The Euro Zone Crisis:From late 2009, fears of a sovereign debt crisis developed among fiscally conservative investors

concerning some European states, with the situation becoming particularly tense in early 2010.This included euro zone members Greece, Ireland, Spain and Portugal and also some EU countries outside the area. Iceland, the country which experienced the largest crisis in 2008 when its entire international banking system collapsed has emerged less affected by the sovereign debt crisis as the government was unable to bail the banks out. In the EU, especially in countries where sovereign debts have increased sharply due to bank bailouts, a crisis of confidence has emerged with the widening of bond yield and risk insurance on credit default swaps between these countries and other EU members, most importantly Germany. While the sovereign debt increases have been most pronounced in only a few euro zone countries they have become a perceived problem for the area as a whole. In May 2011, the crisis resurfaced, concerning mostly the refinancing of Greek public debts. The Greek people generally reject the austerity measures and have expressed their dissatisfaction through angry street protests. In late June 2011, the crisis situation was again brought under control with the Greek government managing to pass a package of new austerity measures and EU leaders pledging funds to support the country. Concern about rising government deficits and debt levels across the globe together with a wave of downgrading of European government debt created alarm in financial markets. On 9 May 2010, Europe's Finance Ministers approved a comprehensive rescue package worth 750 Billion (then almost a trillion dollars) aimed at ensuring financial stability across Europe by creating the European Financial Stability Facility(EFSF). In 2010 the debt crisis was mostly centered on events in Greece, where the cost of financing government debt was rising. On 2 May 2010, the euro zone countries and the International Monetary Fund agreed to a 110 billion loan for Greece, conditional on the implementation of harsh austerity measures. The Greek bail-out was followed by a 85 billion rescue package for Ireland in November, and a 78 billion bail-out for Portugal in May 2011. EU emergency measures On 9 May 2010, the 27 member states of the European Union agreed to create the European Financial Stability Facility (EFSF), a legal instrument aiming at preserving financial stability in Europe by providing financial assistance to euro zone states in difficulty. The facility is jointly and severally guaranteed by the Euro zone countries' governments. In order to reach these goals the Facility is devised in the form of a special purpose vehicle (SPV) that will sell bonds and use the money it raises to make loans up to a maximum of 440 billion to euro zone nations in need. The new entity will sell debt only after an aid request is made by a country. The EFSF loans would complement loans backed by the lender of last resort International Monetary Fund, and in selected cases loans by the European Financial Stabilizations Mechanism. The total safety net available is therefore 750 billion, consisting of up to 440 billion from EFSF, up to 60 billion loan from the European Financial Stabilisation Mechanism (reliant on guarantees given by the European Commission using the EU budget as collateral) and 250 billion loan backed by the IMF. The agreement is interpreted to allow the ECB to start buying government debt from the secondary market which is expected to reduce bond yields.(Greek bond yields fell from over 10% to just over 5%; Asian bonds yields also fell with the EU bailout.)

The ECB has announced a series measures aimed at reducing volatility in the financial markets and at improving liquidity: First, it began open market operations buying government and private debt securities. Second, it announced two 3-month and one 6-month full allotment of Long Term Refinancing Operations (LTRO's). Thirdly, it reactivated the dollar swap lines with Federal Reserve support. Subsequently, the member banks of the European System of Central Banks started buying government debt. Stocks worldwide surged after this announcement as fears that the Greek debt crisis would spread subsided, some rose the most in a year or more. The Euro made its biggest gain in 18 months, before falling to a new four-year low a week later. Commodity prices also rose following the announcement. The dollar Libor held at a nine-month high. Default swaps also fell. The VIX closed down a record almost 30%, after a record weekly rise the preceding week that prompted the bailout. Despite the moves by the EU, the European Commissioner for Economic and Financial Affairs, Olli Rehn, called for "absolutely necessary" deficit cuts by the heavily indebted countries of Spain and Portugal. Private sector bankers and economists also warned that the threat from a double dip recession has not faded. Stephen Roach, chairman of Morgan Stanley Asia, warned about this threat saying "When you have a vulnerable post-crisis economic recovery and crises reverberating in the aftermath of that, you have some very serious risks to the global business cycle." Nouriel Roubinisaid the new credit available to the heavily indebted countries did not equate to an immediate revival of economic fortunes: "While money is available now on the table, all this money is conditional on all these countries doing fiscal adjustment and structural reform." After initially falling to a four-year low early in the week following the announcement of the EU guarantee packages, the euro rose as hedge funds and other short-term traders unwound short positionsand carry trades in the currency. While the aid package has so far averted a financial panic, international credit rating agencies consider that eurozone countries such as Portugal continue to have economic difficulties. In July 2011, it was agreed during the EU summit Greece should receive EU loans at lower interest rates of 3.5%. In September, 2011, Jrgen Stark became the second German after Axel A. Weber to resign from the ECB Governing Council in 2011. Weber, the former Deutsche Bundesbank president, was once thought to be a likely successor to Jean-Claude Trichet as bank president. He and Stark were both thought to have resigned due to "unhappiness with the ECBs bond purchases, which critics say erode the banks independence". Stark was "probably the most hawkish" member of the council when he resigned. Weber was replaced by his Bundesbank successor Jens Weidmann and "[l]eaders in Berlin plan to push for a German successor to Stark as well, news reports said". Reform and recovery In November, as concerns started to resurface about the fiscal health of Ireland, Greece and Portugal, EU President Herman Van Rompuy said "If we dont survive with the euro zone we will not survive with the European Union." In March 2011 a new reform of the Stability and Growth Pact was initiated, aiming at straightening the rules by adopting an automatic procedure for imposing of penalties in case of breaches of either the deficit or the debt rules. Subsequently, the proposed European treasury was implemented as the temporary European Financial Stability Facility, which will function until the permanent European Stability Mechanism is established following ratification of its treaty. In July 2011, it was agreed during the EU summit that the EFSF will be

given more powers to intervene in the secondary markets, thus dramatically socializing risk in the euro zone, which ends the crisis. Controversy about national statistics The revision of Greeces 2009 budget deficit from a forecast of "6-8% of GDP" to 12.7% by the new Pasok Government in late 2009 (a number which, after reclassification of expenses under IMF/EU supervision was further raised to 15.4% in 2010) has been cited as one of the issues that ignited the Greek debt crisis. This added a new dimension in the world financial turmoil, as the issues of "creative accounting" and manipulation of statistics by several nations came into focus, potentially undermining investor confidence. The focus has naturally remained on Greece due to its debt crisis, however there has been a growing number of reports about manipulated statistics by EU and other nations aiming, as was the case for Greece, to mask the sizes of public debts and deficits. These have included analyses of examples in several countries or have focused on Italy, the United Kingdom, Spain and the United States among others. Credit rating agencies The international U.S. based credit rating agencies Moody's, Standard & Poor's and Fitch have played a central and controversial role in the current European bond market crisis. As with the housing bubble and the Icelandic crisis the ratings agencies have been under fire. The agencies have been accused of giving overly generous ratings due to conflicts of interest. Ratings agencies also have a tendency to act conservatively, and to take some time to adjust when a firm or country is in trouble. In the case of Greece, the market responded to the crisis before the downgrades, with Greek bonds trading at junk levels several weeks before the ratings agencies began to describe them as such. In a response to the downgrading of Greek governmental bonds the ECB announced on 3 May that it will accept as collateral all outstanding and new debt instruments issued or guaranteed by the Greek government, regardless of the nation's credit rating. Government officials have criticized the ratings agencies. Following downgrades of Greece, Spain and Portugal that roiled financial markets, Germany's foreign minister Guido Westerwelle said that traders should not take global rating agencies "too seriously" and called for an "independent" European rating agency, which could avoid the conflicts of interest that he claimed US-based agencies faced. European leaders are reportedly studying the possibility of setting up a European ratings agency in order that the private U.S.-based ratings agencies have less influence on developments in European financial markets in the future. According to German consultant company Roland Berger, setting up a new ratings agency would cost 300 million Euros and could be operating by 2014. Due to the failures of the ratings agencies, European regulators will be given new powers to supervise ratings agencies. With the creation of the European Supervisory Authority in January 2011 the European Union set up a whole range of new financial regulatory institutions, including the European Securities and Markets Authority (ESMA), which will become the EUs single credit-ratings firm regulator on 7 July. Credit-ratings companies have to comply with the new standards or be denied operation on EU territory, says ESMA Chief Steven Maijoor.

But attempts to regulate more strictly credit rating agencies in the wake of the European sovereign debt crisis have been rather unsuccessful. Some European financial law and regulation experts have argued that the hastily drafted, unevenly transposed in national law, and poorly enforced EU rule on rating agencies (Rglement CE n 1060/2009) has had little effect on the way financial analysts and economists interpret data or on the potential for conflicts of interests created by the complex contractual arrangements between credit rating agencies and their clients".