Euro Zone Crisis Q

Long-term interest rates of all eurozone countries except
Estonia (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]
From Wikipedia, the free encyclopedia
The European sovereign debt crisis 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.
[3]
From late 2009, fears of a sovereign debt crisis
developed among investors as a result of the rising
private and government debt levels around the world
together with a wave of downgrading of government
debt in some European states. Causes of the crisis
varied by country. In several countries, private debts
arising from a property bubble were transferred to
sovereign debt as a result of banking system bailouts
and government responses to slowing economies
post-bubble. In Greece, unsustainable public sector
wage and pension commitments drove the debt
increase. The structure of the Eurozone as a
monetary union (i.e., one currency) without fiscal
union (e.g., different tax and public pension rules)
contributed to the crisis and harmed the ability of
European leaders to respond.
[4][5]
European banks
own a significant amount of sovereign debt, such that
concerns regarding the solvency of banking systems
or sovereigns are negatively reinforcing.
[6]
Concerns intensified in early 2010 and thereafter,
[7][8]
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).
[9]
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,
[10]
increasing the EFSF to about 1 trillion, and requiring
European banks to achieve 9% capitalisation.
[11]
To restore confidence in Europe, EU leaders also agreed to
create a European Fiscal Compact including the commitment of each participating country to introduce a
balanced budget amendment.
[12][13]
European policy makers have also proposed greater integration of EU
banking management with euro-wide deposit insurance, bank oversight and joint means for the recapitalization
or resolution of failing banks.
[14]
The European Central Bank has taken measures to maintain money flows
between European banks by lowering interest rates and providing weaker banks (mostly from crisis countries)
with cheap loans of more than one trillion Euros.
While sovereign debt has risen substantially in only a few eurozone countries, it has become a perceived problem
for the area as a whole,
[15]
leading to continuous speculation of a possible breakup of the Eurozone. However, 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,
[16][17]
before losing some ground in the following months.
[18][19]
Three countries
European sovereign-debt crisis - Wikipedia, the free encyclopedia http://en.wikipedia.org/wiki/European_sovereign-debt_crisis
1 of 70 9/19/2012 4:16 PM
significantly affected, Greece, Ireland and Portugal, collectively accounted for 6% of the eurozone's gross
domestic product (GDP).
[20]
In June 2012, also Spain became a matter of concern,
[21]
when rising interest rates
began to affect its ability to access capital markets, leading to a bailout of its banks and other measures.
[22]
To address the deeper roots of economic imbalances most EU countries agreed on adopting the Euro Plus Pact,
consisting of political reforms to improve fiscal strength and competitiveness. This has forced weaker countries
to draw up ever more austerity measures to bring down national deficits and debt levels. Such non-Keynesian
policies have been criticized by various economists, many of which called for a new growth strategy based on
additional public investments, financed by growth-friendly taxes on property, land, wealth, and financial
institutions, most prominently a new EU financial transaction tax. EU leaders have agreed to moderately increase
the funds of the European Investment Bank to kick-start infrastructure projects and increase loans to the private
sector. Furthermore, weaker EU economies were asked to restore competitiveness through internal devaluation,
i.e. lowering their relative production costs.
[23]
It is hoped that these measures will decrease current account
imbalances among Euro-zone member states and gradually lead to an end of the crisis.
The crisis has had a major impact on EU politics, leading to power shifts in several European countries, most
notably in Greece, Ireland, Italy, Portugal, Spain, and France.
1 Causes
1.1 Rising household and government debt levels
1.2 Trade imbalances
1.3 Structural problem of Eurozone system
1.4 Monetary policy inflexibility
1.5 Loss of confidence
2 Evolution of the crisis
2.1 Greece
2.2 Ireland
2.3 Portugal
2.4 Spain
2.5 Cyprus
2.6 Possible spread to other countries
2.6.1 Italy
2.6.2 Belgium
2.6.3 France
2.6.4 United Kingdom
2.6.5 Switzerland
2.6.6 Germany
2.6.7 Slovenia
3 Policy reactions
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
3.2 European Central Bank
3.3 European Stability Mechanism (ESM)
3.4 European Fiscal Compact
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Public debt $ and %GDP (2010) for selected
European countries
4 Economic reforms and recovery proposals
4.1 Direct loans to banks and banking regulation
4.2 Increase investment
4.3 Increase competitiveness
4.4 Address current account imbalances
4.5 Mobilization of credit
4.6 Commentary
5 Proposed long-term solutions
5.1 European fiscal union
5.2 Eurobonds
5.3 European Monetary Fund
5.4 Drastic debt write-off financed by wealth tax
5.5 Debt defaults and national exits from the Eurozone
5.5.1 Commentary
6 Controversies
6.1 EU treaty violations
6.2 Actors fueling the crisis
6.2.1 Credit rating agencies
6.2.2 Media
6.2.3 Speculators
6.3 Speculation about the breakup of the eurozone
6.4 Odious debt
6.5 National statistics
6.6 Collateral for Finland
7 Political impact
8 Projections
9 See also
10 References
11 External links
The European sovereign debt crisis resulted from a
combination of complex factors, including the globalization
of finance; easy credit conditions during the 20022008
period that encouraged high-risk lending and borrowing
practices; the 20072012 global financial crisis; international
trade imbalances; real-estate bubbles that have since burst;
the 20082012 global recession; fiscal policy choices related
to government revenues and expenses; and approaches used
by nations to bail out troubled banking industries and private
bondholders, assuming private debt burdens or socializing
losses.
[24][25]
One narrative describing the causes of the crisis begins with
the significant increase in savings available for investment
during the 20002007 period when the global pool of fixed-
income securities increased from approximately $36 trillion
3 of 70 9/19/2012 4:16 PM
Government debt of Eurozone, Germany and crisis
countries compared to Eurozone GDP
Government deficit of Eurozone compared to USA
and UK
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.
[26]
The temptation offered by such readily available savings
overwhelmed the policy and regulatory control mechanisms
in country after country, as lenders and borrowers put these
savings to use, 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.
[25]
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 wage and pension
benefits, with the former doubling in real terms over 10
years.
[4]
Iceland's banking system grew enormously, creating
debts to global investors (external debts) several times
GDP.
[25][27]
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,
the banking systems of creditor nations face losses. For
example, in October 2011, Italian borrowers owed French banks $366 billion (net). Should Italy be unable to
finance itself, the French banking system and economy could come under significant pressure, which in turn
would affect France's creditors and so on. This is referred to as financial contagion.
[6][28]
Another factor
contributing to interconnection is the concept of debt protection. 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). But, since multiple CDSs can be purchased on the same security, it is unclear what
exposure each country's banking system now has to CDS.
[29]
Greece hid its growing debt and deceived EU officials with the help of derivatives designed by major banks.
[30][31][32][33][34][35]
Although some financial institutions clearly profited from the growing Greek government
debt in the short run,
[30]
there was a long lead-up to the crisis.
Rising household and government debt levels
In 1992, members of the European Union signed the Maastricht Treaty, under which they pledged to limit their
deficit spending and debt levels. However, a number of EU member states, including Greece and Italy, were able
to circumvent these rules, failing to abide by their own internal guidelines, sidestepping best practice and
4 of 70 9/19/2012 4:16 PM
Public debt as a percent of GDP (2010)
ignoring internationally agreed standards.
[36]
This allowed the sovereigns to mask their deficit and debt levels
through a combination of techniques, including inconsistent accounting, off-balance-sheet transactions
[36]
as
well as the use of complex currency and credit derivatives structures.
[37][38]
The complex structures were
designed by prominent U.S. investment banks, who received substantial fees in return for their services.
[30]
The adoption of the euro led to many Eurozone countries of different credit worthiness receiving similar and
very low interest rates for their bonds during years preceding the crisis, which author Michael Lewis referred to
as "a sort of implicit Germany guarantee."
[4]
A number of economists have dismissed the popular belief
that the debt crisis was caused by excessive social welfare
spending. According to their analysis, increased debt levels
were mostly due to the large bailout packages provided to
the financial sector during the late-2000s financial crisis, and
the global economic slowdown thereafter. The average fiscal
deficit in the euro area in 2007 was only 0.6% before it grew
to 7% during the financial crisis. 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.
[39]
US
economist Paul Krugman named Greece as the only country where fiscal irresponsibility is at the heart of the
crisis.
[40]
Unprecedented household debt levels were another cause. The International Monetary Fund (IMF) reported in
April 2012 that in advanced economies, during the five years preceding 2007, the ratio of household debt to
income rose by an average of 39 percentage points, to 138 percent. In Denmark, Iceland, Ireland, the
Netherlands, and Norway, debt peaked at more than 200 percent of household income. A surge in household
debt to historic highs also occurred in emerging economies such as Estonia, Hungary, Latvia, and Lithuania.
When house prices declined, many households saw their wealth shrink relative to their debt. By the end of 2011,
real house prices had fallen from their peak by about 41% in Ireland, 29% in Iceland, 23% in Spain and the
United States, and 21% in Denmark. Household defaults, underwater mortgages (where the loan balance exceeds
the house value), foreclosures, and fire sales were endemic to a number of economies as of 2012. Household
deleveraging by paying off debts or defaulting on them has begun in some countries, which slows economic
growth.
[41][42]
Either way, high debt levels alone may not explain the crisis. According to The Economist Intelligence Unit, the
position of the euro area looked "no worse and in some respects, rather better than that of the US or the UK."
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. Moreover, private-sector
indebtedness across the euro area is markedly lower than in the highly leveraged Anglo-Saxon economies.
[43]
Trade imbalances
Commentator and Financial Times journalist Martin Wolf has asserted that the root of the crisis was growing
trade imbalances. He notes in the run-up to the crisis, from 1999 to 2007, Germany had a considerably better
public debt and fiscal deficit relative to GDP than the most affected eurozone members. In the same period,
these countries (Portugal, Ireland, Italy and Spain) had far worse balance of payments positions.
[44][45]
Whereas
German trade surpluses increased as a percentage of GDP after 1999, the deficits of Italy, France and Spain all
worsened.
5 of 70 9/19/2012 4:16 PM
Current account balances relative to GDP (2010)
Paul Krugman wrote in 2009 that a trade deficit by definition
requires a corresponding inflow of capital to fund it, which
can drive down interest rates and stimulate the creation of
bubbles: "For a while, the inrush of capital created the
illusion of wealth in these countries, just as it did for
American homeowners: asset prices were rising, currencies
were strong, and everything looked fine. But bubbles always
burst sooner or later, and yesterdays miracle economies
have become todays basket cases, nations whose assets
have evaporated but whose debts remain all too real."
[46]
A trade deficit can also be affected by changes in relative
labor costs, which made southern nations less competitive
and increased trade imbalances. Since 2001, Italy's unit labor
costs rose 32% relative to Germany's.
[47][48]
Greek unit
labor costs rose much faster than Germany's during the last decade.
[49]
However, most EU nations had increases
in labor costs greater than Germany's.
[50]
Those nations that allowed "wages to grow faster than productivity"
lost competitiveness.
[45]
Germany's restrained labor costs, while a debatable factor in trade imbalances,
[50]
are
an important factor for its low unemployment rate.
[51]
More recently, Greece's trading position has improved;
[52]
in the period 2011 to 2012, imports dropped 20.9% while exports grew 16.9%, reducing the trade deficit by
42.8%.
[52]
Simon Johnson explains the hope for convergence in the Euro-zone and what went wrong. The euro locks
countries into an exchange rate amounting to very big bet that their economies would converge in
productivity. If not, workers would move to countries with greater productivity. Instead the opposite happened:
the gap between German and Greek productivity increased resulting in a large current account surplus financed
by capital flows. The capital flows could have been invested to increase productivity in the peripheral nations.
Instead capital flows were squandered in consumption and consumptive investments.
[53]
Further, Eurozone countries with sustained trade surpluses (i.e., Germany) do not see their currency appreciate
relative to the other Eurozone nations due to a common currency, keeping their exports artificially cheap.
Germany's trade surplus within the Eurozone declined in 2011 as its trading partners were less able to find
financing necessary to fund their trade deficits, but Germany's trade surplus outside the Eurozone has soared as
the euro declined in value relative to the dollar and other currencies.
[54]
Structural problem of Eurozone system
There is a structural contradiction within the euro system, namely that there is a monetary union (common
currency) without a fiscal union (e.g., common taxation, pension, and treasury functions).
[55]
In the Eurozone
system, the countries are required to follow a similar fiscal path, but they do not have common treasury to
enforce it. That is, countries with the same monetary system have freedom in fiscal policies in taxation and
expenditure. So, even though there are some agreements on monetary policy and through European Central
Bank, countries may not be able to or would simply choose not to follow it. This feature brought fiscal free riding
of peripheral economies, especially represented by Greece, as it is hard to control and regulate national financial
institutions. Furthermore, there is also a problem that the euro zone system has a difficult structure for quick
response. Eurozone, having 17 nations as its members, require unanimous agreement for a decision making
process. This would lead to failure in complete prevention of contagion of other areas, as it would be hard for the
Eurozone to respond quickly to the problem.
[56]
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In addition, as of June 2012 there was no "banking union" meaning that there was no Europe-wide approach to
bank deposit insurance, bank oversight, or a joint means of recapitalization or resolution (wind-down) of failing
banks.
[14]
Bank deposit insurance helps avoid bank runs. Recapitalization refers to injecting money into banks so
that they can meet their immediate obligations and resume lending, as was done in 2008 in the U.S. via the
Troubled Asset Relief Program.
[57]
Columnist Thomas L. Friedman wrote in June 2012: "In Europe, hyperconnectedness both exposed just how
uncompetitive some of their economies were, but also how interdependent they had become. It was a deadly
combination. When countries with such different cultures become this interconnected and interdependent
when they share the same currency but not the same work ethics, retirement ages or budget discipline you
end up with German savers seething at Greek workers, and vice versa."
[58]
Monetary policy inflexibility
Further information: Economic and Monetary Union of the European Union
Since membership of the Eurozone establishes a single monetary policy, individual member states can no longer
act independently, preventing them from printing money in order to pay creditors and ease their risk of default.
By "printing money", a country's currency is devalued relative to its (eurozone) trading partners, making its
exports cheaper, in principle leading to an improved balance of trade, increased GDP and higher tax revenues in
nominal terms.
[59]
In the reverse direction moreover, assets held in a currency which has devalued suffer losses on the part of those
holding them. For example, by the end of 2011, following a 25 percent fall in the rate of exchange and 5 percent
rise in inflation, eurozone investors in Pound Sterling, locked in to euro exchange rates, had suffered an
approximate 30 percent cut in the repayment value of this debt.
[60]
Loss of confidence
Prior to development of the crisis it was assumed by both regulators and banks that sovereign debt from the
eurozone was safe. Banks had substantial holdings of bonds from weaker economies such as Greece which
offered a small premium and seemingly were equally sound. As the crisis developed it became obvious that
Greek, and possibly other countries', bonds offered substantially more risk. 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.
[61]
The loss of confidence is marked by rising sovereign CDS prices, indicating market
expectations about countries' creditworthiness (see graph).
Furthermore, investors have doubts about the possibilities of policy makers to quickly contain the crisis. Since
countries that use the euro as their currency have fewer monetary policy choices (e.g., they cannot print money
in their own currencies to pay debt holders), certain solutions require multi-national cooperation. Further, the
European Central Bank has an inflation control mandate but not an employment mandate, as opposed to the U.S.
Federal Reserve, which has a dual mandate.
According to The Economist, 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.
[43]
Heavy
bank withdrawals have occurred in weaker Eurozone states such as Greece and Spain.
[62]
Bank deposits in the
Eurozone are insured, but by agencies of each member government. If banks fail, it is unlikely the government
will be able to fully and promptly honor their commitment, at least not in euros, and there is the possibility that
they might abandon the euro and revert to a national currency; thus, euro deposits are safer in Dutch, German,
7 of 70 9/19/2012 4:16 PM
Sovereign CDS prices of selected European countries
(20102012). The left axis is in basis points; a level
of 1,000 means it costs $1 million to protect
$10 million of debt for five years.
or Austrian banks than they are in Greece or Spain.
[63]
As of June, 2012, many European banking systems were
under significant stress, particularly Spain. A series of
"capital calls" or notices that banks required capital
contributed to a freeze in funding markets and interbank
lending, as investors worried that banks might be hiding
losses or were losing trust in one another.
[64][65]
In June 2012, as the euro hit new lows with no bottom in
sight, there were reports that the wealthy were moving assets
out of the Eurozone.
[66]
Mario Draghi, president of the
European Central Bank, has called for an integrated
European system of deposit insurance which would require
European political institutions craft effective solutions for
problems beyond the limits of the power of the European
Central Bank.
[67]
As of June 6, 2012, closer integration of
European banking appeared to be under consideration by
political leaders.
[68]
Interest on long term sovereign debt
In June, 2012, following negotiation of the Spanish bailout
line of credit interest on long-term Spanish and Italian debt
continued to rise rapidly, casting doubt on the efficacy of
bailout packages as anything more than a stopgap measure.
The Spanish rate, over 6% before the line of credit was
approved, approached 7%, a rough rule of thumb indicator
of serious trouble.
[69]
Rating agency views
On 5 December 2011, S&P placed its long-term sovereign ratings on 15 members of the eurozone on
"CreditWatch" with negative implications; S&P wrote this was due to "systemic stresses from five interrelated
factors: 1) Tightening credit conditions across the eurozone; 2) Markedly higher risk premiums on a growing
number of eurozone sovereigns including some that are currently rated 'AAA'; 3) Continuing disagreements
among European policy makers on how to tackle the immediate market confidence crisis and, longer term, how
to ensure greater economic, financial, and fiscal convergence among eurozone members; 4) High levels of
government and household indebtedness across a large area of the eurozone; and 5) The rising risk of economic
recession in the eurozone as a whole in 2012. Currently, we expect output to decline next year in countries such
as Spain, Portugal and Greece, but we now assign a 40% probability of a fall in output for the eurozone as a
whole."
[70]
See also: 2000s European sovereign debt crisis timeline
In the first few weeks of 2010, there was renewed anxiety about excessive national debt, with lenders
demanding ever higher interest rates from several countries with higher debt levels, deficits and current account
8 of 70 9/19/2012 4:16 PM
Greece's debt percentage since 1999 compared to the average
of the eurozone.
deficits. This in turn made it difficult for some governments to finance further budget deficits and service
existing debt, particularly when economic growth rates were low, and when a high percentage of debt was in the
hands of foreign creditors, as in the case of Greece and Portugal.
[71]
Some governments have focused on austerity measures (e.g., higher taxes and lower expenses) which has
contributed to social unrest and significant debate among economists, many of whom advocate greater deficits
when economies are struggling. Especially in countries where budget deficits and sovereign debts have increased
sharply, a crisis of confidence has emerged with the widening of bond yield spreads and risk insurance on CDS
between these countries and other EU member states, most importantly Germany.
[72]
By the end of 2011,
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).
[73]
By July 2012 also the Netherlands, Austria and
Finland benefited from zero or negative interest rates. Looking at short-term government bonds with a maturity
of less than one year the list of beneficiaries also includes Belgium and France.
[74]
While Switzerland (and Denmark)
[74]
equally benefited from lower interest rates, the crisis also harmed its
export sector due to a substantial influx of foreign capital and the resulting rise of the Swiss franc. 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 1.20 francs", effectively weakening the Swiss franc. This is the biggest
Swiss intervention since 1978.
[75]
Greece
Main article: Greek government-debt crisis
In the early mid-2000s, Greece's economy was one
of the fastest growing in the eurozone and was
associated with a large structural deficit.
[76]
As the
world economy was hit by the global financial crisis
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. The government spent heavily to
keep the economy functioning and the country's debt
increased accordingly.
On 23 April 2010, the Greek government requested
an initial loan of 45 billion from the EU and
International Monetary Fund (IMF), to cover its
financial needs for the remaining part of
2010.
[77][78]
A few days later Standard & Poor's
slashed Greece's sovereign debt rating to BB+ or
"junk" status amid fears of default,
[79]
in which case
investors were liable to lose 3050% of their
money.
[79]
Stock markets worldwide and the euro
currency declined in response to the downgrade.
[80]
On 1 May 2010, the Greek government announced a
series of austerity measures
[81]
to secure a three year 110 billion loan.
[82]
This was met with great anger by the
9 of 70 9/19/2012 4:16 PM
100,000 people protest against the
harsh austerity measures in front of
parliament building in Athens, 29 May
2011
Greek public, leading to massive protests, riots and social unrest
throughout Greece.
[83]
The Troika (EU, ECB and IMF), offered Greece a
second bailout loan worth 130 billion in October 2011, but with the
activation being conditional on implementation of further austerity
measures and a debt restructure agreement. A bit surprisingly, the Greek
prime minister George Papandreou first answered that call, by
announcing a December 2011 referendum on the new bailout
plan,
[84][85]
but had to back down amidst strong pressure from EU
partners, who threatened to withhold an overdue 6 billion loan payment
that Greece needed by mid-December.
[84][86]
On 10 November 2011
Papandreou instead opted to resign, following an agreement with the
New Democracy party and the Popular Orthodox Rally, to appoint
non-MP technocrat Lucas Papademos as new prime minister of an
interim national union government, with responsibility for implementing the needed austerity measures to pave
the way for the second bailout loan.
[87][88]
All the implemented austerity measures, have so far helped Greece bring down its primary deficit - i.e. fiscal
deficit before interest payments - from 24.7bn (10.6% of GDP) in 2009 to just 5.2bn (2.4% of GDP) in
2011,
[89][90]
but as a side-effect they also contributed to a worsening of the Greek recession, which began in
October 2008 and only became worse in 2010 and 2011.
[91]
The austerity relies primarily on tax increases which
harms the private sector and economy.
[92]
Overall the Greek GDP had its worst decline in 2011 with 6.9%,
[93]
a year where the seasonal adjusted industrial output ended 28.4% lower than in 2005,
[94][95]
and with 111,000
Greek companies going bankrupt (27% higher than in 2010).
[96][97]
As a result, the seasonal adjusted
unemployment rate also grew from 7.5% in September 2008 to a record high of 19.9% in November 2011, while
the Youth unemployment rate during the same time rose from 22.0% to as high as 48.1%.
[98][99]
Youth
unemployment ratio hit 13 percent in 2011.
[100][101]
Overall the share of the population living at "risk of poverty or social exclusion" did not increase noteworthily
during the first 2 years of the crisis. The figure was measured to 27.6% in 2009 and 27.7% in 2010 (only being
slightly worse than the EU27-average at 23.4%),
[102]
but for 2011 the figure was now estimated to have risen
sharply above 33%.
[103]
In February 2012, an IMF official negotiating Greek austerity measures admitted that
excessive spending cuts were harming Greece.
[89]
Some economic experts argue that the best option for Greece and the rest of the EU, would be to engineer an
orderly default, allowing Athens to withdraw simultaneously from the eurozone and reintroduce its national
currency the drachma at a debased rate.
[104][105]
However, if Greece were to leave the euro, the economic and
political consequences would be devastating. According to Japanese financial company Nomura an exit would
lead to a 60% devaluation of the new drachma. Analysts at French bank BNP Paribas added that the fallout from
a Greek exit would wipe 20% off Greece's GDP, increase Greece's debt-to-GDP ratio to over 200%, and send
inflation soaring to 40%-50%.
[106]
Also UBS warned of hyperinflation, a bank run and even "military coups and
possible civil war that could afflict a departing country".
[107][108]
Eurozone National Central Banks (NCBs) may
lose up to 100bn in debt claims against the Greek national bank through the ECB's TARGET2 system. The
Deutsche Bundesbank alone may have to write off 27bn.
[109]
To prevent all this from happening, the troika (EU, IMF and ECB) eventually agreed in February 2012 to provide
a second bailout package worth 130 billion,
[110]
conditional on the implementation of another harsh austerity
package, reducing the Greek spendings with 3.3bn in 2012 and another 10bn in 2013 and 2014.
[90]
For the
10 of 70 9/19/2012 4:16 PM
first time, the bailout deal also included a debt restructure agreement with the private holders of Greek
government bonds (banks, insurers and investment funds), to "voluntarily" accept a bond swap with a 53.5%
nominal write-off, partly in short-term EFSF notes, partly in new Greek bonds with lower interest rates and the
maturity prolonged to 1130 years (independently of the previous maturity).
[10]
The deal implies that previous
Greek bond holders are being given, for 1000 of previous notional, 150 in PSI payment notes issued by the
EFSF and 315 in New Greek Bonds issued by the Hellenic Republic, including a GDP-linked security. The
latter represents a marginal coupon enhancement in case the Greek growth meets certain conditions. While the
market price of the portfolio proposed in the exchange is of the order of 21% of the original face value (15% for
the two EFSF PSI notes 1 and 2 years and 6% for the New Greek Bonds 11 to 30 years), the duration of
the set of New Greek Bonds is slightly below 10 years.
[111]
On 9 March 2012 the International Swaps and Derivatives Association (ISDA) issued a communique calling the
debt restructuring deal with its private sector involvement (PSI) a "Restructuring Credit Event" which will trigger
payment of credit default swaps. According to Forbes magazine Greeces restructuring represents a default.
[112][113]
It is the world's biggest debt restructuring deal ever done, affecting some 206 billion of Greek
government bonds.
[114]
The debt write-off had a size of 107 billion, and caused the Greek debt level to fall
from roughly 350bn to 240bn in March 2012, with the predicted debt burden now showing a more sustainable
size equal to 117% of GDP by 2020,
[115]
somewhat lower than the target of 120.5% initially outlined in the
signed Memorandum with the Troika.
[90][116][117]
Critics such as the director of LSE's Hellenic Observatory (http://www2.lse.ac.uk/europeanInstitute/research
/hellenicObservatory/home.aspx) argue that the billions of taxpayer euros are not saving Greece but financial
institutions,
[118]
as "more than 80 percent of the rescue package is going to creditorsthat is to say, to banks
outside of Greece and to the ECB."
[119]
The shift in liabilities from European banks to European taxpayers has
been staggering. One study found that the public debt of Greece to foreign governments, including debt to the
EU/IMF loan facility and debt through the eurosystem, increased from 47.8bn to 180.5bn (+132,7bn) between
January 2010 and September 2011,
[120]
while the combined exposure of foreign banks to (public and private)
Greek entities was reduced from well over 200bn in 2009 to around 80bn (-120bn) by mid-February
2012.
[121]
Mid May 2012 the crisis and impossibility to form a new government after elections led to strong speculations
Greece would have to leave the Eurozone shortly due. This phenomenon became known as "Grexit" and started
to govern international market behaviour.
[122][123]
The center-right's narrow victory in the June 17th election
gives hope that a coalition will enable Greece to stay in the Euro-zone.
[124]
A victory by the anti-austerity axis
could have been "an excuse to cut Greece out of the euro zone" according to the Wall Street Journal.
[125]
Ireland
Main article: 20082012 Irish financial crisis
The Irish sovereign debt crisis was not based on government over-spending, but from the state guaranteeing the
six main Irish-based banks who had financed a property bubble. On 29 September 2008, Finance Minister Brian
Lenihan, Jnr issued a one-year guarantee to the banks' depositors and bond-holders.
[126]
He renewed it for
another year in September 2009 soon after the launch of the National Asset Management Agency (NAMA), a
body designed to remove bad loans from the six banks.
[127]
Irish banks had lost an estimated 100 billion euros, much of it related to defaulted loans to property developers
and homeowners made in the midst of the property bubble, which burst around 2007. The economy collapsed
11 of 70 9/19/2012 4:16 PM
Irish government deficit compared to other European
countries and the United States (20002013)
during 2008. Unemployment rose from 4% in 2006
to 14% by 2010, while the national budget went from
a surplus in 2007 to a deficit of 32% GDP in 2010,
the highest in the history of the eurozone, despite
austerity measures.
[25][128]
Ireland could have guaranteed bank deposits and let
private bondholders who had invested in the banks
face losses, but instead borrowed money from the
ECB to pay these bondholders, shifting the losses
and debt to its taxpayers, with severe negative
impact on Ireland's creditworthiness. As a result, the
government started negotiations with the EU, the
IMF and three nations: the United Kingdom,
Denmark and Sweden, resulting in a 67.5 billion
"bailout" agreement of 29 November 2010
[129][130]
Together with additional 17.5 billion coming from
Ireland's own reserves and pensions, the government
received 85 billion,
[131]
of which 34 billion were
used to support the country's ailing financial
sector.
[132]
In return the government agreed to
reduce its budget deficit to below three percent by
2015.
[132]
In April 2011, despite all the measures
taken, Moody's downgraded the banks' debt to junk
status.
[133]
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 3.5% and
4% and to double the loan time to 15 years. The
move was expected to save the country between 600700 million euros per year.
[134]
On 14 September 2011, in
a move to further ease Ireland's difficult financial situation, the European Commission announced it would cut
the interest rate on its 22.5 billion loan coming from the European Financial Stability Mechanism, down to 2.59
per cent which is the interest rate the EU itself pays to borrow from financial markets.
[135]
The Euro Plus Monitor report from November 2011 attests to Ireland's vast progress in dealing with its financial
crisis, expecting the country to stand on its own feet again and finance itself without any external support from
the second half of 2012 onwards.
[136]
According to the Centre for Economics and Business Research Ireland's
export-led recovery "will gradually pull its economy out of its trough". As a result of the improved economic
outlook, the cost of 10-year government bonds, has already fallen substantially since its record high at 12% in
mid July 2011 (see the graph "Long-term Interest Rates"). At 24 July 2012 it was down at a sustainable
6.3%,
[137]
and it is expected to fall even further to a level of only 4% by 2015.
[138]
On 26 July 2012, for the first time since September 2010, Ireland was able to return to the financial markets
selling over 5 billion in long-term government debt, with an interest rate of 5.9% for the 5-year bonds and 6.1%
for the 8-year bonds at sale.
[139]
Portugal
12 of 70 9/19/2012 4:16 PM
In the first half of 2011, Portugal requested a 78 billion IMF-EU bailout package in a bid to stabilise its public
finances.
[140]
These measures were put in place as a direct result of decades-long governmental overspending
and an over bureaucratised civil service. After the bailout was announced, the Portuguese government headed
by Pedro Passos Coelho managed to implement measures to improve the State's financial situation and the
country started to be seen as moving on the right track. However, the unemployment level rose to over 14.8
percent, taxes were increased, and civil service-related lower-wages were frozen and higher-wages were cut by
14.3%, on top of the government's spending cuts.
A report released in January 2011 by the Dirio de Notcias
[141]
and published in Portugal by Gradiva, had
demonstrated that in the period between the Carnation Revolution in 1974 and 2010, the democratic Portuguese
Republic governments encouraged over-expenditure and investment bubbles through unclear Publicprivate
partnerships and funding of numerous ineffective and unnecessary external consultancy and advisory of
committees and firms. This allowed considerable slippage in state-managed public works and inflated top
management and head officer bonuses and wages. Persistent and lasting recruitment policies boosted the number
of redundant public servants. Risky credit, public debt creation, and European structural and cohesion funds
were mismanaged across almost four decades. Prime Minister Scrates's cabinet was not able to forecast or
prevent this in 2005, and later it was incapable of doing anything to improve the situation when the country was
on the verge of bankruptcy by 2011.
[142]
Robert Fishman, in the New York Times article "Portugal's Unnecessary Bailout", points out that Portugal fell
victim to successive waves of speculation by pressure from bond traders, rating agencies and speculators.
[143]
In
the first quarter of 2010, before pressure from the markets, Portugal had one of the best rates of economic
recovery in the EU. From the perspective of Portugal's industrial orders, exports, entrepreneurial innovation and
high-school achievement, the country matched or even surpassed its neighbors in Western Europe.
[143]
On 16 May 2011, the eurozone leaders officially approved a 78 billion bailout package for Portugal, which
became the third eurozone country, after Ireland and Greece, to receive emergency funds. The bailout loan was
equally split between the European Financial Stabilisation Mechanism, the European Financial Stability Facility,
and the International Monetary Fund.
[144]
According to the Portuguese finance minister, the average interest
rate on the bailout loan is expected to be 5.1 percent.
[145]
As part of the deal, the country agreed to cut its
budget deficit from 9.8 percent of GDP in 2010 to 5.9 percent in 2011, 4.5 percent in 2012 and 3 percent in
2013.
[146]
The Portuguese government also agreed to eliminate its golden share in Portugal Telecom which gave it veto
power over vital decisions.
[147][148]
In 2012, all public servants had already seen an average wage cut of 20%
relative to their 2010 baseline, with cuts reaching 25% for those earning more than 1,500 euro per month. This
led to a flood of specialized technicians and top officials leaving the public service, many looking for better
positions in the private sector or in other European countries.
[149]
On 6 July 2011, the ratings agency Moody's had cut Portugal's credit rating to junk status, Moody's also launched
speculation that Portugal could follow Greece in requesting a second bailout.
[150]
In December 2011, it was reported that Portugal's estimated budget deficit of 4.5 percent in 2011 would be
substantially lower than expected, due to a one-off transfer of pension funds. The country would therefore meet
its 2012 target a year earlier than expected.
[146]
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.
[151]
Any deficit means increasing the nation's debt. To bring down the debt to sustainable
levels will require a 10% budget surplus for several years according to some estimates.
[152]
13 of 70 9/19/2012 4:16 PM
Spain
See also: 20082012 Spanish financial crisis
Spain has a comparatively low debt among advanced economies.
[153]
The country's public debt relative to GDP
in 2010 was only 60%, more than 20 points less than Germany, France or the US, and more than 60 points less
than Italy, Ireland or Greece.
[154][155]
Debt was largely avoided by the ballooning tax revenue from the housing
bubble, which helped accommodate a decade of increased government spending without debt accumulation.
[156]
Like Italy, Spain has most of its debt controlled internally, and both countries were in a better fiscal situation
than Greece and Portugal at the outset of the financial crisis.
[157]
As one of the largest eurozone economies, the condition of Spain's economy is of particular concern to
international observers, and has faced pressure from the United States, the IMF, other European countries and
the European Commission to cut its deficit more aggressively.
[158][159]
Spain's public debt was approximately
U.S. $820 billion in 2010, roughly the level of Greece, Portugal, and Ireland combined.
[160]
Rumors raised by speculators about a Spanish bail-out were dismissed by then Spanish Prime Minister Jos Luis
Rodrguez Zapatero as "complete insanity" and "intolerable".
[161]
Nevertheless, shortly after the announcement
of the EU's new "emergency fund" for eurozone countries in early May 2010, Spain had to announce new
austerity measures designed to further reduce the country's budget deficit, in order to signal financial markets
that it was safe to invest in the country.
[162]
The Spanish government had hoped to avoid such deep cuts, but
weak economic growth as well as domestic and international pressure forced the government to expand on cuts
already announced in January.
Spain succeeded in trimming its deficit from 11.2% of GDP in 2009 to 9.2% in 2010
[163]
and 8.5% in 2011.
[164]
Due to the European crisis and over spending by regional governments the latest figure is higher than the original
target of 6%.
[165][166]
To build up additional trust in the financial markets, the government amended the Spanish
Constitution in 2011 to require a balanced budget at both the national and regional level by 2020. The
amendment states that public debt can not exceed 60% of GDP, though exceptions would be made in case of a
natural catastrophe, economic recession or other emergencies.
[167][168]
Under pressure from the EU the new
conservative Spanish government led by Mariano Rajoy aims to cut the deficit further to 5.3 percent in 2012 and
3 percent in 2013.
[169]
While public debt was restrained prior to the crisis, private mortgage debt fueled a housing bubble.
[45][170]
The
subsequent burst weakened private banks leading to government bailouts. In May 2012, Bankia received a 19
billion euro bailout,
[171]
on top of the previous 4.5 billion euros to prop up Bankia.
[172]
Questionable accounting
methods disguised bank losses.
[173]
As of June 6, 2012 a bailout package for Spain of between 40 and 100 billion was reported to be under
consideration. The package was described as available if requested which it was on June 9, 2012 and granted for
an amount up to 100 billion. The exact amount will depend on audits of the condition of Spanish banks which
are in progress. The funds will go directly to the Spanish banks to hopefully avoid adding to Spain's sovereign
debt.
[170][174][175][176][177]
A larger economy than other countries which have received bailout packages, Spain
had considerable bargaining power regarding the terms of a bailout.
[178]
Due to reforms already instituted by
Spain's conservative government less stringent austerity requirements are included then was the case with earlier
bailout packages for Ireland, Portugal, and Greece.
[179][180]
During June 2012, Spain also became a prime concern for the Euro-zone.
[21]
Interest on Spains 10-year bonds
14 of 70 9/19/2012 4:16 PM
Total financing needs of selected countries in % of GDP
(20112013).
reached the 7% level and it faced difficulty in accessing bond markets. Spain accepted a 100 billion aid
package for its banks. Spanish banks have propped up the government, which is now forced to turn to Europe
for help propping up the weaker banks. Stronger banks are shying away from buying government bonds. The
aid package (counted towards Spains gross debt but it is not considered a sovereign debt bailout) brings Spains
debt close to the 90% level, the Euro-zone average. It is expected to increase given a negative growth rate of
1.7%, 25% unemployment, falling housing prices, and a deficit of 5.4%. Spain is the EUs fourth-largest
economy, larger than Greece, Portugal and Ireland combined.
[22]
As Spanish CDS hits a record high of 633 basis points and the 10yr bond yield at 7.7% (25 July 2012)
[181]
Spain's economic minister travels to Germany to request that the ECB facilitate government bond purchases to
"avoid an imminent financial collapse".
[182]
A few days later ECB president Mario Draghi reassured investors:
"Within our mandate, the ECB is ready to do whatever it takes to preserve the euro." His statement immediately
led the Spanish 10yr bond yield to retract sharply to 6.6%.
[183]
ECB's "unlimited bond-buying plan," announced
on Sept 6, is well received by the market as the 10yr falls below 6%.
[184]
Cyprus
In September 2011, yields on Cyprus long-term bonds had risen above 12%, since the small island of 840,000
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. Since January 2012, Cyprus is relying on a 2.5bn
emergency loan from Russia to cover its budget deficit and re-finance maturing debt. The loan has an interest
rate of 4.5% and it is valid for 4.5 years
[185]
though it is expected that Cyprus will be able to fund itself again by
the first quarter of 2013.
[186]
On June 12, 2012 financial media reported that a bailout request by Cyprus was
imminent. Despite its low population and small economy Cyprus has an off-shore banking industry which is
disproportional to its economy.
[69]
A request was made to the European Financial Stability Facility or the
European Stability Mechanism on June 25, 2012. It is anticipated that a bailout package would include
requirements for fiscal reforms. The request follows a downgrade of Cyprus bonds to BB+ by Fitch, also on June
25, 2012, which disqualified bonds issued by Cyprus from being accepted as collateral by the European Central
Bank.
[187]
On 13 March 2012 Moody's has slashed Cyprus's credit rating into Junk status, warning that the Cyprus
government will have to inject fresh capital into its banks to cover losses incurred through Greece's debt swap.
Cyprus's banks were highly exposed to Greek debt and so are disproportionately hit by the haircut taken by
creditors.
[169]
It was reported on June 25, 2012 by The Financial Times that banks in Cyprus held 22 billion of
Greek private sector debt.
[187]
Possible spread to other countries
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. 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."
[188]
Besides Ireland, with a government deficit in 2010 of
32.4% of GDP, and Portugal at 9.1%, other countries
such as Spain with 9.2% are also at risk.
[189]
15 of 70 9/19/2012 4:16 PM
Economic data from Portugal, Italy, Ireland, Greece, United
Kingdom, Spain, Germany, the EU and the eurozone for 2009.
The 2010 annual budget deficit and public debt, both relative
to GDP for selected European countries.
For 2010, the OECD forecast $16 trillion would be
raised in government bonds among its 30 member
countries. Financing needs for the eurozone come to
a total of 1.6 trillion, while the U.S. is expected to
issue US$1.7 trillion more Treasury securities in this
period,
[190]
and Japan has 213 trillion of
government bonds to roll over.
[191]
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.S.,
Germany and the UK, have had fraught moments as
investors shunned bond auctions due to concerns
about public finances and the economy.
[192]
Italy
Italy's deficit of 4.6 percent of GDP in 2010 was
similar to Germanys at 4.3 percent and less than that
of the U.K. and France. Italy even has a surplus in its
primary budget, which excludes debt interest
payments. However, its debt has increased to almost
120 percent of GDP (U.S. $2.4 trillion in 2010) and
economic growth was lower than the EU average for
over a decade.
[193]
This has led investors to view
Italian bonds more and more as a risky asset.
[194]
On the other hand, 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, ranking better than
France and Belgium.
[195]
About 300 billion euros of
Italy's 1.9 trillion euro debt matures in 2012. It will
therefore have to go to the capital markets for
significant refinancing in the near-term.
[196]
On 15 July and 14 September 2011, Italy's government passed austerity measures meant to save 124 billion.
[197][198]
Nonetheless, by 8 November 2011 the Italian bond yield was 6.74 percent for 10-year bonds, climbing
above the 7 percent level where the country is thought to lose access to financial markets.
[199]
On 11 November
2011, Italian 10-year borrowing costs fell sharply from 7.5 to 6.7 percent after Italian legislature approved
further austerity measures and the formation of an emergency government to replace that of Prime Minister
Silvio Berlusconi.
[200]
The measures include a pledge to raise 15 billion from real-estate sales over the next three years, a two-year
increase in the retirement age to 67 by 2026, opening up closed professions within 12 months and a gradual
reduction in government ownership of local services.
[194]
The interim government expected to put the new laws
into practice is led by former European Union Competition Commissioner Mario Monti.
[194]
As in other countries, the social effects have been severe, with child labour even re-emerging in poorer
16 of 70 9/19/2012 4:16 PM
Long-term interest rates of selected European countries.
[1]
Note that weak non-eurozone countries (Hungary, Romania)
lack the sharp rise in interest rates characteristic of weak
eurozone countries.
areas.
[201]
Belgium
In 2010, Belgium's public debt was 100% of its
GDPthe third highest in the eurozone after Greece
and Italy
[202]
and there were doubts about the
financial stability of the banks,
[203]
following the
country's major financial crisis in 20082009. After
inconclusive elections in June 2010, by November
2011
[204]
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.
[202]
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.
[203]
However the government deficit of 5% was
relatively modest and Belgian government 10-year
bond yields in November 2010 of 3.7% were still
below those of Ireland (9.2%), Portugal (7%) and
Spain (5.2%).
[203]
Furthermore, thanks to Belgium's
high personal savings rate, the Belgian Government
financed the deficit from mainly domestic savings,
making it less prone to fluctuations of international credit markets.
[205]
Nevertheless, on 25 November 2011,
Belgium's long-term sovereign credit rating was downgraded from AA+ to AA by Standard and Poor
[206]
and
10-year bond yields reached 5.66%.
[204]
Shortly after, Belgian negotiating parties reached an agreement to form a new government. The deal includes
spending cuts and tax rises worth about 11 billion, which should bring the budget deficit down to 2.8% of GDP
by 2012, and to balance the books in 2015.
[207]
Following the announcement Belgium 10-year bond yields fell
sharply to 4.6%.
[208]
France
France's public debt in 2010 was approximately U.S. $2.1 trillion and 83% GDP, with a 2010 budget deficit of
7% GDP.
[209]
By 16 November 2011, France's bond yield spreads vs. Germany had widened 450% since July,
2011.
[210]
France's C.D.S. contract value rose 300% in the same period.
[211]
On 1 December 2011, France's bond yield had retreated and the country auctioned 4.3 billion worth of 10 year
bonds at an average yield of 3.18%, well below the perceived critical level of 7%.
[212]
By early February 2012,
yields on French 10 year bonds had fallen to 2.84%.
[213]
United Kingdom
17 of 70 9/19/2012 4:16 PM
Main article: United Kingdom national debt
According to the Financial Policy Committee "Any associated disruption to bank funding markets could spill
over to UK banks."
[188]
The UK has the highest gross foreign debt of any European country (7.3 trillion;
117,580 per person) due in large part to its highly leveraged financial industry, which is closely connected with
both the United States and the eurozone.
[214]
In 2012 the U.K. economy was in recession, being negatively impacted by reduced economic activity in Europe,
and apprehensive regarding possible future impacts of the Eurozone crisis. The Bank of England made
substantial funds available at reduced interest to U.K. banks for loans to domestic enterprises. The bank is also
providing liquidity by purchase of large quantities of government bonds, a program which may be expanded.
[215]
Bank of England support of British banks with respect to the Eurozone crisis was backed by the British
Treasury.
[216]
Bank of England governor Mervyn King stated in May 2012 that the Eurozone is "tearing itself apart without
any obvious solution." He acknowledged that the Bank of England, the Financial Services Authority, and the
British government were preparing contingency plans for a Greek exit from the euro or a collapse of the
currency, but refused to discuss them to avoid adding to the panic.
[217]
Known contingency plans include
emergency immigration controls to prevent millions of Greek and other EU residents from entering the country
to seek work, and the evacuation of Britons from Greece during civil unrest.
[218]
A euro collapse would damage London's role as a major financial centre because of the increased risk to UK
banks. The pound and gilts would likely benefit, however, as investors seek safer investments.
[219]
The London
real estate market has similarly benefited from the crisis, with French, Greeks, and other Europeans buying
property with capital moved out of their home countries,
[220]
and a Greek exit from the euro would likely
increase such transfer of capital.
[219]
Switzerland
Switzerland was affected by the Eurozone crisis as money was moved into Swiss assets seeking safety from the
Eurozone crisis as well as by apprehension of further worsening of the crisis. This resulted in appreciation of the
Swiss franc with respect to the euro and other currencies which drove down internal prices and raised the price
of exports. Credit Suisse was required to increase its capitalization by the Swiss National Bank. The Swiss
National Bank stated that the Swiss franc was massively overvalued, and that risk of deflation in Switzerland
existed. It therefore announced that it would buy foreign currency in unlimited quantities if the euro/Swiss Franc
exchange rate fell below 1.20 CHF.
[221]
Purchases of the euro have the effect of maintaining the value of the
euro. Real estate values in Switzerland are extremely high, thus posing a possible risk.
[215][222]
Germany
In relationship to the total amounts involved in the Eurozone crisis, the economy of Germany is relatively small
and would be unable, even if it were willing, to guarantee payment of the sovereign debts of the rest of the
Eurozone as Spain and even Italy and France are added to potentially defaulting nations. Thus, according to
Chancellor Angela Merkel, German participation in rescue efforts are conditioned on negotiation of Eurozone
reforms which have the potential to resolve the underlying imbalances which are driving the crisis.
[223][224]
Slovenia
18 of 70 9/19/2012 4:16 PM
Slovenia joined the European Union in 2004. When it also joined the Euro area three years later interest rates
went down. This led Slovenian banks to finance a construction boom and privatization of state assets by sale to
trusted members of the national elite. When the financial crisis hit the country construction has stalled and
once-sound businesses began to struggle, leaving the banks with bad loans of more than 6 billion euros, or 12
percent, of their lending portfolio. Eventually the Slovenian government helped its banking sector unwind bad
loans by guaranteeing as much as 4 billion euros - more than 11 percent of gross domestic product. This in turn
led to rising borrowing costs for the government, with yields on its 10-year bonds rising above 6 percent. In 2012
the government proposed an austerity budget and plans to adopt labor market reforms to cover the costs of the
crisis. Despite these recent difficulties Slovenia is nowhere close to actually requesting a bailout, according to the
New York Times.
[225]
EU emergency measures
European Financial Stability Facility (EFSF)
Main article: European Financial Stability Facility
On 9 May 2010, the 27 EU member states agreed to create the European Financial Stability Facility, a legal
instrument
[226]
aiming at preserving financial stability in Europe by providing financial assistance to eurozone
states in difficulty. 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.
[227]
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. 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.
[228]
The EFSF issued 5 billion of five-year bonds in its inaugural benchmark issue 25 January 2011, attracting an
order book of 44.5 billion. This amount is a record for any sovereign bond in Europe, and 24.5 billion more
than the European Financial Stabilisation Mechanism (EFSM), a separate European Union funding vehicle, with
a 5 billion issue in the first week of January 2011.
[229]
On 29 November 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 EFSFs firepower to intervene in primary and secondary bond markets.
[230]
Reception by financial markets
Stocks surged worldwide after the EU announced the EFSF's creation. The facility eased fears that the Greek
debt crisis would spread,
[231]
and this led to some stocks rising to the highest level in a year or more.
[232]
The
euro made its biggest gain in 18 months,
[233]
before falling to a new four-year low a week later.
[234]
Shortly after
the euro rose again as hedge funds and other short-term traders unwound short positions and carry trades in the
currency.
[235]
Commodity prices also rose following the announcement.
[236]
19 of 70 9/19/2012 4:16 PM
Debt profile of Eurozone countries
The dollar Libor held at a nine-month high.
[237]
Default swaps also fell.
[238]
The VIX closed down a record
almost 30%, after a record weekly rise the preceding week that prompted the bailout.
[239]
The agreement is
interpreted as allowing the ECB to start buying government debt from the secondary market which is expected
to reduce bond yields.
[240]
As a result Greek bond yields fell sharply from over 10% to just over 5%.
[241]
Asian
bonds yields also fell with the EU bailout.
[242]
)
Usage of EFSF funds
The EFSF only raises funds after an aid request is
made by a country.
[243]
As of the end of July 2012, it
has been activated various times. In November 2010,
it financed 17.7 billion of the total 67.5 billion
rescue package for Ireland (the rest was loaned from
individual European countries, the European
Commission and the IMF). In May 2011 it
contributed one third of the 78 billion package for
Portugal. As part of the second bailout for Greece,
the loan was shifted to the EFSF, amounting to
164 billion (130bn new package plus 34.4bn
remaining from Greek Loan Facility) throughout
2014.
[244]
On 20 July 2012, European finance
ministers sanctioned the first tranche of a partial
bail-out worth up to 100 billion for Spanish
banks.
[245]
This leaves the EFSF with
148 billion
[245]
or an equivalent of 444 billion in
leveraged firepower.
[246]
The EFSF is set to expire in 2013, running some
months parallel to the permanent 500 billion rescue
funding program called the European Stability Mechanism (ESM), which will start operating as soon as member
states representing 90% of the capital commitments have ratified it. This was originally expected to be in July
2012
[247][248]
but had to be postponed when the Federal Constitutional Court of Germany decided to rule on the
legality of the measures on 12 September 2012.
[249]
On 13 January 2012, Standard & Poors downgraded France and Austria from AAA rating, lowered Spain, Italy
(and five other
[250]
) euro members further, and maintained the top credit rating for Finland, Germany,
Luxembourg, and the Netherlands; shortly after, S&P also downgraded the EFSF from AAA to AA+.
[250][251]
European Financial Stabilisation Mechanism (EFSM)
Main article: European Financial Stabilisation Mechanism
On 5 January 2011, the European Union created the European Financial Stabilisation Mechanism (EFSM), 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.
[252]
It runs under the supervision of
the Commission
[253]
and aims at preserving financial stability in Europe by providing financial assistance to EU
member states in economic difficulty.
[254]
The Commission fund, backed by all 27 European Union members,
has the authority to raise up to 60 billion
[255]
and is rated AAA by Fitch, Moody's and Standard & Poor's.
20 of 70 9/19/2012 4:16 PM
[256][257]
Under the EFSM, the EU successfully placed in the capital markets a 5 billion issue of bonds as part of the
financial support package agreed for Ireland, at a borrowing cost for the EFSM of 2.59%.
[258]
Like the EFSF, the EFSM will also be replaced by the permanent rescue funding programme ESM, which is due
to be launched in July 2012.
[247]
Brussels agreement and aftermath
On 26 October 2011, leaders of the 17 eurozone countries met in Brussels and agreed on a 50% write-off of
Greek sovereign debt held by banks, a fourfold increase (to about 1 trillion) in bail-out funds held under the
European Financial Stability Facility, 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. Also pledged was 35 billion in
"credit enhancement" to mitigate losses likely to be suffered by European banks. Jos Manuel Barroso
characterised the package as a set of "exceptional measures for exceptional times".
[11][259]
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,
upsetting financial markets.
[260]
On 3 November 2011 the promised Greek referendum on the bailout package
was withdrawn by Prime Minister Papandreou.
In late 2011, Landon Thomas in the New York Times noted that some, at least, 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. Thomas quoted Richard Koo, an economist based in Japan, an expert on that
country's banking crisis, and specialist in balance sheet recessions, 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, the result is going to be even weaker banks and an even
longer recession if not depression.... Government intervention should be the first resort, not the
last resort.
Beyond equity issuance and debt-to-equity conversion, then, one analyst "said that as banks find it more difficult
to raise funds, they will move faster to cut down on loans and unload lagging assets" as they work to improve
capital ratios. This latter contraction of balance sheets "could lead to a depression, the analyst said.
[261]
Reduced lending was a circumstance already at the time being seen in a "deepen[ing] crisis" in commodities
trade finance in western Europe.
[262]
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. The lenders
agreed to increase the nominal haircut from 50% to 53.5%. 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. Furthermore, 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. Altogether this should bring down Greece's debt to between 117%
[115]
and 120.5% of GDP by 2020.
[116]
European Central Bank
21 of 70 9/19/2012 4:16 PM
ECB Securities Markets Program (SMP) covering bond
purchases from May 2010 till August 2012.
The European Central Bank (ECB) has taken a
series of measures aimed at reducing volatility in the
financial markets and at improving liquidity.
[263]
In May 2010 it took the following actions:
It began open market operations buying
government and private debt securities,
[264]
reaching 219.5 billion in February 2012,
[265]
though it simultaneously absorbed the same
amount of liquidity to prevent a rise in
inflation.
[266]
According to Rabobank
economist Elwin de Groot, there is a natural
limit of 300 billion the ECB can
sterilize.
[267]
It reactivated the dollar swap lines
[268]
with
Federal Reserve support.
[269]
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, regardless of the nation's credit rating.
The move took some pressure off Greek government bonds, which had just been downgraded to junk status,
making it difficult for the government to raise money on capital markets.
[270]
On 30 November 2011, the ECB, the U.S. Federal Reserve, the central banks of Canada, Japan, 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. The central banks agreed to lower the cost of dollar currency swaps by 50 basis points
to come into effect on 5 December 2011. They also agreed to provide each other with abundant liquidity to make
sure that commercial banks stay liquid in other currencies.
[271]
Long Term Refinancing Operation (LTRO)
Though the ECB's main refinancing operations (MRO) are from repo auctions with a (bi)weekly maturity and
monthly maturation, the ECB now conducts Long Term Refinancing Operations (LTROs), maturing after three
months, six months, 12 months and 36 months. In 2003, refinancing via LTROs amounted to 45 bln euro which
is about 20% of overall liquidity provided by the ECB.
[272]
The ECB's first supplementary longer-term refinancing operation (LTRO) with a six-month maturity was
announced March 2008.
[273]
Previously the longest tender offered was three months. It announced two 3-month
and one 6-month full allotment of Long Term Refinancing Operations (LTROs). The first tender was settled 3
April, and was more than four times oversubscribed. The 25 billion auction drew bids amounting to 103.1
billion, from 177 banks. Another six-month tender was allotted on 9 July, again to the amount of 25 billion.
[273]
The first 12 month LTRO in June 2009 had close to 1100 bidders.
[274]
On 22 December 2011, the ECB
[275]
started the biggest infusion of credit into the European banking system in
the euro's 13 year history. Under its Long Term Refinancing Operations (LTROs) it loaned 489 billion to 523
banks for an exceptionally long period of three years at a rate of just one percent.
[276]
Previous refinancing
22 of 70 9/19/2012 4:16 PM
operations matured after three, six and twelve months.
[274]
The by far biggest amount of 325 billion was tapped
by banks in Greece, Ireland, Italy and Spain.
[277]
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, and at the same time keep operating and loaning to businesses so that a
credit crunch does not choke off economic growth. It also hoped that banks would use some of the money to buy
government bonds, effectively easing the debt crisis.
[278]
On 29 February 2012, the ECB held a second auction,
LTRO2, providing 800 Eurozone banks with further 529.5 billion in cheap loans.
[279]
Net new borrowing under
the 529.5 billion February auction was around 313 billion; out of a total of 256 billion existing ECB lending
(MRO + 3m&6m LTROs), 215 billion was rolled into LTRO2.
[280]
ECB lending has largely replaced inter-bank lending. Spain has 365 billion and Italy has 281 billion of
borrowings from the ECB (June 2012 data). Germany has 275 billion on deposit.
[281]
Resignations
In September 2011, Jrgen Stark became the second German after Axel A. Weber to resign from the ECB
Governing Council in 2011. Weber, the former Deutsche Bundesbank president, was once thought to be a likely
successor to Jean-Claude Trichet as bank president. He and Stark were both thought to have resigned due to
"unhappiness with the ECBs bond purchases, which critics say erode the banks independence". Stark was
"probably the most hawkish" member of the council when he resigned. Weber was replaced by his Bundesbank
successor Jens Weidmann, while Belgium's Peter Praet took Stark's original position, heading the ECB's
economics department.
[282]
Money supply growth
In April, 2012, statistics showed a growth trend in the M1 "core" money supply. Having fallen from an over 9%
growth rate in mid-2008 to negative 1% +/- for several months in 2011, M1 core has built to a 2-3% range in
early 2012. "'It is still early days but a further recovery in peripheral real M1 would suggest an end to recessions
by late 2012,' said Simon Ward from Henderson Global Investors who collects the data." While attributing the
money supply growth to ECB's LTRO policies, an analysis in The Telegraph said lending "continued to fall
across the eurozone in March [and] ... [t]he jury is out on the ... three-year lending adventure (LTRO)".
[283]
Reorganization of the European banking system
On June 16, 2012 the European Central Bank together with other European leaders hammered out plans for the
ECB to become a bank regulator and to form a deposit insurance program to augment national programs. Other
economic reforms promoting European growth and employment were also proposed.
[284]
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
[247]
but it
was postponed due to a preliminary injunction by the German Constitutional Court.
[285]
The permanent bailout
fund is now expected to be up and running at the end of October 2012.
[286]
On 16 December 2010 the European Council agreed a two line amendment to the EU Lisbon Treaty to allow for
23 of 70 9/19/2012 4:16 PM
Public debt to GDP ratio for selected Eurozone
countries and the UK - 2008 to 2011. Source Data:
Eurostat.
a permanent bail-out mechanism to be established
[287]
including stronger sanctions. In March 2011, the
European Parliament approved the treaty amendment after receiving assurances that the European Commission,
rather than EU states, would play 'a central role' in running the ESM.
[288][289]
According to this treaty, the ESM
will be an intergovernmental organisation under public international law and will be located in Luxembourg.
[290][291]
Such a mechanism serves as a "financial firewall." Instead of a default by one country rippling through the entire
interconnected financial system, the firewall mechanism can ensure that downstream nations and banking
systems are protected by guaranteeing some or all of their obligations. Then the single default can be managed
while limiting financial contagion.
European Fiscal Compact
Main article: European Fiscal Compact
In March 2011 a new reform of the Stability and Growth
Pact was initiated, 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.
[292][293]
By the end of the year, Germany, 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.
[12][13]
On 9 December 2011 at the European
Council meeting, 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, with penalties for those countries
who violate the limits.
[294]
All other non-eurozone countries
apart from the UK are also prepared to join in, subject to
parliamentary vote.
[247]
The treaty will enter into force on 1
January 2013, if by that time 12 members of the euro area have ratified it.
[295]
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, including
the proposed EU financial transaction tax.
[296][297]
By the end of the day, 26 countries had agreed to the plan,
leaving the United Kingdom as the only country not willing to join.
[298]
Cameron subsequently conceded that his
action had failed to secure any safeguards for the UK.
[299]
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 concluded that "Any Prime Minister would have done as Cameron
did".
[300]
Direct loans to banks and banking regulation
24 of 70 9/19/2012 4:16 PM
On June 28, 2012 Eurozone leaders agreed to permit loans by the European Stability Mechanism to be made
directly to stressed banks rather than through Eurozone states, to avoid adding to sovereign debt. The reform was
linked to plans for banking regulation by the European Central Bank. The reform was immediately reflected by a
reduction in yield of long-term bonds issued by member states such as Italy and Spain and a rise in value of the
Euro.
[301][302][303]
Increase investment
There has been substantial criticism over the austerity measures implemented by most European nations to
counter this debt crisis. Some argue that an abrupt return to "non-Keynesian" financial policies" is not a viable
solution
[304]
and predict that deflationary policies now being imposed on countries such as Greece and Spain
might prolong and deepen their recessions.
[305]
In a 2003 study that analyzed 133 IMF austerity programmes,
the IMF's independent evaluation office found that policy makers consistently underestimated the disastrous
effects of rigid spending cuts on economic growth.
[306][307]
Current austerity "cuts have been relatively small
compared to the size of the problem and meaningful structural reforms were seldom implemented."
[308]
Most
austerity cuts came with even larger tax increases.
[309][310][311]
In early 2012 an IMF official, who negotiated Greek austerity measures, admitted that spending cuts were
harming Greece.
[89][89]
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, all this
money is conditional on all these countries doing fiscal adjustment and structural reform."
[312]
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, a theoretical claim that has not
materialized. The case of Greece shows that excessive levels of private indebtedness and a collapse of public
confidence (over 90% of Greeks fear unemployment, poverty and the closure of businesses)
[313]
led the private
sector to decrease spending in an attempt to save up for rainy days ahead. This led to even lower demand for
both products and labor, which further deepened the recession and made it ever more difficult to generate tax
revenues and fight public indebtedness.
[314]
According to Financial Times chief economics commentator Martin
Wolf, "structural tightening does deliver actual tightening. But its impact is much less than one to one. A one
percentage point reduction in the structural deficit delivers a 0.67 percentage point improvement in the actual
fiscal deficit." This means that Ireland e.g. would require structural fiscal tightening of more than 12% to
eliminate its 2012 actual fiscal deficit. A task that is difficult to achieve without an exogenous eurozone-wide
economic boom.
[315]
Austerity is bound to fail if it relies largely on tax increases
[309]
instead of cuts in
government expenditures coupled with encouraging "private investment and risk-taking, labor mobility and
flexibility, an end to price controls, tax rates that encouraged capital formation ..." as Germany has done in the
decade before the crisis.
[316]
Instead of public austerity, a "growth compact" centering on tax increases
[314]
and deficit spending is proposed.
Since struggling European countries lack the funds to engage in deficit spending, German economist and member
of the German Council of Economic Experts Peter Bofinger and Sony Kapoor of the global think tank Re-Define
suggest providing 40 billion in additional funds to the European Investment Bank (EIB), which could then lend
ten times that amount to the employment-intensive smaller business sector.
[314]
The EU is currently planning a
possible 10 billion increase in the EIB's capital base. Furthermore the two suggest financing additional public
investments by growth-friendly taxes on "property, land, wealth, carbon emissions and the under-taxed financial
sector". 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. Currently authorities capture less than 1% in annual
tax revenue on untaxed wealth transferred between EU members.
[314]
According to the Tax Justice Network,
25 of 70 9/19/2012 4:16 PM
Relative change in unit labour costs, 20002011
worldwide, a global super-rich elite had between $21 and $32 trillion (up to 26,000bn Euros) hidden in secret tax
havens by the end of 2010, resulting in a tax deficit of up to $280bn.
[317][318]
Apart from arguments over whether or not austerity, rather than increased or frozen spending, is a
macroeconomic solution,
[319]
union leaders have also argued that the working population is being unjustly held
responsible for the economic mismanagement errors of economists, investors, and bankers. Over 23 million EU
workers have become unemployed as a consequence of the global economic crisis of 20072010, and this has
led many to call for additional regulation of the banking sector across not only Europe, but the entire world.
[320]
In April, 2012, Olli Rehn, the European commissioner for economic and monetary affairs in Brussels,
"enthusiastically announced to EU parliamentarians in mid-April that 'there was a breakthrough before Easter'.
He said the European heads of state had given the green light to pilot projects worth billions, such as building
highways in Greece." Other growth initiatives include "project bonds" wherein the EIB would "provide
guarantees that safeguard private investors. In the pilot phase until 2013, EU funds amounting to 230 million
are expected to mobilize investments of up to 4.6 billion." Der Spiegel also said: "According to sources inside
the German government, instead of funding new highways, Berlin is interested in supporting innovation and
programs to promote small and medium-sized businesses. To ensure that this is done as professionally as possible,
the Germans would like to see the southern European countries receive their own state-owned development
banks, modeled after Germany's [Marshall Plan-era-origin] Kreditanstalt fr Wiederaufbau (KfW) banking
group. It's hoped that this will get the economy moving in Greece and Portugal."
[321]
Increase competitiveness
See also: Euro Plus Pact
Slow GDP growth rates correspond to slower growth in tax
revenues and higher safety net spending, increasing deficits
and debt levels. Indian-American journalist Fareed Zakaria
described the factors slowing growth in the eurozone, writing
in November 2011: "Europe's core problem [is] a lack of
growth... Italy's economy has not grown for an entire decade.
No debt restructuring will work if it stays stagnant for
another decade... The fact is that Western economies with
high wages, generous middle-class subsidies and complex
regulations and taxes have become sclerotic. Now they
face pressures from three fronts: demography (an aging
population), 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)." He advocated lower wages and steps to bring in
more foreign capital investment.
[322]
British economic historian Robert Skidelsky disagreed saying it was excessive lending by banks, not deficit
spending that created this crisis. Government's mounting debts are a response to the economic downturn as
spending rises and tax revenues fall, not its cause.
[323]
To improve the situation, crisis countries must significantly increase their international competitiveness.
Typically this is done by depreciating the currency, as in the case of Iceland, which suffered the largest financial
crisis in 20082011 in economic history but has since vastly improved its position. Since eurozone countries
cannot devalue their currency, policy makers try to restore competitiveness through internal devaluation, a
26 of 70 9/19/2012 4:16 PM
Eurozone economic health and
adjustment progress 2011 (Source:
Euro Plus Monitor)
[329]
painful economic adjustment process, where a country aims to reduce its unit labour costs.
[23][324]
German economist Hans-Werner Sinn noted in 2012 that Ireland was the only country that had implemented
relative wage moderation in the last five years, which helped decrease its relative price/wage levels by 16%.
Greece would need to bring this figure down by 31%, effectively reaching the level of Turkey.
[325][326]
Other economists argue that no matter how much Greece and Portugal drive down their wages, they could never
compete with low-cost developing countries such as China or India. Instead weak European countries must shift
their economies to higher quality products and services, though this is a long-term process and may not bring
immediate relief.
[327]
Jeremy J. Siegel argues that the need to make labor competitive requires devaluation. This could be achieved by
Greece leaving the Euro but that would lead to runs on the banks of Greece and other EU nations. Siegel argues
that the only option left besides internal devaluation is for the devaluation of the Euro as a whole (parity with the
dollar)--if it is to survive.
[328]
Progress
On 15 November 2011, the Lisbon Council published the Euro Plus Monitor
2011. According to the report most critical eurozone member countries are
in the process of rapid reforms. The authors note that "Many of those
countries most in need to adjust [...] are now making the greatest progress
towards restoring their fiscal balance and external competitiveness". Greece,
Ireland and Spain are among the top five reformers and Portugal is ranked
seventh among 17 countries included in the report (see graph).
[329]
Address current account imbalances
Regardless of the corrective measures chosen to solve the current
predicament, as long as cross border capital flows remain unregulated in the
euro area,
[330]
current account imbalances are likely to continue. A country
that runs a large current account or trade deficit (i.e., importing more than it exports) must ultimately be a net
importer of capital; this is a mathematical identity called the balance of payments. In other words, a country that
imports more than it exports must either decrease its savings reserves or borrow to pay for those imports.
Conversely, Germany's large trade surplus (net export position) means that it must either increase its savings
reserves or be a net exporter of capital, lending money to other countries to allow them to buy German
goods.
[331]
The 2009 trade deficits for Italy, Spain, Greece, and Portugal were estimated to be $42.96 billion, $75.31bn and
$35.97bn, and $25.6bn respectively, while Germany's trade surplus was $188.6bn.
[332]
A similar imbalance
exists in the U.S., which runs a large trade deficit (net import position) and therefore is a net borrower of capital
from abroad. Ben Bernanke warned of the risks of such imbalances in 2005, arguing that a "savings glut" in one
country with a trade surplus can drive capital into other countries with trade deficits, artificially lowering interest
rates and creating asset bubbles.
[333][334][335]
A country with a large trade surplus would generally see the value of its currency appreciate relative to other
currencies, which would reduce the imbalance as the relative price of its exports increases. This currency
appreciation occurs as the importing country sells its currency to buy the exporting country's currency used to
purchase the goods. Alternatively, trade imbalances can be reduced if a country encouraged domestic saving by
27 of 70 9/19/2012 4:16 PM
Current account imbalances (19972013)
restricting or penalizing the flow of capital across borders, or
by raising interest rates, although this benefit is likely offset
by slowing down the economy and increasing government
interest payments.
[336]
Either way, many of the countries involved in the crisis are
on the euro, so devaluation, individual interest rates and
capital controls are not available. The only solution left to
raise a country's level of saving is to reduce budget deficits
and to change consumption and savings habits. For example,
if a country's citizens saved more instead of consuming
imports, this would reduce its trade deficit.
[336]
It has
therefore been suggested that countries with large trade
deficits (e.g. Greece) consume less and improve their
exporting industries. On the other hand, export driven
countries with a large trade surplus, such as Germany,
Austria and the Netherlands would need to shift their
economies more towards domestic services and increase
wages to support domestic consumption.
[44][337]
In its spring
2012 economic forecast, the European Commission finds
"some evidence that the current-account rebalancing is
underpinned by changes in relative prices and
competitiveness positions as well as gains in export market
shares and expenditure switching in deficit countries."
[338]
In May 2012 German finance minister Wolfgang Schuble has signaled support for a significant increase in
German wages to help decrease current account imbalances within the eurozone.
[339]
Mobilization of credit
A number of proposals were made in the summer of 2012 to purchase the debt of distressed European countries
such as Spain and Italy. Markus Brunnermeier,
[340]
the economist Graham Bishop, and Daniel Gros were among
those advancing proposals. Finding a formula which was not simply backed by Germany is central in crafting an
acceptable and effective remedy.
[341]
Commentary
U.S. President Barack Obama stated in June 2012: "Right now, [Europe's] focus has to be on strengthening their
overall banking system...making a series of decisive actions that give people confidence that the banking system
is solid...In addition, theyre going to have to look at how do they achieve growth at the same time as theyre
carrying out structural reforms that may take two or three or five years to fully accomplish. So countries like
Spain and Italy, for example, have embarked on some smart structural reforms that everybody thinks are
necessary -- everything from tax collection to labor markets to a whole host of different issues. But they've got
to have the time and the space for those steps to succeed. And if they are just cutting and cutting and cutting,
and their unemployment rate is going up and up and up, and people are pulling back further from spending
money because they're feeling a lot of pressure -- ironically, that can actually make it harder for them to carry
out some of these reforms over the long term...[I]n addition to sensible ways to deal with debt and government
finances, there's a parallel discussion that's taking place among European leaders to figure out how do we also
encourage growth and show some flexibility to allow some of these reforms to really take root."
[342]
28 of 70 9/19/2012 4:16 PM
The Economist wrote in June 2012: "Outside Germany, a consensus has developed on what Mrs. Merkel must do
to preserve the single currency. It includes shifting from austerity to a far greater focus on economic growth;
complementing the single currency with a banking union (with euro-wide deposit insurance, bank oversight and
joint means for the recapitalization or resolution of failing banks); and embracing a limited form of debt
mutualization to create a joint safe asset and allow peripheral economies the room gradually to reduce their debt
burdens. This is the refrain from Washington, Beijing, London and indeed most of the capitals of the euro zone.
Why hasnt the continents canniest politician sprung into action?"
[343]
European fiscal union
Increased European integration giving a central body increased control over the budgets of member states was
proposed on June 14, 2012 by Jens Weidmann President of the Deutsche Bundesbank,
[344]
expanding on ideas
first proposed by Jean-Claude Trichet, former president of the European Central Bank. Control, including
requirements that taxes be raised or budgets cut, would be exercised only when fiscal imbalances
developed.
[345]
This proposal is similar to contemporary calls by Angela Merkel for increased political and fiscal
union which would "allow Europe oversight possibilities."
[346]
Eurobonds
Main article: Eurobonds
A growing number of investors and economists say Eurobonds would be the best way of solving a debt
crisis,
[347]
though their introduction matched by tight financial and budgetary coordination may well require
changes in EU treaties.
[347]
On 21 November 2011, the European Commission suggested that eurobonds issued
jointly by the 17 euro nations would be an effective way to tackle the financial crisis. Using the term "stability
bonds", 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 hazard and ensure sustainable
public finances.
[348][349]
Germany remains largely opposed at least in the short term to a collective takeover of the debt of states that
have run excessive budget deficits and borrowed excessively over the past years, saying this could substantially
raise the country's liabilities.
[350]
European Monetary Fund
On 20 October 2011, the Austrian Institute of Economic Research published an article that suggests transforming
the EFSF into a European Monetary Fund (EMF), which could provide governments with fixed interest rate
Eurobonds at a rate slightly below medium-term economic growth (in nominal terms). These bonds would not be
tradable but could be held by investors with the EMF and liquidated at any time. Given the backing of all
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." To ensure fiscal discipline despite lack
of market pressure, the EMF would operate according to strict rules, providing funds only to countries that meet
fiscal and macroeconomic criteria. Governments lacking sound financial policies would be forced to rely on
traditional (national) governmental bonds with less favorable market rates.
[351]
The econometric analysis suggests that "If the short-term and long- term interest rates in the euro area were
29 of 70 9/19/2012 4:16 PM
Overall debt levels in 2009 and write-offs necessary in the Eurozone,
UK and U.S. to reach sustainable grounds.
stabilized at 1.5% and 3%, respectively, aggregate output (GDP) in the euro area would be 5 percentage points
above baseline in 2015". At the same time sovereign debt levels would be significantly lower with, e.g., Greece's
debt level falling below 110% of GDP, more than 40 percentage points below the baseline scenario with market
based interest levels. Furthermore, 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.
[351]
Drastic debt write-off financed by wealth tax
According to the Bank for International
Settlements, the combined private and public
debt of 18 OECD countries nearly
quadrupled between 1980 and 2010, and will
likely continue to grow, reaching between
250% (for Italy) and about 600% (for Japan)
by 2040.
[352]
A BIS study released in June
2012 warns that budgets of most advanced
economies, excluding interest payments,
"would need 20 consecutive years of
surpluses exceeding 2 per cent of gross
domestic product - starting now - just to
bring the debt-to-GDP ratio back to its
pre-crisis level".
[353]
The same authors 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:
[354]
government debt is more than 80 to 100 percent of GDP;
non-financial corporate debt is more than 90 percent;
private household debt is more than 85 percent of GDP.
The Boston Consulting Group (BCG) adds that if the overall debt load continues to grow faster than the
economy, then large-scale debt restructuring becomes inevitable. 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. This number is based on the assumption that
governments, nonfinancial corporations, and private households can each sustain a debt load of 60 percent of
GDP, at an interest rate of 5 percent and a nominal economic growth rate of 3 percent per year. Lower interest
rates and/or higher growth would help reduce the debt burden further.
[355]
To reach sustainable levels the Eurozone must reduce its overall debt level by 6.1 trillion. According to BCG
this could be financed by a one-time wealth tax of between 11 and 30 percent for most countries, apart from the
crisis countries (particularly Ireland) where a write-off would have to be substantially higher. The authors admit
that such programs would be "drastic", "unpopular" and "require broad political coordination and leadership" but
they maintain that the longer politicians and central bankers wait, the more necessary such a step will be.
[355]
Instead of a one-time write-off, German economist Harald Spehl has called for a 30 year debt-reduction plan,
similar to the one Germany used after World War II to share the burden of reconstruction and development.
[356]
Similar calls have been made by political parties in Germany including the Greens and The Left.
[357][358]
Debt defaults and national exits from the Eurozone
30 of 70 9/19/2012 4:16 PM
Further information: Grexit
In mid May 2012 the financial crisis in Greece and the impossibility of forming a new government after elections
led to strong speculation that Greece would have to leave the Eurozone shortly.
[359][360][361][362]
This
phenomenon had already become known as "Grexit" and started to govern international market behaviour.
Economists have expressed concern that the phenomenon may well become a typical example of what is called a
self-fulfilling prophecy.
[363]
Reuters stated that the implementation of Grexit would have to occur "within days or even hours of the decision
being made"
[364]
due to the high volatility that would result.
Commentary
"The euro should now be recognized as an experiment that failed", wrote Martin Feldstein in 2012.
[365]
Economists, mostly from outside Europe, and associated with Modern Monetary Theory and other
post-Keynesian schools condemned the design of the Euro currency system from the beginning
[366][367]
and
have since been advocating that Greece (and the other debtor nations) unilaterally leave the eurozone, which
would allow Greece to withdraw simultaneously from the eurozone and reintroduce its national currency the
drachma at a debased rate.
[105][368][369]
Economists who favor this radical approach to solve the Greek debt crisis typically argue that a default is
unavoidable for Greece in the long term, and that a delay in organising an orderly default (by lending Greece
more money throughout a few more years), would just wind up hurting EU lenders and neighboring European
countries even more.
[370]
Fiscal austerity or a euro exit is the alternative to accepting differentiated government
bond yields within the Euro Area. If Greece remains in the euro while accepting higher bond yields, reflecting its
high government deficit, then high interest rates would dampen demand, raise savings and slow the economy. An
improved trade performance and less reliance on foreign capital would be the result.
[citation needed]
However, there is opposition in this view. The national exits are expected to be an expensive proposition. The
breakdown of the currency would lead to insolvency of several euro zone countries, a breakdown in intrazone
payments. Having instability and the public debt issue still not solved, the contagion effects and instability would
spread into the system.
[371]
Having that the exit of Greece would trigger the breakdown of the eurozone, this is
not welcomed by many politicians, economists and journalists. According to Steven Erlanger from The New
York Times, a Greek departure is likely to be seen as the beginning of the end for the whole euro zone project, a
major accomplishment, whatever its faults, in the postwar construction of a Europe whole and at peace.
[372]
Likewise, the two big leaders of the Euro zone, German Chancellor Angela Merkel and former French President
Nicolas Sarkozy have said on numerous occasions that they would not allow the eurozone to disintegrate and
have linked the survival of the Euro with that of the entire European Union.
[373][374]
In September 2011, EU
commissioner Joaqun Almunia shared this view, 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".
[375]
Solutions which involve greater integration of European banking and fiscal management and supervision of
national decisions by European umbrella institutions can be criticized as Germanic domination of European
political and economic life:
[376]
This would effectively turn the European Union into a kind of postmodern version of the old Austro-
Hungarian Empire, with a Germanic elite presiding uneasily over a polyglot imperium and its restive
local populations.
[376]
31 of 70 9/19/2012 4:16 PM
Standard & Poor's Headquarters in
The European bailouts are largely about shifting exposure from banks and others, who otherwise are lined up for
losses on the sovereign debt they have piled up, onto European taxpayers.
[118][377][378][379][380][381]
EU treaty violations
No bail-out clause
The EU's Maastricht Treaty contains juridical language which appears to rule out intra-EU bailouts. First, 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. The clause thus
encourages prudent fiscal policies at the national level.
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). The creation of further leverage in EFSF with access
to ECB lending would also appear to violate the terms of this article.
Articles 125 and 123 were meant to create disincentives for EU member states to run excessive deficits and state
debt, and prevent the moral hazard of over-spending and lending in good times. They were also meant to protect
the taxpayers of the other more prudent member states. By issuing bail-out aid guaranteed by prudent eurozone
taxpayers to rule-breaking eurozone countries such as Greece, the EU and eurozone countries also encourage
moral hazard in the future.
[382]
While the no bail-out clause remains in place, the "no bail-out doctrine" seems to
be a thing of the past.
[383]
Convergence criteria
The EU treaties contain so called convergence criteria, specified in the protocols of the Treaties of the European
Union. 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 (see protocol 12 and 13). 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.
Nevertheless many European countries, including Greece and Italy (status November 2011) have substantially
exceeded these criteria over a long period of time.
[384]
Actors fueling the crisis
Credit rating agencies
The international U.S.-based credit rating agenciesMoody's, Standard
& Poor's and Fitchwhich have already been under fire during the
housing bubble
[385][386]
and the Icelandic crisis
[387][388]
have also
played a central and controversial role
[389]
in the current European bond
market crisis.
[390]
On one hand, the agencies have been accused of
giving overly generous ratings due to conflicts of interest.
[391]
On the
other hand, ratings agencies have a tendency to act conservatively, and to
take some time to adjust when a firm or country is in trouble.
[392]
In the
case of Greece, the market responded to the crisis before the
32 of 70 9/19/2012 4:16 PM
Lower Manhattan, New York City downgrades, with Greek bonds trading at junk levels several weeks
before the ratings agencies began to describe them as such.
[76]
According to a study by economists at St Gallen University credit rating agencies have fueled rising euro zone
indebtedness by issuing more severe downgrades since the sovereign debt crisis unfolded in 2009. The authors
concluded that rating agencies were not consistent in their judgments, on average rating Portugal, Ireland and
Greece 2.3 notches lower than under pre-crisis standards, eventually forcing them to seek international aid.
[393]
European policy makers have criticized ratings agencies for acting politically, accusing the Big Three of bias
towards European assets and fueling speculation.
[394]
Particularly Moody's decision to downgrade Portugal's
foreign debt to the category Ba2 "junk" has infuriated officials from the EU and Portugal alike.
[394]
State owned
utility and infrastructure companies like ANA Aeroportos de Portugal, Energias de Portugal, Redes
Energticas Nacionais, and Brisa Auto-estradas de Portugal were also downgraded despite claims to having
solid financial profiles and significant foreign revenue.
[395][396][397][398]
France too has shown its anger at its downgrade. 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, as much debt, more inflation, less growth than us". Similar comments were made by high-ranking
politicians in Germany. Michael Fuchs, deputy leader of the leading Christian Democrats, said: "Standard and
Poor's must stop playing politics. Why doesn't it act on the highly indebted United States or highly indebted
Britain?", adding that the latter's collective private and public sector debts are the largest in Europe. He further
added: "If the agency downgrades France, it should also downgrade Britain in order to be consistent."
[399]
Credit rating agencies were also accused of bullying politicians by systematically downgrading eurozone
countries just before important European Council meetings. As one EU source put it: "It is interesting to look at
the downgradings and the timings of the downgradings ... It is strange that we have so many downgrades in the
weeks of summits."
[400]
Regulatory reliance on credit ratings
Think-tanks such as the World Pensions Council (WPC) have criticized European powers such as France and
Germany for pushing for the adoption of the Basel II recommendations, adopted in 2005 and transposed in
European Union law through the Capital Requirements Directive (CRD), effective since 2008. In essence, this
forced European banks and more importantly the European Central Bank, e.g. when gauging the solvency of
EU-based financial institutions, to rely heavily on the standardized assessments of credit risk marketed by only
two private US firms- Moodys and S&P.
[401]
Counter measures
Due to the failures of the ratings agencies, European regulators obtained new powers to supervise ratings
agencies.
[389]
With the creation of the European Supervisory Authority in January 2011 the EU set up a whole
range of new financial regulatory institutions,
[402]
including the European Securities and Markets Authority
(ESMA),
[403]
which became the EUs single credit-ratings firm regulator.
[404]
Credit-ratings companies have to
comply with the new standards or will be denied operation on EU territory, says ESMA Chief Steven
Maijoor.
[405]
Germany's foreign minister Guido Westerwelle has called for an "independent" European ratings agency, which
could avoid the conflicts of interest that he claimed US-based agencies faced.
[406]
European leaders are
reportedly studying the possibility of setting up a European ratings agency in order that the private U.S.-based
33 of 70 9/19/2012 4:16 PM
ratings agencies have less influence on developments in European financial markets in the future.
[407][408]
According to German consultant company Roland Berger, setting up a new ratings agency would cost 300
million. On 30 January 2012, 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, which could
provide its first country ratings by the end of the year.
[409]
In April 2012, in a similar attempt, the Bertelsmann
Stiftung presented a blueprint for establishing an international non-profit credit rating agency (INCRA) for
sovereign debt, structured in way that management and rating decisions are independent from its financiers.
[410]
But attempts to regulate more strictly credit rating agencies in the wake of the European sovereign debt crisis
have been rather unsuccessful. World Pensions Council (WPC) financial law and regulation experts have argued
that the hastily drafted, unevenly transposed in national law, 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"
[411]
Media
There has been considerable controversy about the role of the English-language press in regard to the bond
market crisis.
[412][413]
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. "This is an attack on the eurozone by
certain other interests, political or financial".
[414]
The Spanish Prime Minister Jos Luis Rodrguez Zapatero has
also suggested that the recent financial market crisis in Europe is an attempt to undermine the euro.
[415][416]
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.
[417][418][419][420][421][422][423]
So far no
results have been reported from this investigation.
Other commentators believe that the euro is under attack so that countries, such as the U.K. and the U.S., can
continue to fund their large external deficits and government deficits,
[424]
and to avoid the collapse of the
US$.
[425][426][427]
The U.S. and U.K. do not have large domestic savings pools to draw on and therefore are
dependent on external savings e.g. from China.
[428][429]
This is not the case in the eurozone, which is
self-funding.
[430][431]
Speculators
Both the Spanish and Greek Prime Ministers have accused financial speculators and hedge funds of worsening
the crisis by short selling euros.
[432][433]
German chancellor Merkel has stated that "institutions bailed out with
public funds are exploiting the budget crisis in Greece and elsewhere."
[434]
According to The Wall Street Journal several hedge-fund managers launched "large bearish bets" against the
euro in early 2010.
[435]
On 8 February, the boutique research and brokerage firm Monness, Crespi, Hardt & Co.
hosted an exclusive "idea dinner" at a private townhouse in Manhattan, where a small group of hedge-fund
managers from SAC Capital Advisors LP, Soros Fund Management LLC, Green Light Capital Inc., 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. Three days later the euro was hit with a wave of
34 of 70 9/19/2012 4:16 PM
selling, triggering a decline that brought the currency below $1.36.
[435]
There was no suggestion by regulators
that there was any collusion or other improper action.
[435]
On 8 June, exactly four months after the dinner, the
Euro hit a four year low at $1.19 before it started to rise again.
[436]
Traders estimate that bets for and against the
euro account for a huge part of the daily three trillion dollar global currency market.
[435]
The role of Goldman Sachs
[437]
in Greek bond yield increases is also under scrutiny.
[438]
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, some markets banned naked short
selling for a few months.
[439]
Speculation about the breakup of the eurozone
Economists, mostly from outside Europe and associated with Modern Monetary Theory and other
post-Keynesian 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. When faced with economic
problems, they maintained, "Without such an institution, EMU would prevent effective action by individual
countries and put nothing in its place."
[366][367]
Some non-Keynesian economists, such as Luca A. Ricci of the
IMF, contend the eurozone does not fulfill the necessary criteria for an optimum currency area, though it is
moving in that direction.
[329][440]
As the debt crisis expanded beyond Greece, these economists continued to advocate, albeit more forcefully, the
disbandment of the eurozone. If this was not immediately feasible, they recommended that Greece and the other
debtor nations unilaterally leave the eurozone, default on their debts, regain their fiscal sovereignty, and re-adopt
national currencies.
[441][442]
Bloomberg suggested in June 2011 that, if the Greek and Irish bailouts should fail,
an alternative would be for Germany to leave the eurozone in order to save the currency through
depreciation
[443]
instead of austerity. The likely substantial fall in the euro against a newly reconstituted
Deutsche Mark would give a "huge boost" to its members' competitiveness.
[444]
The Wall Street Journal conjectured that Germany could return to the Deutsche Mark,
[445]
or create another
currency union
[446]
with the Netherlands, Austria, Finland, Luxembourg and other European countries such as
Denmark, Norway, Sweden, Switzerland and the Baltics.
[447]
A monetary union of these countries with current
account surpluses would create the world's largest creditor bloc, bigger than China
[448]
or Japan. The Wall Street
Journal added that without the German-led bloc, a residual euro would have the flexibility to keep interest rates
low
[449]
and engage in quantitative easing or fiscal stimulus in support of a job-targeting economic policy
[450]
instead of inflation targeting in the current configuration.
George Soros warns in Does the Euro have a Future? that there is no escape from the gloomy scenario of a
prolonged European recession and the consequent threat to the Eurozones political cohesion so long as the
authorities persist in their current course. He argues that to save the Euro long-term structural changes are
essential in addition to the immediate steps needed to arrest the crisis. The changes he recommends include even
greater economic integration of the European Union.
[451]
Soros writes that a treaty is needed to transform the European Financial Stability Fund into a full-fledged
European Treasury. Following the formation of the Treasury, European Council could then ask the European
Commission Bank to step into the breach and indemnify the European Commission Bank in advance against
potential risks to the Treasurys solvency. Soros acknowledges that converting the EFSF into a European
35 of 70 9/19/2012 4:16 PM
Treasury will necessitate a radical change of heart. In particular, he cautions, Germans will be wary of any
such move, not least because many continue to believe that they have a choice between saving the Euro and
abandoning it. Soros writes however that a collapse of European Union would precipitate an uncontrollable
financial meltdown and thus the only way to avert another Great Depression is the formation of a European
Treasury.
[451]
The Economist provides a somewhat modified approach to saving the euro in that "a limited version of
federalization could be less miserable solution than break-up of the euro."
[452]
The recipe to this tricky
combination of the limited federalization, greatly lies on mutualization for limiting the fiscal integration. In order
for overindebted countries to stabilize the dwindling euro and economy, the overindebted countries require
"access to money and for banks to have a "safe" euro-wide class of assets that is not tied to the fortunes of one
country" which could be obtained by "narrower Eurobond that mutualises a limited amount of debt for a limited
amount of time."
[452]
The proposition made by German Council of Economic Experts provides detailed blue
print to mutualize the current debts of all euro-zone economies above 60% of their GDP. Instead of the breakup
and issuing new national governments bonds by individual euro-zone governments, "everybody, from Germany
(debt: 81% of GDP) to Italy(120%) would issue only these joint bonds until their national debts fell to the 60%
threshold. The new mutualized-bond market, worth some 2.3 trillion, would be paid off over the next 25 years.
Each country would pledge a specified tax (such as a VAT surcharge) to provide the cash." However, so far
German Chancellor Angela Merkel has opposed to all forms of mutualization.
[452]
German Chancellor Angela Merkel and French President Nicolas Sarkozy
[453]
have, on numerous occasions,
publicly said that they would not allow the eurozone to disintegrate, linking the survival of the euro with that of
the entire European Union.
[373][454]
In September 2011, EU commissioner Joaqun Almunia shared this view,
saying that expelling weaker countries from the euro was not an option.
[375]
Furthermore, former ECB president
Jean-Claude Trichet also denounced the possibility of a return of the Deutsche Mark.
[455]
Iceland, not part of the EU, is regarded as one of Europe's recovery success stories. It defaulted on its debt and
drastically devalued it currency, which has effectively reduced wages by 50% making exports more
competitive.
[456]
Lee Harris argues that floating exchange rates allows wage reductions by currency
devaluations, a politically easier option than the economically equivalent but politically impossible method of
lowering wages by political enactment.
[457]
Sweden's floating rate currency gives it a short term advantage,
structural reforms and constraints account for longer-term prosperity. Labor concessions, a minimal reliance on
public debt, and tax reform helped to further a pro-growth policy.
[458]
The British betting company Ladbrokes stopped taking bets on Greece exiting the Eurozone in May 2012 after
odds fell to 1/3, and reported "plenty of support" for 33/1 odds for a complete disbanding of the Eurozone during
2012.
[219]
The challenges to the speculation about the breakup or salvage of the eurozone is rooted in its innate nature that
the breakup or salvage of eurozone is not only an economical decision but also a critical political decision
followed by complicated ramifications that "If Berlin pays the bills and tells the rest of Europe how to behave, it
risks fostering destructive nationalist resentment against Germany and ....it would strengthen the camp in Britain
arguing for an exita problem not just for Britons but for all economically liberal Europeans.
[452]
Wolfson economics prize
In July 2012, the Wolfson economics prize, a prize for the "best proposal for a country to leave the European
Monetary Union," was awarded to a Capital Economics team led by Roger Bootle, for their submission titled
"Leaving the Euro: A Practical Guide."
[459]
The winning proposal argued that a member wishing to exit should
36 of 70 9/19/2012 4:16 PM
introduce a new currency and default on a large part of its debts. The net effect, the proposal claimed, would be
positive for growth and prosperity. It also called for keeping the euro for small transactions and for a short period
of time after the exit from the Eurozone, along with a strict regime of inflation-targeting and tough fiscal rules
monitored by "independent experts."
The Roger Bootle/Capital Economics plan also suggested that "key officials" should meet "in secret" one month
before the exit is publicly announced, and that Eurozone partners and international organisations should be
informed "three days before." The judges of the Wolfson economics prize found that the winning plan was the
"most credible solution" to the question of a member state leaving the eurozone.
Odious debt
Main article: Odious debt
Some protesters, commentators such as Libration correspondent Jean Quatremer and the Lige based NGO
Committee for the Abolition of the Third World Debt (CADTM) allege that the debt should be characterized as
odious debt.
[460]
The Greek documentary Debtocracy,
[461]
and a book of the same title and content examine
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.
[462]
National statistics
In 1992, members of the European Union signed an agreement known as the Maastricht Treaty, under which
they pledged to limit their deficit spending and debt levels. However, a number of EU member states, including
Greece and Italy, were able to circumvent these rules and mask their deficit and debt levels through the use of
complex currency and credit derivatives structures.
[37][38]
The structures were designed by prominent U.S.
investment banks, 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.
[37]
Financial reforms within the
U.S. since the financial crisis have only served to reinforce special protections for derivativesincluding greater
access to government guaranteeswhile minimizing disclosure to broader financial markets.
[463]
The revision of Greeces 2009 budget deficit from a forecast of "68% of GDP" to 12.7% by the new Pasok
Government in late 2009 (a number which, after reclassification of expenses under IMF/EU supervision was
further raised to 15.4% in 2010) has been cited as one of the issues that ignited the Greek debt crisis.
This added a new dimension in the world financial turmoil, as the issues of "creative accounting" and
manipulation of statistics by several nations came into focus, potentially undermining investor confidence.
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, to mask the
sizes of public debts and deficits. These have included analyses of examples in several countries
[464]
[465][466][467]
or have focused on Italy,
[468]
the United Kingdom,
[469][470][471][472][473][474][475][476]
Spain,
[477]
the United States,
[478][479][480]
and even Germany.
[481][482]
Collateral for Finland
On 18 August 2011, as requested by the Finnish parliament as a condition for any further bailouts, it became
apparent that Finland would receive collateral from Greece, enabling it to participate in the potential new
37 of 70 9/19/2012 4:16 PM
109 billion support package for the Greek economy.
[483]
Austria, the Netherlands, Slovenia, and Slovakia
responded with irritation over this special guarantee for Finland and demanded equal treatment across the
eurozone, or a similar deal with Greece, so as not to increase the risk level over their participation in the
bailout.
[484]
The main point of contention was that the collateral is aimed to be a cash deposit, 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.
[485]
After extensive negotiations to implement a collateral structure open to all eurozone countries, on 4 October
2011, a modified escrow collateral agreement was reached. The expectation is that only Finland will utilise it,
due to i.a. requirement to contribute initial capital to European Stability Mechanism in one installment instead of
five installments over time. Finland, as one of the strongest AAA countries, can raise the required capital with
relative ease.
[486]
At the beginning of October, Slovakia and Netherlands were the last countries to vote on the EFSF expansion,
which was the immediate issue behind the collateral discussion, with a mid-October vote.
[487]
On 13 October
2011 Slovakia approved euro bailout expansion, but the government has been forced to call new elections in
exchange.
In February 2012, the four largest Greek banks agreed to provide the 880 million in collateral to Finland in
order to secure the second bailout program.
[488]
Finland's recommendation to the crisis countries is to issue asset-backed securities to cover the immediate need,
a tactic successfully used in Finland's early 1990s recession,
[489]
in addition to spending cuts and bad banking.
Handling of the ongoing crisis has led to the premature end of a number of European national governments and
impacted the outcome of many elections:
Republic of Ireland February 2011 After a high deficit in the governments budget in 2010 and the
uncertainty surrounding the proposed bailout from the International Monetary Fund, the 30th Dil
(parliament) collapsed the following year, which led to a subsequent general election, collapse of the
preceding government parties, Fianna Fil and the Green Party, the resignation of the Taoiseach (PM)
Brian Cowen and the rise of the Fine Gael parliamentary party, which formed a government alongside the
Labour Party in the 31st Dil, which led to a change of government and the appointment of Enda Kenny
as Taoiseach.
Portugal March 2011 Following the failure of parliament to adopt the government austerity measures,
PM Jos Scrates and his government resigned, bringing about early elections in June 2011.
[490][491]
Finland April 2011 The approach to the Portuguese bailout and the EFSF dominated the April 2011
election debate and formation of the subsequent government.
[492][493]
Spain July 2011 Following the failure of the Spanish government to handle the economic situation, PM
Jos Luis Rodrguez Zapatero announced early elections in November.
[494]
"It is convenient to hold
elections this fall so a new government can take charge of the economy in 2012, fresh from the balloting"
he said.
[495]
Following the elections, Mariano Rajoy became PM.
Slovenia September 2011 Following the failure of June referendums on measures to combat the
economic crisis and the departure of coalition partners, the Borut Pahor government lost a motion of
confidence and December 2011 early elections were set, following which Janez Jana became PM.
[496]
Slovakia October 2011 In return for the approval of the EFSF by her coalition partners, PM Iveta
38 of 70 9/19/2012 4:16 PM
Radiov had to concede early elections in March 2012, following which Robert Fico became PM.
Italy November 2011 Following market pressure on government bond prices in response to concerns
about levels of debt, the Government of Silvio Berlusconi lost its majority, resigned and was replaced by
the Government of Mario Monti.
[200]
Greece November 2011 After intense criticism from within his own party, the opposition and other EU
governments, for his proposal to hold a referendum on the austerity and bailout measures, PM George
Papandreou of the PASOK party announced his resignation in favour of a national unity government
between three parties, of which only two currently remain in the coalition.
[87]
Following the vote in the
Greek parliament on the austerity and bailout measures, which both leading parties supported but many
MPs of these two parties voted against, Papandreou and Antonis Samaras expelled a total of 44 MPs from
their respective parliamentary groups, leading to PASOK losing its parliamentary majority.
[497]
The early
Greek legislative election, 2012 were the first time in the history of the country, at which the bipartisanship
(consisted of PASOK and New Democracy parties), which ruled the country for over 40 years, collapsed
in votes as a punishment for their support to the strict measures proposed by the country's foreign lenders
and the Troika (consisted of the European Union, the IMF and the European Central Bank). The
popularity of PASOK dropped from 42.5% in 2010 to as low as 7% in some polls in 2012.
[498]
The
extreme right-wing, radical left-wing, communist and populist political parties that have opposed the
policy of strict measures, won the majority of the votes.
Netherlands - April 2012 - After talks between the VVD, CDA and PVV over a new austerity package of
about 14 billion euros failed, the Rutte cabinet collapsed. Early elections were called for 12 September
2012. To prevent fines from the EU - a new budget was demanded by April 30 - five different parties
called the kunduz coalition forged together an emergency budget for 2013 in just two days.
[499][500]
France - May 2012 - The French presidential election, 2012 became the first time since 1981 that an
incumbent failed to gain a second term, when Nicolas Sarkozy lost to Franois Hollande.
Some investors with reasonably good track records expect that the crisis will run its course in 3 to 5 years. It is
possible to invest in hedge funds which follow investment plans based on that projection. However, even they
shy away from Greek investments.
[501]
2000s commodities boom
20072012 global financial crisis
20082012 Icelandic financial crisis
20082012 global recession
Crisis situations and protests in Europe since 2000
European sovereign-debt crisis: List of acronyms
European sovereign-debt crisis: List of protagonists
Federal Reserve Economic Data FRED
Late-2000s recession in Europe
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Retrieved from "http://en.wikipedia.org/w/index.php?title=European_sovereign-debt_crisis&oldid=513327801"
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