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.
Our View
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.”
Their view
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.
Overview
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?
What does KPMG recommend
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.
In our view there are five practical actions that you can take now to protect value whatever the outcome:
Act Now:
1. Immediate defensive actions – you need to identify the actions you can take right now.
2. Immediate trading response – companies need to action what they can do now to preserve value in the current market.
Plan Now:
3. Continuity and contingency planning – decide what plans you should develop now to deal with the prospect of a default or country exit from the eurozone.
4. Group-wide consequences – consider what the impact might be on your business as a whole.
5. Advantage from operating in a fundamentally different environment – sometimes bad situations can be turned into an advantage; can you identify the opportunities?
Please click here to view the full article “Eurozone crisis – five practical strategies”
How can KPMG help?
KPMG has worked with several clients to assist in dealing with the ongoing challenges of the euro crisis. Below are just two examples:
1. We helped a major pharmaceutical company to:
- Identify the business impact of different scenarios on a Greek subsidiary.
- Develop mitigating actions for the Greek business and the group.
- Assess the financial impact of both scenarios and establish governance to monitor the situation, as well as other follow-up steps to allow for quick decision making and implementation.
The outcome? We produced a report with actions in a tracking schedule and were asked to pitch for a follow-on project looking at all exposure to the eurozone.
2. For a major car company, KPMG:
- Assessed Italian suppliers via our ‘suppliers at risk’ system
- Highlighting the risks in the supply chain and the suppliers most likely to fail.
- Increased monitoring of “at risk” suppliers.
- Worked with at risk suppliers to limit the potential of failure or finding alternatives in the supply chain.
KPMG can also help you by identifying your exposure to direct and indirect suppliers from the eurozone, assessing the potential risk from the exposure, and recommending a course of action that will minimise risk and help ensure a more reliable supply chain.
What does 2012 have in store?
KPMG will be hosting a live webinar on 26 January where Graeme Leach will join KPMG partners Malcolm Edge and Bernard Brown to discuss not only the impact of the eurozone crisis, but also to provide an outlook for the economy in 2012.
To reserve your complimentary place, please register by 24 January
For further information about the eurozone crisis, and how KPMG can help, please contact Roger Bayly, Euro CrisisTask Force Lead Partner on +44 20 7694 6424 or roger.bayly@kpmg.co.uk
© 2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
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