2 2 2 2 2 2 2 2 2 2 2 i 2 2 BCG ‘Die Bosros Consume Grovr Collateral Damage What Next? Where Next? What to Expect and How to Prepare David Rhodes and Daniel Stelter January 2012SIT FFF FPSO SSOSPPSGIIFVIVITOOVOSOOOSOVOVUVESESSESS Tis pom con suf gn ine nin edo ie erly ang the mas iportant eno eons conser tesa fo hich ‘ompois ul prep nt spent theta coarse ih ‘ons Fr hose ees ho ae wl epithe soo seats de ‘erie we sages that Jou ster read at Wht Sholom Dao Per ening on ge 3b. ‘Te economic waa of much of the Wes are reaclng dese stage as the yest ends In 2008, we predicted slugs eavery ands an rod ew gt or ‘he West na two-speed word Ts ple doesnot now pope eet the Sovensie rts Toe pay of “ekng he en down te fond alg a the Intensiying eis nthe euro 20 an the are ofthe 29 sn nate Octo ber leat demonstrate As to December Ewopesn si, we dese is ‘pac ater inthis paper Such extreme uncertain is ehalleging fr companies tying to pepe tee bd for net yearox more fname tying to plot ther sate core helps tobave a dear understanding of what may kappen and vy Kay happen, Sobvfire we adress the qustion of wich seats expert a ow prepare, lec us remind oorves about the root of te problem: the Wes droog in| ei. ‘A World with Too Much Debt ‘otal debtto-CDP levels inthe 18 core counties ofthe Ogata Econom Co-operation and Development (OECD) zse fom 160 erent in 2802321 percent n 210. Dsagpegated and adjusted fr iafaten, these numbers meat tha the debt of notnanll corporations icreaeed by 30 pera, the det of ernment increased by 225 pent andthe debt of pate uch Increased by 00 pera ut the costs ofthe West's ain poputlons ste ‘iden inte ofa eportg we ined the aang cos of prog for ‘he elder, the debt evel of mest gveraments would be pifanly ger” Geeenibien)| ‘Ad ths sobering pcre the fact hatte anal sytem isrmning a unpre feted everage level, and we ean a nly one contusion he Soyer cet, boom as uns couse. The debt problem spl stn beaded There ae ‘ur approaches to dealing with 09 nich deb sting and paying bach Bowing ‘ste debt seseuctng sed write oy and resting tat,LL SSCS CPCPCPCCGIOGGSOSOOOIOOOOOOPOZOVOVOVOOOVEEYY ‘Baurr | Net Expected Tax Revenuos Are Not Adequate to Continue Funding Currnt Social Policies ‘Saving and Paying Back. ould he Wes singly sar vga paying back is ‘eit too many debtors pursed tsp af these tine, the ening recon In consumption woud lea lower gow Ager etempoyent, ad coepond- Ing ss teat, maling it ore lia fr ober debies to save nd py back ‘This penemeno,desclbed by ving Fier In 953 oT Debt fat Theory of tex Dies can eat in a dzep a og receson cole wth ling ries eftion). This amplified when goverment smaltanecly purse Sister plces—snc swe se today in many European courte and wile ‘he US tesnnlngn 272A redcton fn government spending by ¥ percent of COP leat redocton consump vt wo yer) 0.75 patel anda ede tion in ecnamic grow of 0.2 percent Saving or more corey deleeagae) wlredace gow potently tiger tesa, sd dv higher debeo-GDP ‘tort ower debt lee aged ding the ea yar the Great Depreston, "ressen Hoover—convinced that balaned federal hadget wae cl reson Ing busines conidenee—cat goverment spending an aed tes ne ae of crashing economy hs nly served to rede cnsute dean. or the rat sector and goverment o reduce debt sinltaneouly would require ‘unning trade spas So nga ups coutles (Cin, Japan, abd eran ‘urs expert rot wil eImporbefor debtor cuties deleverage, Marin Wo ptt neha i the Pail Tee "The Earth cater, hope to run curent ecount suplses wth th people of Mar'Te lack of Inteaonl cooperation to rebalance wade Now sky reason fo cntiaed ‘conoml dies,» 2 2 : 2 ® s 2 2 » . 2 2 2 s . . . FIFFSVSOOTOTOOVIVIVIVIII00 01 Sovng an paying back cannot woe for 4 erent fhe world anomy tthe ‘same ime! The emerging markets woud have inp sige mare which ‘Sunt bappen. ‘rowing Faster The best option for improving woeful debit-SDP ras ito {gow GP fst Historie this as acy been seed sltorgh ean be fdone—for example in the UK ater the Napoleonic Wars an Indonesia. Merde 19977198 Asa cris althongh Indonesian edt eves wee nowhere ear catemporary highs inthe Wen Atsking today's dot owns wold ‘equi efor labor markets ot investing tore acpi srk Neither, + Potictans r uiting to iteree a aber markets pven totes eemted level of employment. Moreover, enpialevaence hows hat tena Impact of sch reforms negate, aso insecury bees lower consumption, *+ Companies can ford to nest siguicany mere a they ae bight profitable. ‘he share of US. corporat profs in slain to US. GDP i alan ame high oft percent ar reat holdings yet ororte el et nett at Invest ess depreciation i apts oc n the tid quae of 2001 wae bao 1975 levels But eompales are reluctant vent wie demande gis, wile esting capacities ate suet and whe the out forthe ‘ori economy seman gly anerain, ‘Te aging of Western soceties wl bea fre drag on exanoni owt By 2020, ‘he westfors in Western Harpe wil sink 4 perent, wth hi of Seay suing 42 pent ‘Teint to row out ofthe problem sad nes fr debtors. ook tay, for ‘rampie aan government det a0 percent of GDR Te amen nee ate ‘orner tue ften-ear bonds? perent—up fom 47 pect a Ap 2013.1 ‘at bad to pay 6 prea nerest on outstanding debt, sch ahigh ate weed ‘mately nea the primary sul (at the euzestaezunt uri baore Interest expense ta ly would need trun nee to sabi debt eve tre assume that aly’ economy grows ts nominal ae of pen per yan he ffvernment would need to run apimar suplasaf 48 percent ODP (aelted ‘Sse perent interest incurred on fs det nts? percent nominal row el bled by 120 perent det fo ODP Jost sablze dbo GDP ees the ates forecasts show oly 30 percent spi for 2011 ny eft aces te par surplus ugh ase and taxincenes rn the isk eet & fowawat pra When nes stat doubng he sity of te debi tere batons eres rates rie een fre edigtvous ene a ute, Joe groaning teres ten Debt intimates more acl to grow ou of eb. Stes ty Carmen Ren- ‘art and Kennets Hog snd te Bank for neato Sees sow hat nce goverment debt eaces90 percent of GDP he relate ofeconoae gow [Sreducd. This al apples tthe de of mannan norte an pate oureolt Exhibit hows the cient debt eel fey cement by sero allDOT PPVPPPPOTVIVIVITV99990OR 2 2 2 2 > . 2 2 2 > 3 a > 2 2 2 3 > 2 3 i, ‘coon he det level oft es one seco lyon the rea mat. Some ‘what perversely, nn Greee ae the two private Seas below he heel ‘And only in Getnay aly Gi adton fo Gees) do piv howsebols have 2 et evel below 70 percent of GDP "Exinrr | Debt Levels wth Negative Impact on Economie Growth Se es Bi semanaor menace Msn coir Debt Restructuring and Weite off. We explored ths opto in rast paper (Gath to hsoptai: The Looming Tro Dee Natractring, BOG Foes er 2011. assuming a comme salable debt eel 189 percent of GDP for Bate households nonfiancalerporations, and goverment, we etinatd the {etc oveang tobe eS tio rte ear sane an 11 tllon for he U,V ‘rged that ome) goverment might be tempted wo fund thi tog one ie wealth ao 2010 30 perent onal ancl wet, ‘The tart eve of 80 percent can be bated (and ws debated by many readers of Bato Mopotai) at level of 20 percent woul tly add eta {uring ofS lon nthe US and €26 elon athe eta one lending t ‘onetime wealth tax o 12 percent and 1 pete, respectively. Given the enpap lay rach ata, we reel tse lea ncedlry aes np The meas that potas mot eo othe ast opto nition. Ination, Ano option to rede Westen det aad would be ancl reps Sona sation in whl the nominal terest rt below te ool rth ‘at ofthe eonomy fora ssaned prod a te. ARer Worl Wa the US and {he UX. surety wed infton fo ede over det levels spt of toes lomineresrte envionment, we have the oppose stain intrertrae ate "ihe than economic row ats Ar tk verso nant are oeeoes snd anew ees in 2012 bom re, the robe oul et ven woe So be only way to abieve higher mamta ron il be to gerate igher Inaton, Agree monetary easing as barely moved the fition nee the Us. and mos of Brope, hough the inact on UK inaton bas ben restr Ian ie not being generate, bee the expectation olan temas aw2 . . ° . ° . . . . 2 . . . 2 2 2 2 a a a ° 2 2 SOCCSCCSSSSSSSSSSBSOOD beet thee sl overeapacy and averndebtednes i the private an ‘ubbcsecoreCantined monetary essing ot (nd wil) lad 2 sutail ‘onetary overbang that cou the publ laces rst in money eed to a nt ‘onary buble Some aretha ato i uniey beer fhe veep of Inborandontinged empetiton fom ew mart etn Uke hina Cray ‘we may se continued pressure on wapes becuse of global, alhoug he Inoge ow goth pera the West, the more kt that Western pve ‘mens wil ear inzesed protections eadg Wo upward esse a pce ‘Mreowes sme obervers belle tht he nation estos dot ea Woe reafing of the uderjngrates of ston. "salsa matter of wus Take fr example te history a hypeiataon ia Germany inthe ery 120, The German Reihebank ended hc oeraea With ey psted one fo several years wtbout aun inaton Bot ones the ube rust none, people sare spend it ast. Tse to higher demand nd anton spl Today the veloety of money in the US eat an ale low of 711 tbe nthe of tines dla cats pe eat ake phases, returned othe longterm average of 127, pe levelin the US woo by 29¢ ‘erent ovr tat period —anles the Federal Reserve silanes reduced ie nance set by $8 lon, Semeftion probably attache fo hae seen, ‘ozeduee debt eels The prolem sopping the ination genie onc it has ee thebote “Tere aren en saatons to he debt problem At bes we expect stale ‘eto ow growth inthe West ven ie woui equi he owing ‘+ -Aczoriated fro rebalance bal tae flows, whl weld equ the ‘ering maces Germany an Japan to npot mor, therey allowing the ‘lebor counties to eam he funds necessary to dleverage ‘+ sStabinng the oversee franc etor trough eapatation and slow dering an dseeragiag—in otra tfodys new ren whic encoage Dank oink thet blane sees ater has Sonne commercial ey Gt |S worth nog tat the ee of monetary easing during ped when ata low intent ae ae below the ate of natn este provide ad tonal suppert tthe banking sem through the proron elon by) ‘+ Reducing excessive debt ves ely though an orderly retain hpherintation ‘current poles alshot aguas al thee chet. The coordinate intervention of several iba central ans on November 20 could be construed a pte en ‘of bal coopera, venta the whole wr fears the mpaios oa (Gorda breatup ofthe eu zane in ray, re one again merely ete of pling the onl lever le—hat of rng money ~and so id ot adres te oe fndamentl obit facing th worl ecabony. Even China partion eect swore about is bigest export market earpe) and erik of anther, (posi deep recesion more than a Woe welling ppt th Wes by retnanetag ade dows‘Any new recession, gen rowing and wautinale debt evel would ncease the is of shoretrm defas and iain Incase te medium rk. ‘ot highrinfaton companies shoul therefore repre these eens ‘Bat they also need to consder how the station a Europe oud amply the prbien, ‘The Euro Zone: Pouring Fuel on the Flames ‘The ess ofthe eure zone makes eating wih te det overbang even more ‘tT ieoguton othe ear ma lowe by So moran develop ‘+ Det grew ql most counties ofthe euro zone becanse cet became heap ann many instances, nae reanteest ates led eal estate bubbles Consumers ete counter o te periphery, made confent by newiy song cuteness iow interest ate, enbarked on spending Boom, + Compettiveness diverged between Germany andthe Netherlands. onthe one hang and te coune f the south (he peribey) on te other withthe ‘counties ofthe periphery aig renin exes wage increases wha the pas could be adresed through ezrency devaluation. Having los the ily to ads trough exchange ate deans the cous of the Detphery ean now ony ese to pall ternal devaluatos (i shor clay fs See ES) December's HU summit was supposed to retore conidenc is the ata of the ozone The European leaders made he lowing decsans ‘Butter 3 |The Inoduetion ofthe Euro Led to Higher Debt and Diversing ompestiveness a a a a 2 2 2 2 2 2 s 2 2 a a . . . . . . . . . . » 8 8 . s 2 5 a 2 2 5 2 s a ” ~~ s a . o a 0 Oo oa = a aSSS SSSSCSHSFS OFF OPP ITIVIFTTFIFIFISOIOSIOOSSLOEEOD ‘+ The members af the wl change the respective constaion nd national lave n rderta impor inion sowable dg det, ‘+ Thememberstthe EU wil acer scr supervsn of el wget by EU Inston uh ar be Rropean cour nclading quaint scone ‘oul tel nana ude efits reach peed nts (rc def nee tan os percent of GDP-refetng he inact a te bns ce. ‘+ The European tablity Mechanism (ES wile implemented a year eae andra er some tne in pra! wth he Eatpean Pian tay Pay (Gs 2 leaders incase otal of €50 ton he cl poe thal, fan be deployed o suppor the weaer counties ofthe er on. ‘+ Temenber ofthe EU wil comider wheter to provide ening of billon tothe teautional Monetary Fund (dein rer to bep cue del with» Tatty squece ‘+ ntuture debt esircurngs,pntesector bondboler wil te weted acc Ingo the rate o the I, with no stomatal Al ovement bends sl rede collec acon clas fiat returns ‘he summit was pesetaly vague onthe subject of balance within he eo zone, although the polilans expressed wish for mre cordeaton ithe ‘With tbe Ux oppsed tan overall EU weaty change, he ober EU ees (ate tro zane countiesalng wih mot other EU memes oats the eto 200) ‘sito se an inagoverment treaty t plement these change y ach 202. Ieremalas tobe seen ach 4st within heresy” wl be fase nepal ‘terms Bven more important, so eerste he nv governments vel commit othe rls as delded at he sunt We may well e some pshback {nd elartsto son heerlen the coming tats And een ¥ te nem ales, ‘re ful implemented prevou egeience wth the comalnen made Unde the 12 Maasticht Teaty does uo ecsaly ie cane foropiism tht hey Wl. be alowed ‘Before the summit, the European Centr] Bank (CB) announce new ease to supprt European bunks lowere the core etna rte o pete ored ‘wo nen long em renanelng operation that wl st forthe ears wend te geo ceptable colar andor the ft Un, ade loans mal snd ‘medhumsize entrsssceptable The 8 lo made cle t does ot plan {oengae in a bronéseae progam to uy up the debt of counties Kk Spain an ay Rather ses the esponstly ar eaig withthe debt crea yng with te inaiisa government fhe er nen ter won te does not wish tw ct aba lender fast rset —the absence of which ane fe aneyng ‘ses ofthe comming weakness fhe embined EU repent. ‘mor view hese arses nthe right ection bt they are ntact, be- cave they dont aces te core ses ofthe debt ovetaang a eringSSSSCCSCSCSSSCSSSBCCBOSSIFIFIIIIVOPSIFITIVOSSRYEEOY ‘cumgettivenes. The plan that emerged om th suit unk be enough {ostablze nancial markets wi he UK oping ot andthe weary aot legal enforcement, there sald eas to qsion the pas ety. ‘Any wue ston o the ess mut, a nim acs otis bay time frtundamental reforms bynioductng ers ree fr the weaker cou tes ofthe eurozone, Improve lative wit sbor car competiveness rere ett det and estas» al ulon. Ove Earpeas tender wie ang Some tps inthe ight rection, gala have bot one enough. 1+ eet a the ana makes need ede cmitsent fom the [ECB tong face" any member ofthe er tne. thas Deore ear hat ty ‘he BCH “Bgbabols using the alimied pce ef the de of toubed ‘untiesoFep interest ates dav) ha the repower an the ret 0 ee interest aes below el theol The EFSF aks the Spon {aks onthe reining needs of Spain and aly ovr tenet to yas Sang the ESA a yea ear and runing tn paral with he EFS wl Increase the fonds aalable as wl the potent rovson of adhiona ening {rhe AF But even ten, the valle and wil ot ewer a over te weaker nuns ing enough lo forfondamental reforms. ven ifthe ECB stepped could only by Une: “been senso of aly 4 percent terest on Spanish ola government eb ke eo COP ‘lo would oatine to gto, fom Go pectin Spin snd 19 pee in Rly today t6S percent and 11 pete expect e038 Any tempt 0 ‘blz et ves would en othe vcs cite aed deseoed + Diving Compson: The sum it ot adres the eo verging ompettineness and the esting ade inalances win th ez zane Te ounties the prighery (swells France) hve regia competdveness by leering heir unter css and introducing nore Next inte the ber markets Gold plated pensions patel in the publi rea) sd td Jtsecurty laws make progres hee very unl ‘the es of pa unt aor cons won have to Be eed by mee than 25 percent onsite cmpetivenesr In arom of Sed exchange rates this an only be chev by sgiantyinceaing productivity (br rerng mare ‘tvting hours per mek or main ap nvestmens andor loweing Satares Lower incomes would make more ila service od ee the igh lela debs revenue rom tes th whic o py back pveaient dest and lower petrol acces with wiht ful owt oc py of rte ‘es. Faling incomes, rece tax evens ab ately prog would ‘edute growth an farther rede debt sutiably les to ihr Premiums in te capital arte “Toe soi ert of sch an neon evasion Wald be Bihan ew people ‘wold axe Arent are he amt mare he pl sds ‘ens forte prighery of rope wit evelopment diag the 130 eadg ‘he ret Depeston’ Buck then adherence be cnstalns ofthe gold.VOVOGVIFVIVGVVISVSSTSVSVSSOLBVCTVEe standard prevented an astmen, and Germany had waive ter evalua resin compettvencs Albaugs ver fev exes asepetin of ‘he tga the ita vou tat tao ving cr wy otf te ‘wl not ony al btw an the ik of epi egaic ensons Euvpe ‘+ The Det Ooehang The summit made it lea that he governess fhe Deripery are expeted to nodace ase rogran non ta lnc hele dpe aoe rece thelr deb lvls Beease any counter tm to ‘uch goverment debt and elevated pevatesetr debt (a shown xb 2), Its obvious tat any stempt to deseerage both smlaneoy wild 2 seep and long ecenton a descibed above. We contin eee tht some do deb resructringand not only of ple debt esr fy te foundation orf roth ‘+ xablohment ofa Fa on At he ust, Bropean leaders moved toward Sloe fsa cordnation tense the cua Zones atrial non Won “timate alo fr the eof int Eoobonde ad oes the periphery 0 Sele bend the suanger arth This maybe one comers for nein foltion othe eno zones pobiens,but it does ot ares theese of ‘verging compettivenes andthe debt verang Capi ats woud ity {queson whether te counter of he perighery woud act lasing contol of {het budget and okey pola decane Ptzal tensions can be expected rasee—or eves wore, Rein—is to (eid on retemen gs ab pension levels But one canal question the ‘lines of Germany and other counties of the not to coin ind the ‘uth Wil the German electorate zp higher tse sppet the conses ‘ofthe ou? And more portant wl the ep market? Sate oherver {ook he fled auction oftnjear Gera bonds inte Novenbe ean iywaring sil And indeed, the Geran econo rote heathy a {enerally sumed With goverment debts 87 presto De and inet Fats of} percent, Germany need nomial rth of 3 eet ut to ep est evel sable assuring mo priary sep —no exe fae gen he ‘eontve inact of demographics on ue rove oe ain est of| ‘ee operations hin te eo tone could case the day of ehoning Sve sooner tan general expert. In summary the existing natives shrt-The new sreement ees put {plc some sional improvements othe existing sabiy ant rth et eh ha nat been sacs to date The poland nt lessee se ‘hesing ene the "ig bazooa” nosy to aol the vil pad fe sve ‘pnd rik thee wasn poses on debt mutation tro the lesan of fomonEurobonds tee wasn foefl monetary eng pan the BD hee ‘rere no ough alae on how addres the probs of deg compete es and no stay was alate fo eigtng port a thee aoe the ‘ene of hs as element perhaps oto sup pven that al bout ‘ontainnent Woateve ou eer? ews ou the sae adopted the Uwe ‘av phot etn hatte ears ofthe ther counties were ana fortheSESS SSSOSTSSSTSCSSSOTSTGITIVIGISFTFFVIZFISFFIFSSe israction provided bythe UX poston, whieh verted attention fom the ack of sucent substantive progres on some ofthe mort resin ee. “The ear sone needs comprehensive plant delve combination of hgh Inflation Ge educerea eb and addres verging nt abr ert) ever fn the petpery and higher oasumptlon nthe nrtarn unre Empoyees oly, Span and Potala a in France—woul vet acet wage nrestes ekow the ate ofination wb employees in Gemany andthe Netestnds wool enjoy ealvapeneases Pitan nthe narth would also need to ower aes Sd introdae simu rogamso suppor dames conmpin In adn, ary ‘ccs ategy would need to incdesetacng of exes Gt pata ea, Some ebservers beseve thal Gerasy wold be unwilingto purse such !srategy gen ers of higher natn an the moral baad of oe idebed ‘ountes benef tom broader cos haring within the er zone Weare mee pms We bev that Grmany wif~afer ang esitance suppor sch ‘Satz asthe ony way the eao zone an sures cuenta The areal, alernatine, he reap, would have major negative epercssins ‘What If..? ‘or some commentators It isnot question of whether the euro 20 wl beak up ‘utr how and when will reat yp Terr undoubtedly a increase rik of east same (potently lode ate ete euro sone. And sme gover ‘ent are rumored oe preparing) nese, fo example, searing sue ‘pact to print new sappties of money. Nt surprisingly we ve engaged with ‘any cles to sess tis scenario an prepare or A county leiagthe ero one woul need to do the flowing ‘+ Ammounce and inmeditelyinpose cpl contol, ‘+ Amposeimmetate trade onto (eease companies would oterwise aly Imports in ner tot thee money ox) + pose inmate border onl to prevent a igh of st *+ implement a bank holiéy co stop eizns tom withdrawing tet money and ‘ing Yel the dalton) and—altho this someet barat Inagne—stamp every euro noe nthe county, converting i back tthe onan. + Amounce new exchange ate (presumably ot Dating tthe Bess, en ‘lal an eehange contol) 9 tat uae ould continue + Decide how o deal wt exiting outstanding exo-denominated debt, which ‘wold probabiy ental maor goverment od peatesctar Get esting (Ghats cet). Tais mip be easier inthe ase of ovement et, wes {ends tobe governed by donee ay, contr tthe det of mao! corps ‘ons which normally governed by U.K law bat we Would sume ence os declaring a halen hee a5 we),® » e 2 . 2 2 2 2 2 . 2 2 a . a a a a a a 2 2 2 2 2 > 2 2 2 ® 2 » ® 2 » 2 ° 2 > > > “+ Recipe he Gsolven banks tomake up fr lois om eft. ‘+ Determine what odo wi te nonbank loan set the ck nd bond ‘mae, and every company azount sd commer cota ia the county. ‘Any breakup woulda sglcant ubulenc in Racial matte ink ou the number of cred deta swap oustanding—and a wale econ ‘The OBCD har warmed that a eakup othe er zone wo lea “save wealth destruct, bankrupls anda cops in entenc in ropa ier tion an enopeation” leading “a deep depression nb the iting and {emaiing car ae cours a well arn te werd eronomy™ EAB e- teresa breaupsenaro ans potential inpcatons 4] A Euro zon reakup Seenario o 2 ES ema ae fm arse Sy eae —= 1, 2 2 See cmos SRT seers or ~~ ore a — aan Sectiring tg AI -euweainwae . See OS aee ace eeSS SSSSTSCSSSSSVSSSSSTSVVSSTSVVOVSVO SLOSS ESECES According to UBS, the ecoomecnt of «beak wold be huge. Depenn whee he country leaving the EUs “weak" or stone eon he ce onl range fom € $00 o€1.300 per Inaba per yet Desde there pl ‘ons er the courses of the er ane the word economy would be severely Met, with eztv mpctons forthe US —amplying exiting reesonsry ‘nd potently detionary presser and alo he energing mares that ‘depend on exports tthe Wee. ‘The Year(s) Ahead ‘As they g no 202, buns leaders need to prepare fora fia yea ad Demape or several ial years They hod code a leat fou senaros + swcrsf suting Through Governents and poltcns partly adres ob Ibaances, generate moderate nto, este debt whee news and salize the ero ne andthe ancl tem. usher tceton ale ‘he Wes experiences long pesado lw growih td deleveragiag. wile ‘regig mares erin heir ecnotis award more domes constr ‘o-and thereby enjoy coninaed easenabe wows + ezsion win Dasonar Prse apr), Ming ough cul cay ‘The OMcD abeay sayeth hte va sigan ket receson in 2012 TS would ness the presse en debs, adn eves lower demand ands 0 ‘mor attr mesures Such a scerario eal replete he Japanese experience ‘ofthe ast we decades, ut ls tne wold af: percent of weld GDP + Sie infasion The longer the economy rain in eesion andthe more ental bans try wo supor the prose of dleveraging with seve mon "ary poles. higher theft isk So fay monetary easing hs iecty ected inflation chrugh higher commode). the economy eae "ecrver othe publ sats oe tt In ney, we cl see a udden Spe ‘nian. Ben restive deat ation of 10 pent would have sigleantinplations fo companies See Wiy Campane Shad Pear or Inflasion BOG Foes, November 2010), "+ rat of te Bro Zone Given thespian owns ts company leaders eed to adress his ena o, ling senubepeaulonry meats o ‘pare fr such an eventual, What Should Companies Do to Prepare? ‘ABO recently sald tous: "woud be very sup ifany well company ‘wee not repaint forthe wort senaros however temo thse event Hs ‘maybe So what exc dots tht nea? Le ink at geo session, Seenaro Japan. he expecenceofJapan—hie benefited fom seg ‘pris ina booing word eeonmy ae repeted, me wos fae» proanged ‘etsion and avery slow recovery hat cule yet to redo, Today ho would eqube te combined at rowing but el smal economies of Sts ttes . y s » > > y » ’ ’ ’ ’ ’ , , y ‘up the burden. Bt consumsion Inthe deveoped weed aloes restr ‘han nthe apiy emerging ease ofthe ar Eeoomily and soa, We trosld ve te olowing ‘+ Acontinud balance shee recat wth ov (een 2 ners rats anda ‘masve ovesuppy ot iane. In thse countess exjoyng rat nana ‘athe, we would ee neretangpvernest det Monetary soley ae ‘ecvenes a decveraging welds pans longstanding nity 0 preven pies fom ling hows, 1+ Pang pce would increate the el burden of al es ating to a vious cy of celeveragg abd econ contraction ‘This fn tum would cate many busses tres, and auppotng sector t2 doe esl ing unemployment and fling ving tas + increased roi tenons plication and pratectoii ‘There woud be many implications fr companies i Japansye Lost Decade ook to 1 Maryse hae alent eperence ang pres do nceasingabor produce om emerpingmaret layers, and eanologal Dares However more rsune, mre widespread, and sangre dees one adonal halen Decne conmumes ely spending ation of ‘en rater bargains ne ang 0 weak consumption and sig pes + comorae profits mold ste especialy cons were not eed inne with flg pies A etnary wad sone of sgl dig ag row nt meager socharket tus. Linhlies orig) wood incense neal terms while the vale os, ‘+The protem of ees capac and supply fal kind of pos would be gs ‘te as emerging ariel devoted moe resources to bldg pepe inte, + Busnes and persona anhrptles could sara debt burdens became nes Ing onerous + Leseulnerable ims woul ot be immune, for example feel spe ‘wen ou f bane spt the vale cai, og cstanere west ‘ankupt thereby esting eek + Poslenerese protections could deur supply hans pale 1m auch a scenario management should emphasize cots and fy, whe Jeong for row opportunites in emerging markets andro nnoraonSIPFFTTFFFVFCOVVVUUUTVEVUVU VE SEUSS SISPIPIZawasese sy ‘lta sustainable cst edge When res go down, company mnt enite ‘ats eat go dw ar well elite to competes hat). Tey eed eases the ot base fm erate to enought make arse oad ts what needed ia thorough rengnesing othe cost ase thoughout the tte ale cain Some panes companies have ben able fo slsh cx fd terete peeesby ae meh 5 ere. 1+ Rigrowtymanae rine Bess simply lovesng et and pices, companis, ‘bud to understand te wayne deftion change conte: oychalngy— land be far mate sophisticated in seting pies Yor example, a company ct ‘educe peeled pies y simultaneously deresing pin trough smaller package sae unbundling prods andere In drt ae the ome Dose base piercing ester with ab nial lw ae and owing "pith dana services and ete, sting priest maa cstre ek to acetainyorcoupig pie ncteses with an increased numberof ie 1+ Raeginer ther futon At set companies, theres considerable png ‘ait and leakage dsouning In gene, esing desosaetoo “ecetazed~and salespeople hae to eh sutooony in euting peak ‘eas tstead, companies need to manage pcg mare cea na Inert ‘isendtoend flo taher tan i the sloed maser ta pel oy ‘Consider ppoimtng he ping ocr ‘+ eas on vation. Fundamental Sanoraions wil be the foundation of ew Indus wes wl pnerst mote row inthe ue And even the toughest tines inoraten hep diferentes ata camer Tie wat tie Inthe 19905 Japan ince 1890 ad alo daring the recession of 209 Companies sou therfore ela vee a D(a approach upp ‘edby many investor toda Campanas an alo gh pice detns by resting ‘ow cstmer needa and verving tern wth ew pode and eve ut ook srApple 1+ oki nes goush options een the ho markt order oa be "ope {iI donee demand dele on the back of flat, ok or wth eptons hoa spec nemesing markts~agutaly or by arqltin Of eae, ‘9 wlan of your empets To by et act decivey ad geste 1+ Make deciioe mses that change the ane. I don beter management of bot cat ad pies companies sould e conden ol stg ores o ght detaianary beading Ja the bet Ueto nvest nthe tock made «an be during» downturn a deflationary enveoamen maybe the best tee mate ages corporate investments Think abow acquing a stogging ‘ompetior inode to oat the ns an therey pret psd ‘marin the core busines. ersten in marketing novation to ‘aman caret pice pln. Seenaro 2 inflaton. Many roe leader understate the impletons of Into Inthe Dele at deiation wuld be much was. nou ewan a heSSCS SSCS SSE STS SHS SST HS SHS THC STS SSCS SESESEEECEETD ‘experienc of Japan shows eiation although unwelome can be deat wth ‘eltvely eal naton, on he oer band has sgaieant impact on prota ltyand feecas Nw naan, met of oda’ managers bare had no exper ce with inflaton. In he allowing paragraphs, we summatiae wt We have kd previously about esponding to fnfton™ Senor exetves shoud star now thnk hrogh the consequences ation fer ther busibes to nderstand tht company’s exper, and prepare fr an Inaonary en aay matreone han ey epee ee Fists the potent inact of iaaton on your company's at anos statenent Wheter company can aod eda spots evra harmed by Infiton depends on wo tr: the dpe o which tan it ee nesses by ‘ssupplers andthe arg o wai tan impo price nceneon cso "spt enought hnow yur own expose a indian you mast now he exp. sure of your sapplers and casiomers as we. Seve te desig of Your compa ‘ys cote exits te pce sv of ky customer and analy the Daan of power nthe nds to etene who Hel 0 ese one the eos of ndaton on others The nt of empeion and our amps son wil reat invnce the inp’ of peng decsons so ese tos mst Second estimate the pote impact of ination on your compasy's balznce ‘sheet Ar ination goes, he amount ofesh needed to meet a spat ave- ‘ment progam ineeaessometies sna. ses the pete these. ‘hangs the tre malo components a apa expendtize: net wating et Cavers payables, and receabes) and futur aed cpt nestned ‘Th, pt ergantetonal stroctres and prosses in place to suppor eetve eclom-mabing na turbulent rally changing enveonmen Mae sre you ave fall anspareneyon what drives our own ples and calle eal-sne formation onthe prices f your competors Into egbentcomminleatin betwee yout procurement and sles orgazans Tel your busines sits tela le tows of ieent into cenare in th plan abd to we aasonauted ners formanageent epertng These measues wl provide acer Wew f| Yur depres of exposure to fat and put yu poston to develop acompre- eve infatin poten an ‘Such plan needs tobe hls not fagmented sbi crosfunctonal task {ore responstle fr developing an nerate,companywide antinfaton progam, and fr easing an entyrarang stem o moni leadng eestor, Shoal ‘he company conflation in anys key mares, he ae re wl ect. and oreree the responte ut dot setup a neater ation protection system, nea create longterm impact by developing an iflaon mindset onthe prot employes ros the oranation Keep i ibd hat the vas ajay of anager and "ployee today havent experienced a malo period of natn dng teleLOST IATIVIVIPIDIVIVIPIFIOPIPVPOOSOOCOROCOSSTESBOD Career Aaa elt everyone wll ned 1 eh thei asumpions and aust thetrexpeitions. Finally he ination protection program shoud esate 2a us operational ation can have sgesat inact on orporte an sine lt tae. The relative importance of erent sure a eompetiesvantge ray hi By Paning fer he strategic mpcaton of stato ne ney company i Deter ostioned nat nly ta prtet ei om ingots nati pat ut so expt inten opportunity node to strengten a compettve ‘hranage abit s sammie the eves compas should pl preparing fo ‘plataionary seen, Exwbirs | Elements ofa Comprehensive inflation Protection Program ae. Sart niente rs ess ea Aig encima Epes inuany ‘Gent we support in pepsing fr a scenario higher inden ten to focus on Improving the fndamental notably throug preg and though efor o ‘educe working ental and plot more een Inada, lending Crauletons engage with hl ovata ody explain ht neat t0 Ipberintition andthe countermeasures thy ae conseing vestr ba, of ‘a, tend incded he ete fer intation in eee ay ‘onan. ‘Scanaro 3 Breakup ofthe Euro Zane. Altbough we expect government tof & ‘ayo sablice the eur zone rane) templets of breakup ae 20vesvwvwew s > > s > s s s > s s severe tht companies shoud prepare, We focus onthe pletion fr companies ‘hat operate isthe coo zone ‘Companies within the eurozone need o expect the feng “Severe, unknown pact of urency turbulence on eanings ‘Unter impact on exiting contrac an onstanding ces (nl ouetading ompany det be redenminated or remain i ears? what wi be the tering the contact the crency base changes) ‘+ ase drupon othe supply cain acre realone rate change in competitiveness and decline n export for stongcureny ‘Changes in indus pecking odes due to change in competivenes among 1 siteant is pecan + Greterinportane of domes markets + strong vie into song euro and weakeur markets ‘bv, companies woul have to ais many hey aspect of bow to do busines: Pina neste andreclbrate the entire anes fein = heaury would needa separate “pod ers from “bad eos" ~ ingfece cath and debtor poole In god-eure counties tmplemen mile caency fone in france sees + Marking ond ate Sales ces wou need tobe ready or mah more sph ‘aed oder and invoice pocesig in mule cares reve exiting she race tena et be tbo ro ‘+ Procurement Supply chain management would dasa change: companies would need o eimai edging sates forthe omer ea roe nd ‘onside he ec of esd tele exchange rats on hel bal proce: nent states. + toca Surin, Monctring and Dist, The may seen become ‘andy move ative compare wit the recent endo emoring sch Jobs to Asa lhe conventional widom sound etsaurng se ofshoring ‘ld be trned beadFETT FFCTCCee s 5 » » s » . . > » s ’ > > > > > > » > > > » > > > > > > > » ‘+ Aecunting an Como. Cost cing programs would ned to be exces to ‘otet arin aganst new Inuodued tarts nd tae baie, ‘+ rgntton Rethink te ene eranzatonal sep night ofthe needa sve 2 song Burope” (Germany, ance, he Netesans)and3 weak Eaape™ 1+ Majo Adminsrtve ant Support ssnets, There woud be req fa new treasuries lepl ete, and commanicaton tena and woul be aro [nance again! backdrop of markt nsec looming aban eatin, posible bankas ‘ite et be posible to pt to intone eatin the suston eaves {he breakup ofthe ez zane wold come a3 sock, could happen ae planned “oerigt vet combined wath bank oly, pital eontl and predeined new exchange rates (wich would equte bunt and wally efdental prepara: tionand more thanx ight fo implement. leroy cold be dren, string withthe srpie ext of ne county and eaig io fst chaln eatin. (riteold involve stupy the exo one o to marginal eos, Companier ‘Should prepare ow forall eventuality nding sme novegret more that ah beimpemented imme + Ass rela fics The port ell ely bee redce dependency a0 te ‘nos bordened peripheral eounutes xe fr the maaty feompanie ‘hae basness mode benefits rom he ch “+ econ ering marie. et nave ore aggresive int ster roth ‘cringe economies wich il be the abel owth ein fr yar to ‘one: Ti sae wl bene ncresney compete + ania to fron ash end os fle Tis what estnguihed winner ‘som oer ding the 2008-209 down. + site deratin Siaoting of earings arse verted dvs may rove helpful in weathering the masive uncertainty and neressingy role uch mae 1+ cab enc aid Companies wt sone balance beets lt hak of ways to aly thelr caster (and even state plies) ond them ‘part attack Deploy cash to highervae wes such as A. Pressured ‘vatzaton and deed deal wl yl valable opportnies for ‘he diving Asan article The Econom put I gs work ot we, gg wil be broken on a sale that promises some Indus omelet” smaiegs” ‘These “helt ae Mustaine the ae nether complete nr appropri to ‘every stato, ts worth consign a soured way the fl om hese‘As Reality Catches Up with Our Writing Regular eadees ow that we hve tended to take a her esis ew ofthe ‘conomi outook forte developed economies We ae mae epais sbeut the ‘emerging mares but donot expect ht fey wl eam other, mh coming year, we wl se upswgs and new ensan In moe volte ‘old, We wise surpesng ations by goverment nent bans ae Wh ‘ostire and some wih negative inpttins But the baie thee wl pot eange nha we ate witnessing the eat Sowdown ofthe enty.ft ety at aati {he Wes though we donot expect Yepeat ofthe 13, there te sme fess, ‘ftodays envtonment tha st east eco the pat The davatunslows «cred boom of sgicant shits several counter tthe ame ine i plied by ‘he eo ze mechanism rather than Oy the pl andar “cil we cn bene om the esos of the 1998 a avid sone mistakes. 1 loots tke eur ret sawn wot be neat 29 proninced or eenonieal, eiatng—tut ity bea ong nd nthe ene wl et a cee resting of some kind wallow fra aw sr ‘ur wives have told ws no talk about ese Bat actly we ate qt optimistic Tesla rom sory tat ven nthe mast daaged economies ine a {Shoah cana enn end cat open ones ns oe ‘iy ss ep ay St he ees sce erent Scien ete ee eat a 2g sate a pre come neae se MPa NAS at Fe SES ween nye SEaceaeiee Coenen occas ao een me eter ee nar SEREMEA ith adchem oro thymine Seas eee een ‘Sie inn eee Sec enacaasearia ee io ome Sxaciniatecres oa Fes lteter ener ieGia ea Spe 9.201 al pent ea ‘Sorbent untae pee one es Sesaoniie SS Eee my i em Scar a eee rena Se eee race pence pes a a tena otek wae EyAbout the Authors ‘aid Rhodesia tpt mang dente anon cf! he Bon Cn ‘Str rap an te hmong pas aay eta hat a sraeseaigson ‘thinoyemal trates Acknowledgments ‘eters past Uae tan Crone GaP ota Ok Shes, ‘tn pKa enon, Thr ge tate piety ‘eu sots hte adnan 808s cnr pen en nce abere A ‘ior gn isi an na ata pw pen For Further Contact "uw ed ts eer pas conc aete aha. ‘Te snson Gmciting Gow 6s nanan cont fem newer Inger on baes: tng po ih eon pan ped ae ‘Sco halagnsto lel ieee erring ste tr en Ia antares rca pony res pepe ‘Sram at cmpaner snr recta ait cacao aon ‘Mhsens thor eet one arable sap date pe be ‘enrages Funes 688 el capa th ‘2eantc rar mowstermaion sso gam ‘he te 8c cnet angers st lin oni cr oh pl vist Repreectescon espero Ft tata ‘The etn Cig Guy re 2012. 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