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.[1][2] This included eurozone members Greece,[3] Ireland, Spain and Portugal and also some EU countries outside the area.[4] 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 spreads and risk insurance on credit default swaps between these countries and other EU members, most importantly Germany.[5][6] While the sovereign debt increases have been most pronounced in only a few eurozone countries they have become a perceived problem for the area as a whole.[7] In May 2011, the crisis resurfaced, concerning mostly the refinancing of Greek public debts.[8] The Greek people generally reject the austerity measures and have expressed their dissatisfaction through angry street protests.[9][10] 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.[11] Concern about rising government deficits and debt levels[12][13] across the globe together with a wave of downgrading of European government debt[14] 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).[15] 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 eurozone countries and the International Monetary Fund agreed to a €110 billion loan for Greece, conditional on the implementation of harsh austerity measures.[16] The Greek bail-out was followed by a €85 billion rescue package for Ireland in November,[17] and a €78 billion bail-out for Portugal in May 2011.[18][19] This was the first eurozone crisis since its creation in 1999. As Samuel Brittan pointed out,[20] Jason Manolopoulos "shows conclusively that the eurozone is far from an optimum currency area".[21] Niall Ferguson also wrote in 2010 that "the sovereign debt crisis that is a fiscal crisis of the western world".[22] Axel Merk (FT) argued in a May 2011 article that the dollar was in graver danger than the euro.[23]


1 Eurozone sovereign debt concerns o 1.1 Greek government funding crisis  1.1.1 Causes  1.1.2 Downgrading of debt  1.1.3 Austerity and loan agreement  1.1.4 Danger of default

  

 1.1.5 Objections to proposed policies 1.2 Spread beyond Greece  1.2.1 Ireland  1.2.2 Portugal  1.2.3 Spain  1.2.4 Belgium o 1.3 Other European countries  1.3.1 United Kingdom  1.3.2 Iceland  1.3.3 Switzerland 2 Solutions o 2.1 EU emergency measures o 2.2 Kicking the can o 2.3 Reform and recovery o 2.4 Two-currencies speculation o 2.5 Heterodox recommendations 3 Controversies o 3.1 Odious debt o 3.2 Controversy about national statistics o 3.3 Credit rating agencies o 3.4 Media o 3.5 Role of speculators o 3.6 Finland collateral 4 See also 5 References 6 External links o

[edit] Eurozone sovereign debt concerns
[edit] Greek government funding crisis
See also: Economy of Greece › 2010-2011 debt crisis [edit] Causes
Greek debt crisis

Economy of Greece Euro (currency) Late-2000s financial crisis European sovereign debt crisis

Two of the country's largest industries are tourism and shipping.[30] The purpose of these deals made by several subsequent Greek governments was to enable them to continue spending while hiding the actual deficit from the EU. After the removal of the right-wing military junta.7%. The late-2000s financial crisis that began in 2007 had a particularly large effect on Greece. After the introduction of the euro in Jan 2001.[32] In May 2010.[28][29] In the beginning of 2010.[27] To keep within the monetary union guidelines. during that period. the government wanted to bring disenfranchised left-leaning portions of the population into the economic mainstream. the government of Greece had misreported the country's official economic statistics. large public deficits are one of the features that have marked the Greek social model since the restoration of democracy in 1974. successive Greek governments have. it grew at an annual rate of 4. and both were badly affected by the downturn with revenues falling 15% in 2009. customarily run large deficits to finance public sector jobs. pensions.[31] In 2009. it was discovered that Greece had paid Goldman Sachs and other banks hundreds of millions of dollars in fees since 2001 for arranging transactions that hid the actual level of borrowing.[24] A strong economy and falling bond yields allowed the government of Greece to run large structural deficits. and other social benefits. the .[26] Since 1993 debt to GDP has remained above 100%.[27] Initially currency devaluation helped finance the borrowing.[25] In order to do so.2% as foreign capital flooded the country. among other things. the government of George Papandreou revised its deficit from an estimated 6% (8% if a special tax for building irregularities were not to be applied) to 12. According to an editorial published by the Greek right-wing newspaper Kathimerini.Greek financial crisis 2010–2011 protests v·d·e Greek debt in comparison to Eurozone average The Greek economy was one of the fastest growing in the eurozone from 2000 to 2007. Greece was initially able to borrow due to the lower interest rates government bonds could command.

according to some estimates. Standard & Poor's estimates that in the event of default investors would fail to get 30–50% of their money back. Greek government bond auctions have all been over-subscribed in 2010 (as of 26 January).3% following the downgrading.5bn) in 10-year bonds and received orders for three times that amount.[43] . to hit 120% of GDP in 2010.[39] According to the Financial Times on 25 January 2010." In March."[40] [edit] Downgrading of debt Source: Bloomberg. again according to the Financial Times.[35] Accumulated government debt was forecast.[37] Estimated tax evasion costs the Greek government over $20 billion per year.[41] Stock markets worldwide declined in response to this announcement.6%[33] which is one of the highest in the world relative to GDP. £17bn) in orders for the five-year. On 27 April 2010. "Athens sold €5bn (£4.[36] The Greek government bond market relies on foreign investors. four times more than the (Greek) government had reckoned on.[42] Some analysts continue to question Greece's ability to refinance its debt.[38] Despite the crisis.[34] Greek government debt was estimated at €216 billion in January 2010. with some estimates suggesting that up to 70% of Greek government bonds are held externally. the Greek debt rating was decreased to the upper levels of 'junk' status by Standard & Poor's amidst hints of default by the Greek government.[41] Yields on Greek government two-year bonds rose to 15.Greek government deficit was estimated to be 13. fixed-rate bond. "Investors placed about €20bn ($28bn.

considered to be a rather high level for any bailout loan. Increases in VAT to 23%.[48] Following the introduction of these measures the yield on Greek 10-year bonds fell to 8.[44] Greek bond yields rose in 2010. the European Central Bank (ECB) suspended its minimum threshold for Greek debt "until further notice". According to EU officials. .5%. down from 800 basis points earlier. both in absolute terms and relative to German government bonds.[47] meaning the bonds will remain eligible as collateral even with junk status. more than double the amount of the year before.Following downgradings by Fitch and Moody's.[49] As of 22 September 2011. and analysts said it should also help increase Greek bonds' attractiveness to investors. the Greek government requested that the EU/International Monetary Fund (IMF) bailout package be activated. According to The Wall Street Journal. and included also Poul Thomsen (IMF) and Klaus Masuch (ECB) as junior partners.3bn. The deal consisted of an immediate €45 billion in loans to be provided in 2010. the IMF and ECB set up a tripartite committee (the Troika) to prepare an appropriate programme of economic policies underlying a massive loan. The Troika was led by Servaas Deroose. A total of €110 billion has been agreed.[52] The IMF had said it was "prepared to move expeditiously on this request". from the European Commission.000 a month."[46] On 3 May 2010. the Greek parliament passed the Economy Protection Bill.5%. with more funds available later. An 8% cut on public sector allowances and a 3% pay cut for DEKO (public sector utilities) employees.[53] Greece needed money before 19 May.000 introduced to bi-annual bonus. The decision will guarantee Greek banks' access to cheap central bank funding. the other eurozone countries.[60] The government of Greece agreed to impose a fourth and final round of austerity measures.500 a month. Limit of €800 per month to 13th and 14th month pension installments. the meaning of the bond move isn't so clear. Extraordinary taxes imposed on company profits. Return of a special tax on high pensions. 11% and 5.[57][58] The interest for the eurozone loans is 5%. and the International Monetary Fund. "with only a handful of bonds changing hands. On 2 May 2010.[54][55][56] The European Commission.8 billion[51] through a number of measures including public sector wage reductions. as well as Standard & Poor's. or it would face a debt roll over of $11. Changes were planned to the laws governing lay-offs and overtime pay. On 23 April 2010. 550 basis points above German yields. abolished entirely for those earning over €3.[45] Yields have risen. These include:[61]        Public sector limit of €1.[50] [edit] Austerity and loan agreement On 5 March 2010. expected to save €4. Greek 10-year bonds were trading at an effective yield of 23. particularly in the wake of successive ratings downgrading.6%. abolished for pensioners receiving over €2. France and Germany [59] demanded that their military dealings with Greece be a condition of their participation in the financial rescue. a loan agreement was reached between Greece.

It will amount to a total of €30 billion (i.[67] It has been claimed that this could destabilise the Euro Interbank Offered Rate. there was a possibility that Greece would prefer to default on some of its debt.[62] On 5 May 2010. perhaps 50 or 25 percent. 12.[72] Despite its size. the danger is that a default by Greece will cause investors to lose faith in other eurozone countries.5% of the eurozone economy. dozens injured. coining money). General pension age has not changed. and 107 arrested.3 trillion USD since the global financial crisis began. Federal Reserve expanded its balance sheet by over $1. at a debased rate [69] (essentially. In fact the seniority of the IMF loans themselves has no legal basis but is respected nonetheless. which is backed by government securities. Three people were killed.[62] Public-owned companies to be reduced from 6. by Citibank. because Greece is a member of the eurozone. The premiums on Greek debt had risen to a level that reflected a high chance of a default or restructuring.[71] Greece represents only 2. estimating a 25% to 90% chance of a default or restructuring.S. but a mechanism has been introduced to scale them to life expectancy changes. which include the up to €110 billion 2010 Greece bailout participants i. and fuel. This concern is . it cannot unilaterally stimulate its economy with monetary policy. the EMU loans will be pari passu and not senior like those of the IMF. a nationwide general strike was held in Athens to protest to the planned spending cuts and tax increases.[68] Some experts have nonetheless argued that the best option at this stage for Greece is to engineer an “orderly default” on Greece’s public debt which would allow Athens to withdraw simultaneously from the eurozone and reintroduce a national currency. essentially printing new money and injecting it into the system by purchasing outstanding debt.5% of 2009 Greek GDP) and consist of 5% of GDP tightening in 2010 and a further 4% tightening in 2011. Analysts gave a wide range of default probabilities. such as its historical drachma.[65][66] A default would most likely have taken the form of a restructuring where Greece would pay creditors.[64] [edit] Danger of default Further information: Sovereign default Without a bailout agreement. cigarettes. The loans should cover Greece's funding needs for the next three years (estimated at €30 billion for the rest of 2010 and €40 billion each for 2011 and 2012).      10% rise in luxury taxes and taxes on alcohol. only a portion of what they were owed.000 to 2. For example.000. the U. Average retirement age for public sector workers has increased from 61 to 65. Citibank finds the fiscal tightening "unexpectedly tough". A financial stability fund has been created.e. Eurozone governments and IMF. Economists who favor this approach to solve the Greek debt crisis typically argue that a delay in organising an orderly default would wind up hurting EU lenders and neighboring European countries even more.[63] According to research published on 5 May 2010.[70] At the moment. Equalization of men's and women's pension age limits.e.

[81] As an alternative to the bailout agreement. and are in a better fiscal situation than Greece and Portugal.[75] Spain has a comparatively low debt among advanced economies. lacking the will power to set up sufficient "solidarity and stabilisation framework" to support countries experiencing economic difficulty. and too deferential to bond rating agencies. Joseph Stiglitz has also criticised the EU for being too slow to help Greece. like Ecuador did. professor emeritus of economics at the Goethe University Frankfurt suggested[82] in an article published in the Financial Times that the preferred solution to the Greek bond 'crisis' is a Greek exit from the euro followed by a devaluation of the currency.[74] Recent rumours raised by speculators about a Spanish bail-out were dismissed by Spanish Prime Minister José Luis Rodríguez Zapatero as "complete insanity" and "intolerable".focused on Portugal and Ireland.[73] Italy also has a high debt. making a default unlikely unless the situation gets far more severe. [edit] Spread beyond Greece .[78] [edit] Objections to proposed policies See also: 2010–2011 Greek protests The crisis is seen as a justification for imposing fiscal austerity[79] on Greece in exchange for European funding which would lower borrowing costs for the Greek government. If Greece remains in the euro while accepting higher bond yields. Fiscal austerity or a euro exit is the alternative to accepting differentiated government bond yields within the Euro Area. Greece could have left the eurozone. it is argued that Greece should create an audit commission. and force bondholders to suffer from losses. raise savings and slow the economy. Ireland or Greece. and it is not considered among the countries most at risk.[76] and it doesn't face a risk of default. both of whom have high debt and deficit issues. at only 53% of GDP in 2010.[citation needed] In the documentary Debtocracy made by a group of Greek journalists. both countries have most of their debt controlled internally.[77] Spain and Italy are far larger and more central economies than Greece.[80] The negative impact of tighter fiscal policy could offset the positive impact of lower borrowing costs and social disruption could have a significantly negative impact on investment and growth in the longer term. Wilhelm Hankel. more than 20 points less than Germany. then high interest rates would dampen demand. France or the US. An improved trade performance and less reliance on foreign capital would be the result. reflecting its high government deficit. but its budget position is better than the European average. insufficiently supportive of the new government. and more than 60 points less than Italy.

Greece. Italy. The government surplus or deficit of Portugal. Ireland.Public debt as a percent of GDP (2010). and Spain against the eurozone 2000–2010 . United Kingdom.

Italy. . Ireland. Germany.Long-term interest rates of selected European countries (secondary market yields of government bonds with maturities of close to ten years). A yield of 6 % or more indicates that financial markets have serious doubts about credit-worthiness. the EU and the eurozone for 2009. United Kingdom.[84] A graph showing the economic data from Portugal. Spain. Greece.[83] Note that weak non-eurozone countries (Hungary. The data is taken from Eurostat. Romania) lack the sharp rise in interest rates characteristic of weak eurozone countries.

5 billion issue that was three times oversubscribed. following a marked increase in Irish 2-year bond yields. The Anglo Irish Bank Corporation Act 2009 was passed to nationalise Anglo Irish Bank was voted through Dáil Éireann and passed through Seanad Éireann without a vote on 20 January 2009. The crisis has reduced confidence in other European economies. Its requirement for €20 billion in 2010 was matched by a €23 billion cash balance.1% are most at risk.7 trillion more Treasury securities in this period. Spain with 9. Even countries such as the US. and so the government started negotiations with the ECB and the IMF. a body designed to remove bad loans from the six banks.[92] In April 2010. the OECD forecasts $16.4% of GDP. but from the state guaranteeing the six main Irish-based banks who had financed a property bubble.S. Jnr issued a one-year guarantee to the banks' depositors and bond-holders. A mysterious "Golden Circle" of ten businessmen are being investigated over shares they purchased in Anglo Irish Bank. Greece has been the notable example of an industrialised country that has faced difficulties in the markets because of rising debt levels. and Greece should not be dismissed.6 trillion.[89] For 2010. According to Ferguson similarities between the U. On 29 September 2008 the Finance Minister Brian Lenihan. Germany and the UK. Ireland.[85] According to the UK Financial Policy Committee "Market concerns remain over fiscal positions in a number of euro area countries and the potential for contagion to banking systems.[91] President Mary McAleese then signed the bill at Áras an Uachtaráin the following day. have had fraught moments as investors shunned bond auctions due to concerns about public finances and the economy.[87] and Japan has ¥213 trillion of government bonds to roll over. confirming the bank's nationalisation. The December 2008 hidden loans controversy within Anglo Irish Bank had led to the resignations of three executives.[93] On 18 May the NTMA tested the market and sold a €1.2%. including chief executive Seán FitzPatrick. . and Portugal at 9. He renewed it for another year in September 2009 soon after the launch of the National Asset Management Agency.One of the central concerns prior to the bailout was that the crisis could spread beyond Greece.000bn will be raised in government bonds among its 30 member countries.[94] By September 2010 the banks could not raise finance and the bank guarantee was renewed for a third year. Ireland's NTMA state debt agency said that it had "no major refinancing obligations" in 2010. with a government deficit in 2010 of 32.[90] [edit] Ireland Main article: 2008–2011 Irish financial crisis The Irish sovereign debt crisis was not based on government over-spending. in 2008. and it remarked: "We're very comfortably circumstanced"."[86] Financing needs for the eurozone in 2010 come to a total of €1.[88] The countries most at risk are those that rely on foreign investors to fund their government sector. This had a negative impact on Irish government bonds. using loans from the bank. while the US is expected to issue US$1. government help for the banks rose to 32% of GDP.

1%[102] As part of the bailout.[citation needed] Risky credit. in the New York Times article "Portugal's Unnecessary Bailout". On 6 July 2011 it was confirmed that the ratings agency Moody's had cut Portugal's credit rating to junk status. exports. 2011. This allowed considerable slippage in state-managed public works and inflated top management and head officer bonuses and wages.[98] [edit] Portugal A report published in January 2011 by the Diário de Notícias[citation needed] demonstrated that in the period between the Carnation Revolution in 1974 and 2010.[97] Debate continues on whether Ireland will need a "second bailout". despite all the measures taken. and European structural and cohesion funds were mismanaged across almost four decades. In April 2011. Portugal agreed to eliminate its golden share in Portugal Telecom to pave the way for privatization. rating agencies and speculators[citation needed].[95][96] In February the government lost the ensuing Irish general election. the European Financial Stability Facility.[99] Robert Fishman. Spain's government announced new austerity measures designed to further reduce the country's budget deficit.[105] [edit] Spain Main article: 2008–2011 Spanish financial crisis Shortly after the announcement of the EU's new "emergency fund" for eurozone countries in early May 2010. Persistent and lasting recruitment policies boosted the number of redundant public servants. entrepreneurial innovation and high-school achievement the country matched or even surpassed its neighbors in Western Europe. The bailout loan will be equally split between the European Financial Stabilisation Mechanism. Moody's also launched speculation that Portugal may follow Greece in requesting a second bailout. Industrial orders.[101] According to the Portuguese finance minister. before markets pressure. public debt creation. In the first quarter of 2010.resulting in the €85 billion "bailout" agreement of 29 November 2010. and later it was incapable of doing anything to improve the situation when the country was on the verge of bankruptcy by 2011. to receive a bailout package. Portugal had one of the best rates of economic recovery in the EU.[103][104] Portugal became the third Eurozone country.[100] On 16 May 2011 the Eurozone leaders officially approved a €78 billion bailout package for Portugal. The Prime Minister Sócrates's cabinet was not able to forecast or prevent this in 2005. the democratic Portuguese Republic governments have encouraged over-expenditure and investment bubbles through unclear publicprivate partnerships and funding of numerous ineffective and unnecessary external consultancy and advisory of committees and firms. but weak economic growth as well as domestic and international pressure forced the . Moody's downgraded the banks' debt to junk status. and the International Monetary Fund. the average interest rate on the bailout loan is expected to be 5.[106] The socialist government had hoped to avoid such deep cuts. after Ireland and Greece. points out that Portugal fell victim to successive waves of speculation by pressure from bond traders.

0%). and Germany (83. Ireland (96. After a sharp increase in public debts due to the banking failures. the government has been able to reduce the .2). As one of the largest eurozone economies the condition of Spain's economy is of particular concern to international observers.2% of GDP in 2009 to 9. other European countries and the European Commission to cut its deficit more aggressively. making it less prone to fluctuations of international credit markets.7%) and the United Kingdom (80.[113] Furthermore.[113] After inconclusive elections in June 2010. thanks to Belgium's high personal savings rate.[115] [edit] Other European countries [edit] United Kingdom According to the Financial Policy Committee "Any associated disruption to bank funding markets could spill over to UK banks. that its situation was essentially the same as Portugal's but that it was merely fortunate in having long-dated debt.[107][108] According to the Financial Times. Spain has succeeded in trimming its deficit from 11.[112] Financial analysts forecast that Belgium would be the next country to be hit by the financial crisis as Belgium's borrowing costs rose.[citation needed] [edit] Iceland Main article: 2008–2011 Icelandic financial crisis Iceland suffered the failure of its banking system and a subsequent economic crisis.[113] However the government deficit of 5% was relatively modest and Belgian government 10-year bond yields in November 2010 of 3. Italy (119%). France (81. the Belgian Government financed the deficit from mainly domestic savings. by July 2011[114] the country still had only a caretaker government as parties from the two main language groups in the country (Flemish and Walloon) were unable to reach agreement on how to form a majority government.2% in 2010.8%). Belgium's public debt was 100% of its GDP – the third highest in the eurozone after Greece and Italy[112] and there were doubts about the financial stability of the banks.1% of GDP in 2010) is significantly lower than that of Greece (142.2%).[86] The incoming coalition government declared its austerity measures to be essential lest the markets lose confidence in the UK too. Portugal (93%).2%). the IMF."[86] Bank of England governor Mervyn King declared that the UK is very much at risk from a domino-fall of defaults and called on banks to build up more capital when financial conditions allowed.[110][111] [edit] Belgium Main article: 2008–2009 Belgian financial crisis In 2010.[109] It should be noted that Spain's public debt (60.2%).government to expand on cuts already announced in January. Portugal (7%) and Spain (5. and faced pressure from the United States.7% were still below those of Ireland (9.

[117] The foreign operations of the banks. the Swiss National Bank weakened the Swiss franc to a floor of 1.size of deficits each year. [edit] Solutions [edit] EU emergency measures On 9 May 2010. central government debts have been stabilised at around 80-90 percent of GDP. they jointly owed over 10 times Iceland's GDP.[118] Capital controls were also enacted and the work began to resurrect a sharply downsized domestic banking system on the ruins of its gargantuan international banking system. with two of the three biggest banks now in foreign hands. The new entity will sell debt only after an aid request is made by a country.[116] Before the crash of the three largest commercial banks in Iceland. Glitnir. As a result. The franc has been appreciating against the euro during to the crisis. harming Swiss exporters. which the government was unable to bail out. The Financial Supervisory Authority of Iceland used permission granted by the emergency legislation to take over the domestic operations of the three largest banks. went into receivership. The government has enacted a program of medium term fiscal consolidation. a legal instrument[122] aiming at preserving financial stability in Europe by providing financial assistance to eurozone states in difficulty. the Icelandic government successfully raised 1$ billion with a bond issue indicating that international investors are viewing positively the efforts of the government to consolidate the public finances and restructure the banking system.[119][120] [edit] Switzerland In September 2011. As a result. the 27 member states of the European Union agreed to create the European Financial Stability Facility (EFSF). on 9 June 2011. the Icelandic parliament passed emergency legislation to minimise the impact of the financial crisis.20 francs. Further. In large part this is due to the success of an IMF Stand-By Arrangement in the country since November 2008.[124] . however. Landsbanki and Kaupthing. In October 2008.[119][120] Despite a contentious debate with Britain and the Netherlands over the question of a state guarantee on the Icesave deposits of Landsbanki in these countries.[123] 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 eurozone nations in need.20[121] francs per euro. The effort has been made more difficult by a more sluggish recovery than earlier expected. based on expenditure cuts and broad based and significant tax hikes. the country has not been seriously affected by the European sovereign debt crisis from 2010. The facility is jointly and severally guaranteed by the Eurozone countries' governments. credit default swaps on Icelandic sovereign debt have steadily declined from over 1000 points prior to the crash in 2008 to around 200 points in June 2011." This is the biggest Swiss intervention since 1978. The SNB surprised currency traders by pledging that "it will no longer tolerate a euro-franc exchange rate below the minimum rate of 1.

[141] Despite the moves by the EU. after a record weekly rise the preceding week that prompted the bailout. it began open market operations buying government and private debt securities. warned about this threat saying "When you have a vulnerable post-crisis economic recovery and crises reverberating in the aftermath of that."[143] Nouriel Roubini said 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.[137] Commodity prices also rose following the announcement.[132] Subsequently. it reactivated the dollar swap lines[131] with Federal Reserve support.The EFSF loans would complement loans backed by the lender of last resort International Monetary Fund. Thirdly. international credit rating agencies consider that eurozone countries such as Portugal continue to have economic difficulties. Olli Rehn. chairman of Morgan Stanley Asia. called for "absolutely necessary" deficit cuts by the heavily indebted countries of Spain and Portugal.[134] some rose the most in a year or more.[128] Asian bonds yields also fell with the EU bailout.[125][126] The agreement is interpreted to allow the ECB to start buying government debt from the secondary market which is expected to reduce bond yields. The total safety net available is therefore €750 billion. all this money is conditional on all these countries doing fiscal adjustment and structural reform. you have some very serious risks to the global business cycle.[135] The Euro made its biggest gain in 18 months.[145] While the aid package has so far averted a financial panic. Second.[129]) The ECB has announced a series measures aimed at reducing volatility in the financial markets and at improving liquidity:[130]    First. Stephen Roach."[144] After initially falling to a four-year low early in the week following the announcement of the EU guarantee packages. and in selected cases loans by the European Financial Stabilisation Mechanism.[127] (Greek bond yields fell from over 10% to just over 5%.[138] The dollar Libor held at a nine-month high. it announced two 3-month and one 6-month full allotment of Long Term Refinancing Operations (LTRO's).[146] .[136] before falling to a new four-year low a week later. consisting of up to € 440 billion from EFSF. the member banks of the European System of Central Banks started buying government debt.[139] Default swaps also fell. the European Commissioner for Economic and Financial Affairs.[133] Stocks worldwide surged after this announcement as fears that the Greek debt crisis would spread subsided.[140] The VIX closed down a record almost 30%.[142] Private sector bankers and economists also warned that the threat from a double dip recession has not faded. the euro rose as hedge funds and other short-term traders unwound short positions and carry trades in the currency. 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.

[148] [edit] Kicking the can See also: Euro Plus Pact European Union leaders have made two major proposals for ensuring fiscal stability in the long term. Weber.In July 2011.[147] In September. lending money to other countries to allow them to buy German goods. can all provide some support for the treasury while it is still being built.[151] Some senior German policy makers went as far as to say that emergency bailouts should bring harsh penalties to EU aid recipients such as Greece. and other social benefits. In other words. 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. Regardless of the corrective measures chosen to solve the current predicament. pensions. strong European Commission oversight in the fields of taxation and budgetary policy and the enforcement mechanisms that go with it have sometimes been described as potential infringements on the sovereignty of eurozone member states. it was agreed during the EU summit Greece should receive EU loans at lower interest rates of 3. Conversely.. The first proposal is the creation of the European Financial Stability Facility. this is a mathematical identity called the balance of payments. and especially the European Commission. He and Stark were both thought to have resigned due to "unhappiness with the ECB’s bond purchases. Weber to resign from the ECB Governing Council in 2011. the former Deutsche Bundesbank president. as long as cross border capital flows remain unregulated in the Euro Area.[150] The stability facility is financially backed by the EU and the IMF. Germany's large trade surplus (net export position) means that it must also be a net exporter of capital. temporarily called the European Treasury. The European Parliament. 2011.[149] The second is a single authority responsible for tax policy oversight and government spending coordination of EU member countries. a country that imports more than it exports must also borrow to pay for those imports.[69][153] The Economist has suggested that ultimately the Greek "social contract.5%.[155] asset bubbles[156] and current account imbalances are likely to continue. Jürgen Stark became the second German after Axel A.e. news reports said". Stark was "probably the most hawkish" member of the council when he resigned. However. was once thought to be a likely successor to Jean-Claude Trichet as bank president. For example. the European Council.[154] As Greece can no longer devalue its way out of economic difficulties it will have to more tightly control spending than it has since the inception of the Third Hellenic Republic. will have to be changed to one predicated more on price stability and government restraint if the euro is to survive. a country that runs a large current account or trade deficit (i.[152] Others argue that an abrupt return to "non-Keynesian" financial policies is not a viable solution and predict the deflationary policies now being imposed on countries such as Greece and Italy might prolong and deepen their recessions." which involves "buying" social peace through public sector jobs.[157] The 2009 . which critics say erode the bank’s independence". it imports more than it exports) must also be a net importer of capital.

but the entire world. Over 23 million EU workers have become unemployed as a consequence of the global economic crisis of 2007–2010. if a country's citizens saved more instead of consuming imports.[161] The suggestion has been made that long term stability in the eurozone requires a common fiscal policy rather than controls on portfolio investment.97B.[162] In exchange for cheaper funding from the EU. Apart from arguments over whether or not austerity.[158] A similar imbalance exists in the U. Ben Bernanke warned of the risks of such imbalances in 2005. However. For example. artificially lowering interest rates and creating asset bubbles. as a direct consequence of the financial crisis. reducing budget deficits is another method of raising a country's level of saving. there has been some criticism over the austerity measures implemented by most European nations to counter this debt deficits for Italy. Likewise. EU President Herman Van Rompuy said "If we don’t survive with the eurozone we will not survive with the European Union.6B. the working population should not be held responsible for the economic mismanagement errors of economists.[163] [edit] Reform and recovery In November. rather than increased or frozen spending. many of the countries involved in the crisis are on the Euro.[159][160] A country with a large trade surplus would generally see the value of its currency appreciate relative to other currencies. Interest rates can also be raised to encourage domestic saving. a fact that has led many to call for additional regulation of the banking sector across not only Europe. there has also been a sense of unjust crisis management which mostly stems from the notion that. Alternatively. investors. which runs a large trade deficit (net import position) and therefore is a net borrower of capital from abroad. Greece and Portugal.S. while thousands of bankers across the EU have become millionaires despite collapse or nationalization (ultimately paid for by taxpayers) of institutions they worked for during the crisis.. is a macroeconomic solution. which would reduce the imbalance as the relative price of its exports increases. This currency appreciation occurs as the importing country sells its currency to buy the exporting country's currency used to purchase the goods. Greece and other countries. and Portugal were estimated to be $42. as concerns started to resurface about the fiscal health of Ireland. so this is not an available solution at present.96 billion. and bankers."[164] .31B and $35. and $25. $75. while Germany's trade surplus was $188. Finally. Spain. in addition to having already lost control over monetary policy and foreign exchange policy since the euro came into being. Capital controls that restrict or penalize the flow of capital across borders is another method that can reduce trade imbalances. this would reduce its trade deficit. trade imbalances might be addressed by changing consumption and savings habits. would therefore also lose control over domestic fiscal policy. arguing that a "savings glut" in one country with a trade surplus can drive capital into other countries with trade deficits. although this benefit is offset by slowing down an economy and increasing government interest payments. Greece.6B respectively.

Finland. In September 2011. Austria.[165][166] Subsequently. The Wall Street Journal and other writers suggest. which will function until the permanent European Stability Mechanism is established following ratification of its treaty. an EU commissioner. give up the stability mandate copied from the Bundesbank. it was agreed during the EU summit that the EFSF will be given more powers to intervene in the secondary markets. for example the three percent deficit to GDP rule. second only to the United States. A monetary union of all the remaining current account deficit countries would create the world's second largest deficit bloc. but it will not be as widely used internationally as the euro. thus dramatically socializing risk in the eurozone.[175] Heterodox recommendations The school of economists who are. let the German-led bloc exit the eurozone orderly.[167] Two-currencies speculation Bloomberg has suggested that. The German-led bloc can lawfully exit the eurozone. A monetary union of these seven current account surplus countries would create the world's largest creditor bloc that is bigger than China[171] or Japan. adherents of the post-Keynesian school of the Modern Monetary Theory have condemned the introduction of the Euro currency from the beginning. by simply breaking the Maastricht criteria for membership. an alternative is for Germany to leave the eurozone in order to save the currency through depreciation[168] instead of austerity. which ends the crisis. The Wall Street Journal conjectures that Germany could return to the Deutsche Mark. increasing its usage overseas and improving its status as reserve currency. 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. In July 2011.[176] on the basis that the Eurozone does not fulfill the necessary criteria for an .In March 2011 a new reform of the Stability and Growth Pact was initiated. the eurozone must do the following. the proposed European treasury was implemented as the temporary European Financial Stability Facility. Joaquin Almunia.[169] or create another currency union[170] with the Netherlands. such as Denmark. and other European countries that have a positive current account balance. In order to overtake the dollar. and Sweden. has lashed out against the bloc of Germany. import more goods and export more of its paper overseas. Finland. Netherlands. The French-led euro bloc is expected to grow its combined current account deficits. if the Greek and Irish bailouts should fail. or by negotiating an exit with the rest of the eurozone if there is a failure of any of the bailouts. Austria. Without the German-led bloc. Norway. And fourth. First. Third. build economic governance and fiscal union in the leftover eurozone. the owner of the world's primary reserve currency. broadly. comparable to the United States. dependent on the economic goals and global ambitions of each EU member state. Second. a residual French-led euro will then have the flexibility to keep interest rates[172] low and engage in quantitative easing[173] or fiscal stimulus in support of a job-targeting economic policy[174] instead of inflation targeting in the current configuration. The German-led bloc will be less inflationary than the euro. This can benefit all of Europe.

however there has been a growing number of reports about manipulated statistics by EU and other nations aiming.4% in 2010) has been cited as one of the issues that ignited the Greek debt crisis. as was the case for Greece. albeit more forcefully. potentially undermining investor confidence.[citation needed] The Greek documentary Debtocracy examines whether the recent Siemens scandal and uncommercial ECB loans which were conditional on the purchase of military aircraft and submarines are evidence that the loans amount to odious debt and that an audit would result in invalidation of a large amount of the debt. If this is not immediately feasible. [186] the United Kingdom. and re-adopt national currencies.[178] As the debt crisis expanded beyond Greece. [195] and the United States [196] [197] [198] among others. of the IMF. . "a new science of macroeconomics". commentators such as Libération correspondent Jean Quatremer and the Liège based NGO Committee for the Abolition of the Third World Debt (CADTM) allege that the debt should be characterized as odious debt. the disbandment of the Eurozone. default on their debts. as the issues of "creative accounting" and manipulation of statistics by several nations came into focus. These have included analyses of examples in several countries [182] [183] [184] [185] or have focused on Italy. Controversies Odious debt Some protesters. such as Luca A.optimum currency area. regain their fiscal sovereignty. [187] [188] [189] [190] [191] [192] [193] [194] Spain. Controversy about national statistics The revision of Greece’s 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. to mask the sizes of public debts and deficits. Ricci. The focus has naturally remained on Greece due to its debt crisis. these economists continued to advocate. The latter view is supported also by non-Keynesian economists.[181] with an anticipated "huge boost" to its members' competitiveness via the "(likely) substantial fall in the Euro against the newly reconstituted Deutsche Mark".[177] Others have even declared an urgent need for more radical shift in perspective.[179][180] Others have suggested that it's Germany that should first leave the Eurozone in order to save it. after reclassification of expenses under IMF/EU supervision was further raised to 15. This added a new dimension in the world financial turmoil. they recommended that Greece and the other debtor nations unilaterally leave the Eurozone.

based credit rating agencies – Moody's.[216] But attempts to regulate more strictly credit rating agencies in the wake of the European sovereign debt crisis have been rather unsuccessful.[200] With the creation of the European Supervisory Authority in January 2011 the European Union set up a whole range of new financial regulatory institutions.[201] As with the housing bubble[202][203] and the Icelandic crisis. Spain and Portugal that roiled financial markets. European regulators will be given new powers to supervise ratings agencies. and poorly enforced EU rule on rating agencies (Règlement 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" [217] Media There has been considerable controversy about the role of the English-language press in the regard to the bond market crisis. Standard & Poor's and Fitch – have played a central[199] and controversial role[200] in the current European bond market crisis. setting up a new ratings agency would cost 300 million Euros and could be operating by 2014.[218][219] The Spanish Prime Minister José Luis Rodríguez Zapatero has suggested that the recent financial market crisis in Europe is an attempt to draw . says ESMA Chief Steven Maijoor.[208] Government officials have criticized the ratings agencies.[215] Credit-ratings companies have to comply with the new standards or be denied operation on EU territory.Credit rating agencies The international U.[210][211] According to German consultant company Roland Berger. Some European financial law and regulation experts have argued that the hastily drafted.[206] Ratings agencies also have a tendency to act conservatively. the market responded to the crisis before the downgrades.S. The agencies have been accused of giving overly generous ratings due to conflicts of interest.[214] which will become the EU’s single credit-ratings firm regulator on 7 July.-based ratings agencies have less influence on developments in European financial markets in the future. 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.[213] including the European Securities and Markets Authority (ESMA). unevenly transposed in national law.[212] Due to the failures of the ratings agencies.[199][209] European leaders are reportedly studying the possibility of setting up a European ratings agency in order that the private U. Following downgrades of Greece. which could avoid the conflicts of interest that he claimed US-based agencies faced.S. and to take some time to adjust when a firm or country is in trouble.[207] In the case of Greece.[204][205] the ratings agencies have been under fire. with Greek bonds trading at junk levels several weeks before the ratings agencies began to describe them as such.[199] 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.

[239] The main point of contention was that the collateral is aimed to be a cash deposit. In response to accusations that speculators were worsening the problem.[224][225][226][227][228][229][230] No results have so far been reported from this investigation. some markets banned naked short selling for a few months. a collateral the Greeks can only give by recycling part of the funds loaned by Finland for the bailout..[237] Finland collateral On August 18. and the U.[12] The U. as not to increase the risk level over their participation in the bailout. it became apparent that Finland would receive collateral from Greece to participate in support for the Greek economy. "This is an attack on the eurozone by certain other interests. a statistic on the articles referenced here shows that only "bad" news was propagated by the media and never "good" news. and U. or a similar deal with Greece. the Netherlands.S.[223] Zapatero ordered the Centro Nacional de Inteligencia intelligence service (National Intelligence Center.[231] At the same time. as requested by the Finnish parliament as a condition for any further bailouts.[240][241] . such as the U."[234] The role of Goldman Sachs[235] in Greek bond yield increases is also under scrutiny.S.K. Role of speculators Financial speculators and hedge funds engaged in selling euros have also been accused by both the Spanish and Greek Prime Ministers of worsening the crisis.[238] Austria. CNI in Spanish) to investigate the role of the "Anglo-Saxon media" in fomenting the crisis. can continue to fund their large external deficits which are matched by large government deficits. political or financial".[236] It is not yet clear to what extent this bank has been involved in the unfolding of the crisis or if they have made a profit as a result of the sell-off on the Greek government debt market. which means Finland and the other Eurozone countries guarantee the Finnish loans in the event of a Greek default.[232][233] Angela Merkel has stated that "institutions bailed out with public funds are exploiting the budget crisis in Greece and elsewhere. and Slovakia responded with irritation over this special guarantee for Finland and demanded equal treatment across the Eurozone.[222] This is not the case in the eurozone which is self funding. do not have large domestic savings pools to draw on and therefore are dependent on external savings. capital away from the euro[220][221] in order that countries. Greek Prime Minister Papandreou is quoted as saying that there was no question of Greece leaving the euro and suggested that the crisis was politically as well as financially motivated.

It is the Austrian arm of the Bavarian bank Bayern LB.12:21:06 PM Euro's Crisis of 2010 By MARTIN WALKER. The euro has now declined for the alarming reason that the markets are starting to wonder whether the eurozone can hold together. This is because the markets simply do not know the scale of the losses and bad debts for the banks' Eastern European subsidiaries. because of an accounting rule that lets Austrian banks value asset prices at cost so long as they are counted as fixed assets. Oesterreichische Volksbanken. But other small eurozone countries are in trouble. 2009 . with its government debt downgraded and its spreads widening ominously and the new center-left government terrified of the kind of austerity that could provoke labor unrest. and so eurozone businesses found themselves facing cheaper competition both at home and abroad. making their exports to Europe cheaper. the country's sixth-largest bank. Greece is the best-known crisis. To the horror of Europe's central bankers. "Eastern Europe" is a worryingly vague term that lumps together strong economies like Estonia and Poland and mature ones like the Czech Republic with heavily indebted problem countries . This less-than-reassuring statement followed reports that the central bank had put it too under surveillance. Erste Group and Raiffeisen. Europe's exporters found themselves priced out of more and more markets. As the euro's exchange rate against the dollar rose this year to almost $1.Business Last Updated: Dec 24. "Our stress tests show that capital adequacy levels must be raised further in the medium term. announced last week that there was no need for it to be nationalized. 2009 . This applies to both the quality and the amount of banks' own funds. There is renewed nervousness over two of the biggest banks." noted Austrian banking supervisor Andreas Ittner.50. The problem was the predictable one of overexposure to Eastern European and Balkan borrowers. whose banking sector has just been rocked by the need to nationalize Hypo Alpe Adria bank. UPI 22/12/09 Dec 22. that is starting to happen. the fourth-largest bank in the country. which took a $3 billion hit with the writedown. the same problem that looms ominously over Austria's biggest banks. for the worst of all possible reasons. however much it may be needed. The euro has been under pressure because of the growing fear in the markets that a number of countries that use the euro are heading into trouble. The fall in the dollar meant an equal fall in the Chinese RMB. starting with Austria. despite Erste's impressive profits this year.1:30:39 PM Email this article Printer friendly page European business has been praying for a stronger dollar and a weaker euro.

Industrial orders were down 2.000 in the third quarter.1 percent from the year-earlier month. Even Slovenia. but the commission reckons it will rise to 10. the United States. while production fell by 1 percent in France. And the total number of employed persons in the eurozone fell 712. That calmed the markets but the same problem is reviving because the prospect of Greece. The key fact is that the very modest recovery of the past six months has come in Europe. after industrial production fell in October from September. . The plan has always been to stop the deficit spending once the private economy recovered. Greek banks are also heavily exposed to the rickety Balkan economies. Austria. Japan and the EU countries borrowed $4 trillion this year to pump into deficit spending to keep their economies afloat. whose leasing arm had a third of Slovenia's leasing business and more than half of its mortgages. German output slid 1. which eased when German officials acknowledged that they might not like Lithuania and Hungary. the commission is forecasting that some important economies. The fear now. reports industrial production in the 16 countries that use the euro declined 0. notably Holland and Spain. These are huge sums and cannot be long sustained. but the stronger eurozone countries might have no choice but to bail out their weaker brethren. We have been here before. is reeling after this year's crisis at the Istrabenz finance group. is that the private sector is not recovering nearly enough. and that is without counting the separate stimulus measures taken by the various central banks to flood the system with liquidity.1 percent. which had seemed on the road to recovery. Like all the other Balkan states.6 percent in October from September and was down 11. at a very steep price. Slovenia's property markets and its construction industry have collapsed. as in the United States.000 decline in the second quarter. And despite claims of a modest recovery.8 percent. Between them. But the more a bank has exposure in the Balkans. Eurostat.7 percent next year. the more ominous the outlook." The EU Commission agrees. which in turn puts a big question mark over the ability or the will of Germany and the European Central Bank to mount any rescue. with the added problems of Greece and Austria and the Balkans. long reckoned the strongest of the former Yugoslav states. compared with a 702. 54 percent. EU unemployment is current 9. "believe the worst is still to come regarding the impact of the crisis on jobs. There was a similar spike in alarm over Austria's banks in April. having risen throughout the summer. They will be borrowing as much again next year. The EU's own statistical arm. Overall. Slovenia and possibly Spain all needing support at the same time is daunting even for the Germans. No wonder the EU's Eurobarometer poll found most Europeans. face accelerated GDP declines in the new year. That brings us back to the troubled Hypo.8 percent in October from September. Germany fears that it could be entering the second plunge of a double-dip recession. as Austrian banks tend to do.

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