Eurozone crisis: Are you exposed?

Failure to resolve the Eurozone crisis over the past two years has culminated in a situation where even drastic outcomes can no longer be ignored. In particular, the focus of the crisis has shifted from Greece alone, as the Spanish banking sector has caused Spain to become a focal point for the market.

Recognising the fact that the consequences of one or several countries leaving the Eurozone can have devastating impacts on multiple levels, many organisations have decided to take proactive actions in identifying potential exposures and are moving to mitigate them. In this context, PwC Luxembourg is helping its clients assessing and managing Eurozone risk with a specific methodology covering both the potential scenarios for the Eurozone and diagnostics & vision tools.

Potential scenarios for the eurozone in 2012

There are a number of ways in which the Eurozone crisis could play out depending on the mix of policy responses over the next year or two. Presented below are four possible, though not necessarily exhaustive, scenarios that represent a range of potential resolutions to the crisis in 2012:

Scenario 1: Successive phases of monetary and fiscal action hold the Eurozone together at the cost of inflation.

Scenario 2: Voluntary defaults for highly-indebted sovereigns.

Scenario 3: Greece exits the Eurozone and a firewall is built around other economies.

Scenario 4: A new currency union is formed by the stronger economies.

Each scenario varies in its likelihood and impact. The eurozone that emerges from the crisis is likely to be very different to the one we know today, with 2012 being dominated by uncertainty and high volatility. There is a wide range of potential outcomes.

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