European sovereign debt crisis

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Long-term interest rates of all Eurozone countries (secondary market yields of government bonds with maturities of close to ten years).[1] A yield of 6 % or more indicates that financial markets have serious doubts about credit-worthiness.[2] Part of a series on:

Late-2000s financial crisis
Major dimensions[show]

Countries[show]

Summits[show]

Legislation[show]

Company bailouts[show]

Company failures[show]

Causes[show]

Solutions[show]

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From late 2009, fears of a sovereign debt crisis developed among investors concerning rising government debt levels across the globe together with a wave of downgrading of government debt of certain European states. Concerns intensified early 2010 and thereafter[3][4] making it difficult or impossible for Greece, Ireland and Portugal to re-finance their debts. On 9 May 2010, Europe's Finance Ministers approved a rescue package worth €750 billion aimed at ensuring financial stability across Europe by creating the European Financial Stability Facility (EFSF).[5] In October 2011 eurozone leaders agreed on another package of measures designed to prevent the collapse of member economies. This included an agreement with banks to accept a 50% write-off of Greek debt owed to private creditors,[6][7] increasing the EFSF to about €1 trillion, and requiring European banks to achieve 9% capitalisation.[8] To restore confidence in Europe, EU leaders also suggested to create a commonfiscal union across the eurozone with strict and enforceable rules embedded in the EU treaties.[9][10] 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.[11] Nevertheless, the European currency has remained stable.[12] As of mid-November 2011 it was trading even slightly higher against the Euro bloc's major trading partners than at the beginning of the crisis.[13][14] The three most affected countries, Greece, Ireland and Portugal, collectively account for six percent of eurozone's gross domestic product (GDP).[15]
Contents
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1 Causes

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1.1 Rising government debt levels 1.2 Trade imbalances

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1.3 Monetary policy inflexibility 1.4 Loss of confidence

2 Evolution of the crisis

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2.1 Greece 2.2 Ireland 2.3 Portugal 2.4 Possible spread to other countries

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3 Solutions

2.4.1 Belgium 2.4.2 France 2.4.3 Italy 2.4.4 Spain 2.4.5 United Kingdom

3.1 EU emergency measures

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3.1.1 European Financial Stability Facility (EFSF) 3.1.2 European Financial Stabilisation Mechanism (EFSM)

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3.1.3 Brussels agreement and aftermath

3.2 ECB interventions 3.3 Concerted action of several central banks 3.4 Reform and recovery

4 Proposed long-term solutions

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4.1 European fiscal union and revision of the Lisbon Treaty 4.2 Eurobonds 4.3 European Stability Mechanism (ESM) 4.4 Address current account imbalances 4.5 European Monetary Fund

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4.6 Speculation of the breakup of the Eurozone

5 Controversies

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5.1 Breaking of the EU treaties 5.2 Actors fueling the crisis

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5.2.1 Credit rating agencies 5.2.2 Media 5.2.3 Speculators

5.3 Doubts about effectiveness of non-Keynesian policies 5.4 Odious debt 5.5 National statistics 5.6 Finland collateral

6 Political impact 7 See also 8 References 9 External links

[edit]Causes

Public debt $ and %GDP (2010) for selected European countries

The European sovereign debt crisis has been created by a combination of complex factors such as: the globalization of finance; easy credit conditions during the 2002-2008 period that encouraged high-risk lending

.[17] The interconnection in the global financial system means that if one nation defaults on its sovereign debt or enters into recession that places some of the external private debt at risk as well.[16][17] One narrative describing the causes of the crisis begins with the significant increase in savings available for investment during the 2000-2007 period. Should Italy be unable to finance itself. Ireland's government and taxpayers assumed private debts. such as a government bond.[17] How each European country involved in this crisis borrowed and invested the money varies. have sought to attribute some of the blame for the crisis to hedge funds and other speculators stating that "institutions bailed out with public funds are exploiting the budget crisis . which in turn would affect France's creditors and so on. generating a massive property bubble. the liabilities owed to global investors remain at full price.[21] Some politicians. Financial institutions enter into contracts called credit default swaps (CDS) that result in payment or receipt of funds should default occur on a particular debt instrument or security. the banking systems of creditor nations face losses. fiscal policy choices related to government revenues and expenses. generating questions regarding the solvency of governments and their banking systems. For example. In Greece. generating bubble after bubble across the globe. real-estate bubbles that have since burst. the value of money changing hands can be many times larger than the amount of debt itself. This "Giant Pool of Money" increased as savings from high-growth developing nations entered global capital markets. It is unclear what exposure each country's banking system has to CDS. and approaches used by nations to bailout troubled banking industries and private bondholders.[19][20] Further creating interconnection is the concept of debt protection. which creates another type of uncertainty. This is referred to as financial contagion. slow growth economic conditions 2008 and after.g. During this time.S. the French banking system and economy could come under significant pressure. Treasury bonds sought alternatives globally.and borrowing practices. Investors searching for higher yields than those offered by U. housing and commercial property) to decline. in October 2011 Italian borrowers owed French banks $366 billion (net). the global pool of fixed income securities increased from approximately $36 trillion in 2000 to $70 trillion by 2007.[18] The temptation offered by this readily available savings overwhelmed the policy and regulatory control mechanisms in country after country as global fixed income investors searched for yield. notably Angela Merkel. For example. Ireland's banks lent the money to property developers. the government increased its commitments to public workers in the form of extremely generous pay and pension benefits. Iceland's banking system grew enormously. international trade imbalances. When the bubble burst. While these bubbles have burst causing asset prices (e. creating debts to global investors ("external debts") several times larger than its national GDP. Since multiple CDS can be purchased on the same security. assuming private debt burdens or socializing losses.

and the global economic slowdown thereafter. However.in Greece and elsewhere". were able to circumvent these rules and mask their deficit and debt levels through the use of complex currency and credit derivatives structures. [edit]Rising government debt levels Public debt as a percent of GDP (2010). including Greece and Italy.[27] there was a long lead up to the crisis. Government deficit of Eurozone compared to USA and OECD.6% before it grew to 7% during the financial crisis. investment banks. The authors also stressed that fiscal deficits in the euro area were stable or even shrinking since the early 1990s. The average fiscal deficit in the euro area in 2007 was only 0.[28][29] The structures were designed by prominent U. According to their analysis increased debt levels are due to the large bailout packages provided to the financial sector during the late-2000s financial crisis.[30] . In 1992 members of the European Union signed the Maastricht Treaty. In the same period the average government debt rose from 66% to 84% of GDP.[22][23][24][25][26] Although some financial institutions clearly profited from the growing Greek government debt in the short run. under which they pledged to limit their deficit spending and debt levels. who received substantial fees in return for their services and who took on little credit risk themselves thanks to special legal protections for derivatives counterparties.S.[28] A number of "appalled economists" have condemned the popular notion in the media that rising debt levels of European countries were caused by excess government spending. a number of EU member states.

high debt levels alone may not explain the crisis. which makes its exports cheaper. while the negative balance of payments (trade deficits) of Italy. Whereas in the same period. Germany had a considerably better public debt and fiscal deficit relative to GDP than some of the worse affected Eurozone members like Spain and Ireland.2% (40.[33] It is a mathematical identity (a rule that must hold true by definition) that a country with a trade deficit must be a net borrower of capital to fund the deficit. Ireland. the British government can "print money" to pay creditors to reduce the risk of default. Greece's imports-to-exports ratio has gotten better between 2010 and 2011.[34] [edit]Monetary policy inflexibility Since Eurozone countries are not able to conduct their own monetary policy.[35] [edit]Loss of confidence . Italy and Spain) had a far worse balance of payments position than Germany. For example." The budget deficit for the euro area as a whole (see graph) is much lower and the euro area's government debt/GDP ratio of 86% in 2010 was about the same level as that of the US. He notes that in the run to the crises from 1999–2007. According to The Economist Intelligence Unit. all the worse affected major countries (Portugal. they have a higher default risk than countries that can. France and Spain have worsened.3% while its exports grew by 15. when a country "prints money" it devalues its currency relative to its trading partners.[32] Germany's positive balance of payments (trade surplus) has increased as a percentage of GDP since 1999. thereby increasing GDP and tax revenue while reducing its trade deficit. the position of the euro area looked "no worse and in some respects. rather better than that of the US or the UK. while Eurozone countries like France cannot. In addition.[31] [edit]Trade imbalances Commentators such as Financial Times journalist Martin Wolf have asserted the root cause of the crisis is imbalances on the balance of payments. private-sector indebtedness across the euro area is markedly lower than in the highly leveraged Anglo-Saxon economies.[33] in the period November 2010 to October 2011 its imports dropped by 12. Moreover.7% to non-EU countries in comparison to October 2010).Either way.

there was renewed anxiety about excessive national debt. S&P wrote this was due to "systemic stresses from five interrelated factors: 1) Tightening credit conditions across the eurozone. as opposed to the U. which has a dual mandate. and fiscal convergence among eurozone members. This in turn makes it difficult for governments to finance further budget deficits and service existing high debt levels.. According to the Economist. indicating market expectations about countries' creditworthiness (see graph).Sovereign CDS prices of selected European countries (2010-2011). we expect output to decline next year in countries such as Spain.g. certain solutions require multi-national cooperation. a level of 1.. Since countries that use the Euro as their currency have fewer monetary policy choices (e.000 means it costs $1 million to protect $10 million of debt for five years. Currently. Further. the crisis "is as much political as economic" and the result of the fact that the euro area is not supported by the institutional paraphernalia (and mutual bonds of solidarity) of a state. The left axis is in basis points. financial. bonds offered substantially more risk.S. Furthermore. how to ensure greater economic. Banks had substantial holdings of bonds from weaker economies such as Greece which offered a small premium and seemingly were equally sound. 3) Continuing disagreements among European policy makers on how to tackle the immediate market confidence crisis and.[36] The loss of confidence is marked by rising sovereign CDS prices. they cannot print money in their own currencies to pay debt holders). Prior to development of the crisis it was assumed by both regulators and banks that sovereign debt from the Euro zone was safe. 2) Markedly higher risk premiums on a growing number of eurozone sovereigns including some that are currently rated 'AAA'. higher taxes and lower expenses) contributing to social . investors have doubts about the possibilities of policy makers to quickly contain the crisis. Elected officials have focused on austerity measures (e. and 5) The rising risk of economic recession in the eurozone as a whole in 2012."[37] [edit]Evolution of the crisis In the first weeks of 2010.[31] Rating agency views S&P placed its long-term sovereign ratings on 15 members of the European Economic and Monetary Union (EMU or eurozone) on "CreditWatch" with negative implications on December 5.g. Federal Reserve. but we now assign a 40% probability of a fall in output for the eurozone as a whole. As the crisis developed it became obvious that Greek. Frightened investors demanded higher interest rates from several governments with higher debt levels or deficits. and possibly other countries'. Portugal and Greece. 4) High levels of government and household indebtedness across a large area of the eurozone. Contributing to lack of information about the risk of European sovereign debt was conflict of interest by banks that were earning substantial sums underwriting the bonds. longer term. the European Central Bank has an inflation control mandate but not an employment mandate. 2011.

Greece was hit especially hard because its main industries—shipping and tourism—were especially sensitive to changes in the business cycle. effectively weakening the Swiss franc.[38][39] By the end of 2011.[41] [edit]Greece Main article: Greek government debt crisis Greece's debt percentage between 1999 and 2010 compared to the average of the Eurozone. even as the reality of economics suggested the Euro was in danger. a crisis of confidence has emerged with the widening of bond yield spreads and risk insurance on CDS between these countries and otherEU member states. In September 2011 the Swiss National Bank surprised currency traders by pledging that "it will no longer tolerate a euro-franc exchange rate below the minimum rate of 1. partly due to high defense spending amid historic enmity to Turkey.This is the biggest Swiss intervention since 1978. as concerns about Greece's national debt grew. In the early-mid 2000s. the Greek government requested that the EU/IMF bailout package (made of relatively highinterest loans) be activated.20 francs".[40] While Switzerland equally benefited from lower interest rates the crisis also harmed its exporting sector due to a substantial influx of foreign capital and the resulting rise of the Swiss Franc.unrest and significant debate among economists. Germany was estimated to have made more than €9 billion out of the crisis as investors flock to safer but near zero interest rate bunds. EU politicians in Brussels have long turned a blind eye and gave Greece a fairly clean bill of health. Especially in countries where government budget deficits and sovereign debts have increased sharply. As a result. policy makers suggested that emergency bailouts might be necessary. the country's debt began to pile up rapidly. On 23 April 2010. Greece's economy was strong and the government took advantage by running a large deficit. The .[42] The IMF had said it was "prepared to move expeditiously on this request". In early 2010. many of whom advocate greater deficits when economies are struggling. As the world economy cooled in the late 2000s. most importantly Germany.

Nevertheless. a national strike was held in opposition to the planned spending cuts and tax increases.[47] Former Prime Minister George Papandreou and European Commission President José Manuel Barroso after their meeting in Brussels on 20 June 2011. the Eurozone countries and the International Monetary Fund agreed to a €110 billion loan for Greece.[43] On 27 April 2010.initial size of the loan package was €45 billion ($61 billion) and its first installment covered €8. then continuing efforts to meet the continuing crisis in Greece and other countries.3% in the secondary market.[48] The proposal helped persuade Germany.[44] Stock markets worldwide and the Euro currency declined in response to this announcement. to sign on to a larger. investors would lose 30–50% of their money. €110 billion EU/IMF loan package over three years for Greece (retaining a relatively high interest of 5% for the main part of the loans. the last remaining holdout.[49] On 5 May 2010. provided by the EU). a €78 billion bail-out for Portugal in May 2011. Protest on that date was widespread and turned violent in Athens.[44][45] The yield of the Greek two-year bond reached 15. The Greek bail-out was followed by a €85 billion rescue package for Ireland in November.[46] Standard & Poor's estimates that. Standard & Poor's slashed Greece's sovereign debt rating to BB+ or "junk" status amid fears of default. This was followed by an announcement of the . credit rating agencies downgraded Greek governmental bonds to junk status. conditional on the implementation of harsh austerity measures. killing three people.5 billion of Greek bonds that became due for repayment.[49] On 2 May 2010. On 1 May 2010. in the event of default. a series of austerity measures was proposed.

[51] Japan. In late June 2011. which is seen by certain analysts as more difficult to sustain. and have expressed their dissatisfaction through angry street protests. Italy and Belgium's creditors are mainly domestic institutions.[54] On 13 June 2011. Prime Minister George Papandreou proposed a re-shuffled cabinet. and indications signal a recession harsher than originally feared.[52] In May 2011. and amidst riots and a general strike. but Greece and Portugal have a higher percent of their debt in the hands of foreign creditors. The next 12 billion euros from the Eurozone bail-out package will be released when the proposal is passed. high deficit. Greece's government proposed additional spending cuts worth €28 billion (£25bn) over five years. Standard and Poor's downgraded Greece's sovereign debt rating to CCC. Greece.[citation needed] Some experts argue the best option for Greece and the rest of the EU should be to engineer an “orderly default” on Greece’s public debt which would allow Athens to withdraw simultaneously from the eurozone and reintroduce its national currency the drachma at a debased rate. and Spain have a 'credibility problem'.[59][60] 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. Some believe that this will cause more debt for Greece.[56][57] The crisis sent ripples around the world. With this new package it is projected that there will be a 3. etc.[50] The November 2010 revisions of 2009 deficit and debt levels made accomplishment of the 2010 targets even harder. This adjustment program hoped to reestablish the access to private capital markets by 2012. regardless of the nation's credit rating.6% growth in 2012. where it will eventually plateau in 2015 at 6. Eurozoneleaders and the IMF came to . However it was soon found that this process would take longer than expected.5%. the lowest in the world. because they lack the ability to repay adequately due to their low growth rate. In July 2011 there was a new package instilled in which an extra €109 billion in support of Greece which included a large privatization effort.[62] In the early hours of 27 October 2011.8% decline in 2011 but a . less FDI.[55] After the major political parties failed to reach consensus on the necessary measures to qualify for a further bailout package. with major stock exchanges exhibiting losses.4%.[58] Greece’s first adjustment plan was launched in March 2010 with €80 billion in support from the European governments and €30 billion from the IMF. Portugal.[61] At an extraordinary summit on 21 July 2011 in Brussels the euro area leaders agreed to lower the interest rates of EU loans to Greece to 3.5% increase in 2013. following with a 3. and asked for a vote of confidence in the parliament. following the findings of a bilateral EU-IMF audit which called for further austerity measures.ECB on 3 May that it will still accept as collateral all outstanding and new debt instruments issued or guaranteed by the Greek government. without which Greece would have had to default on loan repayments due in mid-July. Greek public debt gained prominence as a matter of concern.[53] The Greek people generally reject the austerity measures.

but instead borrowed money from the ECB to pay these bondholders. Irish banks had lost an estimated 100 billion euros. On 29 September 2008 the Finance Minister Brian Lenihan. Ireland could have guaranteed bank deposits and let private bondholders who had invested in the banks face losses.[70] On 18 May the NTMA tested the market and sold a €1. confirming the bank's nationalisation. following a marked increase in Irish 2-year bond yields. including chief executive Seán FitzPatrick.[17][67] The December 2008 hidden loans controversy within Anglo Irish Bank had led to the resignations of three executives. in 2008.[66] [edit]Ireland Main article: 2008–2011 Irish financial crisis The Irish sovereign debt crisis was not based on government over-spending. despite draconian austerity measures. Greece even expects a primary surplus in 2012 of 1. Jnr issued a one-year guarantee to the banks' depositors and bond-holders.1%. shifting the losses and debt to its taxpayers.[69] In April 2010. government help for the banks rose to 32% of GDP. Unemployment rose from 4% in 2006 to 14% by 2010. promising to cut its deficit from 9% of GDP 2011 to 5. NAMA purchased over 80 billion euros in bad loans from the banks as the mechanism for this transfer. He renewed it for another year in September 2009 soon after the launch of the National Asset Management Agency (NAMA). while the federal budget went from a surplus in 2007 to a deficit of 32% GDP in 2010. and it remarked: "We're very comfortably circumstanced".[6][7][63] the equivalent of €100 billion.[71] By September 2010 the banks could not raise finance and the bank guarantee was renewed for a third year. the new interim national union government led by Lucas Papademos submitted its plans for the 2012 budget. and so the government started negotiations with the EU. The economy collapsed during 2008.[6] The aim of the haircut is to reduce Greece's debt to 120% of GDP by 2020. Ireland's NTMA state debt agency said that it had "no major refinancing obligations" in 2010. This had a negative impact on Irish government bonds. the IMF and three nations: the United Kingdom. much of it related to defaulted loans to property developers and homeowners made in the midst of the property bubble.5 billion issue that was three times oversubscribed. a body designed to remove bad loans from the six banks.[68] President Mary McAleese then signed the bill at Áras an Uachtaráin the following day.[6][64][65] On 7 December 2011.4% in 2012. . Excluding interest payments. but from the state guaranteeing the six main Irish-based banks who had financed a property bubble. mostly due to a write-off of debt held by banks. which burst around 2007. using loans from the bank. 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. A mysterious "Golden Circle" of ten businessmen are being investigated over shares they purchased in Anglo Irish Bank. Its requirement for €20 billion in 2010 was matched by a €23 billion cash balance. the highest in the history of the euro zone.an agreement with banks to accept a 50% write-off of (some part of) Greek debt.

The bailout loan will be equally split between the European Financial Stabilisation Mechanism.[77] According to the Centre for Economics and Business Research Ireland's export-led recovery "will gradually pull its economy out of its trough". In April 2011. despite all the measures taken.5 billion "bailout" agreement of 29 November 2010. in the New York Times article "Portugal's Unnecessary Bailout".[75] In return the government agreed to reduce its budget deficit to below three percent by 2015. The Prime Minister Sócrates's cabinet was not able to forecast or prevent this in 2005. theEuropean Financial Stability Facility.[80] Robert Fishman.1%[83] As part of the bailout. the country matched or even surpassed its neighbors in Western Europe. rating agencies and speculators. 2011.[75] In February the government lost the ensuing Irish general election. Moody's downgraded the banks' debt to junk status. points out that Portugal fell victim to successive waves of speculation by pressure from bond traders. which has already fallen substantially since mid July 2011 (see the graph "Long-term Interest Rates"). and later it was incapable of doing anything to improve the situation when the country was on the verge of bankruptcy by 2011.Denmark and Sweden. before markets pressure.5 billion coming from Ireland's own reserves and pensions. Risky credit. resulting in a €67. the government received €85 billion.[81] In the first quarter of 2010. Portugal had one of the best rates of economic recovery in the EU. and European structural and cohesion funds were mismanaged across almost four decades. This allowed considerable slippage in state-managed public works and inflated top management and head officer bonuses and wages. exports.[72][73] Together with additional €17. after Ireland and Greece.[78] [edit]Portugal A report released in January 2011 by the Diário de Notícias[79] and published in Portugal by Gradiva. expecting the country to stand on its own feet again and finance itself without any external support from the second half of 2012 onwards. to receive a bailout package. is expected to fall further to 4 per cent by 2015.[81] On 16 May 2011 the Eurozone leaders officially approved a €78 billion bailout package for Portugal. . entrepreneurial innovation and highschool achievement.[82] According to the Portuguese finance minister. [74] of which €34 billion were used to support the country's ailing financial sector. Portugal agreed to eliminate its golden share in Portugal Telecom to pave the way for privatization. and the International Monetary Fund. Persistent and lasting recruitment policies boosted the number of redundant public servants. the average interest rate on the bailout loan is expected to be 5. demonstrated that in the period between the Carnation Revolution in 1974 and 2010.[84][85] Portugal became the third Eurozone country. public debt creation. As a result of the improved economic outlook. the democraticPortuguese Republic governments have encouraged over-expenditure and investment bubbles through unclear public-private partnerships and funding of numerous ineffective and unnecessary external consultancy and advisory of committees and firms. the cost of 10-year government bonds. From the perspective of Portugal's industrial orders.[76] The Euro Plus Monitor report from November 2011 attests to Ireland's vast progress in dealing with its financial crisis.

Germany. United Kingdom.On 6 July 2011 it was confirmed that the ratings agency Moody's had cut Portugal's credit rating to junk status. Ireland. The data is taken from Eurostat. Italy.[86] [edit]Possible spread to other countries Total financing needs of selected countries in % of GDP (2011-2013) A graph showing the economic data from Portugal. Moody's also launched speculation that Portugal may follow Greece in requesting a second bailout. Spain. . the EU and the eurozone for 2009. Greece.

Italy. Hungary. Iceland. The 2010 annual budget deficit and public debt. Portugal. Greece. both relative to GDP for selected European countries . Spain and the UK against the Eurozone and the United States (2001-2011).The government surplus or deficit of Belgium. France.

Romania) lack the sharp rise in interest rates characteristic of weak eurozone countries. while the US is expected to issue US$1.Long-term interest rates of selected European countries. the OECD forecasts $16 trillion will be raised in government bonds among its 30 member countries.[92] .1%.[1] Note that weak non-eurozone countries (Hungary. Even countries such as the US. One of the central concerns prior to the bailout was that the crisis could spread to several other countries. with a government deficit in 2010 of 32.S. Germany and the UK.[89] and Japan has ¥213 trillion of government bonds to roll over. have had fraught moments as investors shunned bond auctions due to concerns about public finances and the economy. other countries such as Spain with 9.[90] According to British economist and historian Niall Ferguson similarities between the U. and Greece should not be dismissed. The crisis has reduced confidence in other European economies. and Portugal at 9.[88] Financing needs for the eurozone in 2010 come to a total of €1.2% are also at risk.4% of GDP. 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. Greece has been the notable example of an industrialised country that has faced difficulties in the markets because of rising debt levels.[91] For 2010."[87] Besides Ireland.7 trillion more Treasury securities in this period.6 trillion.

[93] In November 2010 financial analysts forecast that Belgium would be the next country to be hit by the financial crisis as Belgium's borrowing costs rose. Germany had widened 450% since July.66%.2%). [94] Furthermore.3 percent and less than that of the U. Belgium's public debt was 100% of its GDP – the third highest in the eurozone after Greece and Italy[93] and there were doubts about the financial stability of the banks.D. The deal includes spending cuts and tax rises worth about €11 billion.3 billion worth of 10 year bonds at an average yield of 3.[94] However the government deficit of 5% was relatively modest and Belgian government 10-year bond yields in November 2010 of 3. Overall this makes the country more resilient to financial shocks. well below the perceived critical level of 7 percent.[102] On 1 December 2011. and to balance the books in 2015.[94] After inconclusive elections in June 2010.[106] About 300 billion euros of Italy's 1. Italy even has a surplus in its primary budget. However. $2. 2011.S. with a 2010 budget deficit of 7% GDP. its debt has increased to almost 120 percent of GDP (U.6 percent of GDP in 2010 was similar to Germany’s at 4.[107] . which excludes debt interest payments.[104] This has led investors to view Italian bonds more and more as a risky asset. the public debt of Italy has a longer maturity and a big share of it is held domestically. by November 2011[95] 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.[edit]Belgium Main article: 2008–2009 Belgian financial crisis In 2010. $2. the Belgian Government financed the deficit from mainly domestic savings.1 trillion and 83% GDP.8% of GDP by 2012. contract value rose 300% in the same period.[105] On the other hand.S. ranking better than France and Belgium.9 trillion euro debt matures (is due) in 2012.4 trillion in 2010) and economic growth was lower than the EU average for over a decade.6%.[99] [edit]France France's public debt in 2010 was approximately U.2%). France's bond yield had retreated and the country successfully auctioned €4. Belgium's long-term sovereign credit rating was downgraded from AA+ to AA by Standard and Poor[97] and 10-year bond yields reached 5.7% were still below those of Ireland (9. thanks to Belgium's high personal savings rate.[98] Following the announcement Belgium 10-year bond yields fell sharply to 4. which should bring the budget deficit down to 2.[103] [edit]Italy Italy's deficit of 4. so it must go to the capital markets for significant refinancing in the near-term. and France. making it less prone to fluctuations of international credit markets. Portugal (7%) and Spain (5.[100] By 16 November 2011.[95] Shortly after Belgian negotiating parties reached an agreement to form a new government. [96] Nevertheless on 25 November 2011.S.18 percent.[101] France's C. France's bond yield spreads vs.K.

[123][124] The new conservative Spanish government led by Mariano Rajoy aims to cut the deficit further to 4. Spain succeeded in trimming its deficit from 11.2% of GDP in 2009 to 9. roughly the level of Greece. Spain has most of its debt controlled internally. France or the US. other European countries and the European Commission to cut its deficit more aggressively. making a default unlikely unless the situation gets far more severe. but weak economic growth as well as domestic and international pressure forced the government to expand on cuts already announced in January.[113][114] Like Italy. the IMF. Portugal.4 percent in 2012 and 3 percent in 2013. and more than 60 points less than Italy.[105] [edit]Spain Main article: 2008–2011 Spanish financial crisis Spain has a comparatively low debt among advanced economies and it does not face a risk of default. opening up closed professions within 12 months and a gradual reduction in government ownership of local services. [108][109] Nonetheless.74 percent for 10-year bonds. [122] To build up additional trust in the financial markets.[110] On 11 November 2011. $820 billion in 2010.[120] The Spanish government had hoped to avoid such deep cuts.[125] . economic recession or other emergencies.[105] The interim government expected to put the new laws into practice is led by former European Union Competition CommissionerMario Monti.7 percent after Italian legislature approved further austerity measures and the formation of an emergency government to replace that of Prime Minister Silvio Berlusconi. and Ireland combined. The amendment states that public debt can not exceed 60% of GDP. in order to signal financial markets that it was safe to invest in the country.[115] As one of the largest eurozone economies the condition of Spain's economy is of particular concern to international observers. by 8 November 2011 the Italian bond yield was 6.[111] The measures include a pledge to raise €15 billion from real-estate sales over the next three years.On 15 July and 14 September 2011.[116][117] Spain's public debt was approximately U. more than 20 points less than Germany. Ireland or Greece.5 to 6.[118] Rumors raised by speculators about a Spanish bail-out were dismissed by Spanish Prime Minister José Luis Rodríguez Zapatero as "complete insanity" and "intolerable". a two-year increase in the retirement age to 67 by 2026. though exceptions would be made in case of a natural catastrophe.2% in 2010[121] and around 6% in 2011. and both countries are in a better fiscal situation than Greece and Portugal.[112] The country's public debt relative to GDP in 2010 was only 60%. and faced pressure from the United States.S. shortly after the announcement of the EU's new "emergency fund" for eurozone countries in early May 2010. climbing above the 7 percent level where the country is thought to lose access to financial markets. the government amended the Spanish Constitution in 2011 to require a balanced budget at both the national and regional level by 2020. Spain had to announce new austerity measures designed to further reduce the country's budget deficit.[119] Nevertheless. Italian 10-year borrowing costs fell sharply from 7. Italy's government passed austerity measures meant to save €124 billion.

The €440 billion lending capacity of the Facility is jointly and severally guaranteed by the Eurozone countries' governments and may be combined with loans up to €60 billion from theEuropean Financial Stabilisation Mechanism (reliant on funds raised by the European Commission using the EU budget as collateral) and up to €250 billion from the International Monetary Fund (IMF) to obtain a financial safety net up to €750 billion.[129] On November 29.[126] [edit]Solutions [edit]EU emergency measures [edit]European Financial Stability Facility (EFSF) Main article: European Financial Stability Facility On 9 May 2010. a legal instrument[127] aiming at preserving financial stability in Europe by providing financial assistance to eurozone states in difficulty. the 27 EU member states agreed to create the European Financial Stability Facility.[139] The agreement is interpreted to allow the ECB to start buying government debtfrom the secondary market which is expected to reduce bond yields. recapitalize banks or buy sovereign debt. The EFSF can issue bonds or other debt instruments on the market with the support of the German Debt Management Office to raise the funds needed to provide loans to eurozone countries in financial troubles.[134] Shortly after the euro rose again as hedge funds and other short-term traders unwound short positions and carry trades in the currency.[130] Reception by financial markets Stocks surged worldwide after the EU announced the EFSF's creation. €117. which is closely connected with both the United States and the Eurozone. This is because the UK has the highest gross foreign debt of any European country (€7.3 trillion.[edit]United Kingdom According to the Financial Policy Committee "Any associated disruption to bank funding markets could spill over to UK banks.[140] As a result . The Facility eased fears that the Greek debt crisis would spread.[133] before falling to a new four-year low a week later. 2011 the member state finance ministers agreed to expand the EFSF by creating certificates that could guarantee up to 30% of new issues from troubled euro-area governments and to create investment vehicles that would boost the EFSF’s firepower to intervene in primary and secondary bond markets.[137] Default swaps also fell."[87] 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.[138]The VIX closed down a record almost 30%.[132] The Euro made its biggest gain in 18 months.580 per person) due in large part to its highly leveraged financial industry.[135] Commodity prices also rose following the announcement. after a record weekly rise the preceding week that prompted the bailout.[128] Emissions of bonds are backed by guarantees given by the euro area member states in proportion to their share in the paid-up capital of the European Central Bank.[136] The dollar Libor held at a ninemonth high.[131] and this led to some stocks rising to the highest level in a year or more.

[144] The EFSF is set to expire in 2013. the EU successfully placed in the capital markets a €5 billion issue of bonds as part of the financial support package agreed for Ireland. In the future.[147] It runs under the supervision of the Commission[148] and aims at preserving financial stability in Europe by providing financial assistance to EU member states in economic difficulty. a fourfold increase (to about €1 trillion) in bail-out funds held under the European Financial Stability Facility. In May 2011 it contributed one third of the €78 billion package for Portugal in May 2011. which according to EU diplomats would amount to about €80 billion. This leaves the EFSF with€250 billion or an equivalent of €750 billion in leveraged firepower. it has been activated two times. it is planned to also shift the loan for Greece to the EFSF. backed by all 27 European Union members. it financed €17.[145] [edit]Brussels agreement and aftermath On 26 October 2011. the European Union created the European Financial Stabilisation Mechanism (EFSM).[141] Asian bonds yields also fell with the EU bailout. has the authority to raise up to€60 billion[150] and is rated AAA by Fitch.5 billion rescue package for Ireland (the rest was loaned from individual European countries. this is more than enough to finance the debt rollovers of all flagging European countries until end of 2012.Greek bond yields fell sharply from over 10% to just over 5%.[151][152] Under the EFSM.59%. running one year parallel to the permanent €500 billion rescue funding program called European Stability Mechanism (ESM).[143] As of end of December 2011. In November 2010. Also pledged was €35 . This is expected to be in July 2012.7 billion of the total€67.[145][146] [edit]European Financial Stabilisation Mechanism (EFSM) Main article: European Financial Stabilisation Mechanism On 5 January 2011. which will start operating as soon as Member States representing 90% of the capital commitments have ratified it. at a borrowing cost for the EFSM of 2. [144] According to German newspaper Sueddeutsche.[153] Like the EFSF also the EFSM will be replaced by the permanent rescue funding programme ESM. an emergency funding programme reliant upon funds raised on the financial markets and guaranteed by the European Commission using the budget of the European Union as collateral.[142]) Usage of EFSF funds The EFSF only raises funds after an aid request is made by a country. the European Commission and the IMF). Moody's and Standard & Poor's. an increased mandatory level of 9% for bank capitalisation within the EU and a set of commitments from Italy to take measures to reduce its national debt. in case necessary.[149] The Commission fund. leaders of the 17 Eurozone countries met in Brussels and agreed on a 50% write-off of Greek sovereign debt held by banks. which is due to be launched in July 2012.

[163] Subsequently.[8][154] The package's acceptance was put into doubt on 31 October when Greek Prime Minister George Papandreou announced that a referendum would be held so that the Greek people would have the final say on the bailout.  Thirdly. upsetting financial markets.. In late 2011. Thomas quoted Richard Koo. European banks were maintaining high dividend payout rates and none were getting capital injections from their governments even while being required to improve capital ratios. not the last resort. as saying: I do not think Europeans understand the implications of a systemic banking crisis.. and specialist in balance sheet recessions. the analyst said. at least. it began open market operations buying government and private debt securities. it reactivated the dollar swap lines[162] with Federal Reserve support. one analyst "said that as banks find it more difficult to raise funds..[155] On 3 November 2011 the promised Greek referendum on the bailout package was withdrawn by Prime Minister Papandreou.. This latter contraction of balance sheets "could lead to a depression”.. [164] . Beyond equity issuance and debt-to-equity conversion. an economist based in Japan.[157] [edit]ECB interventions The European Central Bank (ECB) has taken a series of measures aimed at reducing volatility in the financial markets and at improving liquidity:[158]  First. Government intervention should be the first resort. reaching €200 billion by end of November 2011. they will move faster to cut down on loans and unload lagging assets" as they work to improve capital ratios. the result is going to be even weaker banks and an even longer recession — if not depression.[161]  Second. it would reach €300 billion by mid-January.. it announced two 3-month and one 6-month full allotment of Long Term Refinancing Operations (LTRO's). an expert on that country's banking crisis.[160] If the ECB maintains its average rate of €11 billion additional purchases per week.[159] though it simultaneously absorbed the same amount of liquidity to prevent a rise in inflation. When all banks are forced to raise capital at the same time. the member banks of the European System of Central Banks started buying government debt.billion in "credit enhancement" to mitigate losses likely to be suffered by European banks. [156] Reduced lending was a circumstance already at the time being seen in a "deepen[ing] crisis" in commodities trade finance in western Europe. José Manuel Barroso characterised the package as a set of "exceptional measures for exceptional times". then. Landon Thomas in the New York Times noted that some. a level that Rabobankeconomist Elwin de Groot believes to be a “natural limit” the ECB can sterilize.

The fact is that Western economies . the former Deutsche Bundesbank president. 2011. Weber. which critics say erode the bank’s independence"..[50] On 21 December 2011.[167] [edit]Concerted action of several central banks On 30 November 2011 the European Central Bank. effectively easing the debt crisis. Britain and the Swiss National Bank provided global financial markets with additional liquidity to ward off the debt crisis and to support the real economy.[166] Resignations In September. regardless of the nation's credit rating. The moved took some pressure of Greek government bonds.S.Italy's economy has not grown for an entire decade. It loaned €489 billion to 523 banks for an exceptionally long period of three years at a rate of just one percent. and at the same time keep operating and loaning to businesses so that a credit crunch does not choke off economic growth.The ECB has also changed its policy regarding the necessary credit rating for loan deposits. No debt restructuring will work if it stays stagnant for another decade.with high wages. Federal Reserve Federal Reserve. They also agreed to provide each other with abundant liquidity to make sure that commercial banks stay liquid in other currencies. increasing deficits and debt levels. making it difficult for the government to raise money on capital markets. It also hopes that banks use some of the money to buy government bonds. the U. writing in November 2011: "Europe's core problem [is] a lack of growth. Japan. was once thought to be a likely successor to Jean-Claude Trichet as bank president. which had just been downgraded to junk status. Jürgen Stark became the second German after Axel A. [168] [edit]Reform and recovery See also: Euro Plus Pact Slow GDP growth rates correspond to slower growth in tax revenues and higher safety net spending..[165] 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.have . He and Stark were both thought to have resigned due to "unhappiness with the ECB’s bond purchases.. generous middle-class subsidies and complex regulations and taxes . news reports said". The central banks agreed to lower the cost of dollar Currency swaps by 50 basis points to come into effect on 5 December 2011. 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. the central banks of Canada. Stark was "probably the most hawkish" member of the council when he resigned. the ECB started the biggest infusion of credit into the European banking system in the euro's 13 year history. Weber to resign from the ECB Governing Council in 2011.. On 3 May 2010 the ECB announced it will accept as collateral all outstanding and new debt instruments issued or guaranteed by the Greek government. Fareed Zakaria described the factors slowing growth in the Euro zone.

as stringent orthodoxy across the budgetary.[177] By the end of 2011. Now they face pressures from three fronts: demography (an aging population). strict budgetary discipline and balanced budgets.become sclerotic. technology (which has allowed companies to do much more with fewer people) and globalization (which has allowed manufacturing and services to locate across the world). in addition to having already lost control over monetary policy and foreign exchange policy since the euro came into being.[9][10] German chancellor Angela Merkel also insisted that the European . Germany.[171] In exchange for cheaper funding from the EU. Greece and other countries.." He advocated lower wages and steps to bring in more foreign capital investment. Debt breaks applied across the eurozone would imply much tighter fiscal discipline than the bloc’s existing rules requiring deficits of less than 3 per cent of GDP.[169] Progress On 15 November 2011 the Lisbon Council published the Euro Plus Monitor 2011. Strong European Commission "oversight in the fields of taxation and budgetary policy and the enforcement mechanisms that go with it could further infringe upon the sovereignty of eurozone member states".[175][176] Germany had pressured other member states to adopt a balanced budget law to achieve a clear cap on new debt. France and some other smaller EU countries went a step further and vowed to create a fiscal union across the eurozone with strict and enforceable fiscal rules and automatic penalties embedded in the EU treaties.] are now making the greatest progress towards restoring their fiscal balance and external competitiveness". fiscal and regulatory fronts would necessarily go beyond the treaty in its current form. Greece. According to the report most critical eurozone member countries are in the process of rapid reforms. In March 2011 a new reform of the Stability and Growth Pact was initiated. would therefore also lose control over domestic fiscal policy. 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. The authors note that "Many of those countries most in need to adjust [..[170] [edit]Proposed [edit]European long-term solutions fiscal union and revision of the Lisbon Treaty Main article: European Fiscal Union Angel Ubide from the Peterson Institute for International Economics suggested that long term stability in the eurozone requires a common fiscal policy rather than controls on portfolio investment.[172] Think-tanks such as the World Pensions Council have argued that a profound revision of the Lisbon Treaty would be unavoidable if Germany were to succeed in imposing its economic views. Ireland and Spain are among the top five reformers and Portugal is ranked seventh among 17 countries included in the report. thus further reducing the individual prerogatives of national governments [173] [174].

jointly issued and underwritten by all 17 members of the currency bloc. with penalties for those countries who violate the limits.[145]Originally EU leaders planned to change existing EU treaties but this was blocked by British prime minister David Cameron. Using the term "stability bonds". combining it with a bold debt reduction scheme for countries not on life support from the EFSF. It would mutualise eurozone debt above 60%. subject to parliamentary vote.[178] All other non-eurozone countries except Great Britain are also prepared to join in. leader of the liberal ALDE group in the European parliament suggested following a proposal made by the "five wise economists" from the German Council of Economic Experts. who demanded that the City of London be excluded from future financial regulations.[182] [183] Germany remains opposed to take over the debt and interest risk of states that have run excessive budget deficits and borrowed excessively over the past years. all 17 members of the euro zone and six countries that aspire to join agreed on a new intergovernmental treaty to put strict caps on government spending and borrowing.[180] Britain's refusal to be part of the Franco-German fiscal compact to safeguard the Eurozone constituted a de facto refusal (PM David Cameron vetoed the project) to engage in any radical revision of theLisbon Treaty at the expense of British sovereignty: centrist analysts such as John Rentoul of The Independent (a generally Europhile newspaper) concluded that "Any Prime Minister would have done as Cameron did" [181]. [edit]Eurobonds Main article: Eurobonds On 21 November 2011. Jose Manuel Barroso insisted that any such plan would have to be matched by tight fiscal surveillance and economic policy coordination as an essential counterpart so as to avoid moral hazardand ensure sustainable public finances. on the creation of a European collective redemption fund.[9] On 9 December 2011 at the European Council meeting. 26 countries had agreed to the plan.[179][179] By the end of the day. could substantially raise the country's liabilities in a debt crisis. the European Commission suggested that eurobonds issued jointly by the 17 euro nations would be an effective way to tackle the financial crisis.[184] The introduction of eurobonds matched by tight financial and budgetary coordination may well require changes in EU treaties.[184] Guy Verhofstadt. including the proposed EU financial transaction tax.commission and the European court of justice must play an "important role" in ensuring that countries meet their obligations.[184] . However. a growing field of investors and economists say it would be the best way of solving a debt crisis. leaving the United Kingdom as the only country not willing to join. The German government sees no point in making borrowing easier for states who have problems borrowing so much that they go into debt crisis. Germany says that Eurobonds.

[145] On 16 December 2010 the European Council agreed a two line amendment to the EU Lisbon Treaty to allow for a permanent bail-out mechanism to be established[185] including stronger sanctions.[186][187] According to this treaty. the firewall mechanism can ensure that downstream nations and banking systems are protected by guaranteeing some or all of their obligations.[edit]European Stability Mechanism (ESM) Main article: European Stability Mechanism The European Stability Mechanism (ESM) is a permanent rescue funding programme to succeed the temporary European Financial Stability Facility and European Financial Stabilisation Mechanism in July 2012. rather than EU states. the ESM will be an intergovernmental organisation under public international law and will be located in Luxembourg. [edit]Address current account imbalances Current account balances $ and relative to GDP for 2010 Regardless of the corrective measures chosen to solve the current predicament.[190] current account imbalances are likely to continue. it imports more than it exports) must ultimately be a net importer of capital.. In March 2011.[188][189] Such a mechanism serves as a "financial firewall." Instead of a default by one country rippling through the entire interconnected financial system. this is a mathematical identity called the balance of payments. Then the single default can be managed while limiting financial contagion. a country that imports more than it exports must either decrease its savings reserves or borrow to pay for those .e. would play 'a central role' in running the ESM. A country that runs a large current account or trade deficit (i. In other words. the European Parliament approved the treaty amendment after receiving assurances that the European Commission. as long as cross border capital flows remain unregulated in the Euro Area.

Given the backing of the entire eurozone countries and the ECB "the EMU would achieve a similarly strong position vis-avis financial investors as the US where the Fed backs government bonds to an unlimited extent. while Germany's trade surplus was $188. Governments that lack sound financial policies would be forced to rely on traditional (national) governmental bonds with less favorable market rates." To ensure fiscal discipline despite the lack of market pressure. Ben Bernanke warned of the risks of such imbalances in 2005.[191] The 2009 trade deficits for Italy.97bn.S. Alternatively.[32][197] [edit]European Monetary Fund On 20 October 2011. Germany's large trade surplus (net export position) means that it must either increase its savings reserves or be a net exporter of capital. Greece.6bn respectively. Greece) consume less and improve their exporting industries. such as Germany. These bonds would not be tradable but could be held by investors with the EMF and liquidated at any time. artificially lowering interest rates and creating asset bubbles. export driven countries with large trade surplus. the EMF would operate according to strict rules. $75. arguing that a "savings glut" in one country with a trade surplus can drive capital into other countries with trade deficits. Conversely. so devaluation. this would reduce its trade deficit.[196] Either way. which could provide governments with fixed interest rate Eurobonds at a rate slightly below medium-term economic growth (in nominal terms).[198] . the Austrian Institute of Economic Research published an article that suggests to transform the EFSF into a European Monetary Fund (EMF). For example. which runs a large trade deficit (net import position) and therefore is a net borrower of capital from abroad. trade imbalances can be reduced if a country encouraged domestic saving by restricting or penalizing the flow of capital across borders..31bn and $35. Spain. providing funds only to countries that meet agreed on fiscal and macroeconomic criteria. individual interest rates and capital controls are not available.96 billion. Austria and the Netherlands would need to shift their economies more towards domestic services and increase wages to support domestic consumption. The only solution left to raise a country's level of saving is to reduce budget deficits and to change consumption and savings habits. This currency appreciation occurs as the importing country sells its currency to buy the exporting country's currency used to purchase the goods. if a country's citizens saved more instead of consuming imports.g.6bn. lending money to other countries to allow them to buy German goods.[192] A similar imbalance exists in the U. or by raising interest rates.imports. which would reduce the imbalance as the relative price of its exports increases.[196]It has therefore been suggested that countries with large trade deficits (e. and Portugal were estimated to be $42. and $25.[193][194][195] A country with a large trade surplus would generally see the value of its currency appreciate relative to other currencies. On the other hand. many of the countries involved in the crisis are on the Euro. although this benefit is likely offset by slowing down the economy and increasing government interest payments.

[205] Also The Wall Street Journalconjectured that Germany could return to the Deutsche Mark. Finland. Luxembourg and other European countries such as Denmark. Sweden.[206] or create another currency union[207] with the Netherlands. though it is moving in that direction. default on their debts. if the Greek and Irish bailouts should fail. and associated with Modern Monetary Theory and other postKeynesian schools condemned the design of the Euro currency system from the beginning because it ceded national monetary and economic sovereignty but lacked a central fiscal authority . such as Luca A. EMU would prevent effective action by individual countries and put nothing in its place. Norway. on numerous occasions publicly said that they would not allow the Eurozone to disintegrate and have linked the survival of the Euro with that of the entire European Union. Econometric analysis suggests that a stable long-term interest rate of three percent in all eurozone countries would lead to higher nominal GDP growth rates and substantially lower sovereign debt levels by 2015. banks were also no longer able to unduly benefit from intermediary rents by borrowing from the ECB at low rates and investing in government bonds at high rates. If this is not immediately feasible. The former president of the German Industries. albeit more forcefully."[199][200] Some non-Keynesian economists. regain their fiscal sovereignty. Ricci of the IMF. [210] The Wall Street Journal added that without the German-led bloc a residual euro would have the flexibility to keep interest rates low[211] and engage in quantitative easing or fiscal stimulus in support of a job-targeting economic policy[212] instead of inflation targeting in the current configuration.[198] [edit]Speculation of the breakup of the Eurozone Economists. these economists continued to advocate. The likely substantial fall in the Euro against a newly reconstituted Deutsche Mark would give a "huge boost" to its members' competitiveness.[202][203] Bloomberg suggested in June 2011 that. Hans-Olaf Henkel suggested that "southern countries" could retain their competitiveness through a greater tolerance for inflation and corresponding regular devaluations. and re-adopt national currencies. an alternative would be for Germany to leave the eurozone in order to save the currency through depreciation[204]instead of austerity. they recommended that Greece and the other debtor nations unilaterally leave the Eurozone. contend the Eurozone does not fulfill the necessary criteria for an optimum currency area.[170][201] As the debt crisis expanded beyond Greece. once they are freed of the "straitjacket of Germanic stability phobia". Austria.[208] A monetary union of the mentioned current account surplus countries would create the world's largest creditor bloc that is bigger than China[209] or Japan.Since investors would finance governments directly.[213][214] . the disbandment of the Eurozone. however. "Without such an institution. compared to the baseline scenario with market based interest levels. German Chancellor Angela Merkel and French President Nicolas Sarkozy have. mostly from outside Europe. Switzerland and the Baltics.saying that faced with economic problems.

The world needs the euro or something like it to compete with the US dollar. fiscal and regulatory fronts would necessarily go beyond the treaty in its current form. Joaquín Almunia. an EU commissioner. debtor states. In September 2011. Austria. as stringent orthodoxy across the budgetary. the EU and Eurozone . the “no bail-out” clause (Article 125 TFEU) ensures that the responsibility for repaying public debt remains national and prevents risk premiums caused by unsound fiscal policies from spilling over to partner countries. "lashed out"[217] against the bloc of Germany.. First. The clause thus encourages prudent fiscal policies at the national level. It's not the euro. The European Central Bank purchase of distressed country bonds can be viewed to break the prohibition of monetary financing of budget deficits (Article 123 TFEU). and prevent the moral hazard of over-spend and lending in good times. The Articles 125 and 123 were meant to create disincentive for EU member states to run excessive deficits and state debt. By issuing bail out aid guaranteed by the prudent Eurozone taxpayers to rule-breaking Eurozone countries such as Greece. thus further reducing the individual prerogatives of national governments[215] [216]. Netherlands. Finland. big problem. absolutely not. saying that expelling weaker countries from the euro was not an option: "Those who think that this hypothesis is possible just do not understand our process of integration".Some think-tanks such as the World Pensions Council have argued that a profound revision of the Lisbon Treaty would be unavoidable if Germany were to succeed in imposing its economic views. They were also meant to protect the taxpayers of the other more prudent member states."[219] [edit]Controversies [edit]Breaking of the EU treaties Wikisource has original text related to this article: Consolidated version of the Treaty on the Functioning of the European Union No bail-out clause The Maastricht Treaty of EU contains juridical language which appears to rule out intra-EU bailouts. but it's not a big. "No. Also former ECB president Jean-Claude Trichet denounced the possibility of a return of the deutsche mark and defended the price stability of the euro. The creation of further leverage in EFSF with access to ECB lending would also appear to break this Article. It needs to work.. Jim Rogers in an interview with the BBC responded to the assertion that the euro was responsible for the crisis saying.[218] On 26 December 2011. some debtor nations. The eurozone as a whole is not a big debtor nation. The eurozone has some debtor problems. The euro is good for the world.

The international U.[231] Particularly Moody's decision to downgrade Portugal's foreign debt to the category Ba2 "junk" has infuriated officials from the EU and Portugal alike.countries encourage moral hazard also in the future.have also played a central[226] and controversial role[227] in the current European bond market crisis. the market responded to the crisis before the downgrades. For Eurozone members there is the Stability and Growth Pact which contains the same requirements for budget deficit and debt limitation but with a much stricter regime. and to take some time to adjust when a firm or country is in trouble. based credit rating agencies – Moody's. ratings agencies have a tendency to act conservatively. Concerning government finance the states have agreed that the annual government budget deficit should not exceed 3% of the gross domestic product (GDP) and that the gross government debt to GDP should not exceed 60% of the GDP.[229] On the other hand.S. [edit]Actors fueling the crisis [edit]Credit rating agencies Standard & Poor's Headquarters in Lower Manhattan. accusing the Big Three of bias towards European assets and fueling speculation. Nevertheless the main crisis states Greece and Italy (status November 2011) have exceeded these criteria execessively over a long period of time.[221] Convergence criteria The EU treaties contain so called convergence criteria. Energias de .[228] On the one hand. Standard & Poor's and Fitch – which have already been under fire during the housing bubble[222][223] and the Icelandic crisis[224][225] .[230] In the case of Greece. the "no bail-out doctrine" seems to be a thing of the past.[220] While the no bail-out clause remains in place. the agencies have been accused of giving overly generous ratings due to conflicts of interest. with Greek bonds trading at junk levels several weeks before the ratings agencies began to describe them as such. [231] State owned utility and infrastructure companies like ANA – Aeroportos de Portugal. [226] European policy makers have criticized ratings agencies for acting in political manner. New York City.

[245] But attempts to regulate more strictly credit rating agencies in the wake of the European sovereign debt crisis have been rather unsuccessful. they forced European banks.[240]Credit-ratings companies have to comply with the new standards or be denied operation on EU territory.[238] including the European Securities and Markets Authority (ESMA). says ESMA Chief Steven Maijoor. In essence.[227] With the creation of the European Supervisory Authority in January 2011 the EU set up a whole range of new financial regulatory institutions. to rely more than ever on the standardized assessments of credit risk marketed by two private US agencies. private cartel… [237] Counter measures Due to the failures of the ratings agencies. adopted in 2005..[239] which became the EU’s single credit-ratings firm regulator. It is strange that we have so many downgrades in the weeks of summits.[243] [244] According to German consultant company Roland Berger. theEuropean Central Bank itself e. highly deregulated.[232][233][234][235] Credit rating agencies were also accused of bullying politicians by systematically downgrading eurozone countries just before important European Council meetings. unevenly transposed in national law. setting up a new ratings agency would cost €300 million and could be operating by 2014. more importantly. Redes Energéticas Nacionais. which could avoid the conflicts of interest that he claimed US-based agencies faced.-based ratings agencies have less influence on developments in European financial markets in the future. effective since 2008. and. Ironically..S. Some European financial law and regulation experts have argued that the hastily drafted. As one EU source put it: "It is interesting to look at the downgradings and the timings of the downgradings ."[236] Regulatory reliance on credit ratings Think-tanks such as the World Pensions Council have argued that European powers such as France and Germany pushed dogmatically and naïvely for the adoption of the Basel II recommendations.g. 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 .[241] Germany's foreign minister Guido Westerwelle has called for an "independent" European rating agency. European governments have abdicated most of their regulatory authority in favor of a non-European.[226][242]European leaders are reportedly studying the possibility of setting up a European ratings agency in order that the private U. European regulators obtained new powers to supervise ratings agencies.Portugal.Moody’s and S&P. transposed in European Union law through the Capital Requirements Directive (CRD). when gauging the solvency of EU-based financial institutions. thus using public policy and ultimately taxpayers’ money to strengthen an anti-competitive duopolistic industry. and Brisa – Auto-estradas de Portugal were also downgraded despite claims to having solid financial profiles and significant foreign revenue.

[267][268] German chancellor Merkel has stated that "institutions bailed out with public funds are exploiting the budget crisis in Greece and elsewhere.. Other commentators believe that the euro is under attack so that countries. triggering a decline that brought the currency below $1.19 before it started to rise again. Crespi. political or financial".[270] There was no suggestion by regulators that there was any collusion or other improper action.[263][264] This is not the case in the eurozone which is self funding.S.or on the potential for conflicts of interests created by the complex contractual arrangements between credit rating agencies and their clients"[246] [edit]Media There has been considerable controversy about the role of the English-language press in the regard to the bond market crisis.36.[270] . Three days later the euro was hit with a wave of selling.[247][248] 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.[252][253][254][255][256][257] [258] No results have so far been reported from this investigation. from China. "This is an attack on the eurozone by certain other interests.[250][251] He ordered the Centro Nacional de Inteligencia intelligence service (National Intelligence Center. CNI in Spanish) to investigate the role of the "Anglo-Saxon media" in fomenting the crisis.[259] and to avoid the collapse of the US dollar. do not have large domestic savings pools to draw on and therefore are dependent on external savings e.[249] The Spanish Prime Minister José Luis Rodríguez Zapatero has also suggested that the recent financial market crisis in Europe is an attempt to undermine the euro. the Euro hit a four year low at $1. and U..[260][261][262] The U. and the U.[270] On February 8. Soros Fund Management LLC. Brigade Capital Management LLC and others argued that the euro was likely to fall to parity with the US dollar and were of the opinion that Greek government bonds represented the weakest link of the euro and that Greek contagion could soon spread to infect all sovereign debt in the world. such as the U.g. the boutique research and brokerage firmMonness. hosted an exclusive "idea dinner" at a private townhouse in Manhattan.[265][266] [edit]Speculators Both the Spanish and Greek Prime Ministers have accused financial speculators and hedge funds of worsening the crisis by short selling euros. exactly four months after the dinner. Green Light Capital Inc.[270] On 8 June."[269] According to The Wall Street Journal several hedge-funds managers launched "large bearish bets" against the euro in early 2010.K. Hardt & Co.S. where a small group of hedge-fund managers from SAC Capital Advisors LP.[271] Traders estimate that bets for and against the euro account for a huge part of the daily three trillion dollar global currency market. can continue to fund their large external deficits and large government deficits.K.

not deficit spending that created this crisis. 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. [edit]National statistics In 1992.[275] 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. Over 23 million EU workers have become unemployed as a consequence of the global economic crisis of 2007–2010. all this money is conditional on all these countries doing fiscal adjustment and structural reform. members of the European Union signed an agreement known as the Maastricht Treaty.[274] [edit]Doubts about effectiveness of non-Keynesian policies There has been some criticism over the austerity measures implemented by most European nations to counter this debt crisis. 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. and bankers. some markets banned naked short selling for a few months. including . under which they pledged to limit their deficit spending and debt levels.The role of Goldman Sachs[272] in Greek bond yield increases is also under scrutiny. Some 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. However.[277] Apart from arguments over whether or not austerity. Government's mounting debts are a response to the economic downturn as spending rises and tax revenues fall.[278] union leaders have also argued that the working population is being unjustly held responsible for the economic mismanagement errors of economists.[273] 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. a number of EU member states. investors. rather than increased or frozen spending. not its cause."[276] Robert Skidelsky wrote that it was excessive lending by banks. is a macroeconomic solution. a fact that has led many to call for additional regulation of the banking sector across not only Europe.[279] [edit]Odious debt Main article: Odious debt Some protesters. but the entire world.[280] 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. In response to accusations that speculators were worsening the problem.

This added a new dimension in the world financial turmoil. can raise the required capital with relative ease. potentially undermining investor confidence. or a similar deal with Greece. which was the immediate issue behind the collateral discussion. [286] the United Kingdom. Finland.7% by the new Pasok Government in late 2009 (a number which. [299] [300] [edit]Finland collateral On 18 August 2011. as was the case for Greece.[281] The revision of Greece’s 2009 budget deficit from a forecast of "6–8% of GDP" to 12. with a mid-October vote.[302] The main point of contention was that the collateral is aimed to be a cash deposit. The expectation is that only Finland will utilise it. a collateral the Greeks can only give by recycling part of the funds loaned by Finland for the bailout. which means Finland and the other Eurozone countries guarantee the Finnish loans in the event of a Greek default. as the issues of "creative accounting" and manipulation of statistics by several nations came into focus.[28] Financial reforms within the U. however there has been a growing number of reports about manipulated statistics by EU and other nations aiming.[306] On 13 October . enabling it to participate in the potential new €109 billion support package for the Greek economy. who received substantial fees in return for their services and who took on little credit risk themselves thanks to special legal protections for derivatives counterparties. requirement to contribute initial capital to European Stability Mechanism in one installment instead of five installments over time. it became apparent that Finland would receive collateral from Greece. a modified escrow collateral agreement was reached. the Netherlands. Slovakia and Netherlands were the last countries to vote on the EFSF expansion. so as not to increase the risk level over their participation in the bailout. as requested by the Finnish parliament as a condition for any further bailouts.S.[305] At the beginning of October. [296] [297] [298] and even Germany. after reclassification of expenses under IMF/EU supervision was further raised to 15.[301] Austria.a.Greece and Italy.S. to mask the sizes of public debts and deficits. The focus has naturally remained on Greece due to its debt crisis. as one of the strongest AAA countries. and Slovakia responded with irritation over this special guarantee for Finland and demanded equal treatment across the Eurozone. were able to circumvent these rules and mask their deficit and debt levels through the use of complex currency and credit derivatives structures.[303][304] After extensive negotiations to implement a collateral structure open to all Eurozone countries. investment banks. on 4 October 2011.4% in 2010) has been cited as one of the issues that ignited the Greek debt crisis. [287] [288] [289] [290] [291] [292] [293] [294] Spain. These have included analyses of examples in several countries [282] [283] [284] [285] or have focused on Italy. Slovenia.[28][29] The structures were designed by prominent U. since the financial crisis have only served to reinforce special protections for derivatives—including greater access to government guarantees—while minimizing disclosure to broader financial markets. [295] the United States. due to i.

In return for its support for the IMF bailout and consequent austerity budget. "It is convenient to hold elections this fall so a new government can take charge of the economy in 2012. PM José Luis Rodríguez Zapatero announced early elections in November.  Slovakia .October 2011 .November 2010 .  Slovenia . PM George Papandreou announced plans for his resignation in favour of a national unity government.Following the failure of parliament to adopt the government austerity measures. fresh from the balloting" he said.  Greece . the Government of Silvio Berlusconi lost its majority and his impending resignation was announced by the President. the Borut Pahor government lost a motion of confidence and December 2011 early elections were set.In return for the approval of the EFSF by her coalition partners. PM Iveta Radičová had to concede early elections in March 2012.September 2011 . PM Ivars Godmanis and his government resigned and there were subsequent changes to the constitutional election process.Following a severe economic downturn.  Portugal . PM José Sócrates and his government resigned and this led to early elections in June 2011. the junior party in the coalition government. but the government has been forced to call new elections in exchange.July 2011 . [edit]Political impact Handling of the ongoing crisis led to the premature end of a number of European national Governments and impacted the outcome of many elections:  Finland .  Italy .Following market pressure on Government bond prices in response to concerns about levels of debt. the opposition and other EU governments.Following the failure of the Spanish government to handle the economic situation. from within his party. [edit]See also .  Ireland . the Green Party set a time-limit on its support for the Cowen Government which set the path to early elections in Feb 2011.Following widespread criticism of a referendum proposal on austerity and bailout measures.2011 Slovakia approved Euro bailout expansion.  Latvia .November 2011 .November 2011 .The approach to the Portuguese bailout and the EFSF dominated the April 2011 election debate and formation of the subsequent government.February 2009 .Following the failure of June referendums on measures to combat the economic crisis and the departure of coalition partners.March 2011 . riots and criticism of the Governments handling of the crisis.  Spain .April 2011 .

29 April 2010. The Economist. Retrieved 22 July 2011. ^ a b Long-term interest rate "Long-term interest rate statistics for EU Member States". BBC News. ^ "How the Euro Became Europe's Greatest Threat". ^ a b c d ""Κούρεμα" 50% του ελληνικού χρέους"". Retrieved 27 October 2011. Retrieved 2011-12-02. "Peripheral euro zone government bond spreads widen". ^ a b "Leaders agree eurozone debt deal after late-night talks". ^ "Puzzle over euro's "mysterious" stability". 9. 11. 12 July 2011. 15 November 2011. London: Guardian.BBC. ECB. 12. Retrieved 28 April 2010. 10. 7. ^ "Acropolis now". The Wall Street Journal. "Angela Merkel vows to create 'fiscal union' across eurozone". ^ Euro in US Dollar 14. Reuters. "EU debt crisis: Italy hit with rating downgrade". ^ George Matlock (16 February 2010). ^ a b "Barroso: Europe 'closer to resolving eurozone crisis'".       2000s European sovereign debt crisis timeline 2000s commodities boom Crisis situations and protests in Europe since 2000 FRED (Federal Reserve Economic Data) List of countries by credit rating Late-2000s recession in Europe 2008–2011 Icelandic financial crisis [edit]References 1. 4. 22 August 2011. 8. Helen (2011-12-02). Retrieved 27 October 2011. Retrieved 20 September 2011. Graeme (20 September 2011). Skai TV. 6. ^ a b c Pidd. 2. Retrieved 11 May 2010. 27 October 2011. Retrieved 27 October 2011. 27 October 2011. ^ a b "European fiscal union: what the experts say". 2011-12-02. ^ "EU ministers offer 750bn-euro plan to support currency". ^ Wearden. 27 October 2011. Retrieved 2011-12-02. 10 May 2010. London: Guardian. Reuters. ^ "Euro Stable Despite Debt Crisis Says Schaeuble". Retrieved 22 June 2011. The Guardian (UK). . BBC News. 20 June 2011. Der Spiegel. 13. 3. 5.

Norton. Atterres. 83. ^ Bernd Riegert. ^ "Merkel Slams Euro Speculation. "Wall St. Helped to Mask Debt Fueling Europe’s Crisis". Retrieved 17 May 2011. Retrieved 8 December 2011. Warns of 'Resentment' (Update 1)". ^ NYT Review of Books-Touring the Ruins of the Old Economy-September 2011 17.. ^ NPR-The Giant Pool of Money-May 2008 19. "Europe's next bankruptcy candidates?". Philippas. Retrieved 19 September 2011. dw-world.4)" (PDF). Retrieved 17 May 2011. Retrieved 2011-12-19. 2011 22. 26. Retrieved 17 May 2011. LOUISE. ISBN 978-0-39308181-7. Boomerang . ^ The Economist-No Big Bazooka-October 29. 2009 29. SCHWARTZ (14 February 2010). Project Syndicate. Retrieved 17 May 2011. Transparency. 9 December 2011. ^ STORY. Vol.gr. ^ a b c d Michael Simkovic. 3 June 2011. 18. ^ NYT-It's All Connected-A Spectators Guide to the Euro Crisis 21. 25. ^ a b "State of the Union: Can the euro zone survive its debt crisis? (p. ^ "The Euro’s PIG-Headed Masters". 32. ^ a b Michael Simkovic. BusinessWeek. ^ "PIIGS Definition". p. Presentation at the World Bank. 27. ^ a b "COMMERCIAL TRANSACTIONS OF GREECE (Estimations) : October 2011".Travels in the New Third World. New York Times (New York): pp. Retrieved 28 April 2010.gr. Michael (2011). Bankruptcy Immunities. and Capital Structure. ^ a b c d Lewis. ^ a b Martin Wolf (2011-12-06). LANDON THOMAS Jr. 24. 16. skai. Hellenic Statistical Authority. "Ζωώδη Ένστικτα και Οικονομικές Καταστροφές" (in Greek). www. January 11. 33. "Merkozy failed to save the eurozone". 23. American Bankruptcy Law Journal. 23 February 2010. ^ Laurence Knight (22 December 2010). A1. 2011-10-27.. Retrieved 2011-12-01. Economist Intelligence Unit. "Europe's Eastern Periphery". Retrieved 201112-09.15. NELSON D. ^ "Manifeste d'économistes atterrés". 28. Secret Liens and the Financial Crisis of 2008. ^ NYT-Floyd Norris-Euro Benefits Germany More Than Others in Zone-April 2011 . The Financial Times. investopedia. 253. BBC. 2011 30. see English version manifesto 31.statistics.com. 34. ^ Nikolaos D. 2011-03-01.com. ^ NYT-It's All Connected-An Overview of the Euro Crisis-October 2011 20.

economy is mending. According to Bonadurer.S. That will dilute the U." Bonadurer says. The eurozone crisis already has had a direct impact on consumers in Europe. But the modest growth may fizzle if the eurozone crisis deepens. ^ S&P-Standard & Poor's Puts Ratings On Eurozone Sovereigns On CreditWatch With Negative Implications-December 5. that quaint expression looks increasingly like a relic of a bygone era. regulators who permitted banks to treat the bonds as risk-free and investors who for too long did not make much of a distinction between the bonds of troubled economies like Greece and Italy and those issued by the rock-solid Germany. the world gets a cold. distinguished adjunct professor of economics at the Mercatus Center at George Mason University's Washington.S..The New York Times. Retrieved November 11.35. orChina. "A reduction in exports will reduce GDP because Europe is one of the largest export markets for the U. gross domestic product.S. it's that many financial analysts predict that a "flight to quality" may encourage investors to park their money in U. ^ Project Syndicate-Martin Feldstein-The French Don't Get It-December 2011 36. Put simply. 2011)." says Bruce Yandle. economic growth has been fueled by government spending and exports. including governments that borrowed beyond their means.. In global financial circles. but he warns that too much liquidity in the U.whether in Europe." 4. 2 2." But in the age of globalization. pointing out that exports to Europe account for about 20% of U.S. But in an interconnected world. and elsewhere is connected to a global economy.S. campus.S.S. the U. ^ Liz Alderman. experts agree any fallout won't be limited to Europe. While it may not feel like it to most American consumers." 37. consumers worldwide face dimmer prospects. the sovereign debt crisis that began in Greece has spread throughout much of the eurozone. Susanne Craig (November 10. clinical professor of finance at Arizona State University. 7. Europe. the U."Europe’s Banks Turned to Safe Bonds and Found Illusion". says Werner Bonadurer. 5. Read on to find out how the eurozone crisis could affect your pocket book." 8.C. But if there's an immediate silver lining to Europe's woes.. These days. 3. "When the great wealthcreating machine slows down -. there's an old saying: "When America sneezes. Treasury bills because of their perceived relative safety as an investment. "Recent U. Asia. recovery. Trade and the economy 6.S. D.S. economy could "lead to a higher domestic inflation .S. 2011. "every consumer in the U. that should keep interest rates low in the U. "How European sovereign debt became the new subprime is a story with many culprits.

"A run on the euro banks. it's something Cramer says he's continuing to monitor. widespread bank failures in Europe or downgrades in European sovereign debt could spell disaster for the average American. But he says equity markets across the globe also are likely to suffer." Cramer says. 13. making it difficult to predict which types of businesses will feel the most pain.Money market 14. money market funds that are heavily exposed to assets falling in price may see their own net asset value drop below $1 per share. "if the crisis spreads to Germany.500 points or more very quickly." Connelly says.Few funds currently have exposure to the most troubled countries but. people in those funds got their money back." 15. 20% of the Standard & Poor's 500 index earnings come directly or indirectly from Europe. dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. stocks are most likely to tumble on bad news from Europe? According to Bonadurer. According to Terry Connelly. "If a money market fund has exposure to the sovereign debt (of some eurozone countries) or a bank in one of those countries. 17. France or Great Britain.S." 12.S." 16. But it's not an experience you want to go through.S. what is called "breaking the buck. 9. Bonadurer believes sectors such as aircraft. president of Cramer & Rauchegger Inc.. machinery. "(Those scenarios) would kill off the U. eventually. Fla. And while the damage is likely to be widespread. 11. there's a good chance it's insured by the Federal Deposit Insurance Corp. Stocks 10." That could be exacerbated if European central banks keep their rates low for an extended period of time. If consumers invested in a money market account through their bank. there's a risk that it could break the buck. but they should check.S. an investment firm in Maitland. But as some consumers learned in 2008. "In 2008. But that pattern doesn't just affect the Wall Street crowd. and professional and financial services are likely to be hit hardest.We think of money market funds as safe investments. recovery. and create a consumerdriven recessionary fall in spending (that may trigger) the prospect of deflation in the U. Recently.For now. blow out 401(k)s and IRAs just getting back on track. American investors have seen bad news from Europe on one day drive U. So which U. stocks down the next.risk. If their money market fund is through a ." says Scott Cramer. a France downgrade or both could well provoke an equity market crash of 1.. the risk that some funds may break the buck increases significantly.

But before you pack your bags.32 to $1. which makes trips to Europe more affordable for the U. 20. Va. Connelly says. But while it's hard to predict moves in the currency market. which would reduce costs abroad. The dollar has traded from $1. 28. "In a financial crisis.Travel 25.' now famous top 1%. dollar stands to strengthen significantly against the euro. then it becomes reality. making American currency that much stronger for tourists traveling to France. it grinds to a halt.S. says Christopher Vecchio." .S. then they will spend less because they are afraid. If consumers believe that their employment status is compromised. The more pronounced the negative headlines.Psychological 19. the U. says Jamie Cox. but if it does. you might want to check your own finances. managing partner of Harris Financial Group in Colonial Heights. "If the market unfolds as expected."The euro will lose relative value against the U. It is hoped that Europe won't see any Lehman-like collapses. the bad news also tends to erode consumer confidence and that could be most damaging of all.S. 26." Cox says. Germany or any of the 17 countries that use the euro. Vecchio says that by next fall the euro and dollar may evenly trade at or near a 1-to-1 ratio. dollar. 18.brokerage house." Cox says. The U."Consumer spending doesn't stop in a recession.S." 24. 22. While there's a lot of data out there about the adverse effects of a eurozone crisis." 27. junior currency analyst at the foreign exchange trading firm DailyFX in New York.So far. few people would have predicted the collapse of Lehman Brothers. With the Euro under pressure and falling in value. "Traveling to Europe during the crisis would be the ideal time. 23. and fewer still would have pegged that event to a widespread panic that struck at the core of consumer confidence. "If enough people believe that something is true." 21. In 2008. but consumers can ask about the fund company's exposure. "But that can change quickly." Vecchio says. the more consumers believe that their employment may be at risk. 29. it slows down. it's not likely insured." Cox says. dollar would be stronger. Cox expects real trouble on the consumer spending front.S. those negative headlines in Europe haven't impacted consumer sentiment in the U. travelers betting that the euro's loss will be the dollar's gain are probably right. "Consumer sentiment is driven largely by employment.42 against the euro over the last year. you might guess the dollar stands to gain.

. "When the great wealth-creating machine slows down -. Asia. According to Bonadurer. stocks down the next. orChina." But if there's an immediate silver lining to Europe's woes. But the modest growth may fizzle if the eurozone crisis deepens. According to Terry Connelly. consumers worldwide face dimmer prospects. distinguished adjunct professor of economics at the Mercatus Center at George Mason University's Washington. dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco." Put simply." 30. that quaint expression looks increasingly like a relic of a bygone era. campus. .S.Connelly says. Share This Article Read more: http://www. "Recent U. Treasury bills because of their perceived relative safety as an investment." Bonadurer says.S. American investors have seen bad news from Europe on one day drive U.S. These days.S. widespread bank failures in Europe or downgrades in European sovereign debt could spell disaster for the average American." But in the age of globalization. the U. Trade and the economy While it may not feel like it to most American consumers. that should keep interest rates low in the U. and elsewhere is connected to a global economy.. recovery. D.S." says Bruce Yandle. "But the 99% will suffer the effects of a profound European recession.S. economy could "lead to a higher domestic inflation risk.C. clinical professor of finance at Arizona State University. the sovereign debt crisis that began in Greece has spread throughout much of the eurozone. gross domestic product.foxbusiness.S. it's that many financial analysts predict that a "flight to quality" may encourage investors to park their money in U. says Werner Bonadurer.com/personal-finance/2011/12/12/five-ways-eurozone-crisis-mayimpact/#ixzz1i0vMJ1X1In global financial circles. the world gets a cold. Europe.S. The eurozone crisis already has had a direct impact on consumers in Europe. But that pattern doesn't just affect the Wall Street crowd. experts agree any fallout won't be limited to Europe. Stocks Recently. But in an interconnected world. the U. economic growth has been fueled by government spending and exports. economy is mending.whether in Europe.. pointing out that exports to Europe account for about 20% of U.S." That could be exacerbated if European central banks keep their rates low for an extended period of time.S. "every consumer in the U. That will dilute the U. but he warns that too much liquidity in the U.S. there's an old saying: "When America sneezes. Read on to find out how the eurozone crisis could affect your pocket book. "A reduction in exports will reduce GDP because Europe is one of the largest export markets for the U.

there's a risk that it could break the buck. eventually. Despite being a continent away. Money market We think of money market funds as safe investments. • 2 months ago Some people liken this situation to another Lehman Brothers. "In 2008. people in those funds got their money back. There's a lot of banks out there. There's a lot of banks out there." says Scott Cramer. what is called "breaking the buck. There's a lot of banks out there. But as some consumers learned in 2008. which have a lot of exposure to Greek debt which might become very hard to liquidate at any time. making it difficult to predict which types of businesses will feel the most pain. president of Cramer & Rauchegger Inc.S." Cramer says. Eurozone is still a huge part of the world economy. Fla. mostly European banks. and it's not helping anyone when they're having problems financing the equivalent of TARP and look to be headed into another recession. For now. • 2 months ago Some people liken this situation to another Lehman Brothers. which have a lot of exposure to Greek debt which might become very hard to liquidate at any time. Bonadurer believes sectors such as aircraft. As a result. As a result. investors are very nervous about the possibility that Greece defaults and all its debt becomes toxic debt just like in 2008 when the housing market crashed. As a result. which have a lot of exposure to Greek debt which might become very hard to liquidate at any time. machinery. an investment firm in Maitland. and create a consumer-driven recessionary fall in spending (that may trigger) the prospect of deflation in the U. "(Those scenarios) would kill off the U. Eurozone is still a huge part of the world economy." So which U. but also a few American banks. If consumers invested in a money Some people liken this situation to another Lehman Brothers. mostly European banks. and professional and financial services are likely to be hit hardest. it's something Cramer says he's continuing to monitor. stocks are most likely to tumble on bad news from Europe? According to Bonadurer. 20% of the Standard & Poor's 500 index earnings come directly or indirectly from Europe." "If a money market fund has exposure to the sovereign debt (of some eurozone countries) or a bank in one of those countries. but also a few American banks. Despite being a continent away. But he says equity markets across the globe also are likely to suffer. And while the damage is likely to be widespread. investors are very nervous about the possibility . mostly European banks. But it's not an experience you want to go through. the risk that some funds may break the buck increases significantly.500 points or more very quickly. "if the crisis spreads to Germany. and it's not helping anyone when they're having problems financing the equivalent of TARP and look to be headed into another recession. but also a few American banks." Connelly says. recovery. money market funds that are heavily exposed to assets falling in price may see their own net asset value drop below $1 per share. France or Great Britain. a France downgrade or both could well provoke an equity market crash of 1.. investors are very nervous about the possibility that Greece defaults and all its debt becomes toxic debt just like in 2008 when the housing market crashed."A run on the euro banks.S.S. blow out 401(k)s and IRAs just getting back on track." Few funds currently have exposure to the most troubled countries but.

Va. travelers betting that the euro's loss will be the dollar's gain are probably right. those negative headlines in Europe haven't impacted consumer sentiment in the U." Cox says. few people would have predicted the collapse of Lehman Brothers. Despite being a continent away. and fewer still would have pegged that event to a widespread panic that struck at the core of consumer confidence. the bad news also tends to erode consumer confidence and that could be most damaging of all. the more consumers believe that their employment may be at risk. • 2 months ago market account through their bank. says Christopher Vecchio." Cox says. making American currency that much stronger for tourists traveling to France. "In a financial crisis. The dollar has traded from $1. "But that can change quickly. "If enough people believe that something is true. Cox expects real trouble on the consumer spending front. but they should check.that Greece defaults and all its debt becomes toxic debt just like in 2008 when the housing market crashed. but if it does. dollar would be stronger." Vecchio says that by next fall the euro and dollar may evenly trade at or near a 1-to-1 ratio. then it becomes reality." So far. then they will spend less because they are afraid. it slows down. junior currency analyst at the foreign exchange trading firm DailyFX in New York. If consumers believe that their employment status is compromised. dollar stands to strengthen significantly against the euro.. In 2008. it's not likely insured." Travel With the Euro under pressure and falling in value. Psychological While there's a lot of data out there about the adverse effects of a eurozone crisis. If their money market fund is through a brokerage house.S. "Traveling to Europe during the crisis would be the ideal time. but consumers can ask about the fund company's exposure. . Eurozone is still a huge part of the world economy. The more pronounced the negative headlines. the U. it grinds to a halt.42 against the euro over the last year.S." Vecchio says. you might guess the dollar stands to gain. which would reduce costs abroad." Cox says. there's a good chance it's insured by the Federal Deposit Insurance Corp. Germany or any of the 17 countries that use the euro.S. managing partner of Harris Financial Group in Colonial Heights. But while it's hard to predict moves in the currency market. It is hoped that Europe won't see any Lehman-like collapses. and it's not helping anyone when they're having problems financing the equivalent of TARP and look to be headed into another recession.32 to $1. "Consumer sentiment is driven largely by employment. The U. "Consumer spending doesn't stop in a recession. says Jamie Cox. "If the market unfolds as expected.

According to Terry Connelly. But in an interconnected world. the U. Europe. the world gets a cold.com/personal-finance/2011/12/12/five-ways-eurozone-crisis-mayimpact/#ixzz1i0vMJ1X1In global financial circles.S. These days. that should keep interest rates low in the U. which makes trips to Europe more affordable for the U." Connelly says. But the modest growth may fizzle if the eurozone crisis deepens. American investors have seen bad news from Europe on one day drive U." Share This Article Read more: http://www. The eurozone crisis already has had a direct impact on consumers in Europe. But that pattern doesn't just affect the Wall Street crowd.But before you pack your bags." says Bruce Yandle.C.S. Asia. stocks down the next. it's that many financial analysts predict that a "flight to quality" may encourage investors to park their money in U.. economy could "lead to a higher domestic inflation risk.. Trade and the economy While it may not feel like it to most American consumers. "A reduction in exports will reduce GDP because Europe is one of the largest export markets for the U. that quaint expression looks increasingly like a relic of a bygone era. distinguished adjunct professor of economics at the Mercatus Center at George Mason University's Washington. According to Bonadurer. experts agree any fallout won't be limited to Europe. "Recent U. economic growth has been fueled by government spending and exports. and elsewhere is connected to a global economy. campus. there's an old saying: "When America sneezes.S.foxbusiness.S.S. Stocks Recently.' now famous top 1%. recovery. "But the 99% will suffer the effects of a profound European recession. D. That will dilute the U. says Werner Bonadurer. pointing out that exports to Europe account for about 20% of U." But in the age of globalization.S. clinical professor of finance at Arizona State University. gross domestic product. but he warns that too much liquidity in the U. the U. "every consumer in the U.S.S.S.S. consumers worldwide face dimmer prospects." That could be exacerbated if European central banks keep their rates low for an extended period of time. you might want to check your own finances.S. orChina." Bonadurer says. "When the great wealth-creating machine slows down -. "The euro will lose relative value against the U.whether in Europe." But if there's an immediate silver lining to Europe's woes. Treasury bills because of their perceived relative safety as an investment. Connelly says.S.. economy is mending." Put simply. dollar.S. the sovereign debt crisis that began in Greece has spread throughout much of the eurozone. dean emeritus of the Ageno . Read on to find out how the eurozone crisis could affect your pocket book.

the bad news also tends to erode consumer confidence and that could be most damaging of all. then it becomes reality. "In 2008. "if the crisis spreads to Germany. Money market We think of money market funds as safe investments. "Consumer sentiment is driven largely by employment. and professional and financial services are likely to be hit hardest.500 points or more very quickly. 20% of the Standard & Poor's 500 index earnings come directly or indirectly from Europe. managing partner of Harris Financial Group in Colonial Heights. Bonadurer believes sectors such as aircraft. "(Those scenarios) would kill off the U. but they should check. money market funds that are heavily exposed to assets falling in price may see their own net asset value drop below $1 per share." Few funds currently have exposure to the most troubled countries but..S. there's a good chance it's insured by the Federal Deposit Insurance Corp. France or Great Britain." Cox says. then they will spend . it's not likely insured. but consumers can ask about the fund company's exposure. people in those funds got their money back. it's something Cramer says he's continuing to monitor. a France downgrade or both could well provoke an equity market crash of 1." Connelly says. says Jamie Cox. "A run on the euro banks.S. eventually. Fla. stocks are most likely to tumble on bad news from Europe? According to Bonadurer. If consumers invested in a money market account through their bank. But it's not an experience you want to go through. recovery. what is called "breaking the buck.. blow out 401(k)s and IRAs just getting back on track. and create a consumer-driven recessionary fall in spending (that may trigger) the prospect of deflation in the U. If their money market fund is through a brokerage house." So which U.S. If consumers believe that their employment status is compromised. "If enough people believe that something is true. But he says equity markets across the globe also are likely to suffer." says Scott Cramer. an investment firm in Maitland. president of Cramer & Rauchegger Inc. And while the damage is likely to be widespread. the risk that some funds may break the buck increases significantly. widespread bank failures in Europe or downgrades in European sovereign debt could spell disaster for the average American. machinery. For now. But as some consumers learned in 2008." "If a money market fund has exposure to the sovereign debt (of some eurozone countries) or a bank in one of those countries. Psychological While there's a lot of data out there about the adverse effects of a eurozone crisis. Va.School of Business at Golden Gate University in San Francisco. there's a risk that it could break the buck." Cramer says. making it difficult to predict which types of businesses will feel the most pain.

It is hoped that Europe won't see any Lehman-like collapses. the U. few people would have predicted the collapse of Lehman Brothers." Travel With the Euro under pressure and falling in value. In 2008." So far. But before you pack your bags." Vecchio says that by next fall the euro and dollar may evenly trade at or near a 1-to-1 ratio. it grinds to a halt.42 against the euro over the last year. "If the market unfolds as expected. Germany or any of the 17 countries that use the euro." Vecchio says. the more consumers believe that their employment may be at risk. travelers betting that the euro's loss will be the dollar's gain are probably right. which makes trips to Europe more affordable for the U. dollar. "Traveling to Europe during the crisis would be the ideal time. "The euro will lose relative value against the U. "But that can change quickly. dollar stands to strengthen significantly against the euro. which would reduce costs abroad.S. you might want to check your own finances.less because they are afraid. and fewer still would have pegged that event to a widespread panic that struck at the core of consumer confidence. those negative headlines in Europe haven't impacted consumer sentiment in the U. says Christopher Vecchio.32 to $1.S." Cox says." Share This Article 1. it slows down. The dollar has traded from $1. junior currency analyst at the foreign exchange trading firm DailyFX in New York." Connelly says. but if it does.S. Connelly says. "In a financial crisis.' now famous top 1%." Cox says. The more pronounced the negative headlines. Cox expects real trouble on the consumer spending front. you might guess the dollar stands to gain. "But the 99% will suffer the effects of a profound European recession. Read more: http://www. But while it's hard to predict moves in the currency market. The U.com/personal-finance/2011/12/12/five-ways-eurozone-crisis-mayimpact/#ixzz1i0vMJ1X1 . dollar would be stronger.foxbusiness.S. "Consumer spending doesn't stop in a recession.S. making American currency that much stronger for tourists traveling to France.

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