NEWS RELEASE

EMBARGOED: 00:01 (EST) 21st December 2011

PwC predicts potential outcomes for 2012 ahead of the Greek and Eurozone economical crisis
Growing market pressures and sovereign debt have created a dire situation for the Eurozone and economies around the world, with businesses looking at four possible resolutions at the onset of the new year, according to a report issued today by PwC, "What next for the Eurozone? Possible scenarios for 2012".

Yael Selfin, head of macro-consulting and a director in PwCs economics team, commented: We expect these scenarios could have an impact well beyond the Eurozone. Countries
like the UK and US are likely to see falls in exports and banking sector problems but possibly also increased levels of capital inflows, as investors look to place a larger proportion of their portfolios in safe haven markets. Other countries, like China, will have to deal with a decline in a significant proportion of their export markets.

Orderly defaults by the most indebted countries, a Greek exit, or strong monetary expansion in Eurozone are likely to highlight the UKs position as a safe haven for capital. Capital flows out of the Eurozone and into the UK would cause sterling to appreciate against the euro. Borrowing costs may well be lower as investors purchase UK gilts in preference to risky Eurozone bonds.

Report key themes:

However the UKs principal trading partner is the Eurozone which is the destination for around 50% of its exports. A relatively strong sterling and a recession in the Eurozone would weigh down on the UKs growth prospects.

Scenario 1: Monetary expansion The ECB injects signicant liquidity into vulnerable economies and banks. Recession is avoided, but ination rises well above the 2% target. Monetary stimulus would be a shock to investors who likely would sell Euro assets and cause the currency to depreciate. Austerity measures undertaken in parallel by vulnerable economies would mean a struggle to grow before 2015.

Scenario 2: Orderly defaults Eurozone leaders agree to a program of voluntary defaults for highly indebted countries.

 Estimates for post- debt restructuring foresee over 800bn in lost wealth by the private sector, with banks possibly losing over 100bn. Long term consequences include vulnerable countries struggling to regain access to nancial markets, requiring the intervention of European institutions, and thereby becoming a scal drain on surplus economies.

Scenario 3: Greek exit Both the remaining Eurozone and Greece agree to the latter's exit, with the Greek government re-denominating old and new contracts into a 'new-drachma' at parity with the Euro. New-drachma may depreciate by at least 50% once oated, increasing ination to about 30% in the rst quarter and averaging 10% in the rst year. Greek exit would spur bank losses and capital ight from the Eurozone as investors lose condence in the region.

Scenario 4: New currency bloc Begins with Franco-German acknowledgement that current Eurozone is no longer sustainable, resulting in a movement to create a new, smaller, and more stringently regulated monetary union. Investors are expected to support the new-euro, as the bloc benets from an inow of capital and increasing domestic demand but yet also suffers a loss in competitiveness Excluded countries would undergo an economic contraction and could expect a similar fate as that of Greece in scenario 3.

2012 Scenario 1 (% change) GDP growth Inflation Scenario 2 (% change) GDP growth Inflation Scenario 3 (% change) GDP growth Inflation Scenario 4 new euro outcomes (% change) -1 1.5 -3 1 1.5 4.5

2013

2014

2015

2016

2 3.5

2 3.5

1.5 3

1.5 2

-1.5 0

-0.5 0

1 1

2 2

0.5 1.75

1 2

1.6 2

1.8 2

GDP growth Inflation Scenario 4 periphery countries outcomes (% change) GDP growth Inflation

0.25 -1

2.5 0

2.5 0

2 2

2 2

-5 10

-2 8

0 7

2 5

3 3

Yael Selfin, head of macro-consulting and a director in PwCs economics team, concluded:

Source: PwC Projections

Expect surprises next year. We are currently experiencing unprecedented levels of uncertainty in the Eurozone. The potential political and economic outcomes emerging from the Eurozone crisis in 2012 are disparate, although all share a similar theme. A harsh adjustment to a new fiscal reality will be unavoidable, regardless of the path politicians decide to follow.

The Eurozone that re-emerges next year is likely to be very different to the one we know today and the implications for business within and outside this region are enormous. Growing market pressure and significant tranches of sovereign debt due for refinancing by early Spring point at a likely resolution to the current phase of the crisis around the first quarter of 2012."

Ends

For more information contact: Mark Howbrook Position: Tel: Cell phone: About PwC

PwC rms provide industry- focused assurance, tax and advisory services to enhance value for their clients. More than 161,000 people in 154 countries in rms across the PwC network share their thinking, experience and solutions to develop fresh perspective and practical advice. See pwc.com for more information.