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From Wikipedia, the free encyclopedia Long-term interest rates of all eurozone countries except Estonia (secondary market yields of government bonds with maturities of close to ten years) A yield of 6 % or more indicates that financial markets have serious doubts about credit-worthiness. The European sovereign debt crisis (commonly referred to by analysts as the ESDC) is an ongoing financial crisis that has made it difficult or impossible for some countries in the euro area to re-finance their government debt without the assistance of third parties. From late 2009, fears of a sovereign debt crisis developed among investors as a result of the rising government debt levels around the world together with a wave of downgrading of government debt in some European states. Concerns intensified in early 2010 and thereafter, leading Europe's finance ministers on 9 May 2010 to approve a rescue package worth €750 billion aimed at ensuring financial stability across Europe by creating the European Financial Stability Facility (EFSF). In October 2011 and February 2012, the eurozone leaders agreed on more measures designed to prevent the collapse of member economies. This included an agreement whereby banks would accept a 53.5% write-off of Greek debt owed to private creditors, increasing the EFSF to about €1 trillion, and requiring European banks to achieve 9% capitalisation. To restore confidence in Europe, EU leaders also agreed to create a common fiscal union including the commitment of each participating country to introduce a balanced budget amendment. While sovereign debt has risen substantially in only a few eurozone countries, it has become a perceived problem for the area as a whole. Nevertheless, the European currency has remained stable. As of mid-November 2011, the euro was even trading slightly higher against the bloc's major trading partners than at the beginning of the crisis. The three countries most affected, Greece, Ireland and Portugal, collectively account for six percent of the eurozone's gross domestic product (GDP).
1 Causes o 1.1 Rising government debt levels o 1.2 Trade imbalances o 1.3 Monetary policy inflexibility o 1.4 Loss of confidence 2 Evolution of the crisis o 2.1 Greece o 2.2 Ireland o 2.3 Portugal o 2.4 Cyprus
2.5 Possible spread to other countries 2.5.1 Italy 2.5.2 Spain 2.5.3 Belgium 2.5.4 France 2.5.5 United Kingdom 3 Solutions o 3.1 EU emergency measures 3.1.1 European Financial Stability Facility (EFSF) 3.1.2 European Financial Stabilisation Mechanism (EFSM) 3.1.3 Brussels agreement and aftermath o 3.2 ECB interventions o 3.3 Economic reforms and recovery 3.3.1 Increase competitiveness 3.3.2 Increase investment 4 Proposed long-term solutions o 4.1 European fiscal union and revision of the Lisbon Treaty o 4.2 Eurobonds o 4.3 European Stability Mechanism (ESM) o 4.4 Address current account imbalances o 4.5 European Monetary Fund o 4.6 Drastic debt write-off financed by wealth tax o 4.7 Speculation about the breakup of the eurozone 5 Controversies o 5.1 EU treaty violations o 5.2 Actors fueling the crisis 5.2.1 Credit rating agencies 5.2.2 Media 5.2.3 Speculators o 5.3 Odious debt o 5.4 National statistics o 5.5 Collateral for Finland 6 Political impact 7 See also 8 References 9 External links
There are many contributing factors to the ongoing European financial crisis. To find the origin of the financial distress, researchers have to be conduct and analyze financial records dated many years and possible decades old. According to Zdeneil Kudrna, a political economist and the author of article Cross-Border Resolution of Failed Banks in the European Union after the Crisis: Business as Usual, has pinpointed the true cause of the economical crisis that threatens the existence of the European Union. In his article, Kudrna says that the financial crisis was destined
to happen due to the way the European Union deals and make their trade policies. He argues that the European Union only takes action after the facts. They only address a situation when they have already become a problem.
Public debt $ and %GDP (2010) for selected European countries The European sovereign debt crisis has resulted from a combination of complex factors, including the globalization of finance; easy credit conditions during the 2002–2008 period that encouraged high-risk lending and borrowing practices; international trade imbalances; real-estate bubbles that have since burst; slow economic growth in 2008 and thereafter; fiscal policy choices related to government revenues and expenses; and approaches used by nations to bailout troubled banking industries and private bondholders, assuming private debt burdens or socializing losses. It is sometimes suggested that the European welfare state contributed to the disaster, but this is demonstrably false. One narrative describing the causes of the crisis begins with the significant increase in savings available for investment during the 2000–2007 period when the global pool of fixed income securities increased from approximately $36 trillion in 2000 to $70 trillion by 2007. This "Giant Pool of Money" increased as savings from high-growth developing nations entered global capital markets. Investors searching for higher yields than those offered by U.S. Treasury bonds sought alternatives globally. The temptation offered by such readily available savings overwhelmed the policy and regulatory control mechanisms in country after country as global fixed income investors searched for yield, generating bubble after bubble across the globe. While these bubbles have burst causing asset prices (e.g., housing and commercial property) to decline, the liabilities owed to global investors remain at full price, generating questions regarding the solvency of governments and their banking systems. How each European country involved in this crisis borrowed and invested the money varies. For example, Ireland's banks lent the money to property developers, generating a massive property bubble. When the bubble burst, Ireland's government and taxpayers assumed private debts. In Greece, the government increased its commitments to public workers in the form of extremely generous pay and pension benefits. Iceland's banking system grew enormously, creating debts to global investors ("external debts") several times GDP.
investment banks. However. members of the European Union signed the Maastricht Treaty. But. Should Italy be unable to finance itself. under which they pledged to limit their deficit spending and debt levels. there was a long lead up to the crisis. . 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 in Greece and elsewhere". which in turn would affect France's creditors and so on. Germany and crisis countries compared to Eurozone GDP Government deficit of Eurozone compared to USA and UK In 1992. in October 2011 Italian borrowers owed French banks $366 billion (net). notably Angela Merkel. Institutions entered into contracts called credit default swaps (CDS) that result in payment should default occur on a particular debt instrument (including government issued bonds). the French banking system and economy could come under significant pressure. since multiple CDS's can be purchased on the same security.  Rising government debt levels Government debt of Eurozone. Another factor contributing to interconnection is the concept of debt protection. the banking systems of creditor nations face losses. Some politicians.S. The structures were designed by prominent U.The interconnection in the global financial system means that if one nation defaults on its sovereign debt or enters into recession putting some of the external private debt at risk. a number of EU member states. were able to circumvent these rules and mask their deficit and debt levels through the use of complex currency and credit derivatives structures. Although some financial institutions clearly profited from the growing Greek government debt in the short run. This is referred to as financial contagion. it is unclear what exposure each country's banking system now has to CDS. who received substantial fees in return for their services and who took on little credit risk themselves thanks to special legal protection for derivatives counterparties. For example. including Greece and Italy.
 Whereas German trade surpluses increased as a percentage of GDP after 1999. these countries (Portugal. increased debt levels are due to the large bailout packages provided to the financial sector during the late-2000s financial crisis. and the global economic slowdown thereafter. US economist Paul Krugman named Greece as the only country where fiscal irresponsibility is at the heart of the crisis. high debt levels alone may not explain the crisis.Public debt as a percent of GDP (2010) 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. He notes in the run-up to the crisis. Moreover. the position of the euro area looked "no worse and in some respects. Either way. Ireland. Italy and Spain) had far worse balance of payments positions. the deficits of Italy.  Trade imbalances Current account balances relative to GDP (2010) Commentators such as Financial Times journalist Martin Wolf have asserted that the root of the crisis was growing trade imbalances. France and Spain all worsened.6% before it grew to 7% during the financial crisis. In the same period. from 1999 to 2007. According to The Economist Intelligence Unit." 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. Germany had a considerably better public debt and fiscal deficit relative to GDP than the most affected eurozone members. . private-sector indebtedness across the euro area is markedly lower than in the highly leveraged Anglo-Saxon economies. rather better than that of the US or the UK. The average fiscal deficit in the euro area in 2007 was only 0. According to their analysis. In the same period the average government debt rose from 66% to 84% of GDP. The authors also stressed that fiscal deficits in the euro area were stable or even shrinking since the early 1990s.
Contributing to lack of information about the risk of European . Prior to development of the crisis it was assumed by both regulators and banks that sovereign debt from the eurozone was safe. had suffered an approximate 30 percent cut in the repayment value of this debt.More recently. As the crisis developed it became obvious that Greek. For example by the end of 2011. and possibly other countries'. eurozone investors in Sterling. assets held in a currency which has devalued suffer losses on the part of those holding them.  Loss of confidence Sovereign CDS prices of selected European countries (2010–2011). (Such an option is not available to a state such as France. In the reverse direction moreover. making its exports cheaper.) By "printing money" a country's currency is devalued relative to its (eurozone) trading partners. locked in to euro exchanges rates. following a 25 percent fall in the rate of exchange and 5 percent rise in inflation. Greece's trading position has improved.000 means it costs $1 million to protect $10 million of debt for five years. bonds offered substantially more risk. a level of 1. in principle leading to an improving balance of trade. Banks had substantial holdings of bonds from weaker economies such as Greece which offered a small premium and seemingly were equally sound. in the period November 2010 to October 2011 imports dropped 12% while exports grew 15% (40% to non-EU countries in comparison to October 2010). increased GDP and higher tax revenues in nominal terms. The left axis is in basis points.  Monetary policy inflexibility Since membership of the eurozone establishesable to "print money" in order to pay creditors and ease their risk of default.
g. indicating market expectations about countries' creditworthiness (see graph). there was renewed anxiety about excessive national debt. certain solutions require multi-national cooperation. By the end of 2011. they cannot print money in their own currencies to pay debt holders). Frightened investors demanded ever higher interest rates from several governments with higher debt levels. many of whom advocate greater deficits when economies are struggling. investors have doubts about the possibilities of policy makers to quickly contain the crisis. longer term. Since countries that use the euro as their currency have fewer monetary policy choices (e. and 5) The rising risk of economic recession in the eurozone as a whole in 2012.g. we expect output to decline next year in countries such as Spain.sovereign debt was conflict of interest by banks that were earning substantial sums underwriting the bonds. Portugal and Greece. as opposed to the U. 4) High levels of government and household indebtedness across a large area of the eurozone. Furthermore. Germany was estimated to have made more than €9 billion out of the crisis as investors flocked to safer but near zero interest rate German federal government bonds (bunds). While Switzerland equally benefited from lower interest rates. This in turn made it difficult for some governments to finance further budget deficits and service existing debt. Elected officials have focused on austerity measures (e. most importantly Germany. financial. 3) Continuing disagreements among European policy makers on how to tackle the immediate market confidence crisis and. Rating agency views On December 5."  Evolution of the crisis See also: 2000s European sovereign debt crisis timeline In the first few weeks of 2010.. 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. Especially in countries where government budget deficits and sovereign debts have increased sharply. 2) Markedly higher risk premiums on a growing number of eurozone sovereigns including some that are currently rated 'AAA'. According to the Economist. which has a dual mandate. how to ensure greater economic. The loss of confidence is marked by rising sovereign CDS prices. Federal Reserve. the European Central Bank has an inflation control mandate but not an employment mandate. S&P wrote this was due to "systemic stresses from five interrelated factors: 1) Tightening credit conditions across the eurozone. 2011 S&P placed its long-term sovereign ratings on 15 members of the eurozone on "CreditWatch" with negative implications. Currently. Further.S.. deficits and current account deficits. particularly when economic growth rates were low. the crisis also harmed its export sector due to a substantial influx of foreign capital and the resulting . but we now assign a 40% probability of a fall in output for the eurozone as a whole. and when a high percentage of debt was in the hands of foreign creditors. a crisis of confidence has emerged with the widening of bond yield spreads and risk insurance on CDS between these countries and other EU member states. as in the case of Greece and Portugal. and fiscal convergence among eurozone members. higher taxes and lower expenses) contributing to social unrest and significant debate among economists.
Greece's economy was one of the fastest growing in the eurozone and the government took advantage of it by running a large structural deficit. in which case investors were liable to lose 30–50% of their money.000 people protest against the harsh austerity measures in front of parliament building in Athens (29 May 2011) On 23 April 2010. the country's debt began to increase rapidly. the Greek government requested an initial loan of €45 billion from the EU and International Monetary Fund (IMF). As the world economy cooled in the late 2000s. Greece was hit especially hard because its main industries — shipping and tourism — were especially sensitive to changes in the business cycle.rise of the Swiss franc.20 francs". Stock markets worldwide and the Euro currency declined in response to this . A few days later Standard & Poor's slashed Greece's sovereign debt rating to BB+ or "junk" status amid fears of default. effectively weakening the Swiss franc. This is the biggest Swiss intervention since 1978. As a result.  Greece Main article: Greek government debt crisis Greece's debt percentage since 1999 compared to the average of the eurozone In the early mid 2000s. partly due to high defense spending amid historic enmity to Turkey. to cover its financial needs for the remaining part of 2010. 100. 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.
which began in October 2008 and only became worse in 2010 and 2011. but with the activation being conditional on implementation of further austerity measures and a debt restructure agreement.4% lower than in 2005. The figure was measured to 27.4% of GDP) in 2011.4%). the economic and political impact would be devastating.7bn (10. Overall the Greek GDP had its worst decline in 2011 with -6. On 10 November 2011 Papandreou instead opted to resign. The Troika (EU. by announcing a December 2011 referendum on the new bailout plan. insurers and investment funds). As a result.000 Greek companies going bankrupt (27% higher than in 2010). the troika (EU. For the first time. from €24. would be to engineer an ―orderly default‖. military coups and possible civil war that could afflict a departing country". UBS warned of "hyperinflation. the Greek government announced a series of austerity measures to secure a three year €110 billion loan. while the Youth unemployment rate during the same time rose from 22. A bit surprisingly. To prevent this from happening.5% in September 2008 to a record high of 19. and with 111. but for 2011 the figure was now estimated to have risen sharply above 33%.3bn in 2012 and another €10bn in 2013 and 2014). the bailout deal also included a debt restructure agreement with the private holders of Greek government bonds (banks.6% of GDP) in 2009 to just €5. According to Japanese financial company Nomura an exit would lead to a 60 percent devaluation of the new drachma. ECB and IMF). to appoint non-MP technocrat Lucas Papademos as new prime minister of an interim national union government. the Greek prime minister George Papandreou first answered that call. have so far helped Greece bring down its primary deficit before interest payments.announcement.6% in 2009 and 27. an IMF official negotiating Greek austerity measures admitted that excessive spending cuts were harming Greece. conditional on the implementation of another harsh austerity package (reducing the Greek spendings with €3. leading to massive protests. Overall the share of the population living at "risk of poverty or social exclusion" did not increase noteworthy during the first 2 year of the crisis.9%. but as a side-effect they also contributed to a worsening of the Greek recession. In February 2012.1%. On 1 May 2010. However. This was met with great anger by the Greek public. Some economic experts argue that the best option for Greece and the rest of the EU. with responsibility for implementing the needed austerity measures to pave the way for the second bailout loan.9% in November 2011. offered Greece a second bailout loan worth €130 billion in October 2011. following an agreement with the New Democracy party and the Popular Orthodox Rally.7% in 2010 (only being slightly worse than the EU27-average at 23. the seasonal adjusted unemployment rate also grew from 7.0% to as high as 48. who threatened to withhold an overdue €6 billion loan payment that Greece needed by midDecember. to "voluntarily" accept a bond swap with a 53. a year where the seasonal adjusted industrial output ended 28. but had to back down amidst strong pressure from EU partners. All the implemented austerity measures. riots and social unrest throughout Greece. if Greece were to leave the euro. IMF and ECB) eventually agreed in February 2012 to provide a second bailout package worth €130 billion.2bn (2. allowing Athens to withdraw simultaneously from the eurozone and reintroduce its national currency the drachma at a debased rate.5% nominal write-off along with lower interest rates and the maturity prolonged to 11-30 years (depending on the .
The economy collapsed during 2008. He renewed it for another year in September 2009 soon after the launch of the National Asset Management Agency (NAMA). The debt write-off had a seize of €107 billion. affecting some €206 billion of Greek government bonds. Jnr issued a one-year guarantee to the banks' depositors and bond-holders. Ireland . According to Forbes magazine Greece’s restructuring represents a default. It is the world's biggest debt restructuring deal ever done. On 9 March 2012 the International Swaps and Derivatives Association (ISDA) issued a communique calling the PSI/debt restructuring deal a "Restructuring Credit Event" which will cause credit default swaps. a body designed to remove bad loans from the six banks. and caused the Greek debt level to fall from roughly €350bn to €240bn in March 2012. but from the state guaranteeing the six main Irish-based banks who had financed a property bubble. Finance Minister Brian Lenihan. somewhat lower than the originally expected 120. despite draconian austerity measures. with the predicted debt burden now showing a more sustainable size equal to 117% of GDP. Unemployment rose from 4% in 2006 to 14% by 2010. On 29 September 2008. the highest in the history of the eurozone. which burst around 2007. while the federal budget went from a surplus in 2007 to a deficit of 32% GDP in 2010.5%. Irish banks had lost an estimated 100 billion euros.   Ireland Main article: 2008–2012 Irish financial crisis Irish government deficit compared to other European countries and the United States (2000– 2013) The Irish sovereign debt crisis was not based on government over-spending. much of it related to defaulted loans to property developers and homeowners made in the midst of the property bubble.previous maturity).
which has already fallen substantially since mid July 2011 (see the graph "Long-term Interest Rates"). the government received €85 billion. Risky credit. the country matched or even surpassed its neighbors in Western Europe. demonstrated that in the period between the Carnation Revolution in 1974 and 2010.5 billion "bailout" agreement of 29 November 2010 Together with additional €17. is expected to fall further to 4 per cent by 2015. the European Commission announced it would cut the interest rate on its €22. . points out that Portugal fell victim to successive waves of speculation by pressure from bond traders. shifting the losses and debt to its taxpayers. rating agencies and speculators. On 14 September 2011. the democratic Portuguese 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. entrepreneurial innovation and high-school achievement.could have guaranteed bank deposits and let private bondholders who had invested in the banks face losses.5 billion coming from Ireland's own reserves and pensions. As a result of the improved economic outlook. In return the government agreed to reduce its budget deficit to below three percent by 2015. Moody's downgraded the banks' debt to junk status. In April 2011. Persistent and lasting recruitment policies boosted the number of redundant public servants. Portugal had one of the best rates of economic recovery in the EU. This allowed considerable slippage in state-managed public works and inflated top management and head officer bonuses and wages. expecting the country to stand on its own feet again and finance itself without any external support from the second half of 2012 onwards. resulting in a €67. Denmark and Sweden. The move was expected to save the country between 600–700 million euros per year.5% and 4% and to double the loan time to 15 years. and later it was incapable of doing anything to improve the situation when the country was on the verge of bankruptcy by 2011. despite all the measures taken. Prime Minister Sócrates's cabinet was not able to forecast or prevent this in 2005. From the perspective of Portugal's industrial orders.  Portugal A report released in January 2011 by the Diário de Notícias and published in Portugal by Gradiva. the IMF and three nations: the United Kingdom. According to the Centre for Economics and Business Research Ireland's export-led recovery "will gradually pull its economy out of its trough". In the first quarter of 2010. exports. In July 2011 European leaders agreed to cut the interest rate that Ireland was paying on its EU/IMF bailout loan from around 6% to between 3. of which €34 billion were used to support the country's ailing financial sector.59 per cent – which is the interest rate the EU itself pays to borrow from financial markets. down to 2. public debt creation. Robert Fishman. with severe negative impact on Ireland's creditworthiness. and European structural and cohesion funds were mismanaged across almost four decades. but instead borrowed money from the ECB to pay these bondholders. the cost of 10-year government bonds. before pressure from the markets. in a move to further ease Ireland's difficult financial situation. The Euro Plus Monitor report from November 2011 attests to Ireland's vast progress in dealing with its financial crisis. As a result. in the New York Times article "Portugal's Unnecessary Bailout".5 billion loan coming from the European Financial Stability Mechanism. the government started negotiations with the EU.
with cuts reaching 25% for those earning more than 1.  Possible spread to other countries .500 euro[quantify]. it was reported that Portugal's estimated budget deficit of 4. The country would therefore meet its 2012 target a year earlier than expected. The loan has an interest rate of 4. Cyprus is relying on a € 2.5 years though it is expected that Cyprus will be able to fund itself again by the first quarter of 2013. On 13 March 2012 Moody's has slashed Cyprus's credit rating into Junk status. after Ireland and Greece.  Cyprus In September 2011. The Portuguese government also agreed to eliminate its golden share in Portugal Telecom to pave the way for privatization.5 percent in 2012 and 3 percent in 2013.8 percent of GDP in 2010 to 5. warning that the Cyprus government will have to inject fresh capital into its banks to cover losses incurred through Greece's debt swap. all public servants had already seen an average wage cut of 20% relative to their 2010 baseline. due to a one-off transfer of pension funds. On 6 July 2011. the eurozone leaders officially approved a €78 billion bailout package for Portugal. As part of the deal. many looking for better positions in the private sector or in other European countries. yields on Cyprus long-term bonds have risen above 12%.5% and it is valid for 4. which became the third eurozone country. Despite the fact that the economy is expected to contract by 3 percent in 2011 the IMF expects the country to be able to return to medium and long-term debt sovereign markets by late 2013. Since January 2012. the country agreed to cut its budget deficit from 9. Cyprus's banks were highly exposed to Greek debt and so are disproportionately hit by the haircut taken by creditors.1 percent. the ratings agency Moody's had cut Portugal's credit rating to junk status. In 2012.On 16 May 2011. the European Financial Stability Facility. Moody's also launched speculation that Portugal could follow Greece in requesting a second bailout.9 percent in 2011. The bailout loan was equally split between the European Financial Stabilisation Mechanism. and the International Monetary Fund. the average interest rate on the bailout loan is expected to be 5. to receive emergency funds.5 percent in 2011 would be substantially lower than expected. since the small island of 840. In December 2011.5bn emergency loan from Russia to cover its budget deficit and re-finance maturing debt.000 people was downgraded by all major credit ratings agencies following a devastating explosion at a power plant in July and slow progress with fiscal and structural reforms. This led to a flood of specialized technicians and top officials leaving the public service. 4. According to the Portuguese finance minister.
with a . Spain. Greece. the EU and the eurozone for 2009 The 2010 annual budget deficit and public debt. 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. Note that weak non-eurozone countries (Hungary.Total financing needs of selected countries in % of GDP (2011–2013) Economic data from Portugal. Italy. Ireland. One of the central concerns prior to the bailout was that the crisis could spread to several other countries after reducing confidence in other European economies. Germany. United Kingdom." Besides Ireland. both relative to GDP for selected European countries Long-term interest rates of selected European countries. Romania) lack the sharp rise in interest rates characteristic of weak eurozone countries.
 On 11 November 2011. Ireland or Greece.  Spain See also: 2008–2011 Spanish financial crisis Spain has a comparatively low debt among advanced economies. while the U. Italy's government passed austerity measures meant to save €124 billion. The interim government expected to put the new laws into practice is led by former European Union Competition Commissioner Mario Monti.S. The country's public debt relative to GDP in 2010 was only 60%. with the re-emergence of even child labour in poorer areas.1%. have had fraught moments as investors shunned bond auctions due to concerns about public finances and the economy. which excludes debt interest payments. Germany and the UK.S. France or the US. the OECD forecast $16 trillion would be raised in government bonds among its 30 member countries. About 300 billion euros of Italy's 1. On the other hand. and Portugal at 9.6 percent of GDP in 2010 was similar to Germany’s at 4. the public debt of Italy has a longer maturity and a substantial share of it is held domestically. Overall this makes the country more resilient to financial shocks. and Japan has ¥213 trillion of government bonds to roll over.government deficit in 2010 of 32. The measures include a pledge to raise €15 billion from real-estate sales over the next three years. opening up closed professions within 12 months and a gradual reduction in government ownership of local services.2% are also at risk. by 8 November 2011 the Italian bond yield was 6. ranking better than France and Belgium. On 15 July and 14 September 2011. the social effects have been severe.74 percent for 10-year bonds. Greece has been the notable example of an industrialised country that has faced difficulties in the markets because of rising debt levels but even countries such as the U. This has led investors to view Italian bonds more and more as a risky asset. As in other countries.3 percent and less than that of the U. is expected to issue US$1. Italy even has a surplus in its primary budget. more than 20 points less than Germany. and more than 60 points less than Italy. $2. It will therefore have to go to the capital markets for significant refinancing in the near-term. other countries such as Spain with 9. Financing needs for the eurozone come to a total of €1. For 2010.  Italy Italy's deficit of 4. its debt has increased to almost 120 percent of GDP (U. and both countries are in a better fiscal situation than Greece and . a two-year increase in the retirement age to 67 by 2026. and France.S. Like Italy. Nonetheless. Italian 10-year borrowing costs fell sharply from 7. climbing above the 7 percent level where the country is thought to lose access to financial markets.7 percent after Italian legislature approved further austerity measures and the formation of an emergency government to replace that of Prime Minister Silvio Berlusconi..4% of GDP.9 trillion euro debt matures in 2012.6 trillion.4 trillion in 2010) and economic growth was lower than the EU average for over a decade.7 trillion more Treasury securities in this period. However.K.5 to 6. Spain has most of its debt controlled internally.
 To build up additional trust in the financial markets. though exceptions would be made in case of a natural catastrophe. Spain's public debt was approximately U.66%. Shortly after.S. Portugal (7%) and Spain (5. the IMF. The amendment states that public debt can not exceed 60% of GDP. the government amended the Spanish Constitution in 2011 to require a balanced budget at both the national and regional level by 2020.  Belgium In 2010.5% in 2011.2%).2% in 2010 and 8. Due to the European crisis and over spending by regional governments the latest figure is higher than the original target of 6%.Portugal.7% were still below those of Ireland (9. making a default unlikely unless the situation gets far more severe. the Belgian Government financed the deficit from mainly domestic savings. After inconclusive elections in June 2010. As one of the largest eurozone economies the condition of Spain's economy is of particular concern to international observers.8% of GDP by 2012. thanks to Belgium's high personal savings rate. and to balance . following the country's major financial crisis in 2008–2009. other European countries and the European Commission to cut its deficit more aggressively. Belgium's public debt was 100% of its GDP—the third highest in the eurozone after Greece and Italy and there were doubts about the financial stability of the banks.2% of GDP in 2009 to 9.3 percent in 2012 and 3 percent in 2013. in order to signal financial markets that it was safe to invest in the country. Belgian negotiating parties reached an agreement to form a new government. The deal includes spending cuts and tax rises worth about €11 billion. However the government deficit of 5% was relatively modest and Belgian government 10-year bond yields in November 2010 of 3. Nevertheless. but weak economic growth as well as domestic and international pressure forced the government to expand on cuts already announced in January. economic recession or other emergencies. $820 billion in 2010. Nevertheless on 25 November 2011. Furthermore.2%). Belgium's long-term sovereign credit rating was downgraded from AA+ to AA by Standard and Poor and 10-year bond yields reached 5. Under pressure from the EU the new conservative Spanish government led by Mariano Rajoy aims to cut the deficit further to 5. and Ireland combined. which should bring the budget deficit down to 2. Spain had to announce new austerity measures designed to further reduce the country's budget deficit. making it less prone to fluctuations of international credit markets. Spain succeeded in trimming its deficit from 11. Rumors raised by speculators about a Spanish bail-out were dismissed by then Spanish Prime Minister José Luis Rodríguez Zapatero as "complete insanity" and "intolerable". The Spanish government had hoped to avoid such deep cuts. 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. by November 2011 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. shortly after the announcement of the EU's new "emergency fund" for eurozone countries in early May 2010. and has faced pressure from the United States. roughly the level of Greece. Portugal.
  Solutions  EU emergency measures  European Financial Stability Facility (EFSF) Main article: European Financial Stability Facility On 9 May 2010.  United Kingdom According to the Financial Policy Committee "Any associated disruption to bank funding markets could spill over to UK banks. By early February 2012.S." 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. 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. recapitalize banks or buy sovereign debt.  France France's public debt in 2010 was approximately U.6%.  The EFSF issued €5 billion of five-year bonds in its inaugural benchmark issue January 25 2011. yields on French 10 year bonds had fallen to 2.1 trillion and 83% GDP. France's bond yield spreads vs.580 per person) due in large part to its highly leveraged financial industry.3 billion worth of 10 year bonds at an average yield of 3.the books in 2015. well below the perceived critical level of 7%. 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. Following the announcement Belgium 10-year bond yields fell sharply to 4. On 1 December 2011. $2.5 billion. This is because the UK has the highest gross foreign debt of any European country (€7.S. By 16 November 2011. which is closely connected with both the United States and the eurozone. the 27 EU member states agreed to create the European Financial Stability Facility. €117.84%. 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 the European 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. contract value rose 300% in the same period. This amount is a record for any sovereign bond in . 2011. France's C. a legal instrument aiming at preserving financial stability in Europe by providing financial assistance to eurozone states in difficulty. attracting an order book of €44. France's bond yield had retreated and the country successfully auctioned €4.3 trillion. Germany had widened 450% since July.D.18%. with a 2010 budget deficit of 7% GDP.
it has been activated two times. 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.5 billion rescue package for Ireland (the rest was loaned from individual European countries. and €24. Shortly after the euro rose again as hedge funds and other shortterm traders unwound short positions and carry trades in the currency. The facility eased fears that the Greek debt crisis would spread. before falling to a new four-year low a week later. On 29 November 2011. The dollar Libor held at a nine-month high. the European Commission and the IMF). it financed €17. with a €5 billion issue in the first week of January 2011. Reception by financial markets Stocks surged worldwide after the EU announced the EFSF's creation. The euro made its biggest gain in 18 months. this is . In November 2010.) Usage of EFSF funds Debt profile of Eurozone countries The EFSF only raises funds after an aid request is made by a country. Asian bonds yields also fell with the EU bailout. The agreement is interpreted as allowing the ECB to start buying government debt from the secondary market which is expected to reduce bond yields. As a result Greek bond yields fell sharply from over 10% to just over 5%. and to create investment vehicles that would boost the EFSF’s firepower to intervene in primary and secondary bond markets.5 billion more than the European Financial Stabilisation Mechanism (EFSM). As part of the second bailout for Greece. As of the end of December 2011.7 billion of the total €67. The VIX closed down a record almost 30%. In May 2011 it contributed one third of the €78 billion package for Portugal. Commodity prices also rose following the announcement. This leaves the EFSF with €250 billion or an equivalent of €750 billion in leveraged firepower.4bn remaining from Greek Loan Facility) throughout 2014.Europe. the loan was shifted to the EFSF. after a record weekly rise the preceding week that prompted the bailout. and this led to some stocks rising to the highest level in a year or more. Default swaps also fell. According to German newspaper Sueddeutsche. a separate European Union funding vehicle. amounting to €164 billion (130bn new package plus 34.
 On 13 January 2012. It runs under the supervision of the Commission and aims at preserving financial stability in Europe by providing financial assistance to EU member states in economic difficulty.more than enough to finance the debt rollovers of all flagging European countries until end of 2012. backed by all 27 European Union members. the EU successfully placed in the capital markets a €5 billion issue of bonds as part of the financial support package agreed for Ireland. Luxembourg. which will start operating as soon as member states representing 90% of the capital commitments have ratified it.59%. Moody's and Standard & Poor's. The Commission fund. 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 . 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.  European Financial Stabilisation Mechanism (EFSM) Main article: European Financial Stabilisation Mechanism On 5 January 2011. The EFSF is set to expire in 2013. lowered Spain. the European Union created the European Financial Stabilisation Mechanism (EFSM). the EFSM will also be replaced by the permanent rescue funding programme ESM. Standard & Poor’s downgraded France and Austria from AAA rating. Italy (and five other) euro members further. running one year parallel to the permanent €500 billion rescue funding program called the European Stability Mechanism (ESM). S&P also downgraded the EFSF from AAA to AA+. Also pledged was €35 billion in "credit enhancement" to mitigate losses likely to be suffered by European banks. Germany. Like the EFSF. shortly after. leaders of the 17 eurozone countries met in Brussels and agreed on a 50% write-off of Greek sovereign debt held by banks. 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. in case necessary. at a borrowing cost for the EFSM of 2. and maintained the top credit rating for Finland. and the Netherlands. José Manuel Barroso characterised the package as a set of "exceptional measures for exceptional times".  Brussels agreement and aftermath On 26 October 2011. a fourfold increase (to about €1 trillion) in bailout funds held under the European Financial Stability Facility. This is expected to be in July 2012. Under the EFSM. which is due to be launched in July 2012. has the authority to raise up to €60 billion and is rated AAA by Fitch.
upsetting financial markets. Beyond equity issuance and debt-to-equity conversion. Furthermore. Thomas quoted Richard Koo. as saying: I do not think Europeans understand the implications of a systemic banking crisis. When all banks are forced to raise capital at the same time. In late 2011. Final agreement on the second bailout package In a marathon meeting on 20/21 February 2012 the Eurogroup agreed with the IMF and the Institute of International Finance on the final conditions of the second bailout package worth €130 billion..5% of GDP by 2020. an expert on that country's banking crisis. they will move faster to cut down on loans and unload lagging assets" as they work to improve capital ratios. and specialist in balance sheet recessions. On 3 November 2011 the promised Greek referendum on the bailout package was withdrawn by Prime Minister Papandreou...  ECB interventions . EU Member States agreed to an additional retroactive lowering of the interest rates of the Greek Loan Facility to a level of just 150 basis points above the Euribor.5%.final say on the bailout. Reduced lending was a circumstance already at the time being seen in a "deepen[ing] crisis" in commodities trade finance in western Europe. one analyst "said that as banks find it more difficult to raise funds. This latter contraction of balance sheets "could lead to a depression‖.. Landon Thomas in the New York Times noted that some. at least. then. Altogether this should bring down Greece's debt to between 117% and 120. an economist based in Japan. governments of Member States where central banks currently hold Greek government bonds in their investment portfolio commit to pass on to Greece an amount equal to any future income until 2020. the result is going to be even weaker banks and an even longer recession — if not depression... the analyst said. 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. The lenders agreed to increase the nominal haircut from 50% to 53. Government intervention should be the first resort. not the last resort.
 It changed its policy regarding the necessary credit rating for loan deposits. accepting as collateral all outstanding and new debt instruments issued or guaranteed by the Greek government. though it simultaneously absorbed the same amount of liquidity to prevent a rise in inflation. which had just been downgraded to junk status.S. The move took some pressure off Greek government bonds. Federal Reserve. According to Rabobank economist Elwin de Groot. 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. regardless of the nation's credit rating. They also agreed to provide each other with abundant liquidity to make sure that commercial banks stay liquid in other currencies. the central banks of Canada. It reactivated the dollar swap lines with Federal Reserve support. Japan.ECB Securities Markets Program (SMP) covering bond purchases from May 2010 till March 2012 The European Central Bank (ECB) has taken a series of measures aimed at reducing volatility in the financial markets and at improving liquidity. On 30 November 2011. making it difficult for the government to raise money on capital markets. The central banks agreed to lower the cost of dollar currency swaps by 50 basis points to come into effect on 5 December 2011. reaching €219. Long Term Refinancing Operation (LTRO) The ECB conducts repo auctions as weekly main refinancing operations (MRO with a (bi)weekly maturity and monthly Long Term Refinancing Operations (LTROs) maturing after .5 billion by February of 2012. In May 2010 it took the following actions: It began open market operations buying government and private debt securities. the European Central Bank. there is a ―natural limit‖ of €300 billion the ECB can sterilize. the U.
 This way the ECB tried 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. which critics say erode the bank’s independence". Italy and Spain.three months. Previously the longest tender offered was three months. Jürgen Stark became the second German after Axel A. It also hoped that banks would use some of the money to buy government bonds. the former Deutsche Bundesbank president. In 2003. was once thought to be a likely successor to Jean-Claude Trichet as bank president. providing 800 Eurozone banks with further €529. Under its LTRO it loaned €489 billion to 523 banks for an exceptionally long period of three years at a rate of just one percent. while Belgium's Peter Praet took Stark's original position. refinancing via LTROs amounted to 45 bln Euro which is about 20% of overall liquidity provided by the ECB.  On 22 December 2011. On 29 February 2012.5 billion in cheap loans.  Economic reforms and recovery  Increase competitiveness See also: Euro Plus Pact . 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. The €25 billion auction drew bids amounting to €103. effectively easing the debt crisis. out of a total of €256 billion existing ECB lending (MRO + 3m&6m LTROs). Weber was replaced by his Bundesbank successor Jens Weidmann. and was more than four times oversubscribed. Weber to resign from the ECB Governing Council in 2011. Ireland. The first 1y LTRO in June 2009 had close to 1100 bidders. LTRO2.  The ECB's first supplementary longer-term refinancing operation (LTRO) with a six-month maturity was announced March 2008. from 177 banks. It announced two 3-month and one 6-month full allotment of Long Term Refinancing Operations (LTROs). €215 billion was rolled into LTRO2.  Net new borrowing under the €529. The first tender was settled April 3. and at the same time keep operating and loaning to businesses so that a credit crunch does not choke off economic growth. Another six-month tender was allotted on July 9. again to the amount of €25 billion. He and Stark were both thought to have resigned due to "unhappiness with the ECB’s bond purchases.5 billion February auction was around €313 billion. Weber.  Resignations In September 2011. The by far biggest amount of €325 billion was tapped by banks in Greece. the ECB held a second auction.1 billion. heading the ECB's economics department.
not deficit spending that created this crisis. British economic historian Robert Skidelsky disagreed saying it was excessive lending by banks. To improve the situation. Now they face pressures from three fronts: demography (an aging population). Instead . No debt restructuring will work if it stays stagnant for another decade. where a country aims to reduce its unit labour costs. a painful economic adjustment process... Since eurozone countries cannot devalue their currency. as in the case of Iceland." He advocated lower wages and steps to bring in more foreign capital investment. Typically this is done by depreciating the currency. effectively reaching the level of Turkey. 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). Italy's economy has not grown for an entire decade. not its cause. Fareed Zakaria described the factors slowing growth in the eurozone. which helped decrease its relative price/wage levels by 16%. which suffered the largest financial crisis in 2008-2011 in economic history but has since vastly improved its position.. writing in November 2011: "Europe's core problem [is] a lack of growth. Greece would need to bring this figure down by 31%. German economist Hans-Werner Sinn noted in 2012 that Ireland was the only country that had implemented relative wage moderation in the last five year.have become sclerotic. policy makers try to restore competitiveness through internal devaluation. Government's mounting debts are a response to the economic downturn as spending rises and tax revenues fall. crisis countries must significantly increase their international competitiveness.with high wages. they could never compete with low-cost developing countries such as China or India. The fact is that Western economies .. generous middle-class subsidies and complex regulations and taxes . increasing deficits and debt levels.Change in unit labour costs (2000-2010) Eurozone economic health and adjustment progress 2011 (Source: Euro Plus Monitor) Slow GDP growth rates correspond to slower growth in tax revenues and higher safety net spending. Other economists argue that no matter how much Greece and Portugal drive down their wages.
Greece. In early 2012 an IMF official.  Increase investment There has been substantial criticism over the austerity measures implemented by most European nations to counter this debt crisis. though this is a long-term process and may not bring immediate relief. Ireland and Spain are among the top five reformers and Portugal is ranked seventh among 17 countries included in the report (see graph). the IMF's independent evaluation office found that policy makers consistently underestimated the disastrous effects of rigid spending cuts on economic growth. who negotiated Greek austerity measures. This led to even lower demand for both products and labor. Keynes suggested increasing investment and cutting income tax for low earners to kick-start the economy and boost growth and employment. . Progress On 15 November 2011. German economist and member of the German Council of Economic Experts Peter Bofinger and Sony Kapoor from global think tank "re-define" suggest financing additional public investments by growth-friendly taxes on "property. which could then lend ten times that amount to the employment-intensive smaller business sector.." According to Keynesian economists "growth-friendly austerity" relies on the false argument that public cuts would be compensated for by more spending from consumers and businesses. The authors note that "Many of those countries most in need to adjust [. which further deepened the recession and made it ever more difficult to generate tax revenues and fight public indebtedness.. Furthermore they suggest providing €40 billion in additional funds to the European Investment Bank.] are now making the greatest progress towards restoring their fiscal balance and external competitiveness". land. a theoretical claim that has not materialized. Currently authorities capture less than 1% in annual tax revenue on untaxed wealth transferred to other EU members. carbon emissions and the under-taxed financial sector". the Lisbon Council published the Euro Plus Monitor 2011. In a 2003 study that analyzed 133 IMF austerity programmes. Instead of austerity. Nouriel Roubini adds that 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. Since struggling European countries lack the funds to engage in deficit spending. wealth. all this money is conditional on all these countries doing fiscal adjustment and structural reform.weak European countries must shift their economies to higher quality products and services. They also called on EU countries to renegotiate the EU savings tax directive and to sign an agreement to help each other crack down on tax evasion and avoidance. poverty and the closure of businesses) led the private sector to decrease spending in an attempt to save up for rainy days ahead. The case of Greece shows that excessive levels of private indebtedness and a collapse of public confidence (over 90% of Greeks fear unemployment. admitted that spending cuts were harming Greece. According to the report most critical eurozone member countries are in the process of rapid reforms. Some argue that an abrupt return to "non-Keynesian" financial policies is not a viable solution and predict that deflationary policies now being imposed on countries such as Greece and Spain might prolong and deepen their recessions.
 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 the Lisbon 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". Germany. though their introduction matched by tight financial and budgetary coordination may well require changes in EU treaties. Jose Manuel Barroso insisted that any such plan would have to be matched by tight fiscal surveillance and economic policy . 26 countries had agreed to the plan. is a macroeconomic solution. and bankers. union leaders have also argued that the working population is being unjustly held responsible for the economic mismanagement errors of economists. including the proposed EU financial transaction tax. On 9 December 2011 at the European Council meeting. By the end of the day. but the entire world. All other non-eurozone countries apart from the UK are also prepared to join in.  Eurobonds Main article: Eurobonds A growing number of investors and economists say Eurobonds would be the best way of solving a debt crisis. rather than increased or frozen spending. 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. and this has led many to call for additional regulation of the banking sector across not only Europe. 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. with penalties for those countries who violate the limits.Apart from arguments over whether or not austerity. On 21 November 2011. Using the term "stability bonds". all 17 members of the eurozone and six countries that aspire to join agreed on a new intergovernmental treaty to put strict caps on government spending and borrowing. Over 23 million EU workers have become unemployed as a consequence of the global economic crisis of 2007–2010. Originally EU leaders planned to change existing EU treaties but this was blocked by British prime minister David Cameron. who demanded that the City of London be excluded from future financial regulations. subject to parliamentary vote. By the end of the year. Cameron subsequently conceded that his action had failed to secure any safeguards for the UK.  Proposed long-term solutions  European fiscal union and revision of the Lisbon Treaty Main article: European Fiscal Union In March 2011 a new reform of the Stability and Growth Pact was initiated. leaving the United Kingdom as the only country not willing to join. the European Commission suggested that eurobonds issued jointly by the 17 euro nations would be an effective way to tackle the financial crisis. investors.
 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 including stronger sanctions. the firewall mechanism can ensure that downstream nations and banking systems are protected by guaranteeing some or all of their obligations. According to this treaty.coordination as an essential counterpart so as to avoid moral hazard and ensure sustainable public finances. rather than EU states. the European Parliament approved the treaty amendment after receiving assurances that the European Commission. Germany remains opposed (at least in the short term) to take over the debt and interest risk of states that have run excessive budget deficits and borrowed excessively over the past years.  Address current account imbalances Current account imbalances (1997-2013) ." Instead of a default by one country rippling through the entire interconnected financial system. In March 2011. However. the ESM will be an intergovernmental organisation under public international law and will be located in Luxembourg. saying this could substantially raise the country's liabilities. Such a mechanism serves as a "financial firewall.  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. would play 'a central role' in running the ESM. Then the single default can be managed while limiting financial contagion.
These bonds would not be tradable but could be held by investors with the EMF and liquidated at any time. if a country's citizens saved more instead of consuming imports. Greece) consume less and improve their exporting industries. the Austrian Institute of Economic Research published an article that suggests transforming the EFSF into a European Monetary Fund (EMF). this would reduce its trade deficit. the EMF would operate according to strict rules. arguing that a "savings glut" in one country with a trade surplus can drive capital into other countries with trade deficits. so devaluation.31bn and $35. In other words. Alternatively." To ensure fiscal discipline despite the lack of market pressure. This currency appreciation occurs as the importing country sells its currency to buy the exporting country's currency used to purchase the goods. Austria and the Netherlands would need to shift their economies more towards domestic services and increase wages to support domestic consumption. A similar imbalance exists in the U. On the other hand. many of the countries involved in the crisis are on the euro. For example. $75. Either way. Spain. while Germany's trade surplus was $188. importing more than it exports) must ultimately be a net importer of capital. which runs a large trade deficit (net import position) and therefore is a net borrower of capital from abroad. A country that runs a large current account or trade deficit (i. artificially lowering interest rates and creating asset bubbles. The 2009 trade deficits for Italy. Conversely. and $25. export driven countries with a large trade surplus. current account imbalances are likely to continue.. A country with a large trade surplus would generally see the value of its currency appreciate relative to other currencies. or by raising interest rates. Greece. this is a mathematical identity called the balance of payments. a country that imports more than it exports must either decrease its savings reserves or borrow to pay for those imports.6bn.  European Monetary Fund On 20 October 2011. and Portugal were estimated to be $42.6bn respectively. trade imbalances can be reduced if a country encouraged domestic saving by restricting or penalizing the flow of capital across borders. such as Germany. The only solution left to raise a country's level of saving is to reduce budget deficits and to change consumption and savings habits.S. although this benefit is likely offset by slowing down the economy and increasing government interest payments.Regardless of the corrective measures chosen to solve the current predicament. individual interest rates and capital controls are not available. Ben Bernanke warned of the risks of such imbalances in 2005. It has therefore been suggested that countries with large trade deficits (e.96 billion.e. which could provide governments with fixed interest rate Eurobonds at a rate slightly below medium-term economic growth (in nominal terms).. providing . lending money to other countries to allow them to buy German goods. as long as cross border capital flows remain unregulated in the euro area. which would reduce the imbalance as the relative price of its exports increases.g. Germany's large trade surplus (net export position) means that it must either increase its savings reserves or be a net exporter of capital. Given the backing of all the eurozone countries and the ECB "the EMU would achieve a similarly strong position vis-a-vis financial investors as the US where the Fed backs government bonds to an unlimited extent.97bn.
To prevent a vicious upward debt spiral from gaining momentum the authors urge policy makers to "act quickly and decisively" and aim for an overall debt level well below 180 percent for the private and government sector. Furthermore. the combined private and public debt of 18 OECD countries nearly quadrupled between 1980 and 2010. and private households can each sustain a debt load of 60 percent of GDP. at an . reaching between 250% (for Italy) and about 600% (for Japan) by 2040. Greece's debt level falling below 110% of GDP.5 % and 3 %.g. The Boston Consulting Group (BCG) adds that if the overall debt load continues to grow faster than the economy. UK and U. At the same time sovereign debt levels would be significantly lower with e. to reach sustainable grounds According to the Bank for International Settlements.funds only to countries that meet fiscal and macroeconomic criteria.  Drastic debt write-off financed by wealth tax Overall debt levels in 2009 and write-offs necessary in the Eurozone. The econometric analysis suggests that "If the short-term and long.S. private household debt is more than 85 percent of GDP. The same authors also found in a previous study that increased financial burden imposed by aging populations and lower growth makes it unlikely that indebted economies can grow out of their debt problem if only one of the following three conditions is met: government debt is more than 80 to 100 percent of GDP. Governments lacking sound financial policies would be forced to rely on traditional (national) governmental bonds with less favorable market rates. respectively. aggregate output (GDP) in the euro area would be 5 percentage points above baseline in 2015". This number is based on the assumption that governments. banks would no longer be able to unduly benefit from intermediary profits by borrowing from the ECB at low rates and investing in government bonds at high rates. and will likely continue to grow. then large-scale debt restructuring becomes inevitable. nonfinancial corporations. non-financial corporate debt is more than 90 percent.term interest rates in the euro area were stabilized at 1. more than 40 percentage points below the baseline scenario with market based interest levels.
 Instead of a one-time write-off. if the Greek and Irish bailouts should fail. If this was not immediately feasible. As the debt crisis expanded beyond Greece. these economists continued to advocate. bigger than China or Japan. Finland. Sweden. 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. default on their debts. The Wall Street Journal added that without the German-led bloc. To reach sustainable levels the Eurozone must reduce its overall debt level by €6. mostly from outside Europe and associated with Modern Monetary Theory and other post-Keynesian schools. or create another currency union with the Netherlands. however. an alternative would be for Germany to leave the eurozone in order to save the currency through depreciation instead of austerity. Bloomberg suggested in June 2011 that. Luxembourg and other European countries such as Denmark. Also The Wall Street Journal conjectured that Germany could return to the Deutsche Mark. The authors admit that such programs would be "drastic". German Chancellor Angela Merkel and French President Nicolas Sarkozy have. the disbandment of the eurozone. Ricci of the IMF.  Speculation about the breakup of the eurozone Economists. When faced with economic problems. on numerous occasions publicly said that they would not allow the eurozone to disintegrate. According to BCG this could be financed by a one-time wealth tax of between 11 and 30 percent for most countries. regain their fiscal sovereignty. Switzerland and the Baltics. a residual euro would have the flexibility to keep interest rates low and engage in quantitative easing or fiscal stimulus in support of a job-targeting economic policy instead of inflation targeting in the current configuration. though it is moving in that direction. they recommended that Greece and the other debtor nations unilaterally leave the eurozone. linking the survival of the euro with that of the entire European Union. the more necessary such a step will be. such as Luca A.1 trillion. "Without such an institution. EMU would prevent effective action by individual countries and put nothing in its place. apart from the crisis countries (particularly Ireland) where a write-off would have to be substantially higher. The likely substantial fall in the euro against a newly reconstituted Deutsche Mark would give a "huge boost" to its members' competitiveness. Austria. contend the eurozone does not fulfill the necessary criteria for an optimum currency area. and re-adopt national currencies. "unpopular" and "require broad political coordination and leadership" but they maintain that the longer politicians and central bankers wait. they maintained. In September 2011. Similar calls have been made by political parties in Germany including the Greens and The Left. German economist Harald Spehl has called for a 30 year debtreduction plan." Some non-Keynesian economists. A monetary union of these countries with current account surpluses would create the world's largest creditor bloc. Lower interest rates and/or higher growth would help reduce the debt burden further. Norway. similar to the one Germany used after the Second World War to share the burden of reconstruction and development.interest rate of 5 percent and a nominal economic growth rate of 3 percent per year. albeit more forcefully. EU .
the EU and eurozone countries also encourage moral hazard in the future. Articles 125 and 123 were meant to create disincentives for EU member states to run excessive deficits and state debt. Convergence criteria The EU treaties contain so called convergence criteria. . saying that expelling weaker countries from the euro was not an option. 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. onto European taxpayers. The clause thus encourages prudent fiscal policies at the national level. 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. 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. who otherwise are lined up for losses on the sovereign debt they recklessly bought. The European Central Bank's purchase of distressed country bonds can be viewed as violating the prohibition of monetary financing of budget deficits (Article 123 TFEU). and prevent the moral hazard of over-spending and lending in good times.  EU treaty violations 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 EU's Maastricht Treaty contains juridical language which appears to rule out intra-EU bailouts. By issuing bail-out aid guaranteed by prudent eurozone taxpayers to rule-breaking eurozone countries such as Greece. Nevertheless the main crisis states Greece and Italy (status November 2011) have substantially exceeded these criteria over a long period of time. First. The creation of further leverage in EFSF with access to ECB lending would also appear to violate the terms of this article. former ECB president Jean-Claude Trichet also denounced the possibility of a return of the Deutsche Mark. They were also meant to protect the taxpayers of the other more prudent member states.commissioner Joaquín Almunia shared this view. the "no bail-out doctrine" seems to be a thing of the past. Furthermore. While the no bail-out clause remains in place.  Controversies The European bailouts are largely about shifting exposure from banks and others.
ratings agencies have a tendency to act conservatively. Redes Energéticas Nacionais. and to take some time to adjust when a firm or country is in trouble. State owned utility and infrastructure companies like ANA – Aeroportos de Portugal. Michael Fuchs.S. as much debt. On the other hand. accusing the Big Three of bias towards European assets and fueling speculation. with Greek bonds trading at junk levels several weeks before the ratings agencies began to describe them as such." Credit rating agencies were also accused of bullying politicians by systematically downgrading eurozone countries just before important European Council meetings. less growth than us". adding that the latter's collective private and public sector debts are the largest in Europe. Particularly Moody's decision to downgrade Portugal's foreign debt to the category Ba2 "junk" has infuriated officials from the EU and Portugal alike. France too has shown its anger at its downgrade." . Actors fueling the crisis  Credit rating agencies Standard & Poor's Headquarters in Lower Manhattan. Standard & Poor's and Fitch— which have already been under fire during the housing bubble and the Icelandic crisis—have also played a central and controversial role in the current European bond market crisis. and Brisa – Autoestradas de Portugal were also downgraded despite claims to having solid financial profiles and significant foreign revenue. it should also downgrade Britain in order to be consistent. As one EU source put it: "It is interesting to look at the downgradings and the timings of the downgradings . the agencies have been accused of giving overly generous ratings due to conflicts of interest. deputy leader of the leading Christian Democrats. It is strange that we have so many downgrades in the weeks of summits. Energias de Portugal. said: "Standard and Poor's must stop playing politics.. more inflation. New York City The international U. In the case of Greece. On the one hand. He further added: "If the agency downgrades France. European policy makers have criticized ratings agencies for acting politically. French central bank chief Christian Noyer criticized the decision of Standard & Poor's to lower the rating of France but not that of the United Kingdom. which "has more deficits.-based credit rating agencies—Moody's.. Why doesn't it act on the highly indebted United States or highly indebted Britain?". Similar comments were made by high ranking politicians in Germany. the market responded to the crisis before the downgrades.
Some European financial law and regulation experts have argued that the hastily drafted. e. the company said it was already collecting funds from financial institutions and business intelligence agencies to set up an independent non-profit ratings agency by mid 2012. says ESMA Chief Steven Maijoor. In essence. setting up a new ratings agency would cost €300 million. and poorly enforced EU rule on ratings agencies (Regulation EC N° 1060/2009) has had little effect on the way financial analysts and economists interpret data or on the potential for conflicts of interests created by the complex contractual arrangements between credit rating agencies and their clients"  Media There has been considerable controversy about the role of the English-language press in regard to the bond market crisis. But attempts to regulate more strictly credit rating agencies in the wake of the European sovereign debt crisis have been rather unsuccessful. European regulators obtained new powers to supervise ratings agencies. political or financial". this forced European banks and more importantly the European Central Bank. On 30 January 2012. European leaders are reportedly studying the possibility of setting up a European ratings agency in order that the private U. which could provide its first country ratings by the end of the year. to rely heavily on the standardized assessments of credit risk marketed by only two private US agencies. which became the EU’s single credit-ratings firm regulator. Credit-ratings companies have to comply with the new standards or will be denied operation on EU territory. including the European Securities and Markets Authority (ESMA).g. The Spanish Prime Minister José Luis Rodríguez Zapatero has also suggested that the recent financial .-based ratings agencies have less influence on developments in European financial markets in the future.Regulatory reliance on credit ratings Think-tanks such as the World Pensions Council have criticized European powers such as France and Germany for pushing for the adoption of the Basel II recommendations. According to German consultant company Roland Berger. which could avoid the conflicts of interest that he claimed US-based agencies faced. adopted in 2005 and transposed in European Union law through the Capital Requirements Directive (CRD). when gauging the solvency of EU-based financial institutions. unevenly transposed in national law. effective since 2008. "This is an attack on the eurozone by certain other interests. 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. Germany's foreign minister Guido Westerwelle has called for an "independent" European ratings agency. Counter measures Due to the failures of the ratings agencies.S. With the creation of the European Supervisory Authority in January 2011 the EU set up a whole range of new financial regulatory institutions.Moody’s and S&P.
Green Light Capital Inc. Three days later the euro was hit with a wave of selling. The role of Goldman Sachs in Greek bond yield increases is also under scrutiny. CNI in Spanish) to investigate the role of the "Anglo-Saxon media" in fomenting the crisis. triggering a decline that brought the currency below $1.36. where a small group of hedge-fund managers from SAC Capital Advisors LP.      So far no results have been reported from this investigation. and U. and the U. He ordered the Centro Nacional de Inteligencia intelligence service (National Intelligence Center. Hardt & Co. some markets banned naked short selling for a few months.K." According to The Wall Street Journal several hedge-fund managers launched "large bearish bets" against the euro in early 2010. do not have large domestic savings pools to draw on and therefore are dependent on external savings e. 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. Other commentators believe that the euro is under attack so that countries. the Euro hit a four year low at $1. The U. On 8 June. from China. 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.19 before it started to rise again..  German chancellor Merkel has stated that "institutions bailed out with public funds are exploiting the budget crisis in Greece and elsewhere. such as the U. can continue to fund their large external deficits and government deficits. Soros Fund Management LLC. hosted an exclusive "idea dinner" at a private townhouse in Manhattan.   Speculators Both the Spanish and Greek Prime Ministers have accused financial speculators and hedge funds of worsening the crisis by short selling euros. Traders estimate that bets for and against the euro account for a huge part of the daily three trillion dollar global currency market. The Greek documentary Debtocracy examines .K. exactly four months after the dinner.S.  This is not the case in the eurozone which is self funding.  Odious debt Main article: Odious debt Some protesters. the boutique research and brokerage firm Monness. There was no suggestion by regulators that there was any collusion or other improper action. On February 8.S.market crisis in Europe is an attempt to undermine the euro.. 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. In response to accusations that speculators were worsening the problem.g. Crespi. and to avoid the collapse of the US dollar.
which means Finland and the other eurozone countries guarantee the Finnish loans in the event of a Greek default. The main point of contention was that the collateral is aimed to be a cash deposit. However. Slovenia. as the issues of "creative accounting" and manipulation of statistics by several nations came into focus. The structures were designed by prominent U.    Collateral for Finland On 18 August 2011. after reclassification of expenses under IMF/EU supervision was further raised to 15.S. the Netherlands. Financial reforms within the U.7% by the new Pasok Government in late 2009 (a number which. These have included analyses of examples in several countries     or have focused on Italy.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. were able to circumvent these rules and mask their deficit and debt levels through the use of complex currency and credit derivatives structures. Austria. and Slovakia responded with irritation over this special guarantee for Finland and demanded equal treatment across the eurozone.         Spain. a number of EU member states.    and even Germany. as requested by the Finnish parliament as a condition for any further bailouts. members of the European Union signed an agreement known as the Maastricht Treaty. . a collateral the Greeks can only give by recycling part of the funds loaned by Finland for the bailout. it became apparent that Finland would receive collateral from Greece. to mask the sizes of public debts and deficits.4% in 2010) has been cited as one of the issues that ignited the Greek debt crisis.  the United States. under which they pledged to limit their deficit spending and debt levels. potentially undermining investor confidence. or a similar deal with Greece. The focus has naturally remained on Greece due to its debt crisis. There has however been a growing number of reports about manipulated statistics by EU and other nations aiming. as was the case for Greece.  the United Kingdom. enabling it to participate in the potential new €109 billion support package for the Greek economy. so as not to increase the risk level over their participation in the bailout. 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. including Greece and Italy.  National statistics In 1992. investment banks.S. The revision of Greece’s 2009 budget deficit from a forecast of "6–8% of GDP" to 12. 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. This added a new dimension in the world financial turmoil.
 At the beginning of October. a modified escrow collateral agreement was reached. as one of the strongest AAA countries.After extensive negotiations to implement a collateral structure open to all eurozone countries. the four largest Greek banks agreed to provide the €880 million in collateral to Finland in order to secure the second bailout program. Finland. due to i. on 4 October 2011. . with a midOctober vote. can raise the required capital with relative ease. Slovakia and Netherlands were the last countries to vote on the EFSF expansion.a. The expectation is that only Finland will utilise it. which was the immediate issue behind the collateral discussion. On 13 October 2011 Slovakia approved euro bailout expansion. In February 2012. but the government has been forced to call new elections in exchange. requirement to contribute initial capital to European Stability Mechanism in one installment instead of five installments over time.
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