Eurozone Crisis – Five Practical Strategies

Kimberly Watson, Editor in Chief
February 28, 2012 /

The ongoing debates between politicians, economists and central bankers as to how to deal with the European sovereign debt and banking crisis continue on a daily basis in summits and across the media.

It seems that the only thing that we can be really sure of is that no one really knows where this will all end up.

In short, either the North will have to bail out the South in some way, or there are likely to be defaults and possible eurozone exits by one or more countries. Either way the outlook is not good with the least worst outcome being to continue to muddle through with significant austerity and, at best, weak growth.

Roger Bayly, KPMG Euro CrisisTask Force Lead Partner says: “Corporates need a good radar and decision making process – they need to be able to monitor the situation and have plans in place, allowing them to respond quickly as the situation unfolds.”

Neill Thomas, KPMG Head of Debt Advisory says: “With the potential impact on bank liquidity, we could see a second credit crunch. Companies should diversify their funding sources and ensure they are not over-dependent on a narrow base of lending institutions.”

Charlie Patrick, KPMG Director says: “Times of confusion and rapid change significantly heighten the risks of fraud, misdemeanour and error. Both corporates and financial institutions should pay extra attention to anti-fraud controls; they can be sure that both organised and opportunistic criminals will be seeking to take advantage of such circumstances.”

Graeme Leach, Chief Economist at the Institute of Directors says: “We can have one EU summit after another but they will achieve nothing until they address the fundamental problem that euro-zone countries don’t control the currency in which they issue their debt. The only game changer out there is a complete change of heart by Germany to allow the ECB to print money and buy sovereign bonds. But we have serious doubts that will ever happen.

“Financial markets are waiting for some sort of catastrophe to force a U-turn by Chancellor Merkel. They don’t seem to recognise that Mrs Merkel probably means what she says. Germans worry that if the ECB loses its virginity printing money there’s no knowing how promiscuous it might become.”

The IoD’s latest report on the euro crisis shows how the absence of a sovereign lender of the last resort role for the ECB creates a dangerous and almost inevitable propensity for liquidity and insolvency crises.

The eurozone is facing the dangerous combination of a sovereign debt and banking crisis. Politicians, economists and central bankers are attempting to solve this but the outcome will not be clear for some time – meanwhile the noise and uncertainty continues.

There has been much discussion of potential outcomes and their impact on economies but there has been much less focus on what is actually happening on the ground and how companies can and should respond.

So far, banks have been told to prepare contingency plans for the break up of the eurozone, some are at risk from the current instability in European capital markets. Stronger austerity measures are being introduced that will impact both government spending and are already changing consumer behaviour in the countries affected.

Capital is moving towards safer havens as Euro deposits are reduced and transferred away. Risk of disruption, unrest and fraud have all increased in the most affected countries.

We know that a large number of European companies face the challenge of refinancing their activities in the face of this crisis over the next 12 months.

It’s clear that Boards and management teams of companies with customers, operations or critical suppliers in the eurozone should be responding to these events now and preparing for a range of potential outcomes as the situation evolves over the coming months.

The real question facing our clients is – what practical actions can be taken now to protect value?

It is clear that the initial focus for action is rightly treasury and management of cash in the business. But there has been far less attention paid to the current and potential impact of the crisis on customers, operations, supply chains and the back office.

 

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