Many forecasters question whether Greece’s
“Cheered by the signs of recovery, and relieved partial default on its debt and additional
that disaster has been avoided (particularly funding from the ECB and the IMF of €130
in Europe, which towards the end of last year billion is a long-term fix or simply a way to
seemed on the brink of a calamity of Lehman- delay the inevitable. Even with this package,
like magnitude), financial markets have been Greece’s debt is still expected to be 120% of
climbing steadily higher.”¹ GDP in 2020 under what some consider to be
optimistic economic and budget assumptions.³
While financial markets have recently started
to move higher, GDP data reflected a different As soon as the ink was dry on the Greek bailout
story—confirming that the region shrank agreement, market attention turned to debt
by 0.3% in the last quarter of 2011 while issues in Italy, Spain, and Portugal, thereby
household spending, exports, and imports all signaling a potential continuation of the crisis
fell.² Some fear that the eurozone may slide and once again highlighting the historical
into deeper recession. origins of the current dilemma.
Percent change in real GDP since 2000 Share of EurozoneGDP
Share of eurozone GDP
Percent Change in Real GDP Since 2000
150 Greece, Ireland,
and Portugal:
140 6.1% of eurozone GDP
130
Spain and Italy:
28.5% of eurozone GDP
120
110
Rest of eurozone:
100 65.4%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Greece Spain Portugal
Germany Ireland Italy Source: Haver Analytics, IMF, and WEO Databases.
Source: Haver Analytics and PwC analysis
1 Can it be… the recovery?” The Economist, 17 March, 2012.
“
2 Eurozone crisis live: FTSE 100 posts biggest fall of 2012 - as it
“
happened,” Guardian Unlimited, March 6, 2012.
http://www.guardian.co.uk
3 Greece: Request for Extended Arrangement Under the Extended
“
Fund Facility,” IMF Country Report No. 12/57, March 2012.
4 FS Viewpoint

5. The roots of the crisis go Diverging competitiveness This imbalance stemmed from the eurozone’s
unique governance structure (part
back to the inception of the Divergences in the competitive positions
intergovernmental, part supranational)
and current-account balances of eurozone
euro in 1999 and two countries have been building up over the and macroeconomic policy framework
(single monetary policy and devolved
underlying problems that past decade. Countries such as Germany
fiscal authorities). Additionally, there
and the Netherlands gained in price/
have gone unchecked: cost competitiveness while others such as was no mechanism for regulating wider
Greece, Ireland, Portugal, and Spain lost macroeconomic imbalances.
competitiveness.¹
Current account balance (US$ billion) Manufacturing unit labor cost index
Current account balance (US$ billion) Manufacturing unit labor cost index
400 180
300 160
Q1 2000 = 100
200 140
100
120
0
100
-100
80
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
-200
Greece Spain Portugal
-300
Germany France Italy
-400 Netherland
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Source: OECD
Germany Netherland Portugal
Greece Spain France
Italy
Source: IMF
1 European Economy News,” April 2010, European Commission
“
Economic and Financial Affairs. Available from http://ec.europa.eu/.
Accessed April 10, 2012.
Understanding the crisis 5

6. The roots of the crisis go Over-reliance on debt The European banking sector is an important
channel of transmission of the crisis because
back to the inception of The divergence trend has been supported
banks have large holdings of eurozone
by a complementary flow of credit from the
the euro in 1999 and two surplus countries to the deficit countries. This sovereign debt on their books. The ECB is
leading the effort to ease this pressure with the
underlying problems that has caused a build up in public and private
introduction of its credit facility for the banking
have gone unchecked: debt, delayed a correction in competitiveness,
and allowed the structural problems of the sector, the long-term refinancing operations
eurozone to be largely hidden. Many countries (LTROs).
are now struggling to repay this debt.
Pubic debt and and deficit estimates (% of GDP)(%
Public debt deficit estimates for 2011 for 2011 of GDP)
High debt 180
Greece High debt
Gov’t debt (% of GDP)
High deficit Moderate deficit
160
140
Italy
120
Ireland Portugal
Belgium100
France
UK
80
Spain
60
-12 -9 -6 -3 0 3
Government deficit (% of GDP) 40
20
Moderate debt 0 Low debt
High deficit Axes represent Maastricht limits Low deficit
Source: IMF
6 FS Viewpoint

7. The resolution to the crisis Imperfect union
will be impeded by the fact The 17 members of the European Monetary Union remain sovereign
nations. The following timeline outlines potential trigger events during
that the eurozone is not a 2012 that may impact the timing and ultimate resolution of the crisis.
political union.
March Apr May June… Aug Sept Oct Nov Dec
Refinancing €14.4 bn €8 bn €9.5 bn €7.7 bn IMF review of
Greek bond Greek bond Portuguese Greek bond Greek economy
redemption/ redemption bond redemption (Nov)
disbursement (May) redemption (Jun) (Aug)
(Mar)
€14.6 bn IMF IMF review of Review of Greek
disbursement to Greek economy economy by the
Portugal (Mar) (May) IMF (Aug)
€5.5 bn
Ireland bond
redemption
(Mar)
Political meetings EU Council G20 Finance EU Council G20 Finance EU Council
meeting minister and meeting minister and meeting
(1-2/Mar) central banks’ (28-29/Jun) central banks’ (13-14/Dec)
meeting (20/Apr) meeting
(13-14/Sep)
EU Council
G20 Summit
meeting
(18-19/Jun)
(18-19/Oct)
IMF/World
Bank Annual
meeting (Oct)
Elections First round US presidential
of French elections (6/Nov)
presidential
elections
(22/Apr)
Greek elections Greek elections
(6/May) (6/May)
Greek events
Understanding the crisis 7

8. Potential scenarios

9. Potential scenarios for the Each scenario varies in its likelihood and Projected Eurozone GDP growth under
Projected eurozone GDP growth under four scenarios.
four scenarios
impact.
eurozone in 2012. 4%
The eurozone that emerges from the crisis 3%
There are a number of ways in which the is likely to be very different to the one we 2%
1%
eurozone crisis could play out depending on the know today, with 2012 being dominated by 0
mix of policy responses over the next year or uncertainty and high volatility. -1%
-2%
-3%
two. Presented below are four possible, though There is a wide range of potential outcomes. -4%
not necessarily exhaustive, scenarios that -5%
-6%
represent a range of potential resolutions to the
2005
2006
2007
2008
2009
2010
2011
2012
2013
crisis in 2012:
Scenario 1: Scenario 1 Scenario 2
Successive phases of monetary and fiscal Scenario 3 Scenario 4
action hold the eurozone together at the cost of Source: PwC analysis.
inflation.
Scenario 2:
Voluntary defaults for highly-indebted
sovereigns.
Scenario 3:
Greece exits the eurozone and a firewall is built Scenario description Projected GDP growth (percent)2
around other economies.
2012 2013
Scenario 4: Scenario 1: Successive phase of monetary and fiscal action hold 0.1 0.7
the eurozone together at the cost of inflation.
A new currency union is formed by the stronger
economies.¹ Scenario 2: Voluntary defaults for highly-indebted sovereigns. -3.0 -1.5
Scenario 3: Greece exits the eurozone and a firewall is built -1.0 0.5
around other economies.
Scenario 4: A new currency union is formed by the -1.5 0.6
stronger economies.
1 What next for the eurozone - Possible scenarios for 2012.”
“
Available from: www.pwc.co.uk. Updated scenarios published
March 2012.
2 Ibid.
Potential scenarios 9

10. Scenario 1 Policy action • Crisis is initially contained by ECB bank financing and agreement on
Greek debt haircut.
Successive phases of • Greece fails to meet the conditions of the deal, triggering another round of ECB
monetary and fiscal action financing coupled with fiscal transfers to peripheral economies in exchange for
austerity measures.
hold the eurozone together • A looser monetary policy is adopted at the end of 2012 to help restore the
at the cost of inflation. competitiveness of the peripheral economies.
Short-term outcomes • No or low growth will put downward pressure on inflation, signalling a looser
monetary policy in 2013.
• “Internal appreciation” of Germany in relation to the periphery helps alleviate
recessionary pressure in peripheral economies by improving their trade balances.
• Improved credit conditions and confidence could support GDP growth of 2% in
2014, as the survival of the euro looks increasingly certain.
Medium-term outcomes • Higher inflation should ease debt restructuring, and improve competitiveness of
peripheral European economies.
• ECB raises interest rates to bring down inflation in the medium-term and
restore credibility.
• Most eurozone countries will be running primary surpluses for many years, putting a
drag on growth.
Higher inflation in the core Eurozone
countries could restore the relative
competitiveness in the core eurozone countries could restore
Higher inflation of the periphery. The policy response restores confidence and prevents
the relative competitiveness of the periphery. a prolonged recession.
140
Consumer Price Index
Eurozone 2012 2013 2014 2015 2016
130 Forecast
GDP growth 0.1 0.7 2 1.5 1.5
2004=100
120 Inflation 1.5 3.0 3.5 3 2
110
100
2004
2006
2008
2010
2012
2014
2016
Spain Germany
Source: Eurostat and PwC Analysis
10 FS Viewpoint

11. Scenario 2 Policy action • Following the Greek precedent, other highly-indebted economies seek to restructure
their debts.
Voluntary defaults for • We assume a 50% default on Portuguese and Irish sovereign debt and a 25%
highly-indebted sovereigns. default on Italian debt.
• In parallel, we assume leaders agree to measures aimed at insulating the rest of the
eurozone from a collapse in confidence.
Short-term outcomes • We estimate that the restructuring will cause a private sector wealth loss of up to
€800bn, including €100bn to banks.
• Bank losses would be partially recapitalized by governments, the European Financial
Stability Facility (EFSF), and the European Stability Mechanism (ESM), but lending
would also need to be reduced.
• We expect that this would precipitate a contractionary debt spiral dragging the
eurozone into a deep and protracted recession.
Medium-term outcomes • We expect that restructuring governments will be locked out of credit markets
and require long-term support from the rest of the eurozone and other
bilateral institutions.
• Over time, these countries would have to reestablish credibility with investors.
Bank losses could total over €100 billion,
whichlosses could total over €100 billion, which could
Bank could precipitate a contractionary ...such a credit contraction could lead to a
debt spiral... contractionary debt spiral...
precipitate a deep recession
€ 35,000
€ 30,000 Eurozone 2012 2013 2014 2015 2016
€ 25,000 GDP growth -3 -1.5 -0.5 1 2
€ 20,000
Inflation 1 0 0 1 2
€ 15,000
€ 10,000
€ 5,000
0
Italy
Greece*
France
Germany
Portugal
UK
Ireland
Spain
Source: EBA. *Data as at 30 Dec, 2010
Potential scenarios 11

12. Scenario 3 Policy action • Greece exits the eurozone by imposing temporary capital controls and
redenominating all new and existing contracts in new drachma.
Greece exits the eurozone • The eurozone commits to saving the euro and uses the ECB and EFSF to build a
and a firewall is built firewall around other vulnerable economies.
around other economies. Greece outcomes • We expect that the new drachma could depreciate by as much as 50%, constituting
an implicit default on debt.
• Inflation would soar, potentially averaging 10% in 2012.
• The Greek economy would enter a severe recession as credit conditions and
confidence deteriorate and further fiscal austerity is mandated in return for
IMF funding.
• In the medium term, the economy could recover—driven by exports spurred by a
weaker currency and improved competitiveness.
Rest of eurozone outcomes • We expect this would cause an 18-month recession in the eurozone as investors’
losses and shaken confidence lead to capital flight and deteriorating credit
conditions.
• But the Greek exit also would provide an impetus for other vulnerable countries
to bring forward fiscal and structural reforms to “avoid the Greek fate,” improving
longer-term growth prospects.
Historical devaluations have led to tosharp contraction in
Historical devaluations have led a a sharp The region would suffer an immediate but short-lived
GDP lasting one to two years. to 2 years
contraction in GDP lasting 1 recession and growth would resume after 18 months.
GDP index (100 = year of devaluation) 2012 2013 2014 2015 2016
120
115
GDP Greece -5 -1.5 0 2.6 2.8
110
growth
105
Rest of -1 0.5 1 1.6 1.8
100
eurozone
95
90 Inflation Greece 10 8 8 6 6
85
80 Rest of 1.5 1.8 2 2 2
0 1 2 3 eurozone
Sweden (1992) Thailand (1997)
Indonesia (1997) Argentina (2001)
Korea (1997)
Source: IMF, PwC analysis
12 FS Viewpoint

13. Scenario 4 Policy action • A Franco-German acknowledgement that the existing eurozone is unsustainable
paves the way for a new, smaller, and more tightly regulated currency bloc.
A new currency union is • The new bloc includes: Germany, France, the Netherlands, Finland, and some of the
formed by the stronger stronger new member states.
economies. • More stringent rules are set out for members on fiscal union and structural positions.
“New euro” • New bloc benefits from an inflow of capital in the first year.
bloc outcomes
• However, transition costs and a loss of competitiveness as a result of the stronger
currency would drag on growth in 2012.
• The new euro exchange rate could be permanently higher by up to 15% compared
to the exchange rate for major trading partners.
Periphery outcomes • Economies that break away from the euro face challenges of depreciating exchange
rates, soaring inflation, and falling output.
• Future success will depend on their ability to rebuild credible fiscal and monetary
institutions.
Countries with weak economic fundamentals are most at
Countries with weak economic fundamentals The new eurozone will experience a boost in domestic
risk if the euro were to break up.
are most at risk if the euro were to break up demand while the periphery contracts in 2012.
Indicative scorecard of economic and fiscal
fundamentals (selected eurozone countries)
Greece 2012 2013 2014 2015 2016
Stronger fundamentals
Portugal
Ireland GDP New euro 0.3 2.5 2.5 2 2
Italy growth
Spain Periphery -5 -2 0 2 3
Belgium
France Inflation New euro -1 0 0 2 2
Germany
Netherlands Periphery 10 8 7 5 3
Finland
government debt
Gross general
(% of GDP)
Budget deficit
yields
10-year
GDP growth
Expected
outlook
Ratings
Potential scenarios 13

14. Exit of a country from the A country leaving the eurozone may need to do • Decide how to deal with existing outstanding
the following: euro-denominated debt, which would
eurozone will have broad probably entail a major government and
• Announce and immediately impose capital
and far-reaching impacts. controls.
private-sector debt restructuring (i.e.,
default).
• Impose immediate trade controls to limit
• Recapitalize the insolvent banks to make up
capital outflows.
for losses from defaults.
• Impose immediate border controls to prevent
• Determine what to do with the non-bank
a flight of cash.
financial sector and the stock and bond
• Implement a bank holiday to prevent a “run markets.
on the bank.”
• Determine how to handle commercial
• Announce a new exchange rate (presumably contracts that are written and denominated
not floating at the beginning, given capital in euros and now may be in the new
and exchange controls) so that trade could currency.
continue.
• Convert all euro-denominated notes and coin
to a new currency.
14 FS Viewpoint

15. Implications for US corporations

16. How does all this impact Eurozone restructuring has the potential to Thus, companies should be more fully prepared
create significant change and disruption to for a range of unpredictable outcomes. One way
US corporations? the operations of many firms. These changes to accomplish this is to focus on the potential
would potentially materialize when the broader consequences of the four scenarios outlined to
economic and market environment create determine what actions would be required at
conditions in which many companies cannot an organizational level based on likely market
afford the direct and indirect costs to their conditions, such as a credit crunch or currency
businesses of carrying out such changes. devaluation.
Many of the specific actions required at the Based on this analysis, companies can
organization level following a complete or proactively develop contingency plans to
partial eurozone restructuring will be intrusive address the potential consequences of various
to the processes, systems, and operations of potential eurozone scenarios and begin to take
an organization and will have to be executed steps to help minimize the risks today.
quickly and with minimal lead time for impact
assessment and action planning.
16 FS Viewpoint

17. Potential actions required We expect the euro crisis to have a broad and
profound impact on US-based multinational
companies in the following areas, among others:
1 Business model and structure
2 Revenue
3 Treasury
4 Legal
5 Procurement and supply contracts
6 IT
7 Finance
8 HR/people
9 Tax
10 Crisis/incident management
Implications for US corporations 17

18. 1 Business model
1. Problem statement In setting long-term business strategy—what products to make, what markets to
target, where to source and manufacture, how to organize the company, where to raise
and structure and deploy capital—companies have typically planned based on the assumption of
a stable eurozone and regulatory environment with stable, moderate growth and the
free flow of goods, capital and people. The current crisis has called many of these
assumptions into question. As a result, many companies, particularly those with heavy
business activities in Europe or significant European stakeholders, will need to question
many of the fundamental assumptions that have formed the basis of their strategies,
business models, and organizational structures.
Critical questions • How might the various potential outcomes for the euro impact overall
corporate strategy?
• Where do we want to invest capital going forward? Which countries (inside and
outside the eurozone) will present attractive investment opportunities going forward?
• How will the crisis impact ability to effectively borrow and invest in the eurozone?
• Could the break-up of the eurozone result in increased regulatory costs and
additional friction in the flow of goods and services within the region?
• Will the declining attractiveness of European markets increase the level of
competition in other developed and developing markets?
• How should companies best alter their European footprint under various potential
outcomes?
Key areas of exposure and impact • Significant declines in economic growth reduces the attractiveness of
for corporations European markets.
• Reduced growth and higher costs result in impairment of prior investments.
• Constrained capital markets result in further challenges to fund European growth
and investment.
• Reduced growth and constrained credit weaken the supplier base and create
significant operational risks.
18 FS Viewpoint

19. 2. Revenue
2 Problem statement Corporate revenue and profit margins are based on uninterrupted global demand and
supply as well as free flows of capital, labor, and goods throughout the eurozone.
Should these be disrupted by the crisis (e.g., through a collapse in sales, FX
movements, or capital controls), the impact on revenues will be significant and could
undermine the viability of businesses.
Some countries may impose some form of currency controls in order to limit the
shocks to their economies. Countries with strong currencies but small economies (e.g.,
Swiss franc) will also try to suppress the value of their currencies through the use of
market mechanisms.
Critical questions • Under what scenario and in what circumstances is revenue most at risk? How long
can businesses survive with below-average sales in the eurozone?
• Under what scenarios do eurozone countries become unattractive to sell to
or produce in?
• Can potential exposures be hedged? Have non-traditional/natural hedging strategies
been considered?
• Have alternative growth strategies been identified and reviewed?
• Can the business still afford to serve clients in euros in the short—and
medium—term? Do margins need recalculating and pricing pegged to a more
“stable” currency?
Key areas of exposure and impact • A collapse in sales could occur as a result of severe recession or unfavorable price
for corporations and foreign exchange movements.
• Liquidity shortages as a result of sales collapse and regulatory measures could limit
cross-border transfers.
• Revenue streams could be significantly impacted through sharp foreign exchange
movements.
Implications for US corporations 19

20. 3. Treasury
3 Problem statement Treasury must be prepared for the significant and difficult changes that would
occur under each scenario. A credit squeeze is likely to result. Possible capital and
foreign exchange controls may need to be invoked at short notice and eurozone
hedging strategies may need to be disaggregated by country, with aspects no longer
effective as new currencies are created. Additionally, treasury should understand
which scenarios will cause covenants to be triggered and cash to be trapped, and
set parameters for exchange rate appetites if volatility increases and new currencies
are created.
Critical questions • Is there an appropriate forum for discussing working capital and cash forecasting?
Have counterparty risk policies and credit scoring processes been reviewed? Is the
business appropriately hedged?
• How is credit risk currently monitored? Should changes be made to better predict
and/or react to declining credit?
• How legally enforceable are netting arrangements to reduce exposure?
• What cash can be moved to neutralize euro exposures, surplus repatriated?
Facilities redenominated?
• Will weaker eurozone banks be able to provide local funding?
• What will become of local deposits, if banks are no longer functioning?
• How might a company redirect/collect customer payments outside high
risk countries?
• Will cash pooling structures continue to be viable and efficient?
• How might increasing currency volatility impact FX hedging programs?
Key areas of exposure and impact • Diversity of funding arrangements, credit risk, trapped cash risk, off balance sheet
for corporations contingencies triggered
• Forecasted internal cash reserves, intercompany balances
• Debt arrangements upon currency restriction events, covenant implications
• Cross-border cash management structures and credit facility interaction
• Working capital strain as customers take longer to pay, suppliers weaken without
prompt payment, and foreign exchange rates change or become increasingly volatile
• Enforceability of euro derivatives/country of bank counterparty
• Volatility arising from ineffective hedging strategies or hedge accounting
20 FS Viewpoint

21. 4. Legal
4 Problem statement For many organizations, legal contracts are based on existing EU law and the
premise of a stable single currency, governed by the ECB. Should any of the four
scenarios occur, sales, supply, and employment contracts (among others) are likely to
require review and some revision. In extreme circumstances, contracts may become
unenforceable. The consequences will vary dependent on applicable governing law
and jurisdiction. Payment obligations will be dependent on applicable exchange rates.
This in turn could cause defaults to occur. The potential for associated disputes could
also increase.
Critical questions • Is the potential impact on key contracts fully understood?
• In the event of changes to either the currency of payment or the reference/regulatory
bodies, are the associated contractual obligations and flow down provisions clear?
• Are the definitions within existing contracts still valid?
• Have the potential commercial risks been considered, as well as how these risks can
be avoided or mitigated?
• Has the financial impact of employment contracts and packages been evaluated?
• Is there a plan in place to identify and solve legal exposures?
Key areas of exposure and impact • All key commercial contracts including supply contracts, sales contracts, joint-
for corporations venture agreements, distribution agreements, and IP licensing arrangements
• Payment arrangements and systems and support service agreements
• Transfer pricing
• Impact on cross default provision arising from contractual default
• Currency hedging and treasury management
• Referencing in all contracts (for example, euro-dependent provisions, reference to
bodies such as ECB or eurozone, Material Adverse Change)
• Employee terms and conditions (such as salary, bonus, and other remuneration)
Implications for US corporations 21

22. 5. Procurement and
5 Problem statement Many global organizations, especially large consumer products companies, rely on
sourcing raw materials, products and services needed for their operations from the
supply contracts eurozone countries. They also supply clients across Europe from different EU and non-
EU hubs. With the four scenarios in mind, the changes could result in the creation of
European low-cost countries. For US Companies, these changes could imply:
• Strategic sourcing decisions may need to be revisited with changes to price or
availability conditions.
• Supply models may need changes in pricing, logistics, invoicing, and transportion.
• Alternate vendors may be needed or activities may need to be brought in-house if
the vendors are unable to survive the outcome of the crisis.
Critical questions • Will there be low-cost country opportunities created as a result of
eurozone restructuring?
• Are there supply-chain risks as a result of rising material costs for suppliers no
longer in the eurozone?
• Can the impacts of those moves be reliably modelled (e.g., on cost or profit margin)?
• Can the impact of supply-side changes on key clients’ supply chains be anticipated?
• Are there alternative sources of supply for critical products and services? Are rapid
moves to an alternative supplier feasible?
• Are multiple critical suppliers in the same situation (i.e., could an organization
experience multiple vendor failures)?
• How might a company redirect/collect customer payments outside
high-risk countries?
Key areas of exposure and impact • The cost of producing and operating could change dramatically as a result of sharp
for corporations economic and foreign exchange movements.
• Potential cost reduction opportunities may arise.
• Supply continuity for critical raw materials and products may need to be monitored.
• Supply chain reviews should be considered for the most price-sensitive products
and services, resulting in potential service model changes.
• Different cost and margin scenarios may need to be evaluated, and alternative
suppliers may be needed if the impact is material.
• Make/buy decisions may need to be revisited across a range of products, and new
efficiencies should be realized.
22 FS Viewpoint

23. 6. IT
6 Problem statement Regardless of size, complexity, or industry, companies are becoming increasingly
reliant on IT/IS systems—both within their own companies as well as with customers,
suppliers, and vendors—to conduct business operations. This reliance will create
challenges for organizations to:
• Understand the impact that the different scenarios will have on the IT environment
and the various interfaces between systems (both external and internal)
• Ensure that internal systems can remain flexible and adaptable enough to meet the
demands of new and changing regulations and market environments
• Ensure that external vendors of hardware, software, and services have developed
plans to deal with each potential scenario and are able to maintain continuity of
operations
• Implement potentially significant master and transaction data changes
In addition to these challenges, organizations should gauge their readiness to exploit
the opportunities presented (such as integration, renegotiation of support deals,
and relocation).
Critical questions • Which systems and business areas are most exposed to the changes set out in
the scenarios?
• Do company systems have the ability to be modified to handle new currencies?
• Can company systems handle the redenomination of historical transactions?
• Have systems and vendors critical for survival of the organization been identified?
• Do external vendors have plans in place to ensure continuity of IT and
communications infrastructure and services?
• Are transactions and reporting set up to accommodate a high-inflation environment?
Key areas of exposure and impact • Work required to amend existing applications and data
for corporations
• Lack of control over IT systems due to contractual or physical limitations in the
ability to reconfigure
• Inability of systems to cope with extreme changes in inflation and valuations,
including the ability to forecast and restate past performance
• Inability of outsourced service providers to maintain continuity of their systems and
to provide agreed-upon services
• Potential increase in capacity from institutions switching businesses to non-
impacted countries
• Collapse of IT service providers, or inability to honor contractual obligations around
IT service provision
Implications for US corporations 23

24. 7. Finance
7 Problem statement The Finance function is heavily exposed to eurozone challenges in terms of:
• Accountability for planning, budgeting, and forecasting in very uncertain times by
building scenarios and securing board agreement with them.
• Managing increased costs (both of finance and the whole organization) and
interpreting their impacts to the organization.
• Keeping statutory reporting in line without major increases of effort.
• Dealing with increased reporting requirements and new types of what-if analyses
and complex simulations.
Critical questions • Is your Finance operating model still relevant?
• Is the sourcing strategy still optimal, does the restructuring provide opportunities to
revisit shared-service locations and outsourcing contracts?
• Would outsourcing transactional activity mitigate risk in volatile markets during
eurozone restructuring?
• How quickly could the organization exit outsourced or shared environments within
unstable economies?
• Can statutory and management reporting be produced with current resources and
without compromising quality?
• Is the function set up to deal with inflation, currencies leaving the eurozone, and the
introduction of a significant number of new currencies?
• Can costs arising from the changes described in the four scenarios be
modeled reliably?
• Is finance ready to take on a much bigger role in communicating these changes to
the rest of your organization?
• Do you understand the potential financial reporting impacts of each scenario,
including matters like revenue recognition, asset impairment, and hedge accounting?
Key areas of exposure and impact • Service agreements with outsourced providers
for corporations
• Continued availability of qualified staff
• Continued robustness and adequacy of the control environment
• Shared-service center (SSC) location, setup, and internal pricing
• Enterprise resource planning (ERP) and reporting systems
• Current data models
• Accounting policy matters and financial reporting impacts
24 FS Viewpoint

25. 8. HR/people
8 Problem statement For businesses operating in Europe, the HR function is key to supporting the business
strategy while adapting to the impact of economic and legislative change on staff
operations. With differences in specific HR needs among countries likely to increase,
HR functions should be equipped to deal with increasing complexity while managing
limited resources. Resources will be stretched to balance both short-and long-term
measures in dealing with rapid change while facing sustained pressure to cut costs.
Critical questions • With sustained pressure on cost reduction, how will HR operating models and
structures cope with differing demands across territories?
• How will talent be retained in less stable countries while dealing with sustained
financial pressure and rapid change?
• Will businesses need restructuring in response to changes in the eurozone? How will
the impact of this be addressed with respect to human resource operations?
• Have you defined your duty of care and responsibility to your employees in the event
of collective actions in which they are impacted?
• Is your team clear on how you will communicate to employees in the event of
collective actions which keep them from work?
• Do business continuity plans consider the potential for civil unrest or even military
conflict?
Key areas of exposure and impact • Managing a mobile and global workforce could become increasingly complex, with
for corporations less standardization across Europe in terms of tax and employment law. Businesses
should be equipped to deal with the increased risks associated with these changes,
including areas such as rewards and pensions.
• Those operating in less stable European countries may find themselves struggling to
retain talent as employees seek more secure environments.
• Some companies will need to respond to changes in the eurozone by restructuring
their businesses and contracting for high-risk operations. The implications for HR
and people activity should be dealt with appropriately, for example when redeploying
or making headcount reductions.
Implications for US corporations 25

26. 9. Tax
9 Problem statement Companies should understand the immediate tax consequences arising from various
scenarios regarding the future of the eurozone. It will be important for companies to
weigh the tax efficiencies of their proposed mitigation strategies.
Critical questions • Do the changes give rise to a new contract from an accounting perspective? This
may result in the recognition of profit or losses for accounting purposes that could
also be taxable or relievable.
• Do the changes give rise to a new contract from a legal and tax perspective?
Modification of an existing contract could potentially represent the termination of the
original contract and the creation of a new contract. This could crystallize a taxing
event (i.e., the changes could trigger a disposal for capital gains purposes).
• Where the contracts are between related parties, then an additional question is
whether an arm’s length fee should be paid to the counterparty as compensation for
the change in terms. The tax treatment of this fee would need to be considered from
both parties’ perspectives, and whether this payment would be taxable on one side
and deductible on the other.
• Will any losses be tax-deductible and can they be utilized or will they become
“trapped?” How does this change the tax profile of the group?
• What happens if any foreign exchange gains should arise (e.g., due to a smaller,
stronger euro)?
• What will be the impact on business if it cannot defer foreign exchange gains or
losses under the tax matching rules, where the hedge becomes ineffective from a tax
perspective?
• Has taxation been factored into contingency plans such that they are as tax efficient
as possible?
Key areas of exposure and impact • Different scenarios may create losses; it is important to understand whether these
for corporations are foreign-exchange losses or impairment losses and the deductibility of these for
tax purposes.
• Redenomination of foreign assets and liabilities may result in hedges becoming
ineffective from a tax perspective.
• If the changes cause new contracts, especially loans, to be brought into existence,
this may impact existing agreements with the taxing authorities (e.g., withholding
tax clearances may be affected). It may also affect other taxes (e.g., VAT if there is a
change in value of the contract).
26 FS Viewpoint

27. 10 Crisis/incident
10 Problem statement Companies should prepare for massive social disturbances that would likely
accompany any eurozone exit or messy break-up. Strikes, infrastructure outages,
management demonstrations, and other violent street actions are likely, especially if the crisis is seen
as unfairly impacting and further impoverishing certain populations, especially in the
southern EU states.
Critical questions • Is the team prepared for potential collective actions (e.g., strikes or riots)?
• Are crisis management and contingency plans in place and have they been reviewed
to help ensure no elements are missing?
• Have supporting plans been tested to help ensure teams are ready to respond?
• Have critical vendors been identified and assessed?
• Are there vendor resiliency programs in place?
• What strategies have been considered to help ensure the ongoing success of the
business in cases where vendors may be impacted?
Key areas of exposure and impact • Response effort to eurozone crisis not coordinated across the organization
for corporations
• No integrated crisis management team in place to play point and coordinate
the response
• Failure to consider vendor resiliency
• Lack of contingency plans if key suppliers become insolvent
• Lack of insight into the criticality of vendor population and no identification of
alternative options
• No consideration of other impacts such as collective events
(such as riots or demonstrations)
• Lack of comprehensive and tested business continuity plans
Implications for US corporations 27

28. What companies are doing now

29. Companies are already The complexity of the eurozone ecosystem and As a first step, many companies have developed
the political, financial, and cultural drivers that a cross-functional team—often supplemented
taking action shape it make predicting the outcome of this with external resources—of senior staff to
crisis nearly impossible. identify, assess, and mitigate risks to their
organizations.
The countless scenarios that could arise and the
myriad implications of these scenarios make Many boards of directors and audit committees
contingency planning a daunting proposition have been engaged on the topic and are closely
for any organizations trying to identify, size, reviewing management’s plans to prepare for
and mitigate the potential risks. and respond to any potential outcome.
However, some organizations have started In an effort to better understand the risks
anticipating the risk consequences in hopes of and plan for the future, many companies are
mitigating the effects of those risks. employing a structured process to distill the
available information and assess, define, and
execute plans to mitigate risks.
What companies are doing now 29

30. Some companies are Some organizations are proactively taking steps to
mitigate the risk of the crisis.
already taking action
1 De-risking foreign currency holdings—moving cash out of the eurozone into “safer” currencies or investments
2 Managing supplier exposure in the eurozone—no long-term contracts
3 Mitigating refinancing risks—setting cash aside for upcoming bond repayment or expediting refinancing
4 Increasing cash reserves by controlling non-essential expenditures
5 Performing assessment of net euro exposure by country
6 Preparing for volatility in the exchange market by reassessing hedging strategies
7 Analyzing impact of new currency introduction on procurement and sales contracts as well as IT support systems
8 Reassessing current crisis and contingency management plans to ensure teams are ready to respond
30 FS Viewpoint

31. Approach to assessing and Companies are identifying and assessing the potential risks they face as a result of the eurozone
crisis and developing contingency plans to proactively mitigate these risks.
managing eurozone risk
Assess situation Define scenarios Execute
• Look at European business operations • Define potential eurozone outcomes— • For the risks that need to be
and financial assets and liabilities. include several different scenarios, mitigated, develop a contingency plan
Assess the exposures and risks from optimistic to worst-case including financial and operational
on a country-by-country basis scenarios, looking at the short term mechanisms to reduce risk exposure.
from a strategic, operational, and and long term.
• Assign ownership for plans and
financial perspective.
• Quantify how the company would be monitor effectiveness of mitigation
• How much exposure does the impacted by each scenario. plans over time.
company have? Where are the
• Determine which risks are acceptable • Revisit scenarios as conditions
concentrations of companies and
and which need to be mitigated. change and make adjustments to the
vendors? How much exposure can
risk mitigation plan if necessary.
the company bear?
• Develop a high-level diagnostic to
identify and prepare for the impacts of
the crisis in the short term.
What companies are doing now 31

32. Assess the situation For each potential scenario, companies should Developing a high-level diagnostic can assist
ask themselves: what are the likely impacts? with the assessment:
What can we be doing now to reduce potential Engage with key stakeholders across the
consequences? business to identify key areas of exposure,
issues, and the potential impacts of those issues.
Do we have the right plans in place to respond
to events? Outline the critical nature of these issues and
assign a risk rating to each issue.
Is the board adequately involved to ensure
priorities are appropriately set? Assess current crisis management and vendor
resiliency programs and plans to identify any
Have responsibilities been allocated?
gaps in the ability to respond to this crisis.
Do we have appropriate levels of cross-
Produce a prioritized set of 10 actions that will
functional and corporate/business
assist in responding to the eurozone challenge.
coordination?
Produce a 100-day roadmap outlining the
Do we understand the vulnerabilities of our key
interdependencies of these actions and the time
vendors?
frames for completing them.
Have we assessed our risk of being in an area
This analysis will help corporations
where collective actions could occur?
prepare for possible scenarios,
Are crisis management plans in place and will minimizing their reaction time in the
they address these situations? event that one of the scenarios occurs.
Have the plans been rehearsed?
Have we communicated our plans and
requirements to our key vendors?
32 FS Viewpoint

33. Define risk scenarios Organizations should make effective use of Leading companies have a clear plan on how to
scenario analysis and stress testing to determine handle the loss of critical vendors.
the company’s ability to respond to identified
Assessing the situation and defining the
risk scenarios and withstand various stresses.
scenarios will allow an organization to develop
Proactive and robust downturn scenario a matrix that sets out a list of possible scenarios,
and stress testing can help an organization associated risks, and the company’s approach to
formulate plans to deal with a range of mitigating these risks. A firm can then develop
outcomes, enabling the organization to be an associated procedures manual, oversight
ahead of the game in terms of strategy and mechanisms, and detailed contingency plans.
implementation. Such scenario analysis and
stress testing can also help an organization
understand those risks that require additional
investment or attention and monitor them
effectively and regularly.
What companies are doing now 33

34. Prepare to execute The consequences of a eurozone break up go Additionally, organizations are embedding
beyond those organizations directly exposed eurozone risk management into their
to countries that may exit the euro. The risk governance documents. Often, the governance
of contagion and fear of financial institutions’ team is leading the company’s preparation
exposures to these countries remain and effort.
may lead to reduced liquidity and other
Corporations are mobilizing specific eurozone
consequences. Furthermore, some of these
program management teams with defined
actions remain good practice—even if there are
operating parameters, timelines, resources,
no crises.
steering committee oversight, and scheduled
Leading-edge corporations have developed report-outs.
contingency plans that have considered the
Prepared organizations also make effective use
potential risk combinations associated with
of early warning indicators to prevent or limit
the break up of the eurozone. These plans have
the consequences of high-impact risks. These
been integrated into leading organizations’
indicators can help illustrate the emergence of
governance and risk management
risk and enable a timely and planned response,
arrangements. This provides a more complete
even if those risks cannot be prevented.
view of the risks faced and helps corporations
ensure that they plan accordingly. By doing
so, organizations may be able to weather the
resulting crisis and economic downturn by
acting quickly and decisively, and making hard
decisions early on.
34 FS Viewpoint

35. Pulling it together– The diagram below sets out the main stages and activities in the high level
diagnostic. The outcome of the analysis is to define the top 10 actions that
Starting with a high-level can help mitigate risk.
diagnostic
High-level diagnostic and vision
High-level diagnostic and vision
Interview key Develop action lists Rank actions Prioritize top Develop 100-day
Vision statement and guiding principles
stakeholders from: addressing each of by criticality and 10 actions: roadmap
the following areas: risk score:
Revenue 1
2
Treasury
3
Data
Legal 4
Process High 5
Procurement and
supply contracts 6
Systems Medium
IT/IS 7
People Low
Finance 8
Risk 9
HR/people
10
Tax
Temporary/quick-fix solution
Long-term solution
What companies are doing now 35

36. www.pwc.com/fsi
To have a deeper conversation,
please contact:
Miles Everson miles.everson@us.pwc.com
+1 646 471 8620
Harry G. Broadman harry.g.broadman@us.pwc.com
+1 703 918 6655
Peter Frank peter.frank@us.pwc.com
+1 646 471 2787
Brian Kinman brian.j.kinman@us.pwc.com
+1 314 206 8096
Shyam Venkat shyam.venkat@us.pwc.com
+1 646 471 8296
A joint publication of PwC’s Financial Services Institute
and PwC’s Products and Services Industries group.
“Breaking Up is Hard to Do: The Eurozone Crisis–Possible Implications
and Contingency Planning for US Companies,” May 2012.
www.pwc.com/fsi
© 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.
PM-12-0307 FS Viewpoint Eurozone