Contents

Key Words and Acronyms..........................................................................................................................2

Introduction.................................................................................................................................................3
The European sovereign debt crises............................................................................................................4
The Cause....................................................................................................................................................5
The History of the European Sovereign Debt Crisis....................................................................................8
In General....................................................................................................................................................8
Real World Example Greece.......................................................................................................................9
Real World Example Ireland.....................................................................................................................10
Potential Eurozone Crisis Solutions...................................................................................................11
Five Steps to Solving Europe’s Debt Crisis...............................................................................................11
Summary...................................................................................................................................................14
Conclusion.................................................................................................................................................15
Appendix...................................................................................................................................................16
Reference..................................................................................................................................................17

1
Key Words and Acronyms
 European Monetary System - EMS
The European Monetary System (EMS) is an arrangement between European countries
linking their currencies to stabilize the exchange rate. 
 European Economic and Monetary Union (EMU)
The European Economic and Monetary Union (EMU) combined the European Union
member states into a comprehensive economic system. 
 European Financial Stability Facility (EFSF)
The European Financial Stability Facility was a temporary crisis resolution measure in
the EU following the financial and sovereign debt crisis. 
 European Union (EU)
The European Union (EU) is a group of countries that acts as one economic unit in the
world economy. Its official currency is the euro. 
 How the European Banking Authority Works
The European Banking Authority (EBA) is a regulatory body that works to maintain
financial stability in the European Union’s banking industry. 
 European Economic Area (EEA) Agreement
The European Economic Area (EEA) Agreement is an agreement made in 1992 that
brings together the European Union. 

2
Introduction
The European sovereign debt crisis was a period when several European countries
experienced the collapse of financial institutions, high government debt, and rapidly rising
bond yield spreads in government securities.

The debt crisis began in 2008 with the collapse of Iceland's banking system, then spread
primarily to Portugal, Italy, Ireland, Greece, and Spain in 2009. It has led to a loss of
confidence in European businesses and economies.

The crisis was eventually controlled by the financial guarantees of European countries, who
feared the collapse of the euro and financial contagion, and by the International Monetary Fund
(IMF). Rating agencies downgraded several Eurozone countries' debts.

Greece's debt was, at one point, moved to junk status. Countries receiving bailout funds were
required to meet austerity measures designed to slow down the growth of public-sector debt as
part of the loan agreements.

The European debt crisis (often also referred to as the Eurozone crisis or the European sovereign
debt crisis) is a multi-year debt crisis that has been taking place in the European Union since the
end of 2009. Several Eurozone member states (Greece, Portugal, Ireland, Spain and Cyprus)
were unable to repay or refinance their government debt or to bail out over-indebted banks under
their national supervision without the assistance of third parties like other Eurozone countries,
the European Central Bank (ECB), or the International Monetary Fund (IMF).

With increasing fear of excessive sovereign debt, lenders demanded higher interest rates from

Eurozone states in 2010, with high debt and deficit levels making it harder for these countries to
finance their budget deficits when they were faced with overall low economic growth. Some
affected countries raised taxes and slashed expenditures to combat the crisis, which contributed
to social upset within their borders and a crisis of confidence in leadership, particularly in
Greece. Several of these countries, including Greece, Portugal, and Ireland had their sovereign
debt downgraded to junk status by international credit rating agencies during this crisis,
worsening investor fears.

3
The European sovereign debt crises
The European debt crisis (often also referred to as the Eurozone crisis or the European sovereign
debt crisis) is a multi-year debt crisis that has been taking place in the European Union since the
end of 2009. Several Eurozone member states (Greece, Portugal, Ireland, Spain and Cyprus)
were unable to repay or refinance their government debt or to bail out over-indebted banks under
their national supervision without the assistance of third parties like other Eurozone countries,
the European Central Bank (ECB), or the International Monetary Fund (IMF).

The detailed causes of the debt crisis varied. In several countries, private debts arising from a
property bubble were transferred to sovereign debt as a result of banking system bailouts and
government responses to slowing economies post-bubble. The structure of the Eurozone as a
currency union (i.e., one currency) without fiscal union (e.g., different tax and public pension
rules) contributed to the crisis and limited the ability of European leaders to respond. European
banks own a significant amount of sovereign debt, such that concerns regarding the solvency of
banking systems or sovereigns are negatively reinforcing.

As concerns intensified in early 2010 and thereafter, leading European nations implemented a
series of financial support measures such as the European Financial Stability Facility (EFSF) and
European Stability Mechanism (ESM). The ECB also contributed to solve the crisis by lowering
interest rates and providing cheap loans of more than one trillion euro in order to maintain
money flows between European banks. On 6 September 2012, the ECB calmed financial markets
by announcing free unlimited support for all Eurozone countries involved in a sovereign state
bailout/precautionary program from EFSF/ESM, through some yield lowering Outright
Monetary Transactions (OMT).

Return to economic growth and improved structural deficits enabled Ireland and Portugal to exit
their bailout programmers in July 2014. Greece and Cyprus both managed to partly regain
market access in 2014. Spain never officially received a bailout program. Its rescue package
from the ESM was earmarked for a bank recapitalization fund and did not include financial
support for the government itself.

4
The crisis has had significant adverse economic effects and labor market effects, with
unemployment rates in Greece and Spain reaching and was blamed for subdued economic
growth, not only for the entire Eurozone, but for the entire European Union. As such, it can be
argued to have had a major political impact on the ruling governments in 10 out of 19 Eurozone
countries, contributing to power shifts in Greece, Ireland, France, Italy, Portugal, Spain,
Slovenia, Slovakia, Belgium and the Netherlands, as well as outside of the Eurozone, in the
United Kingdom.

The Cause
The Eurozone crisis resulted from the structural problem of the Eurozone and a combination of
complex factors, including the globalization of finance; easy credit conditions during the 2002–
2008 period that encouraged high-risk lending and borrowing practices; the financial crisis of
2007–08; international trade imbalances; real estate bubbles that have since burst; the Great
Recession of 2008–2012; fiscal policy choices related to government revenues and expenses; and
approaches used by states to bail out troubled banking industries and private bondholders,
assuming private debt burdens or socializing losses.

In 1992, members of the European Union signed the Maastricht Treaty, under which they
pledged to limit their deficit spending and debt levels. However, in the early 2000s, some EU
member states were failing to stay within the confines of the Maastricht criteria and turned to
securitizing future government revenues to reduce their debts and/or deficits, sidestepping best
practice and ignoring international standards. This allowed the sovereigns to mask their deficit
and debt levels through a combination of techniques, including inconsistent accounting, off-
balance-sheet transactions, and the use of complex currency and credit derivatives structures.
From late 2009 on, after Greece's newly elected, PASOK government stopped masking its true
indebtedness and budget deficit, fears of sovereign defaults in certain European states developed
in the public, and the government debt of several states was downgraded. The crisis subsequently
spread to Ireland and Portugal, while raising concerns about Italy, Spain, and the European
banking system, and more fundamental imbalances within the Eurozone.

5
The under-reporting was exposed through a revision of the forecast for the 2009 budget deficit
from "6–8%" of GDP (no greater than 3% of GDP was a rule of the Maastricht Treaty) to 12.7%,
almost immediately after PASOK won the October 2009 Greek national elections. Large
upwards revision of budget deficit forecasts due to the international financial crisis were not
limited to Greece: for example, in the United States forecast for the 2009 budget deficit was
raised from $407 billion projected in the 2009 fiscal year budget, to $1.4 trillion, while in the
United Kingdom there was a final forecast more than 4 times higher than the original. In Greece,
the low ("6–8%") forecast was reported until very late in the year (September 2009), clearly not
corresponding to the actual situation.

The fact that the Greek debt exceeded $400 billion (over 120% of GDP) and France owned 10%
of that debt, made investors scared at the mention of the word "default". Although market
reaction was rather slow—Greek 10-year government bond yield only exceeded 7% in April
2010—they coincided with a large number of negative articles, leading to arguments about the
role of international news media and other actors fueling the crisis.

The European debt crisis erupted in the wake of the Great Recession around late 2009, and was
characterized by an environment of overly high government structural deficits and accelerating
debt levels. When, as a negative repercussion of the Great Recession, the relatively fragile
banking sector had suffered large capital losses, most states in Europe had to bail out several of
their most affected banks with some supporting recapitalization loans, because of the strong
linkage between their survival and the financial stability of the economy. As of January 2009, a
group of 10 central and eastern European banks had already asked for a bailout. At the time, the
European Commission released a forecast of a 1.8% decline in EU economic output for 2009,
making the outlook for the banks even worse. The many public funded bank recapitalizations
were one reason behind the sharply deteriorated debt-to-GDP ratios experienced by several
European governments in the wake of the Great Recession. The main root causes for the four
sovereign debt crises erupting in Europe were reportedly a mix of: weak actual and potential
growth; competitive weakness; liquidation of banks and sovereigns; large pre-existing debt-to-
GDP ratios; and considerable liability stocks (government, private, and non-private sector).

6
The states that were adversely affected by the crisis faced a strong rise in interest rate spreads for
government bonds as a result of investor concerns about their future debt sustainability. Four
Eurozone states had to be rescued by sovereign bailout programs, which were provided jointly
by the International Monetary Fund and the European Commission, with additional support at
the technical level from the European Central Bank. Together these three international
organizations representing the bailout creditors became nicknamed "the Troika".

To fight the crisis some governments have focused on raising taxes and lowering expenditures,
which contributed to social unrest and significant debate among economists, many of whom
advocate greater deficits when economies are struggling. Especially in countries where budget
deficits and sovereign debts have increased sharply, a crisis of confidence has emerged with the
widening of bond yield spreads and risk insurance on CDS between these countries and other EU
member states, most importantly Germany

Despite sovereign debt having risen substantially in only a few Eurozone countries, with the
three most affected countries Greece, Ireland and Portugal collectively only accounting for 6% of
the Eurozone’s gross domestic product (GDP), it has become a perceived problem for the area as
a whole, leading to speculation of further contagion of other European countries and a possible
break-up of the Eurozone. In total, the debt crisis forced five out of 17 Eurozone countries to
seek help from other nations by the end of 2012.

In mid-2012, due to successful fiscal consolidation and implementation of structural reforms in

the countries being most at risk and various policy measures taken by EU leaders and the ECB
financial stability in the Eurozone has improved significantly and interest rates have steadily
fallen. This has also greatly diminished contagion risk for other Eurozone countries. As of
October 2012 only 3 out of 17 Eurozone countries, namely Greece, Portugal, and Cyprus still
battled with long-term interest rates above 6%.By early January 2013, successful sovereign debt
auctions across the Eurozone but most importantly in Ireland, Spain, and Portugal, shows
investors believe the ECB-backstop has worked. In November 2013 ECB lowered its bank rate
to only 0.25% to aid recovery in the Eurozone. As of May 2014 only two countries (Greece and
Cyprus) still need help from third parties.

7
The History of the European Sovereign Debt Crisis
Some of the contributing causes included the financial crisis of 2007 to 2008, the Great
Recession of 2008 to 2012, the real estate market crisis, and property bubbles in several
countries. The peripheral states’ fiscal policies regarding government expenses and revenues also
contributed.

By the end of 2009, the peripheral Eurozone member states of Greece, Spain, Ireland, Portugal,
and Cyprus were unable to repay or refinance their government debt or bail out their beleaguered
banks without the assistance of third-party financial institutions. These included the European
Central Bank (ECB), the IMF, and, eventually, the European Financial Stability Facility (EFSF).

Also in 2009, Greece revealed that its previous government had grossly underreported its budget
deficit, signifying a violation of EU policy and spurring fears of a euro collapse via political and
financial contagion.

Seventeen Eurozone countries voted to create the EFSF in 2010, specifically to address and
assist with the crisis. The European sovereign debt crisis peaked between 2010 and 2012.

“The Eurozone debt crisis began in late 2009 when a new Greek government revealed that
previous governments had been misreporting government budget data. Higher than expected
deficit levels eroded investor confidence causing bond spreads to rise to unsustainable levels.
Fears quickly spread that the fiscal positions and debt levels of a number of Eurozone countries
were unsustainable." (2012 report for the United States Congress )

In General
the crisis in Europe has to do with the fear that some countries may be unable to pay back their
debt. But debt in itself is not always considered a problem and European governments often use
more money than they earn. Governments were able to borrow so cheaply in the past decade that
running a deficit was often used to stimulate economic growth.

One of the ways governments can raise money is through selling bonds, which are bought back
after a number of years with interest added. Interest on government bonds has been low for most

8
European countries because bonds were considered secure investments. The market worked on
the assumption that governments would always be able to afford buying them back.

But what if a country can’t pay back their loans? If a business or individual is in this position,
they default and are found bankrupt. But countries can also default on their loans.

In 2009 concern started to mount over Greece’s ability to pay off its debt. Should Greece default,
it would probably be forced to pull out of the euro with unknown but potentially grave
consequences for the global economy.

Real World Example Greece

In early 2010, the developments were reflected in rising spreads on sovereign bond yields
between the affected peripheral member states of Greece, Ireland, Portugal, Spain and, most
notably, Germany.

The Greek yield diverged with Greece needing Eurozone assistance by May 2010. Greece
received several bailouts from the EU and IMF over the following years in exchange for the
adoption of EU-mandated austerity measures to cut public spending and a significant increase
in taxes. The country's economic recession continued. These measures, along with the economic
situation, caused social unrest. With divided political and fiscal leadership, Greece
faced sovereign default in June 2015.

The Greek citizens voted against a bailout and further EU austerity measures the following
month. This decision raised the possibility that Greece might leave the European Monetary
Union (EMU) entirely. The withdrawal of a nation from the EMU is unprecedented, and if it
returned to using the Drachma, the speculated effects on Greece's economy ranged from
total economic collapse to a surprise recovery.

As reported by Reuters in January 2018, the Greek economy is still highly uncertain with an
unemployment rate at approximately 21%.

100,000 people protest against austerity measures in front of parliament building in Athens, 29
May 2011

9
Greek economy had fared well for much of the 20th century, with high growth rates and low
public debt. By 2007 (i.e., before the Global Financial Crisis of 2007-2008), it was still one of
the fastest growing in the Eurozone, with a public debt-to-GDP that did not exceed 104% but it
was associated with a large structural deficit. As the world economy was hit by the financial
crisis of 2007–08, Greece was hit especially hard because its main industries—shipping and
tourism—were especially sensitive to changes in the business cycle. The government spent
heavily to keep the economy functioning and the country's debt increased accordingly.

Real World Example Ireland

The Irish sovereign debt crisis arose not from government over-spending, but from the state
guaranteeing the six main Irish-based banks who had financed a property bubble. On 29
September 2008, Finance Minister Brian Lenihan Jnr issued a two-year guarantee to the banks'
depositors and bondholders. The guarantees were subsequently renewed for new deposits and
bonds in a slightly different manner. In 2009, a National Asset Management Agency (NAMA)
was created to acquire large property-related loans from the six banks at a market-related "long-
term economic value".

Irish banks had lost an estimated 100 billion euros, much of it related to defaulted loans to
property developers and homeowners made in the midst of the property bubble, which burst
around 2007. The economy collapsed during 2008. Unemployment rose from 4% in 2006 to 14%
by 2010, while the national budget went from a surplus in 2007 to a deficit of 32% GDP in 2010,
the highest in the history of the Eurozone, despite austerity measures.

With Ireland's credit rating falling rapidly in the face of mounting estimates of the banking
losses, guaranteed depositors and bondholders cashed in during 2009–10, and especially after
August 2010. (The necessary funds were borrowed from the central bank.) With yields on Irish
Government debt rising rapidly, it was clear that the Government would have to seek assistance
from the EU and IMF, resulting in a €67.5 billion "bailout" agreement of 29 November 2010
Together with additional €17.5 billion coming from Ireland's own reserves and pensions, the
government received €85 billion, of which up to €34 billion was to be used to support the
country's failing financial sector (only about half of this was used in that way following stress

10
tests conducted in 2011). In return the government agreed to reduce its budget deficit to below
three per cent by 2015. In April 2011, despite all the measures taken, Moody's downgraded the
banks' debt to junk status.

Potential Eurozone Crisis Solutions

The failure to resolve the Eurozone Crisis has been largely attributed to a lack of political
consensus on the measures that need to be taken. Rich countries like Germany have insisted on
austerity measures designed to bring down debt levels, while the poorer countries facing the
problems complain that austerity is only hindering economic growth prospects further. This
eliminates any possibility of them "growing out" of the problem through economic improvement.

The so-called Eurobond was proposed as a radical solution - a security that was jointly
underwritten by all Eurozone member states. These bonds would presumably trade with a low
yield and enable countries to more efficiency finance their way out of trouble and eliminate the
need for additional expensive bailouts. However, these concerns were mitigated over time as
deflation took hold and bonds became a safe-haven asset for investors seeking yield.

Some experts also believed that access to low-interest debt financing will eliminate the need for
countries to undergo austerity and only push back an inevitable day of reckoning. Meanwhile,
countries like Germany could face the brunt of the financial burden in the event of any Eurobond
defaults or problems. The primary problem in recent years, however, is prolonged deflation that
could keep growth at bay.

Five Steps to Solving Europe’s Debt Crisis

The crisis of 2008 is repeating itself in reverse. Three years ago, European governments stepped
in to save the banking sector. Today, the euro zone’s indebted sovereigns are threatening to
cause a full-scale bank panic and possibly even another credit crisis. Europe’s lenders must be
insulated from their governments and vice versa. Five radical steps could break the bank-
sovereign “doom loop.”

STEP 1: SOLVING THE CAPITAL CONUNDRUM Europe’s weaker banks need capital if
they are to be prevented from pulling the system down. The most pressing problems are Spain’s

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cajas, or savings banks, and those Italian lenders that barely scraped through Europe’s latest
stress tests. Among those that failed the tests were Banco Pastor, Caja de Ahorros del
Mediterráneo, Banco Grupo Caja3, CatalunyaCaixa and Unnim. Private markets are effectively
closed, and Italy and Spain are scarcely able to afford bailouts. The solution is to repurpose
Europe’s sovereign bailout fund to inject capital directly into banks — much the same way
America retooled its Troubled Asset Relief Program in late 2008.

While the European Financial Stability Facility can already make loans to countries for the
purpose of recapitalizing banks, this shift would be controversial. It would mean governments
ceding control of financial institutions to a pan-European body. Still, the fund could get a big
bang for its buck: bolstering the core Tier 1 capital ratios of Europe’s 90 largest lenders by one
percentage point would cost 100 billion euros, or less than the price of Greece’s second bailout.

STEP 2: SOLVING THE FUNDING FREEZE European banks, especially those in Italy and
Spain, risk a liquidity crisis if wholesale markets do not reopen to them by autumn. And even if
they are able to issue longer-term debt, it is likely to be expensive. That could choke off credit to
the economy. The answer again lies in reinventing the stability fund to offer temporary financing
guarantees. The idea, first proposed by Morgan Stanley analysts, has worked before. The United
States and several European countries restored calm after the collapse of Lehman Brothers by
guaranteeing bank finances.

STEP 3: PREVENTING BANK RUNS Even with capital and wholesale funding worries
addressed, banks would still be vulnerable to a loss of confidence by depositors. Bank deposits
are guaranteed by a lender’s home country, and when savers fret about their government’s
finances, they tend to move their cash — something particularly easy to do in the euro zone.
Deposits at Greek banks have shrink by roughly 15 percent since the beginning of 2010,
according to European Central Bank data. But if there were a single pan-European deposit plan,
savers would be more likely to stay put.

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STEP 4: SAY NO TO BANKS PROPPING UP THEIR GOVERNMENTS Regulators have
unwittingly cemented the sovereign-bank link by encouraging lenders to hold larger reserves of
liquid assets, mainly in the form of sovereign bonds. Banks in troubled countries have also come
under pressure to prop up their governments by buying even more of their debt. To break this
potentially fatal embrace, banks should be subjected to strict limits on their exposure to any
single country’s bonds.

STEP 5: A PAN-EUROPEAN REGULATOR WITH TEETH If the first four steps were
taken, the risk would be that sovereign-bank codependency would re-emerge, but on a pan-
European level. Preventing that from happening requires creditors to face real losses if a bank
falls over. Big lenders must also be structured so they can be safely wound down. Achieving that
would require a single euro zone financial supervisor — something national regulators would no
doubt resist. But America provides a good model, with the Federal Reserve and the Federal
Deposit Insurance Corporation overseeing the system with the help of regional bodies.

13
Summary
WHEN HAPPEN

2009
The European Sovereign Debt Crisis Explained. The debt crisis began in 2008 with the collapse
of Iceland's banking system, then spread primarily to Portugal, Italy, Ireland, Greece, and Spain
in 2009. It has led to a loss of confidence in European businesses and economies. Feb 14, 2019

What caused the European / Eurozone debt crisis

During the European debt crisis, several countries in the Eurozone were faced with high
structural deficits, a slowing economy and expensive bailouts that led to rising interest rates,
which exacerbated these governments' tenuous positions. Oct 26, 2018

HOW DID THE CAUSE START

The crisis started in 2009 when the world first realized Greece could default on its debt. In three
years, it escalated into the potential for sovereign debt defaults from Portugal, Italy, Ireland, and
Spain. The European Union, led by Germany and France, struggled to support these members.
Feb 1, 2019

Implications of the Crisis for Europe

The implications of a crisis can be numerous and they can refer to the financial sector, the real
economy, regulations etc.

The impact of previous crises on the real economy has not always been the same. The direction
of the impact was due to the actions pursued by governments for recapitalizing banks introducing
stimulus measures and restoring investors’ confidence in the economy.( Cogman & Dobbs
(2008)

14
Conclusion
The general cause appears to be a rapid growth of the level of debt (especially in the case of
households), accompanied by sharp increases in real estate prices.

In Greece – unsustainable budget deficits, lack of competitiveness of its economy due to over
hiring and overpayment in the public sector, inappropriate use of complex financial instruments;
in Portugal – large public debt and high budget deficit; in Spain – the housing bust and its
negative impact on the Spanish banking system, and the highest unemployment rate among all
developed economies. Several countries have already received external help from the IMF and
other organizations: Greece, Iceland, Ireland.

One of the consequences of the financial crisis in Europe was the creation of the European
Financial Stability Facility (EFSF) in June 2010 by the 16 euro area member states. The EFSF
has been fully operational since August 2010 and its purpose is to finance loans for euro area
member states which are experiencing difficulty in obtaining financing at sustainable rates
(EFSF (2011)). EFSF will be able to borrow up to EUR 440 bill by issuing bonds guaranteed by
the euro area member states, and it has received the best possible credit rating (AAA) from all
three credit rating agencies (Fitch, Moody’s and Standard & Poor’s). The money borrowed
through such bonds will then be lent to struggling euro zone countries.

15
Appendix

16
Reference
 Investopedia
  "Crisis in Euro-zone—Next Phase of Global Economic Turmoil". Competition master. Archived
from the original  on 25 May 2010. Retrieved  30 January  2014.
 ^ Ziotis, Christos; Weeks, Natalie (20 April 2010). "Greek Bailout Talks Could Take Three
Weeks as Bond Repayment Looms in May". Bloomberg L.P. Archived from  the originalon 2
February 2014.
 wikipedia.org/wiki/European_debt_crisis

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