Contingency plans for Eurozone fallout vital, says PwC

ACCOUNTANCY and advisory firm PwC is urging Midlands companies with business links to the Eurozone to plan ahead to shield themselves from the potential fall-out from the on-going debt crisis.

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

Scenario one 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.

Scenario two 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.

In this scenario 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 three 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.

In this scenario contagion to other countries is minimised and currency union remains intact through a programme of monetary expansion, fiscal transfers and further Eurozone integration.

PwC suggests the loss would have an impact on overall Eurozone confidence however with growth remaining negative in 2012 and only returning in 2013.

Scenario four 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.

This ‘new-euro’ would benefit from a boom in domestic demand while economies on the outside would suffer.

Mark Smith, regional chairman at PwC in the Midlands, said: “Events in Europe are now moving at such a pace that it is difficult to predict which of these scenarios is more likely and exactly how the crisis will play out.

“What we can say with certainty, however, is the impact will be far-reaching and those businesses who assess their exposure to Eurozone markets now and undertake detailed contingency planning will be best placed to safeguard themselves from the impact of potential structural changes that could have a major impact on their operations.”