Discipline: Understanding of global and European business environment Specialty: European business and finance

Report:
Eurozone Debt Crisis problems and solutions

Prepared by: Anjelika Aleksieva 1123274

Revised by: Assoc. Prof. Dr. Iv. Stoychev Assoc. Prof. Dr. Sv. Boneva

January 2012
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Beginning of the crisis Origins of the present crisis What happens when sovereign states accumulate large debts? From Greece to Italy But what is contagion? Why is the euro depreciating? The Crisis in Italy Acknowledging Contagion Bill Auction Disaster Borrowing Costs Tax reform in Italy Aim of Tax Reform in Italy Income Tax Reforms in Italy IVA in Italy Reforms of Corporate Tax Structure in Italy The Crisis in Greece: What If Greece Drops the Euro? Tensions in the Euro Zone Three-Year Package The Crisis in Portugal The Crisis in Ireland Financial assistance package for Ireland Facts and figures on the program for Ireland The Crisis in Spain Solutions European Financial Stability Facility (EFSF) European Financial Stabilisation Mechanism (EFSM) ECB interventions Conclusion References

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Beginning of the crisis

The Greek crisis has led to fears that this is only the beginning of a deeper sovereign debt crisis that could ultimately destabilise the Eurozone. Origins of the present crisis It is useful to start out with the origins of the present crisis. Figure 1 shows the average yearly changes (in percent of GDP) of private and public debt in the Eurozone. The period 1999-2009 has been organised in periods of booms and busts: the boom years were 1999-2001 and 2005-07; the bust years were 2002-04 and 2008-09. We can see a number of remarkable patterns. 1. First, private debt increases much more than public debt throughout the whole period (compare the left hand axis with the right hand axis). 2. Second, during boom years private debt increases spectacularly. The latest boom period of 2005-07 stands out with yearly additions to private debt amounting on average to 35 percentage points of GDP. 3. During these boom periods, public debt growth drops from 1 to 2 percentage points of GDP. The opposite occurs during bust years. Private debt growth slows down and public debt growth accelerates. Again the last period of bust (2008-09) stands out. Public debt increases by 10 percentage points of GDP per year, mirroring the spectacular increase of private debt during the boom years (but note that the surge of public debt during the bust years of 2008-09 are dwarfed by the private debt surge during the preceding boom years).
Figure 1

Source: ECB, Quarterly Euro Area Accounts. Note: 2009 is until second quarter

During boom years the private sector adds a lot of debt. This was spectacularly so during the boom of 2005-07. Then the bust comes and the governments pick up the pieces. They do this in two ways.

First, as the economy is driven into a recession, government revenues decline and social spending increases.

Second as part of the private debt is implicitly guaranteed by the government (bank debt in particular) the government is forced to issue its own debt to rescue private institutions.

Thus the driving force of the cyclical behaviour of government debt is the boom and bust character of private debt. This feature is particularly pronounced during the last boom-bust cycle that led to unsustainable private debt growth forcing governments to add large amounts to its own debt.1

What happens when sovereign states accumulate large debts? Initially, investors start worrying that this debt may not be sustainable, which means that the state cannot be able to pay back capital and interests by generating revenue bigger than expenditures .In this case, investors require higher interest rates to subscribe new public debt as a compensation for the risk of insolvency. This increases the risk of insolvency as it worsens public sector balance sheets. At some point, there may no longer be an interest rate able to compensate investors for the risk of insolvency; then they just stop subscribing the public debt. This is a situation of fiscal crisis and has only two possibilities: 1. government default followed by a renegotiation of the debt (as in Argentinas case), 2. monetisation of the debt, which is effectively bought by the central bank. This represents an injection of money in the economy and thus generates inflation and exchange-rate depreciation. From Greece to Italy

For a fascinating historic analysis of public and private debt see Reinhart and Rogoff(2009).

Second, in the case of Greece, the second option monetisation - was ruled out by Greeces membership in the European monetary union: the Greek government could not force the ECB to buy its own bonds. For this reason, the only option was insolvency and renegotiation of the debt, unless other countries were willing to lend to Greece at an interest rate lower than the market rate. But did the EU help Greece? In 2010 it has been clear that, following a substantial dose of indecision, they did it mainly for fear of contagion. But what is contagion? Thirdly, as the Greek crisis unfolded, investors started to suspect that other countries with high levels of public debt, namely Portugal, Spain and Italy, would find themselves in a similar situation. But as governments of these countries rushed to point out, their fiscal position is not as dramatic as the Greek one. So why are investors so concerned?Because ,even if the government is not highly indebted, investors might start questioning its willingness to raise taxes above a level considered politically sustainable,which ,in future, might seek a renegotiation of the debt, its monetisation, or both. Fear that this will happen can push interest rates to a level so high that the investors fears will eventually come true. In the prevailing interest rates a country that otherwise would be unable to service its debt ultimately require renegotiation or monetization of the debt to avoid full repayment. So the outcome depends on investors confidence. If there is confidence, the good equilibrium with moderate interest rates and stable markets prevails; when confidence disappears, the economy jumps to a bad equilibrium, where a fiscal crisis occurs.2 Greeks contagion has been exactly of this type.The burden of Greek bail-out itself is affecting negatively the fiscal position of Portugal, Spain, and Italy. This too may have contributed to weaken confidence in their ability to service the debt. Why is the euro depreciating? A possible answer is that as the crisis spreads to other large Eurozone countries, the risk of monetisation of the public debt is concentrating. Even if Greece is bailed out by other countries in the Eurozone, this would not be possible for the much larger public debts of Italy, Spain, and Portugal. In the scenario of a widespread crisis, the possibility that the ECB will monetise the debt of weak Eurozone countries exists, and fear of the implied inflation can explain the depreciation of the euro.
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Marco Pagano , Fiscal crisis, contagion, and the future of euro, May 15, 2010

Countries that are in a critic situation: Portugal Italy Ireland Greece Spain

The Crisis in Italy

The plunge in Italian markets overshadowed policy makers efforts to fix Greek finances as the euro-regions debt crisis infected Europes largest borrower. Italian bonds fell for a seventh day and the nations borrowing costs jumped by more than half at an auction of 6.75 billion euros ($9.4 billion) of bills. Stocks decline compared after falling to a two-year low. Warnings made by Investors Service "Moody" and Standard & Poor over the ability of Italy to cut debt, combined with infighting in the government of Silvio Berlusconi over plan to cut budget, fueled sales. Italy coming under severe market pressure, being the third-largest economy and a founding member of the EU, signals that the sovereign and banking crisis has reached a deeply systemic phase,3 The pogrom in Italy highlighted the inability of Europe to contain the crisis that began in Greece in October 2009 and led to rescue Ireland and Portugal. Finance ministers failed to agree how to share with lenders the cost of a second bailout for Greece to be financed mainly from its European allies of the EU, including Italy. Acknowledging Contagion Europe needs to recognize its no longer a crisis of small sovereigns in the euro area, It is becoming a euro-area wide crisis and European policy makers have struggled to accept that for some time. 4 The yield on 10-year Italian bonds rose 7 basis points to 5.76 percent, after reaching 5.96 percent earlier, the highest since 1997. The yield premium investors demand to hold the debt
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Vladimir Pillonca, an economist at Societe Generale SA in London, July 12, 2011 Jacques Cailloux, chief European economist at Royal Bank of Scotland Plc ,Bloomberg Televisions The Pulse.
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over German bunds to a euro-era reached a euro-era record 348 basis points, before narrowing to 311. Bill Auction Italys bonds have suffered more than debt of Spain, considered the euro-regions next-weakest link after the three bailed-out countries. The premium to hold Spanish debt over Italian bonds narrowing to as low as 30 basis points, the least since November 2010. Trading in shares of UniCredit SpA (UCG), Italys biggest bank, had to be suspended limit down after the stock plunged more than 7 percent, pushing the benchmark FTSE MIB index down as much as 4.8 percent. UniCredit, one of the biggest holders of Italian bonds, pared losses and advanced 4.5 percent to 1.206 euros as of 11:40 a.m. in Milan. Even with the rebound, UniCredit has fallen by 22 percent this month, shedding about 9 billion euros in market value. Disaster Italy has more than 500 billion euros of bonds maturing in the next three years. Thats about twice as much as the 256 billion euros extended to Greece, Ireland and Portugal in their three-year aid programs. At almost 120 percent of gross domestic product, Italys debt is the EUs second largest by that measure after Greece. Its 1.8 trillion euros of borrowing in nominal terms is more than the combined debt of Greece, Spain, Portugal and Ireland. Borrowing Costs

Jump in bond yields of Italy, if sustained, would increase funding costs, which the government estimates will total about 75 billion for 2011, or almost 5% of GDP. This figure is expected to grow to 85 billion by 2014.

Jefferies International Ltd. calculated that if the average interest rate on debt rises to 6% during this period rather than 5 percent forecast costs will jump by another 35 billion. Average cost of funding of 5.5 percent means that Italy will need a primary surplus of at least 3% to stabilize the debt of 120% of GDP level will not reach Italy until 2015, Pillonca assessments.

Tax reform in Italy

It has changed the operating system of the entire tax structure of the country. These reforms in the tax structure of Italy have influenced the economy and caused several changes in the economic and social conditions. Tax reform in Italy is done in three fields, income tax, corporate tax and environmental tax. These reforms in the tax structure are meant to create favorable fiscal conditions. Tax reform in Italy is also meant to develop the investment sector and provide encouragement for entrepreneurship. Aim of Tax Reform in Italy One major reason behind these reforms in the Italian tax structure is to introduce fairness in the process and at the same time to make the process simpler than ever. The tax reform activities in the country aim at proper distribution of the tax burden. At the same time, making the tax payment process as simple as possible and reducing other charges related to tax collection, are the other objectives of these tax reform activities. There is a number of a tax prevailing in the country but at present, only five taxes are proposed and all these are fused in a Tax Code. Income Tax Reforms in Italy

The personal income tax generates huge revenues for the country. In the past, the individual taxpayers faced huge financial burdens due to these taxes. Because of this the proposals of tax reform in Italy suggested several changes in the income tax structure of Italy. The income tax reforms in Italy have been designed in two stages. The first stage of these reforms transformed the tax credits that are related to the income to tax allowance. At the same time, it also provided basic allowance that has been designed as tax-free. The second stage abolished unnecessary tax brackets and provided only four brackets for the purpose. IVA in Italy

IVA or Imposta sul Valore Aggiunto is a kind of Value Added Tax. IVA is imposed on trading of goods, import activities and different types of services provided to the clients 8

and customers. The general rate of IVA in Italy is 20%. There are certain operations that are tax exempted and IVA is not imposed on these activities. The foreign businesses are provided with tax exemptions regarding the payment of IVA. Reforms of Corporate Tax Structure in Italy

The public deficit of Italy is under control and because of this, a number of tax reductions are provided through tax reform in Italy. Reform in the corporate tax structure is one of those reductions. At the same time, the corporate taxes are reduced to stimulate the investment sector. The IRPEG taxes are no more in existence in the country. Instead of these taxes, IRES are introduced in the country. The corporate tax rate has also been altered and at present it is 33%. On the other hand, the proposals for tax reforms in Italy has also proposed to abolish the IRAP in the coming years and certain portions of this tax have been abolished.

The Crisis in Greece:

By the end of 2009, as a result of a combination of international and local factors the Greek economy faced its most-severe crisis since the restoration of democracy in 1974 as the Greek government revised its deficit from a prediction of 3.7% in early 2009 and 6% in September 2009, to 12.7% of gross domestic product (GDP). In 2010,it was revealed that successive Greek government have been found to have consistently and deliberately false official economic statistics in the country to keep within the monetary union guidelines. This has allowed the Greek government to spend beyond their means, while hiding the actual deficit from the EU oversees. In May 2010 the Greek government deficit was again reviewed and evaluated to 13.6% for the year is one of the highest in the world, compared to GDP. The total public debt is forecast by some estimates, to hit 120% of GDP in 2010, one of the highest in the world. As a result, there was a crisis of international confidence in Greece's ability to repay its debt. In order to avoid a default in May 2010 other euro zone countries and the IMF agreed on a rescue package, which includes Greece providing immediate 45 billion in loan guarantees, with more resources to follow amounting to 110 billion. In order to provide funding, Greece was obliged to adopt stringent austerity measures to bring its budget deficit under control. On November 15, 2010 EU statistics body Eurostat revised the public finances and 9

debt figure for Greece after an excessive deficit procedure methodological mission in Athens, Greece 2009 and put the government deficit 15.4% of GDP and public debt to 126.8 percent of GDP that it makes the largest deficit (as a percentage of GDP) between the EU member states. The financial crisis - especially austerity package, etc. EU and the IMF met with anger by the Greek public, leading to seditions and social unrest. Although the long range of austerity measures, the government deficit was not reduced according to many economists because of the recession. Therefore, the government debt to GDP continues to increase rapidly. What If Greece Drops the Euro?
Over the last year, Greeks have withdrawn almost 40 billion euros, or nearly $53 billion, in deposits from their banking system, equal to about 17 percent of the nations gross domestic product. A total of 14 billion euros in deposits was withdrawn in September and October alone. The deposit flight peaked in October and early November 2011, at a time of intense political uncertainty in Greece and financial turmoil in Europe. The outflows have stabilized of late under the leadership of the new prime minister. Greeces future lies within the euro zone, not outside it.5

Tensions in the Euro Zone

For Greece and for Spain, Italy, Ireland and Portugal the financial crisis has highlighted the constraints of euro membership. Unable to devalue their currencies to regain competitiveness, and forced by E.U. fiscal agreements to control spending, they are facing austerity measures just when their economies need extra spending. Other economies like Germany, the Netherlands and Austria have kept deficits down while retaining an edge in global markets by restraining domestic wage increases. France lies somewhere between the two camps. The chief difficulty in working out a package to support Greece was the popular sentiment in Germany deeply concerned about becoming the answer to the debt problems of all of Europes endangered economies that Greece should pay a penalty for its former profligacy.

Georgios A. Provopoulos, the head of the Greek central bank

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there are questions widely raised about the role played by banks, including Goldman Sachs, in constructing elaborate financial deals that helped the previous government hide the extent of its deficit.

Three-Year Package
Faced with the prospect of economic contagion spreading to the wobbly economies of Spain and Portugal and the potentially devastating effect of a Greek default on French and German banks, which hold billions in Greek debt the I.M.F. and the euro zone countries quickly worked out the larger aid package. In return for assistance in meeting debt deadlines over the next three years, Greece agreed to austerity measures that are likely to cut its budget deficit sharply and may well produce a new round of recession. Greece had agreed to raise its value-added tax to 23 percent from 21 percent, to freeze civil servants wages and to eliminate public sector annual bonuses amounting to two months pay. In addition, members of parliament would no longer receive bonuses. He said special rules allowing for early retirement of civil servants would be tightened and the government intended to increase taxes on fuel, tobacco and alcohol by about 10 percent.

The Crisis in Portugal:

Everyone knew that Portugal would have to roll over and accept a bailout at some point. It was inevitable that this has happened. Portugal has too much short-term debt. The cost of rolling it over (if possible at all) would be too high. Debt service at free market rates would kill the country. So there is no sense in keeping up the charade any longer. It was Portugals dependence on ST debt that did them in. This chart shows how the maturity schedule of existing debt simply overwhelmed their capacity to refinance.

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Mismanagement comes to mind when you see the situation. The Portuguese Treasury put the country at risk. Rather than point fingers it would be nicer to conclude that Portugal had no option but to borrow short-term. It would be fair to blame the economic leaders of the EU. They knew for years that Portugals ST debt was a time bomb. In this case, ST debt = death. The greater the reliance on ST financing the greater systemic risk. Comparison of the USs debt profile and to Portugals debt profile.

When looking at a countrys aggregate debt and maturity profile it is important to look at the borrowers current status. But it is much more important to look at the relative change of ST debt on a year over year basis. Clearly the US is going in the wrong direction. EU leaders are grappling with a new eurozone threat after Portugal's parliament rejected an austerity budget and PM Jose Socrates resigned. The vote means an international bail-out, similar to those accepted by Greece and the Irish Republic in 2010, is now far more likely.The EU summit in Brussels is aimed at tackling the eurozone debt crisis. Although the situation in Libya, Tunisia and Egypt are high on the agenda, the summit has been pressured the 27 EU member states to adopt a "comprehensive package" on stabilising the eurozone. As part of the deal, the lending capacity of the European Financial Stability Facility (EFSF) would be raised from 250bn euros (218bn; $354bn) to 440bn euros. The EFSF is due to be replaced by a permanent European Stability Mechanism in 2013. Pressure on Portugal's economy intensified as the interest rate on the country's 10-year bonds climbed to a new high of 7.6%.

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Portugal faces bond repayments of 4.3bn euros on 15 April 2011. Mr Socrates warned that the political crisis would have "very serious consequences in terms of the confidence Portugal needs to enjoy with institutions and financial markets"

The Crisis in Ireland

The 2008-2011 Irish financial crisis resulting from the financial crisis of 2008 was a major political and economic crisis in Ireland that is partly responsible for the country falling into recession for the first time since 1980. In September 2008, the Irish government made up of a Fianna Fil (Green Party coalition), officially announced that the country entered a recession, the fast increase in unemployment occurring in the coming months. Ireland was the first country in the euro zone to enter recession as declared by the Central Statistical Office. The numbers of people claiming unemployment benefit in Ireland rose to 326,000 in January 2009, the highest monthly level since records began in 1967. Amidst the crisis, which has coincided with a series of banking scandals, the ruling Fianna Fil party fell to third place in an opinion poll conducted by The Irish Times. The party placed behind Fine Gael and the Labour Party, the latter rising above Fianna Fil for the first time. The weakening conditions force more than 100,000 protesters on the streets of Dublin on February 21, 2009, among the additional threats of protests and industrial action. Irish Stock Exchange (ISE) of the country's overall index peaked at 10,000 points briefly in April 2007, but on February 24, 2009 amounted to 1987 points, a 14-year low. The last time it stood under the level of 2000, was the middle of 1995. With banks guaranteed and the National Asset Management Agency, the evening of November 21, 2010, then Taoiseach Brian Cowen confirmed the intervention of EU / IMF financial matters in Ireland. Fianna Fil / Green Party coalition collapsed within a few months and was replaced by a Fine Gael-Labour coalition in February 2011 general elections. Financial assistance package for Ireland Following the official Irish request for financial assistance from the European Union, the euro-area Member States and the International Monetary Fund (IMF) of 21 November 2010, the joint EC/IMF/ECB mission on 28 November reached agreement at staff level with the Irish authorities on a comprehensive policy package for the period 2010-2013.

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This includes a joint financing package of EUR 85 billion with contributions from the EU, euro area Member States, bilateral contributions from the United Kingdom, Sweden and Denmark as well as funding from the IMF and an Irish contribution through the Treasury cash buffer and investments of the National Pension Reserve Funds. Facts and figures on the program for Ireland Objectives:

Immediate strengthening and comprehensive overhaul of the banking sector. >> EUR 35 billion

Ambitious fiscal adjustment to restore fiscal sustainability, correction of excessive deficit by 2015. >> EUR 50 billion

Growth enhancing reforms, in particular on the labor market, to allow a return to a robust and sustainable growth.

Financing: The total EUR 85 billion of the program are financed as follows:

EUR 17.5 billion contribution from Ireland (Treasury and National Pension Reserve Fund)

EUR 67.5 billion external support, EUR 22.5 billion for each of

EFSM (until October 2011: EUR 13.9 billion disbursed) EFSF (until November 2011: EUR 6.3 billion disbursed) + bilateral loans from the UK, Denmark and Sweden

IMF (until December 2011: EUR 13.1 billion disbursed)

Program disbursements will be made over 3 years with an average maximum maturity of 7.5 years. EFSM loan disbursements and funding plan 2011 Overview on EFSM loan disbursements (Status: 10 October 2011) Amount 5.0 bn 3.4 bn 3.0 bn Maturity 5 yr 7 yr 10 yr Raised on 5 Jan 2011 17 March 2011 24 May 2011 Loan beneficiary Ireland Ireland Ireland Disbursed on 12 Jan 2011 24 March 2011 31 May 2011

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 2.0 bn 0.5 bn

15 yr 7 yr

22 Sept 2011 29 Sept 2011

Ireland Ireland

29 Sept 2011 06 Oct 2011

Source: European Commission Economic and Financial Affairs

Complementary disbursements have been made by the EFSF and the IMF. Disbursements envisaged over the rest of the year will be subject to Ireland's requirements and to quarterly reviews by the Commission in cooperation with the IMF and in liaison with the European Central Bank (ECB).

The Crisis in Spain:

Spain has a comparatively low debt among advanced economies and it does not face a risk of default. The country's public debt relative to GDP in 2010 was only 60%, more than 20 points less than Germany, France or the US, and more than 60 points less than Italy, Ireland or Greece. Like Italy, Spain has most of its debt controlled internally, and both countries are in a better fiscal situation than Greece and Portugal, making a default unlikely unless the situation gets far more severe.] As one of the largest euro zone economies the condition of Spain's economy is of particular concern to international observers, and faced pressure from the United States, the IMF, other European countries and the European Commission to cut its deficit more aggressively. Spain's public debt was approximately U.S. $820 billion in 2010, roughly the level of Greece, Portugal, and Ireland combined. Rumors raised by speculators about a Spanish bail-out were dismissed by Spanish Prime Minister Jos Luis Rodrguez Zapatero as "complete insanity" and "intolerable". Nevertheless, shortly after the announcement of the EU's new "emergency fund" for euro zone countries on May 2010, Spain had to announce new austerity measures designed to further reduce the country's budget deficit, in order to signal financial markets that it was safe to invest in the country. The Spanish government had hoped to avoid such deep cuts, but weak economic growth as well as domestic and international pressure forced the government to expand on cuts already announced in January. Spain succeeded in trimming its deficit from 11.2% of GDP in 2009 to 9.2% in 2010 and around 6% in 2011. To build up additional trust in the financial markets, the government amended the Spanish Constitution in 2011 to require a balanced budget at both the national and regional level by 2020. The amendment states that public debt cannot exceed 60% of GDP, though exceptions would be made in case of a natural catastrophe, economic recession 15

or other emergencies. The new conservative Spanish government led by Mariano Rajoy aims to cut the deficit further to 4.4 percent in 2012 and 3 percent in 2013.

Solutions
European Financial Stability Facility (EFSF)

The European Financial Stability Facility (EFSF) was created by the euro area Member States following the decisions taken on 9 May 2010 within the framework of the Eco fin Council. The aim of the EFSF is to preserve financial stability in Europe by providing financial assistance to the euro area. EFSF is authorized to use the following tools related to appropriate conditions: provision of loans to countries in financial difficulties enter into a debt of primary and secondary markets. Intervention in the secondary market will be only based on an analysis of the ECB acknowledges the existence of exceptional financial market conditions and risks to financial stability Act on the basis of a precautionary program Finance recapitalization of financial institutions through loans to governments

To fulfill its mission, EFSF issues bonds or other debt instruments on the capital markets. EFSF is backed by guarantee commitments from the euro area Member States for a total of 780 billion and has a lending capacity of 440 billion.

European Financial Stabilisation Mechanism (EFSM)

This mechanism provides financial assistance to EU Member States in financial difficulties. The EFSM essentially reproduces for the EU 27 the basic mechanics of the existing Balance of Payments Regulation for non-euro area Member States. Under EFSM, the Commission is allowed to borrow up to a total of 60 billion in financial markets on behalf of the Union under an implicit EU budget guarantee. The Commission then on-lends the

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proceeds to the beneficiary Member State. This particular lending arrangement implies that there is no debt-servicing cost for the Union. All interest and loan principal is repaid by the beneficiary Member State via the Commission. The EU budget guarantees the repayment of the bonds through a p.m. line in case of default by the borrower. The EFSM has currently been activated for Ireland and Portugal, for a total amount up to 48.5 billion (up to 22.5 billion for Ireland and up to 26 billion for Portugal), to be disbursed over 3 years. The EFSM is a part of the wider safety net. Alongside the EFSM, the European Financial Stability Facility (EFSF), i.e. funds guaranteed by the euro area Member States, and funding from the International Monetary Fund are available for euro area Member States. Non-euro area Member States are also eligible for assistance under the Balance of Payments Regulation. The EFSM and the EFSF can only be activated after a request for financial assistance has been made by the concerned Member State and a macroeconomic adjustment program, incorporating strict conditionality, has been agreed with the Commission, in liaison with the European Central Bank (ECB).

ECB interventions

The Governing Council of the European Central Bank (ECB) has decided to take on several measures to address the severe tensions in certain market segments which are hampering the monetary policy transmission mechanism and thereby the effective conduct of monetary policy oriented towards price stability in the medium term. The measures not affect the stance of monetary policy.6 Governing Council has decided: To conduct interventions in the euro area public and private debt securities markets (Securities Markets Programme) to ensure depth and liquidity in those market segments which are dysfunctional. The objective of this programme is to address the malfunctioning of securities markets and restore an appropriate monetary policy transmission mechanism. The scope of the interventions will be determined by the Governing Council. In order to sterilise the impact of the above interventions, specific
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European central Bank, decides on measures to address severe tensions in financial markets,2010

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operations will be conducted to re-absorb the liquidity injected through the Securities Markets Programme. This will ensure that the monetary policy stance will not be affected. To adopt a fixed-rate tender procedure with full allotment in the regular 3-month longer-term refinancing operations (LTROs) to be allotted on 26 May and on 30 June 2010. To conduct a 6-month LTRO with full allotment on 12 May 2010, at a rate which will be fixed at the average minimum bid rate of the main refinancing operations (MROs) over the life of this operation. To reactivate, in coordination with other central banks, the temporary liquidity swap lines with the Federal Reserve, and resume US dollar liquidity-providing operations at terms of 7 and 84 days. These operations will take the form of repurchase operations against ECB-eligible collateral and will be carried out as fixed rate tenders with full allotment. The first operation will be carried out on 11 May 2010.

On 21 December 2011, the ECB started the biggest infusion of credit into the European banking system in the euro's 13 year history. It loaned 489 billion to 523 banks for an exceptionally long period of three years at a rate of just one percent. This way the ECB tries to make sure that banks have enough cash to pay off 200 billion of their own maturing debts in the first three months of 2012, and at the same time keep operating and loaning to businesses so that a credit crunch does not choke off economic growth.

Conclusion
Europes future path will not be straightforward. Even some years from now the monetary union may not have become fully sustainable. But as structural policies bear fruit and structural characteristics converge, the union will become less prone to the sorts of problems that have been afflicting it, and better able to deal with new types of shock should they occur. This crisis may not be the lastthing that Europe will overcome. But provided that political will remains, Europe will probably continue to proceed stepwise to sustainability.

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References: 1. 2. 3. 4. De Grauwe, On the eurozone crisis,2010 Financial times, Euro in crisis, 2011, http://www.ft.com The Guardian, Eurozone crisis, http://www.guardian.co.uk The telegraph, Eurozone debt crisis: leaders warn of dangers facing economy in 2012, 01 Jan 2012 5. Eurozone debt crisis worsens as financial world holds breath over impending financial apocalypse, by Mike Adams, November 30, 2011 6. Global post, The collapse of the Euro, Michael Goldfarb, December 5, 2011 7. Wall St. Cheat Sheet , Euro Finance Ministers Discuss Radical Ideas to Avert Global Crisis, November 29,2011 8. Greece: The start of a systemic crisis of the Eurozone, Paul de Grauwe , May 2010 9. The future of euro, Marco Pagano, May 2010 10. Portugal PM Socrates' resignation overshadows EU summit, BBC news, March 2011 11. The Crisis in Portugal, Bruce Kasting, March 2011 12. The New York Times, Greece and the euro, Jan 9, 2012 13. Plunge Brings Europe Debt Crisis to Italy, Andrew Davis, Jul 12, 2011 14. European Commission, Program for Ireland, Europa.eu 15. www.ecb.int, European Central Bank, May 10, 2010

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