ec debt crisis

7/30/2019 Ec Debt Crisis

1/42

European sovereign-debt crisis

From Wikipedia, the free encyclopedia

20072012 global economic crisis

Major dimensions[show]

Countries[show]

Causes[show]

Summits[show]

Legislation and spending[show]

Company bailouts[show]

v t e

Long-term interest rates (secondary market yields of government bonds with maturities of close to ten years) of all

eurozone countries except Estonia[1] A yield of 6% or more indicates that financial markets have serious doubts

about credit-worthiness.[2]

The European sovereign debt crisis (often referred to as the Eurozone crisis) is an ongoing financial crisis that has

made it difficult or impossible for some countries in the euro area to repay or 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, eurozone leaders agreed on more

measures designed to prevent the collapse of member economies, including 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]


2/42

To restore confidence in Europe, the focus across all EU member states has been gradually to implement austerity

measures. EU leaders agreed on adopting the Euro Plus Pact, consisting of political reforms to improve fiscal

strength and competitiveness, as well as the Fiscal Compact, including the commitment of each participating country

to introduce a balanced budget amendment as part of their national law/constitution.[12][13] Each of the eurozone

countries being involved in a bailout program (Greece, Portugal and Ireland) was asked both to follow a program with

fiscal consolidation/austerity, and to restore competitiveness through implementation of structural reforms andinternal devaluation, i.e. lowering their relative production costs.[14] The European Central Bank (ECB) has done its

part by lowering interest rates and providing cheap loans of more than one trillion Euros to maintain money flows

between European banks. On 6 September 2012, the ECB calmed financial markets by announcing full support for

all eurozone countries involved in a sovereign state bailout program from EFSF/ESM through so-called Outright

Monetary Transactions.[15] It is hoped that these measures will decrease current account imbalances among

eurozone member states and gradually lead to an end of the crisis.

Many economists believing in Keynesian policies however, have criticized the extent of austerity measures for their

negative impact on economic growth. In October 2012 also the International Monetary Fund (IMF) found that tax

hikes and spending cuts have been doing more damage than expected.[16] Already a few months earlier, several

European countries have called for a new growth strategy based on additional public investments, financed bygrowth-friendly taxes on property, land, wealth, and financial institutions. In June 2012, EU leaders agreed to

moderately increase the funds of the European Investment Bank to kick-start infrastructure projects and increase

loans to the private sector. A few months later 11 out of 17 eurozone countries agreed to introduce a new EU

financial transaction tax to be collected from 1 January 2014.[17]

While sovereign debt has risen substantially in only a few eurozone countries, it has become a perceived problem for

the area as a whole,[18] leading to 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,[19][20] before losing some ground in the following months[21][22] and again rebounding thereafter. Three

countries significantly affected, Greece, Ireland and Portugal, collectively accounted for 6% of the eurozone's gross

domestic product (GDP).[23] As of October 2012, the so-called Troika (European Commission, ECB and IMF) alsonegotiates with Spain and Cyprus about setting up an economic recovery program in return of financial loans from

ESM.[24]

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.

Contents [hide]

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


3/42

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

4 Economic reforms and recovery proposals

4.1 Direct loans to banks and banking regulation

4.2 Less austerity, more investment

4.3 Increase competitiveness


4/42

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 European bank recovery and resolution authority

5.3 Eurobonds

5.4 European Monetary Fund

5.5 Drastic debt write-off financed by wealth tax

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

[edit]Causes


5/42

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

Government debt of Eurozone, Germany and crisis countries compared to Eurozone GDP

Government deficit of Eurozone compared to USA and UK

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. [25][26]

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 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.[27]

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.[26]

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.[26][28]

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


6/42

affect France's creditors and so on. This is referred to as financial contagion.[6][29] 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.[30]

Greece hid its growing debt and deceived EU officials with the help of derivatives designed by major

banks.[31][32][33][34][35][36] Although some financial institutions clearly profited from the growing Greek

government debt in the short run,[31] there was a long lead-up to the crisis.

[edit]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 ignoring

internationally agreed standards.[37] This allowed the sovereigns to mask their deficit and debt levels through a

combination of techniques, including inconsistent accounting, off-balance-sheet transactions [37] as well as the use

of complex currency and credit derivatives structures.[38][39] The complex structures were designed by prominent

U.S. investment banks, who received substantial fees in return for their services.[31]

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]

Public debt as a percent of GDP (2010)

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.[40] US economist Paul Krugman named

Greece as the only country where fiscal irresponsibility is at the heart of the crisis.[41]

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


7/42

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.[42][43]

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.[44]

[edit]Trade imbalances

Current account balances relative to GDP (2010)

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.[45][46] Whereas German trade

surpluses increased as a percentage of GDP after 1999, the deficits of Italy, France and Spain all worsened.

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."[47]

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.[48][49] Greek

unit labor costs rose much faster than Germany's during the last decade.[50] However, most EU nations had

increases in labor costs greater than Germany's.[51] Those nations that allowed "wages to grow faster than

productivity" lost competitiveness.[46] Germany's restrained labor costs, while a debatable factor in trade

imbalances,[51] are an important factor for its low unemployment rate.[52] More recently, Greece's trading position

has improved;[53] in the period 2011 to 2012, imports dropped 20.9% while exports grew 16.9%, reducing the trade

deficit by 42.8%.[53]

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.[54]


8/42

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.[55]

[edit]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).[56] 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 incomplete prevention of contagion of other areas, as it would be hard for the Eurozone to respond quickly to the

problem.[57]

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.[58]

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.[59]

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."[60]

[edit]Monetary policy inflexibility

Further information: Economic and Monetary Union of the European Union

Membership in the Eurozone established a single monetary policy, preventing individual member states from acting

independently. In particular they cannot create Euros in order to pay creditors and eliminate their risk of default.

Since they share the same currency as their (eurozone) trading partners, they cannot devalue their currency to make

their exports cheaper, which in principle would lead to an improved balance of trade, increased GDP and higher taxrevenues in nominal terms.[61]

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.[62]


9/42

[edit]Loss of confidence

Sovereign CDS prices of selected European countries (20102012). The left axis is in basis points; a level of 1,000means it costs $1 million to protect $10 million of debt for five years.

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.[63] 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. Sincecountries 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.[44] Heavy bank

withdrawals have occurred in weaker Eurozone states such as Greece and Spain.[64] 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, or Austrian banks thanthey are in Greece or Spain.[65]

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.[66][67]

In June 2012, as the euro hit new lows, there were reports that the wealthy were moving assets out of the

Eurozone[68] and within the Eurozone from the South to the North. Between June 2011 and June 2012 Spain and

Italy alone have lost 286 bn and 235 bn euros. Altogether Mediterranean countries have lost assets worth ten percent

of GDP since capital flight started in end of 2010.[69] Mario Draghi, president of the European Central Bank, has

called for an integrated European system of deposit insurance which would require European political institutionscraft effective solutions for problems beyond the limits of the power of the European Central Bank.[70] As of June 6,

2012, closer integration of European banking appeared to be under consideration by political leaders.[71]

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


10/42

measure. The Spanish rate, over 6% before the line of credit was approved, approached 7%, a rough rule of thumb

indicator of serious trouble.[72]

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) Tighteningcredit 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."[73]

[edit]Evolution of the crisis

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 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.[74]

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 wheneconomies 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.[75] 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 nearzero interest rate

German federal government bonds (bunds).[76] 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.[77]

While Switzerland (and Denmark)[77] 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 ratebelow the minimum rate of 1.20 francs", effectively weakening the Swiss franc. This is the biggest Swiss intervention

since 1978.[78]

[edit]Greece

Main article: Greek government-debt crisis


11/42

Greece's debt percentage since 1999 compared to the average of the eurozone.

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

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.[79] 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.[80][81] A few days later Standard &

Poor's slashed Greece's sovereign debt rating to BB+ or "junk" status amid fears of default,[82] in which case

investors were liable to lose 3050% of their money.[82] Stock markets worldwide and the euro currency declined in

response to the downgrade.[83]

On 1 May 2010, the Greek government announced a series of austerity measures[84] to secure a three year 110

billion loan.[85] This was met with great anger by the Greek public, leading to massive protests, riots and social

unrest throughout Greece.[86] The Troika (EC, 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,[87][88] but had to back down amidst

strong pressure from EU partners, who threatened to withhold an overdue 6 billion loan payment that Greeceneeded by mid-December.[87][89] 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.[90][91]

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,[92][93] 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.[94] The austerity relies primarily on tax increases which harms the private sector

and economy.[95] Overall the Greek GDP had its worst decline in 2011 with 6.9%,[96] a year where the seasonal

adjusted industrial output ended 28.4% lower than in 2005,[97][98] and with 111,000 Greek companies goingbankrupt (27% higher than in 2010).[99][100] 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%.[101][102] Youth unemployment ratio hit 13 percent in

2011.[103][104]

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


12/42

than the EU27-average at 23.4%),[105] but for 2011 the figure was now estimated to have risen sharply above

33%.[106] In February 2012, an IMF official negotiating Greek austerity measures admitted that excessive spending

cuts were harming Greece.[92]

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.[107][108] 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%.[109] Also UBS warned of hyperinflation, a bank run and even "military coups and possible civil war that

could afflict a departing country".[110][111] 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.[112]

To prevent all this from happening, the troika (EC, IMF and ECB) eventually agreed in February 2012 to provide a

second bailout package worth 130 billion,[113] conditional on the implementation of another harsh austeritypackage, reducing the Greek spendings with 3.3bn in 2012 and another 10bn in 2013 and 2014.[93] For the 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.[114]

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 de fault.[115][116] It is the

world's biggest debt restructuring deal ever done, affecting some 206 billion of Greek government bonds.[117] 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,[118] somewhat lower than the target of 120.5% initially outlined in the signed Memorandum with the

Troika.[93][119][120]

Critics such as the director of LSE's Hellenic Observatory argue that the billions of taxpayer euros are not savingGreece but financial institutions,[121] 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."[122] 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,[123] 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.[124]


13/42

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.[125][126][127][128] This phenomenon became known as "Grexit" and

started to govern international market behaviour.[129][130] 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.[131] 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.[132]

[edit]Ireland

Main article: 20082012 Irish financial crisis

Ireland's debt percentage compared to Eurozone average since 1995

Irish government deficit compared to other European countries and the United States (20002013)

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 two-year guarantee to the banks' depositors and bond-holders.[133] The guarantees were

subsequently renewed for new deposits and bonds in a slightly different manner. In 2009, an National Asset

Management Agency (NAMA), was created to acquire large property-related loans from the six banks at a market-

related "long-term economic value".[134]

Irish banks had lost an estimated 100 billion euros, much of it related to defaulted loans to property developers andhomeowners made in the midst of the property bubble, which burst around 2007. The economy collapsed during

2008. Unemployment rose from 4% in 2006 to 14% by 2010, while the national budget went from a surplus in 2007 to

a deficit of 32% GDP in 2010, the highest in the history of the eurozone, despite austerity measures.[26][135]

With Ireland's credit rating falling rapidly in the face of mounting estimates of the banking losses, guaranteed

depositors and bondholders cashed in during 2009-10, and especially after August 2010. (The necessary funds were

borrowed from the central bank.) With yields on Irish Government debt rising rapidly it was clear that the Government

would have to seek assistance from the EU and IMF, resulting in a 67.5 billion "bailout" agreement of 29 November

2010[136][137] Together with additional 17.5 billion coming from Ireland's own reserves and pensions, the

government received 85 billion,[138] of which up to 34 billion was to be used to support the country's ailing

financial sector (only about half of this was used in that way following stress tests conducted in 2011.[139] In returnthe government agreed to reduce its budget deficit to below three percent by 2015.[139] In April 2011, despite all the

measures taken, Moody's downgraded the banks' debt to junk status.[140]

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.[141] 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 i ts 22.5 billion loan


14/42

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.[142]

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.[143] 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%,[144] and it is expected to fall

even further to a level of only 4% by 2015.[145]

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.[146]

[edit]Portugal

Main article: 2010-2012 Portuguese financial crisis

Portugal's debt percentage compared to Eurozone average since 1999

According to a report by the Dirio de Notcias[147] Portugal had allowed considerable slippage in state-managed

public works and inflated top management and head officer bonuses and wages in the period between the Carnation

Revolution in 1974 and 2010. 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.[148] When the global crisis disrupted the markets and the world economy, together with the US

credit crunch and the European sovereign debt crisis, Portugal, with all its structural problems, from the colossal

public debt to the civil service's overcapacity to its endemic fantasist utopia of communist-inspired goals and

ideologies implicitly enforced due to the Carnation Revolution of 1974, was one of the first and most affected

economies to succumb.

In the summer of 2010, Moody's Investors Service cut Portugal's sovereign bond rating,[3][149] which led to

increased pressure on Portuguese government bonds.[150]

In the first half of 2011, Portugal requested a 78 billion IMF-EU bailout package in a bid to stabilise its public

finances.[151] 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 PedroPassos 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, this also lead to a strong increase of the unemployment rate to over

15 percent in the second quarter 2012 and it is expected to rise even further in the near future.[152]

Portugals debt was in September 2012 forecast by the Troika to peak at around 124% of GDP in 2014, followed by a

firm downward trajectory after 2014. Previously the Troika had predicted it would peak at 118.5% of GDP in 2013, so

the developments proved to be a bit worse than first anticipated, but the situation was described as fully sustainable


15/42

and progressing well. As a result from the slightly worse economic circumstances, the country has been given one

more year to reduce the budget deficit to a level below 3% of GDP, moving the target year from 2013 to 2014. The

budget deficit for 2012 has been forecast to end at 5%. The recession in the economy is now also projected to last

until 2013, with GDP declining 3% in 2012 and 1% in 2013; followed by a return to positive real growth in 2014.[153]

[edit]Spain

See also: 20082012 Spanish financial crisis

Spain's debt percentage compared to Eurozone average since 1999

Spain had a comparatively low debt level among advanced economies prior to the crisis.[154] It'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.[155][156] 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.[157]

When the bubble burst, Spain spent large amounts of money on bank bailouts. In May 2012, Bankia received a 19

billion euro bailout,[158] on top of the previous 4.5 billion euros to prop up Bankia.[159] Questionable accounting

methods disguised bank losses.[160] During September 2012, regulators indicated that Spanish banks required 59

billion (USD $77 billion) in additional capital to offset losses from real estate investments.[161]

The bank bailouts and the economic downturn increased the country's deficit and debt levels and led to a substantial

downgrading of its credit rating. To build up trust in the financial markets, the government began to introduce

austerity measures and it 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.[162][163] Asone of the largest eurozone economies (larger than Greece, Portugal and Ireland combined[164]) the condition of

Spain's economy is of particular concern to international observers. Under pressure from the United States, the IMF,

other European countries and the European Commission[165][166] the Spanish governments eventually succeeded

in trimming the deficit from 11.2% of GDP in 2009 to an expected 5.4% in 2012.[164]

Nevertheless, in June 2012, Spain became a prime concern for the Euro-zone[167] when interest on Spains 10-year

bonds reached the 7% level and it faced difficulty in accessing bond markets. This led the Eurogroup on 9 June 2012

to granted Spain a credit line of up to 100 billion.[168] The funds will go directly to the Spanish banks to avoid

adding to Spain's sovereign debt,[169][170][171] which is already expected to increase given a negative growth rate

of 1.7%, 25% unemployment and falling housing prices.[164] In September 2012 the ECB took pressure from Spain

when it announced its "unlimited bond-buying plan".[172][173] As of October 2012, the Troika (EC, ECB and IMF) isin negotiations with Spain to establish an economic recovery program that is required for additional financial loans

from the ESM. Reportedly Spain, in addition to the 100bn "bank recapitalisation" package in June,[174] seeks

financial support from a "Precautionary Conditioned Credit Line" (PPCL) package.[175] If Spain receives a PCCL

package, irrespective to what extent it subsequently decides to draw on this established credit line, Spain would

immediately qualify to receive "free" additional financial support from ECB, in the form of some unlimited yield-

lowering bond purchases (OMT).[176][177]


16/42

[edit]Cyprus

Cyprus's debt percentage compared to Eurozone average since 1999

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[178] though it is expected that Cyprus will be able to fund itself again by the first

quarter of 2013.[179] 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.[72] 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 byCyprus from being accepted as collateral by the European Central Bank.[180]

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.[181] It was

reported on June 25, 2012 by The Financial Times that banks in Cyprus held 22 billion of Greek private sector

debt.[180]

As of October 2012, Cyprus so far applied both for a 6bn "sovereign bailout loan" and a 5bn "bank recapitalisation"

package.[24] The Troika currently negotiates with Cyprus, about setting up an economic recovery programme in

return of providing support with financial loans from ESM. Cyprus so far applied both for a 6bn "sovereign bailoutloan" and a 5bn "bank recapitalisation" package.[24]

[edit]Possible spread to other countries

Total financing needs of selected countries in % of GDP (20112013).

Economic data from Portugal, Italy, Ireland, Greece, United Kingdom, Spain, Germany, the EU and the eurozone for

2009.


17/42

The 2010 annual budget deficit and public debt, both relative to GDP for selected European countries.

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.

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. In July 2011 the UK Financial Policy Committee noted that

"Market concerns remain over fiscal positions in a number of euro area countries and the potential for contagion to

banking systems."[182] 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.[183]

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,[184] and Japan has 213 trillion of government bonds to roll over.[185]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.[186]

As of October 2012 the contagion risk for other eurozone countries has greatly diminished due to a successful fiscal

consolidation and implementation of structural reforms in the countries being most at risk. Together with various other

policy measures taken by EU leaders and the ECB (see below) financial stability in the Eurozone has improved

significantly. Looking at the average long term interest rates for September 2012, only 4 out of 17 eurozone countries

(Greece, Portugal, Cyprus, Slovenia) still battled with rates higher than 6%.[187]

[edit]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.[188] This has led investors to view Italian bonds more and more as a risky asset.[189]

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.[190] 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.[191]

On 15 July and 14 September 2011, Italy's government passed austerity measures meant to save 124billion.[192][193] 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.[194] 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.[195]


18/42

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.[189] The interim government expected to put the new laws into

practice is led by former European Union Competition Commissioner Mario Monti.[189]

As in other countries, the social effects have been severe, with child labour even re-emerging in poorer areas.[196]

[edit]Belgium

In 2010, Belgium's public debt was 100% of its GDPthe third highest in the eurozone after Greece and Italy[197]

and there were doubts about the financial stability of the banks,[198] following the country's major financial crisis in

20082009. After inconclusive elections in June 2010, by November 2011[199] 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.[197] 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.[198]

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%).[198] 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.[200] Nevertheless, on 25 November

2011, Belgium's long-term sovereign credit rating was downgraded from AA+ to AA by Standard and Poor[201] and

10-year bond yields reached 5.66%.[199]

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.[202] Following the announcement Belgium 10-year bond yields fell sharply

to 4.6%.[203]

[edit]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.[204] By 16 November 2011, France's bond yield spreads vs. Germany had widened 450% since July,

2011.[205] France's C.D.S. contract value rose 300% in the same period.[206]

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%.[207] By early February 2012, yields

on French 10 year bonds had fallen to 2.84%.[208]

In April and May, 2012, France held a presidential election in which the winner Franois Hollande had opposed

austerity measures, promising to eliminate France's budget deficit by 2017 by canceling recently enacted tax cuts

and exemptions for the wealthy, raising the top tax bracket rate to 75% on incomes over a million euros, restoring the

retirement age to 60 with a full pension for those who have worked 42 years, restoring 60,000 jobs recently cut from

public education, regulating rent increases; and building additional public housing for the poor. In June, Hollande's

Socialist Party won a supermajority in legislative elections capable of amending the French Constitution and enabling

the immediate enactment of the promised reforms. French government bond interest rates fell 30% to record

lows,[209] less than 50 basis points above German government bond rates.[210]


19/42

[edit]United Kingdom

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."[182] 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 UnitedStates and the eurozone.[211]

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.[212] Bank of England support

of British banks with respect to the Eurozone crisis was backed by the British Treasury.[213]

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, butrefused to discuss them to avoid adding to the panic.[214] 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.[215]

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.[216] 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,[217] and a Greek exit from the euro would likely increase such transfer of

capital.[216]

[edit]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.[218] 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.[212][219]

[edit]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.[220][221]


20/42

[edit]Slovenia

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.[222][223]

[edit]Policy reactions

[edit]EU emergency measures

The table below provides an overview of the financial composition of all bailout programs being initiated for EU

member states, since the financial crisis erupted in September 2008. Member states outside the eurozone (marked

with yellow in the table) have no access to the funds provided by EFSF/ESM, but can be covered with rescue loans

from EU's Balance of Payments programme (BoP), IMF and other funds.

v t e

EU member Time span IMF[174][224][225][226]

(billion ) World Bank[226]

(billion ) EIB / EBRD

(billion ) Bilateral loans[174]

(billion ) BoP[226]

(billion ) GLF[224]

(billion ) EFSM[174]

(billion ) EFSF[174]

(billion ) ESM[174]

(billion ) Bailout in total

(billion )

Cyprus Dec.2012-Dec.2015 (negotiates) - - (negotiates) - - -

- (negotiates) (negotiates)


21/42

Greece May 2010-Mar.2016 48.1 (20.1+19.8+8.2) - - - - 52.9 -

144.6 - 245.61

Hungary Nov.2008-Oct.2010 9.1 out of 12.5[227][228] 1.0 - - 5.5 out of 6.5 -

- - - 15.6 out of 20.02

Ireland Nov.2010-Dec.2013 22.5 - - 4.8 - - 22.5 17.7 -67.53

Latvia Dec.2008-Dec.2011 1.1 out of 1.7[229][230] 0.4[229][230] 0.1[229][230] 0.0 out of

2.2[229][230] 2.9 out of 3.1 - - - - 4.5 out of 7.54

Portugal May 2011-May 2014 26 - - - - - 26 26 -

78

Romania I May 2009-June 2011 12.6 out of 13.6[231][232] 1.0 1.0 - 5.0 -

- - - 19.6 out of 20.65

Romania II Mar 2011-Mar 2013 0.0 out of 3.7[233][234] - - - 0.0 out of 1.4

- - - - 0.0 out of 5.16

Spain I July 2012-Dec.2013 - - - - - - - - 60 out of

100[235] 60 out of 1007

Spain II Nov/Dec.2012-??? (negotiates) - - - - - - -

(negotiates) (negotiates)8

Total payment Nov.2008-Mar.2016 119.4 2.4 1.1 4.8 13.4 52.9 48.5 188.3

60 490.8

1 Many sources list the first bailout was 110bn followed by the second on 130bn. When you deduct 2.7bn due to

Ireland+Portugal+Slovakia opting out as creditors for the first bailout, and add the extra 8.2bn IMF has promised to

pay Greece for the years in 2015-16, the total amount of bailout funds sums up to 245.6bn.[224]

2 Hungary recovered faster than expected, and thus did not receive the remaining 4.4bn bailout support scheduled

for October 2009-October 2010.[226][236] IMF paid in total 7.6 out of 10.5 billion SDR,[227] equal to 9.1bn out of

12.5bn at current exchange rates.[228]

3 In Ireland the National Treasury Management Agency also paid17.5bn for the program on behalf of the Irish

government, increasing the bailout total to 85bn.[174]

4 Latvia recovered faster than expected, and thus did not receive the remaining 3.0bn bailout support originally

scheduled for 2011.[229][230]

5 Romania recovered faster than expected, and thus did not receive the remaining 1.0bn bailout support originally

scheduled for 2011.[231][232]

6 Romania had a precautionary credit line with 5.1bn available for two years (Mar 2011-Mar 2013) to draw money

from if needed; but entirely avoided to draw on it.[226]


22/42

7 Spain's first 100bn support package has been earmarked only for recapitalisation of the financial sector. As of

October 2012 it is estimated maximum 60bn will be needed for the purpose, but the remaining 40bn will stay

avaialable as reserve until December 2013.

8 Spain currently negotiates and consider to accept signing a MoU to get a Precautionery Conditioned Credit Line or

an Enhanced Conditioned Credit Line. If the line is created Spain plan not to draw any money from it, and are only

interested to get it for precautionary reasons (to calm down markets; and to enable ECB to perform a yield lowering

OMT).

[edit]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[237] 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 DebtManagement Office to raise the funds needed to provide loans to eurozone countries in financial troubles,

recapitalize banks or buy sovereign debt.[238]

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.[239]

The EFSF issued 5 billion of five-year bonds in its inaugural benchmark issue 25 January 2011, attracting an orderbook 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.[240]

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.[241]

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,[242] and this led to some stocks rising to the highest level in a year or more.[243] The euromade its biggest gain in 18 months,[244] before falling to a new four-year low a week later.[245] Shortly after the euro

rose again as hedge funds and other short-term traders unwound short positions and carry trades in the

currency.[246] Commodity prices also rose following the announcement.[247]

The dollar Libor held at a nine-month high.[248] Default swaps also fell.[249] The VIX closed down a record almost

30%, after a record weekly rise the preceding week that prompted the bailout.[250] The agreement is interpreted as

allowing the ECB to start buying government debt from the secondary market which is expected to reduce bond


23/42

yields.[251] As a result Greek bond yields fell sharply from over 10% to just over 5%.[252] Asian bonds yields also

fell with the EU bailout.[253])

Usage of EFSF funds

Debt profile of Eurozone countries

The EFSF only raises funds after an aid request is made by a country.[254] 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.[255] On 20 July 2012, European finance ministers sanctioned the first tranche of a partial

bail-out worth up to 100 billion for Spanish banks.[256] This leaves the EFSF with 148 billion[256] or an equivalentof 444 billion in leveraged firepower.[257]

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. (see section: ESM)

On 13 January 2012, Standard & Poors downgraded France and Austria from AAA rating, lowered Spain, Italy (and

five other[258]) 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+.[258][259]

[edit]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.[260] It runs under the supervision of the

Commission[261] and aims at preserving financial stability in Europe by providing financial assistance to EU member

states in economic difficulty.[262] The Commission fund, backed by all 27 European Union members, has the

authority to raise up to 60 billion[263] and is rated AAA by Fitch, Moody's and Standard & Poor's.[264][dead

link][265]

Under the EFSM, the EU successfully placed in the capital markets a 5 billion issue of bonds as part of the financialsupport package agreed for Ireland, at a borrowing cost for the EFSM of 2.59%.[266]

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.[267]

[edit]Brussels agreement and aftermath


24/42

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][268]

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.[269] 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.[270] Reduced lending

was a circumstance already at the time being seen in a "deepen[ing] crisis" in commodities trade finance in western

Europe.[271]

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%[118] and 120.5% of GDP by 2020.[119]

[edit]European Central Bank

ECB Securities Markets Program (SMP) covering bond purchases from May 2010 till October 2012.

The European Central Bank (ECB) has taken a series of measures aimed at reducing volatility in the financial

markets and at improving liquidity.[272]


25/42

In May 2010 it took the following actions:

It began open market operations buying government and private debt securities,[273] reaching 219.5 billion in

February 2012,[274] though it simultaneously absorbed the same amount of liquidity to prevent a rise in

inflation.[275] According to Rabobank economist Elwin de Groot, there is a natural limit of 300 billion the ECB can

sterilize.[276]

It reactivated the dollar swap lines[277] with Federal Reserve support.[278]

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.[279]

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 tocome 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.[280]

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.[281]

The ECB's first supplementary longer-term refinancing operation (LTRO) with a six-month maturity was announced

March 2008.[282] 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 bidsamounting to 103.1 billion, from 177 banks.

Another six-month tender was allotted on 9 July, again to the amount of 25 billion.[282] The first 12 month LTRO in

June 2009 had close to 1100 bidders.[283]

On 22 December 2011, the ECB[284] 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.[285] Previous refinancing operations

matured after three, six and twelve months.[283] The by far biggest amount of 325 billion was tapped by banks in

Greece, Ireland, Italy and Spain.[286]

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.[287] On 29 February 2012, the ECB held a second auction,

LTRO2, providing 800 Eurozone banks with further 529.5 billion in cheap loans.[288] Net new borrowing under the


26/42

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.[289]

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.[290]

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.[291]

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)".[292]

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 economicreforms promoting European growth and employment were also proposed.[293]

Outright Monetary Transactions (OMTs)

On 6 September 2012, the ECB announced to offer additional financial support in the form of some yield-lowering

bond purchases (OMT), for all eurozone countries involved in a sovereign state bailout program from EFSF/ESM (at

the point of time where the country regain/posses a complete market access).[15] A eurozone country can benefit

from the program if -and for as long as- it is found to suffer from stressed bond yields at excessive levels; but only at

the point of time where the country posses/regain a complete market access -and only if the country still comply with

all terms in the signed Memorandum of Understanding (MoU) agreement.[15][172] Countries receiving a

precautionary programme rather than a sovereign bailout, will per definition have complete market access and thus

qualify for OMT support if also suffering from stressed interest rates on its government bonds. In regards of countries

receiving a sovereign bailout (Ireland, Portugal and Greece), they will on the other hand not qualify for OMT support

before they have regained complete market access, which will normally only happen after having received the last

scheduled bailout disbursement.[15][294] Despite none OMT programmes were ready to start in September/October,

the financial markets straight away took notice of the additionally planned OMT packages from ECB, and started

slowly to price-in a decline of both short term and long term interest rates in all European countries previously

suffering from stressed and elevated interest levels (as OMTs were regarded as an extra potential back-stop to


27/42

counter the frozen liquidity and highly stressed rates; and just the knowledge about their potential existence in the

very near future helped to calm the markets).

If Spain signs a negotiated Memorandum of Understanding with the Troika (EC, ECB and IMF) outlining ESM shall

offer a precautionary programme with credit lines for the Spanish government to potentially draw on if needed

(beside of the bank recapitalisation package they already applied for), this would qualify Spain also to receive the

OMT support from ECB, as the sovereign state would still continue to operate with a complete market access with

the precautionary conditioned credit line. In regards of Ireland, Portugal and Greece, they on the other hand have not

yet regained complete market access, and thus do not yet qualify for OMT support.[294] Provided these 3 countries

continue to comply with the programme conditions outlined in their signed Memorandum of Understanding, they will

however qualify to receive OMT at the moment they regain complete market access (until the point of time where

they no longer suffer from elevated/stressed interest rates).[15]

[edit]European Stability Mechanism (ESM)

Main article: European Stability Mechanism

The European Stability Mechanism (ESM) is a permanent rescue funding programme to succeed the temporaryEuropean Financial Stability Facility and European Financial Stabilisation Mechanism in July 2012[267] but it had to

be postponed until after the Federal Constitutional Court of Germany had confirmed the legality of the measures on

12 September 2012.[295][296] The permanent bailout fund is now expected to be up and running on 8 October

2012.[297]

On 16 December 2010 the European Council agreed a two line amendment to the EU Lisbon Treaty to allow for a

permanent bail-out mechanism to be established[298] 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.[299][300] According to this treaty, the ESM will be an

intergovernmental organisation under public international law and will be located in Luxembourg.[301][302]

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.

[edit]European Fiscal Compact

Main article: European Fiscal Compact

Public debt to GDP ratio for selected Eurozone countries and the UK - 2008 to 2011. Source Data: Eurostat.

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 3% deficit or the 60%

debt rules.[303][304] 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


28/42

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.[305] All other

non-eurozone countries apart from the UK are also prepared to join in, subject to parliamentary vote.[267] The treaty

will enter into force on 1 January 2013, if by that time 12 members of the euro area have ratified it.[306]

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.[307][308] 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.[309] Cameron subsequently conceded that his action had

failed to secure any safeguards for the UK.[310]

ec debt crisis

Documents