European Debt Crisis - Wikipedia, The Free Encyclopedia

8/14/2015
EuropeandebtcrisisWikipedia,thefreeencyclopedia
Europeandebtcrisis
FromWikipedia,thefreeencyclopedia
TheEuropeandebtcrisis(oftenalsoreferredtoastheEurozonecrisisorthe
Europeansovereigndebtcrisis)isamultiyeardebtcrisisthathasbeen
takingplaceintheEuropeanUnionsincetheendof2009.Severaleurozone
memberstates(Greece,Portugal,Ireland,SpainandCyprus)wereunableto
repayorrefinancetheirgovernmentdebtortobailoutoverindebtedbanks
undertheirnationalsupervisionwithouttheassistanceofthirdpartieslikethe
EFSF,theECB,ortheIMF.
GreecewasthefirstdevelopedcountrytohavemissedapaymenttotheIMFin
2015,defaultingonitsIMFdebtafterhavingreceivedadebtcutin2012and
variousothersupportmeasuresfrom20102015.AlthoughGreece'sdefaulthad
seriousconsequencesforthecountry'sinternationalcreditrating,itremainsto
beannouncedbyofficialbodiessuchasIMFandEuropeanLeaders.
TheEuropeandebtcrisiseruptedinthewakeoftheGreatRecessionaround
late2009,andwascharacterizedbyanenvironmentofoverlyhighgovernment
structuraldeficitsandacceleratingdebtlevels.Thestatesthatwereadversely
affectedbythecrisisfacedastrongriseininterestratespreadsforgovernment
bondsasaresultofinvestorconcernsabouttheirfuturedebtsustainability.
Foureurozonestateshadtoberescuedbysovereignbailoutprograms,which
wereprovidedjointlybytheInternationalMonetaryFundandtheEuropean
Commission,withadditionalsupportatthetechnicallevelfromtheEuropean
CentralBank.Togetherthesethreeinternationalorganisationsrepresentingthe
bailoutcreditorsbecamenicknamed"theTroika".
Longterminterestrates(secondarymarketyields
ofgovernmentbondswithmaturitiesofclosetoten
years)ofalleurozonecountriesexceptEstonia,
LatviaandLithuania. [1]Ayieldbeingmorethan
4%pointshighercomparedtothelowest
comparableyieldamongtheeurozonestates,i.e.
yieldsabove6%inSeptember2011,indicatesthat
financialinstitutionshaveseriousdoubtsabout
In1992,membersoftheEuropeanUnionsignedtheMaastrichtTreaty,under
whichtheypledgedtolimittheirdeficitspendinganddebtlevels.However,in
theearly2000s,someEUmemberstateswerefailingtostaywithinthe
confinesoftheMaastrichtcriteriaandturnedtosecuritisingfuturegovernment
revenuestoreducetheirdebtsand/ordeficits,sidesteppingbestpracticeand
creditworthinessofthestate. [2]
ignoringinternationalstandards.[3]Thisallowedthesovereignstomasktheir
deficitanddebtlevelsthroughacombinationoftechniques,includinginconsistentaccounting,offbalancesheettransactions,and
theuseofcomplexcurrencyandcreditderivativesstructures.[3]Fromlate2009on,afterGreece'snewlyelectedgovernment
stoppedmaskingitstrueindebtednessandbudgetdeficit,fearsofsovereigndefaultsincertainEuropeanstatesdevelopedinthe
public,andthegovernmentdebtofseveralstateswasdowngraded.
Thedetailedcausesoftheunsustainablebudgetdeficitsanddebtlevelsvaried.Inseveralcountries,privatedebtsarisingfroma
propertybubbleweretransferredtosovereigndebtasaresultofbankingsystembailoutsandgovernmentresponsestoslowing
economiespostbubble.InGreece,thedebtincreasewasassociatedwithhighpublicsectorwageandpensioncommitments.[4]The
structureoftheeurozoneasacurrencyunion(i.e.,onecurrency)withoutfiscalunion(e.g.,differenttaxandpublicpensionrules)
contributedtothecrisisandlimitedtheabilityofEuropeanleaderstorespond.[5][6]Europeanbanksownasignificantamountof
sovereigndebt,suchthatconcernsregardingthesolvencyofbankingsystemsorsovereignsarenegativelyreinforcing.[7]Concerns
intensifiedinearly2010andthereafter,[8][9]leadingEuropeannationstoimplementaseriesoffinancialsupportmeasuressuchas
theEuropeanFinancialStabilityFacility(EFSF)andEuropeanStabilityMechanism(ESM).
When,asanegativerepercussionoftheGreatRecession,therelativelyfragilebankingsectorhadsufferedlargecapitallosses,
moststatesinEuropehadtobailoutseveraloftheirmostaffectedbankswithsomesupportingrecapitalizationloans,becauseof
thestronglinkagebetweentheirsurvivalandthefinancialstabilityoftheeconomy.AsofJanuary2009,agroupof10centraland
easternEuropeanbankshadalreadyaskedforabailout.[10]Atthetime,theEuropeanCommissionreleasedaforecastofa1.8%
declineinEUeconomicoutputfor2009,makingtheoutlookforthebanksevenworse.[10][11]Themanypublicfundedbank
recapitalizationswereonereasonbehindthesharplydeteriorateddebttoGDPratiosexperiencedbyseveralEuropeangovernments
https://en.wikipedia.org/wiki/European_debt_crisis#Evolution_of_the_crisis
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inthewakeoftheGreatRecession.ThemainrootcausesforthefoursovereigndebtcriseseruptinginEuropewerereportedlya
mixof:weakactualandpotentialgrowthcompetitiveweaknessliquidationofbanksandsovereignslargepreexistingdebtto
GDPratiosandconsiderableliabilitystocks(government,private,andnonprivatesector).[12]
Duringthecourseof201012itbecameevidentthat,outofeighteeneurozonestates,four(Greece,Ireland,PortugalandCyprus),
facingpersistentnegativegrowthprospectsandincreasinggovernmentdebt,wouldfinditdifficultorimpossibletorepayor
refinancetheirgovernmentdebtwithouttheassistanceofbailoutsupportfromtheTroika.Thetransfersofbailoutfundswere
performedintranchesoverseveralyearsandwereconditionalonthegovernmentssimultaneouslyimplementingapackageof
fiscalconsolidation,structuralreforms,privatizationofpublicassetsandsettingupfundsforfurtherbankrecapitalizationand
resolution.Spainwas,strictlyspeaking,nothitbyasovereigndebtcrisisin2012,asthefinancialsupportpackagethatthey
receivedfromtheEuropeanStabilityMechanismwasearmarkedforabankrecapitalizationfundanddidnotincludefinancial
supportforthegovernmentitself.AsofJuly2014,IrelandandPortugalhadcompletedandexitedtheirbailoutprogrammes
successfully,meaningthatacombinationofimprovedstructuraldeficitsandareturntoeconomicgrowthhadenabledthemto
regainfullmarketaccesstoaccommodatetheirfuturerefinancingneeds.GreeceandCyprusbothmanagedtopartlyregainmarket
accessin2014,andwerescheduledtohavetheirbailoutprogrammeperiodsendinMarch2016.
Aswellasthepoliticalmeasuresandbailoutprogrammesbeingimplementedtocombattheeurozonecrisis,theEuropeanCentral
Bank(ECB)alsocontributedbyloweringinterestratesandprovidingcheaploansofmorethanonetrillioneuroinorderto
maintainmoneyflowsbetweenEuropeanbanks.On6September2012,theECBalsocalmedfinancialmarketsbyannouncingfree
unlimitedsupportforalleurozonecountriesinvolvedinasovereignstatebailout/precautionaryprogrammefromEFSF/ESM,
throughsomeyieldloweringOutrightMonetaryTransactions(OMT).[13]
Thecrisishadsignificantadverseeconomiceffectsandlabourmarketeffectsfortheworstaffectedcountries,withunemployment
ratesinGreeceandSpainreaching27%,[14]andwasblamedforsubduedeconomicgrowth,notonlyfortheentireeurozone,butfor
theentireEuropeanUnion.Assuch,itcanbearguedtohavehadamajorpoliticalimpactontherulinggovernmentsin9outof19
eurozonecountries,contributingtopowershiftsinGreece,Ireland,France,Italy,Portugal,Spain,Slovenia,Slovakia,andthe
Netherlands.
Contents
1Causes
2Evolutionofthecrisis
2.1Greece
2.2Ireland
2.3Portugal
2.4Spain
2.5Cyprus
3Policyreactions
3.1EUemergencymeasures
3.1.1EuropeanFinancialStabilityFacility(EFSF)
3.1.2EuropeanFinancialStabilisationMechanism(EFSM)
3.1.3Brusselsagreementandaftermath
3.2EuropeanCentralBank
3.3EuropeanStabilityMechanism(ESM)
3.4EuropeanFiscalCompact
4Economicreformsandrecoveryproposals
4.1Directloanstobanksandbankingregulation
4.2Lessausterity,moreinvestment
4.3Increasecompetitiveness
4.4Addresscurrentaccountimbalances
4.5Mobilisationofcredit
4.6Commentary
5Proposedlongtermsolutions
5.1Europeanfiscalunion
5.2Europeanbankrecoveryandresolutionauthority
5.3Eurobonds
5.4EuropeanMonetaryFund
5.5Debtwriteofffinancedbywealthtax
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5.6Debtwriteoffbasedoninternationalagreement
5.7Taxesoncapital,positionofThomasPiketty
6Controversies
6.1EUtreatyviolations
6.2Actorsfuellingthecrisis
6.2.1Creditratingagencies
6.2.2Media
6.2.3Speculators
6.3Speculationaboutthebreakupoftheeurozone
6.4Odiousdebt
6.5Manipulateddebtanddeficitstatistics
6.6CollateralforFinland
7Politicalimpact
8Seealso
9Notes
10References
11Furtherreading
12Externallinks
Causes
Mainarticle:CausesoftheEuropeandebtcrisis
Theeurozonecrisisresultedfromacombinationofcomplex
factors,includingtheglobalisationoffinanceeasycredit
conditionsduringthe20022008periodthatencouragedhigh
risklendingandborrowingpracticesthefinancialcrisisof
200708internationaltradeimbalancesrealestatebubblesthat
havesincebursttheGreatRecessionof20082012fiscal
policychoicesrelatedtogovernmentrevenuesandexpenses
andapproachesusedbystatestobailouttroubledbanking
industriesandprivatebondholders,assumingprivatedebt
burdensorsocializinglosses.
Total(gross)governmentdebtaroundtheworldasapercentofGDP
Aresearchreportcompletedin2012fortheUnitedStates
byIMF
Congressexplains,"Thecurrenteurozonecrisishasbeen
unfoldingsince2009,whenanewGreekgovernmentrevealed
thatpreviousGreekgovernmentshadbeenunderreportingthebudgetdeficit.ThecrisissubsequentlyspreadtoIrelandand
Portugal,whileraisingconcernsaboutItaly,Spain,andtheEuropeanbankingsystem,andmorefundamentalimbalanceswithinthe
eurozone"[15]
Theunderreportingwasexposedthrougharevisionoftheforecastforthe2009budgetdeficitfrom"68%"ofGDP(nogreater
than3%ofGDPwasaruleoftheMaastrichtTreaty)to12.7%,almostimmediatelyafterPasokwontheOctober2009national
elections.LargeupwardsrevisionofbudgetdeficitforecastsduetotheinternationalfinancialcrisiswerenotlimitedtoGreece:for
example,intheUnitedStatesforecastforthe2009budgetdeficitwasraisedfrom$407billionprojectedinthe2009fiscalyear
budget,to$1.4trillion,whileintheUnitedKingdomtherewasafinalforecastmorethan4timeshigherthantheoriginal.[16]In
Greecethelow("68%")forecastwasreporteduntilverylateintheyear(September2009),clearlynotcorrespondingtotheactual
situation.
ThefactthattheGreekdebtexceeded$400billion(over120%ofGDP)andFranceowned10%ofthatdebt,struckterrorinto
investorsattheword"default".AlthoughmarketreactionwasratherslowGreek10yeargovernmentbondyieldonlyexceeded
7%inApril2010theycoincidedwithalargenumberofnegativearticles,leadingtoargumentsabouttheroleofinternational
newsmediaandotheractorsfuellingthecrisis.
Contagionwasconsideredpossible.Greecewasbailedoutin2010witha110billioneurodirectloanbytheEuropeanUnionand
theInternationalMonetaryFund.After2yearsoffiscalausterityandGreekriots,another130billioneuroloanwasmade.Greek
austerityprogramsgreatlyreducedpublicpensionsandpublicwages.[17]
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Evolutionofthecrisis
Seealso:2000sEuropeansovereigndebtcrisistimelineandEuropeandebtcrisiscontagion
The2009annualbudgetdeficitandpublicdebt
bothrelativetoGDP,forselectedEuropean
countries.Intheeurozone,thefollowingnumberof
countrieswere:SGPlimitcompliant(3),Unhealthy
(1),Critical(12),andUnsustainable(1).
Inthefirstfewweeksof
2010,therewasrenewed
anxietyaboutexcessive
nationaldebt,withlenders
demandingeverhigher
interestratesfromseveral
countrieswithhigherdebt
levels,deficits,andcurrent
accountdeficits.Thisin
turnmadeitdifficultfor
somegovernmentsto
financefurtherbudget
deficitsandserviceexisting
debt,particularlywhen
economicgrowthrates
werelow,andwhenahigh
percentageofdebtwasin
thehandsofforeign
creditors,asinthecaseof
GreeceandPortugal.[18]
The2012annualbudgetdeficitandpublicdebt
bothrelativetoGDP,foralleurozonecountriesand
UK.Intheeurozone,thefollowingnumberof
countrieswere:SGPlimitcompliant(3),Unhealthy
(5),Critical(8),andUnsustainable(1).
Tofightthecrisissome
governmentshavefocused
onraisingtaxesand
loweringexpenditures,
whichcontributedtosocial
unrestandsignificant
debateamongeconomists,
Changeinnationaldebtanddeficitlevelssince
manyofwhomadvocate
1980
greaterdeficitswhen
economiesarestruggling.
Especiallyincountries
wherebudgetdeficitsandsovereigndebtshaveincreasedsharply,acrisisof
confidencehasemergedwiththewideningofbondyieldspreadsandrisk
insuranceonCDSbetweenthesecountriesandotherEUmemberstates,most
Debtprofileofeurozonecountries
importantlyGermany.[19]Bytheendof2011,Germanywasestimatedtohave
mademorethan9billionoutofthecrisisasinvestorsflockedtosaferbutnear
zerointerestrateGermanfederalgovernmentbonds(bunds).[20]ByJuly2012alsotheNetherlands,Austria,andFinlandbenefited
fromzeroornegativeinterestrates.Lookingatshorttermgovernmentbondswithamaturityoflessthanoneyearthelistof
beneficiariesalsoincludesBelgiumandFrance.[21]WhileSwitzerland(andDenmark)[21]equallybenefitedfromlowerinterest
rates,thecrisisalsoharmeditsexportsectorduetoasubstantialinfluxofforeigncapitalandtheresultingriseoftheSwissfranc.
InSeptember2011theSwissNationalBanksurprisedcurrencytradersbypledgingthat"itwillnolongertolerateaeurofranc
exchangeratebelowtheminimumrateof1.20francs",effectivelyweakeningtheSwissfranc.ThisisthebiggestSwiss
interventionsince1978.[22]
Despitesovereigndebthavingrisensubstantiallyinonlyafeweurozonecountries,withthethreemostaffectedcountriesGreece,
IrelandandPortugalcollectivelyonlyaccountingfor6%oftheeurozone'sgrossdomesticproduct(GDP),[23]ithasbecomea
perceivedproblemfortheareaasawhole,[24]leadingtospeculationoffurthercontagionofotherEuropeancountriesanda
possiblebreakupoftheeurozone.Intotal,thedebtcrisisforcedfiveoutof17eurozonecountriestoseekhelpfromothernations
bytheendof2012.
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Inmid2012,duetosuccessfulfiscalconsolidationandimplementationofstructuralreformsinthecountriesbeingmostatriskand
variouspolicymeasurestakenbyEUleadersandtheECB(seebelow),financialstabilityintheeurozonehasimproved
significantlyandinterestrateshavesteadilyfallen.Thishasalsogreatlydiminishedcontagionriskforothereurozonecountries.As
ofOctober2012only3outof17eurozonecountries,namelyGreece,Portugal,andCyprusstillbattledwithlongterminterestrates
above6%.[25]ByearlyJanuary2013,successfulsovereigndebtauctionsacrosstheeurozonebutmostimportantlyinIreland,
Spain,andPortugal,showsinvestorsbelievetheECBbackstophasworked.[26]InNovember2013ECBlowereditsbankrateto
only0.25%toaidrecoveryintheeurozone.[27]AsofMay2014onlytwocountries(GreeceandCyprus)stillneedhelpfromthird
parties.[28]
Greece
Mainarticle:Greekgovernmentdebtcrisis
Intheearlymid2000s,Greece'seconomywasoneofthefastestgrowinginthe
eurozoneandwasassociatedwithalargestructuraldeficit.[29]Astheworld
economywashitbythefinancialcrisisof200708,Greecewashitespecially
hardbecauseitsmainindustriesshippingandtourismwereespecially
sensitivetochangesinthebusinesscycle.Thegovernmentspentheavilyto
keeptheeconomyfunctioningandthecountry'sdebtincreasedaccordingly.
Despitethedrasticupwardsrevisionoftheforecastforthe2009budgetdeficit
inOctober2009,Greekborrowingratesinitiallyroseratherslowly.ByApril
2010itwasapparentthatthecountrywasbecomingunabletoborrowfromthe
marketson23April2010,theGreekgovernmentrequestedaninitialloanof
45billionfromtheEUandInternationalMonetaryFund(IMF),tocoverits
financialneedsfortheremainingpartof2010.[30]AfewdayslaterStandard&
Poor'sslashedGreece'ssovereigndebtratingtoBB+or"junk"statusamid
fearsofdefault,[31]inwhichcaseinvestorswereliabletolose3050%oftheir
money.[31]Stockmarketsworldwideandtheeurocurrencydeclinedin
responsetothedowngrade.[32]
DebtofGreececomparedtoeurozoneaveragesince
1999
On1May2010,theGreekgovernmentannouncedaseriesofausterity
measures(theThirdausteritypackagewithinmonths)[33]tosecureathreeyear110billion
loan(FirstEconomicAdjustmentProgramme).[34]Thiswasmetwithgreatangerbysome
Greeks,leadingtomassiveprotests,riots,andsocialunrestthroughoutGreece.[35]The
Troika,atripartitecommitteeformedbytheEuropeanCommission,theEuropeanCentral
BankandtheInternationalMonetaryFund(EC,ECBandIMF),offeredGreeceasecond
bailoutloanworth130billioninOctober2011(SecondEconomicAdjustment
Programme),butwiththeactivationbeingconditionalonimplementationoffurther
austeritymeasuresandadebtrestructureagreement.[36]Abitsurprisingly,theGreekprime
Publicdebt,grossdomesticproduct
ministerGeorgePapandreoufirstansweredthatcallbyannouncingaDecember2011
(GDP),andpublicdebttoGDPratio
Graphbasedon"ameco"datafrom
referendumonthenewbailoutplan,[37][38]buthadtobackdownamidststrongpressure
theEuropeanCommission
fromEUpartners,whothreatenedtowithholdanoverdue6billionloanpaymentthat
[37][39]
GreeceneededbymidDecember.
On10November2011Papandreouresigned
followinganagreementwiththeNewDemocracypartyandthePopularOrthodoxRallytoappointnonMPtechnocratLucas
Papademosasnewprimeministerofaninterimnationaluniongovernment,withresponsibilityforimplementingtheneeded
austeritymeasurestopavethewayforthesecondbailoutloan.[40][41]
AlltheimplementedausteritymeasureshavehelpedGreecebringdownitsprimarydeficiti.e.,fiscaldeficitbeforeinterest
paymentsfrom24.7bn(10.6%ofGDP)in2009tojust5.2bn(2.4%ofGDP)in2011,[42][43]butasasideeffecttheyalso
contributedtoaworseningoftheGreekrecession,whichbeganinOctober2008andonlybecameworsein2010and2011.[44]The
GreekGDPhaditsworstdeclinein2011with6.9%,[45]ayearwheretheseasonaladjustedindustrialoutputended28.4%lower
thanin2005,[46][47]andwith111,000Greekcompaniesgoingbankrupt(27%higherthanin2010).[48][49]Asaresult,Greekshave
lostabout40%oftheirpurchasingpowersincethestartofthecrisis,[50]theyspend40%lessongoodsandservices,[51]andthe
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seasonaladjustedunemploymentrategrewfrom7.5%inSeptember2008toarecordhigh
of27.9%inJune2013,[52]whiletheyouthunemploymentraterosefrom22.0%toashigh
as62%.[53][54]Youthunemploymentratiohit16.1percentin2012.[55][56][57]
Overalltheshareofthepopulationlivingat"riskofpovertyorsocialexclusion"didnot
increasenotablyduringthefirst2yearsofthecrisis.Thefigurewasmeasuredto27.6%in
2009and27.7%in2010(onlybeingslightlyworsethantheEU27averageat23.4%),[58]
butfor2011thefigurewasnowestimatedtohaverisensharplyabove33%.[59]InFebruary
2012,anIMFofficialnegotiatingGreekausteritymeasuresadmittedthatexcessive
spendingcutswereharmingGreece.[42]
100,000peopleprotestagainstthe
austeritymeasuresinfrontof
parliamentbuildinginAthens,29
May2011
SomeeconomicexpertsarguethatthebestoptionforGreeceandtherestoftheEU,would
betoengineeran"orderlydefault",allowingAthenstowithdrawsimultaneouslyfromthe
eurozoneandreintroduceitsnationalcurrencythedrachmaatadebasedrate.[60][61]IfGreeceweretoleavetheeuro,theeconomic
andpoliticalconsequenceswouldbedevastating.AccordingtoJapanesefinancialcompanyNomuraanexitwouldleadtoa60%
devaluationofthenewdrachma.AnalystsatFrenchbankBNPParibasaddedthatthefalloutfromaGreekexitwouldwipe20%
offGreece'sGDP,increaseGreece'sdebttoGDPratiotoover200%,andsendinflationsoaringto40%50%.[62]AlsoUBS
warnedofhyperinflation,abankrunandeven"militarycoupsandpossiblecivilwarthatcouldafflictadepartingcountry".[63][64]
EurozoneNationalCentralBanks(NCBs)mayloseupto100bnindebtclaimsagainsttheGreeknationalbankthroughtheECB's
TARGET2system.TheDeutscheBundesbankalonemayhavetowriteoff27bn.[65]
Topreventthisfromhappening,theTroika(EC,IMFandECB)eventuallyagreedinFebruary2012toprovideasecondbailout
packageworth130billion,[66]conditionalontheimplementationofanotherharshausteritypackagethatwouldreduceGreek
expenditureby3.3bnin2012andanother10bnin2013and2014.[43]Then,inMarch2012,theGreekgovernmentdidfinally
defaultonitsdebt,whichwasthelargestdefaultinhistorybyagovernment,abouttwiceasbigasRussia's1918default.This
countedasa"creditevent"andholdersofcreditdefaultswapswerepaidaccordingly.[67]Thisincludedanewlawpassedbythe
governmentsothatprivateholdersofGreekgovernmentbonds(banks,insurersandinvestmentfunds)would"voluntarily"accepta
bondswapwitha53.5%nominalwriteoff,partlyinshorttermEFSFnotes,partlyinnewGreekbondswithlowerinterestrates
andthematurityprolongedto1130years(independentlyofthepreviousmaturity).[68]Itistheworld'sbiggestdebtrestructuring
dealeverdone,affectingsome206billionofGreekgovernmentbonds.[69]Thedebtwriteoffhadasizeof107billion,and
causedtheGreekdebtleveltofallfromroughly350bnto240bninMarch2012,withthepredicteddebtburdennowshowinga
moresustainablesizeequalto117%ofGDPby2020,[70]somewhatlowerthanthetargetof120.5%initiallyoutlinedinthesigned
MemorandumwiththeTroika.[71][72][73]InDecember2012,theGreekgovernmentboughtback21billion($27billion)oftheir
bondsfor33centsontheeuro.[74]
CriticssuchasthedirectorofLSE'sHellenicObservatory
(http://www2.lse.ac.uk/europeanInstitute/research/hellenicObservatory/home.aspx)argue
thatthebillionsoftaxpayereurosarenotsavingGreecebutfinancialinstitutions.[75]Ofall
252bninbailoutsbetween2010and2015,just10%hasfounditswayintofinancing
continuedpublicdeficitspendingontheGreekgovernmentaccounts.Muchoftherest,
wentstraightintorefinancingtheoldstockofGreekgovernmentdebt(originatingmainly
fromthehighgeneralgovernmentdeficitsbeingraninpreviousyears),whichwasmainly
heldbyprivatebanksandhedgefundsbytheendof2009.[76]AccordingtoLSE,"more
than80%oftherescuepackage"isgoingtorefinancetheexpensiveoldmaturingGreek
governmentdebttowardsprivatecreditors(mainlyprivatebanksoutsideGreece),replacing
CreditorsofGreece2011and2015
itwithnewdebttopubliccreditorsonmorefavourableterms,thatistosaypayingouttheir
privatecreditorswithnewdebtissuedbyitsnewgroupofpubliccreditorsknownasthe
Troika.[77]TheshiftinliabilitiesfromEuropeanbankstoEuropeantaxpayershasbeenstaggering.Onestudyfoundthatthepublic
debtofGreecetoforeigngovernments,includingdebttotheEU/IMFloanfacilityanddebtthroughtheEurosystem,increased
from47.8bnto180.5bn(+132,7bn)betweenJanuary2010andSeptember2011,[78]whilethecombinedexposureofforeign
banksto(publicandprivate)Greekentitieswasreducedfromwellover200bnin2009toaround80bn(120bn)bymid
February2012.[79]Asof2015,78%ofGreekdebtisowedtopublicsectorinstitutions,primarilytheEU.[76]
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MidMay2012thecrisisandimpossibilitytoformanewgovernmentafterelectionsandthepossiblevictorybytheantiausterity
axisledtonewspeculationsGreecewouldhavetoleavetheeurozoneshortlydue.[80][81][82][83][84]Thisphenomenonbecame
knownas"Grexit"andstartedtogoverninternationalmarketbehaviour.[17][85][86]Thecentreright'snarrowvictoryinthe17June
electiongavehopethatGreecewouldhonouritsobligationsandstayintheEurozone.
Duetoadelayedreformscheduleandaworsenedeconomicrecession,thenewgovernmentimmediatelyaskedtheTroikatobe
grantedanextendeddeadlinefrom2015to2017beforebeingrequiredtorestorethebudgetintoaselffinancedsituationwhichin
effectwasequaltoarequestofathirdbailoutpackagefor201516worth32.6bnofextraloans.[87][88]On11November2012,
facingadefaultbytheendofNovember,theGreekparliamentpassedanewausteritypackageworth18.8bn,[89]includinga
"labourmarketreform"and"midtermfiscalplan201316".[90][91]Inreturn,theEurogroupagreedonthefollowingdaytolower
interestratesandprolongdebtmaturitiesandtoprovideGreecewithadditionalfundsofaround10bnforadebtbuyback
programme.ThelatterallowedGreecetoretireabouthalfofthe62billionindebtthatAthensowesprivatecreditors,thereby
shavingroughly20billionoffthatdebt.ThisshouldbringGreece'sdebttoGDPratiodownto124%by2020andwellbelow
110%twoyearslater.[92]WithoutagreementthedebttoGDPratiowouldhaverisento188%in2013.[93]
TheFinancialTimesspecialreportonthefutureoftheEuropeanUnionarguesthattheliberalizationoflabourmarketshasallowed
Greecetonarrowthecostcompetitivenessgapwithothersoutherneurozonecountriesbyapproximately50%overthepasttwo
years.[94]Thishasbeenachievedprimarythroughwagereductions,thoughbusinesseshavereactedpositively.[94]Theopeningof
productandservicemarketsisprovingtoughbecauseinterestgroupsareslowingreforms.[94]ThebiggestchallengeforGreeceis
tooverhaulthetaxadministrationwithsignificantpartofannuallyassessedtaxesnotpaid.[94]PoulThomsen,theIMFofficialwho
headsthebailoutmissioninGreece,statedthat"instructuralterms,Greeceismorethanhalfwaythere".[94]
InJune2013EquityindexproviderMSCIInc.reclassifiedGreeceasanemergingmarket,citingfailuretoqualifyonseveral
criteriaformarketaccessibility.[95]
Bothofthelatestbailoutprogrammeauditreports,releasedindependentlybytheEuropeanCommissionandIMFinJune2014,
revealedthatevenaftertransferofthescheduledbailoutfundsandfullimplementationoftheagreedadjustmentpackagein2012,
therewasanewforecastfinancinggapof:5.6bnin2014,12.3bnin2015,and0bnin2016.Thenewforecastfinancinggaps,
willneedeithertobecoveredbythegovernment'sadditionallendingfromprivatecapitalmarkets,ortobecounteredbyadditional
fiscalimprovementsthroughexpenditurereductions,revenuehikesorincreasedamountofprivatizations.[96][97]Duetoan
improvedoutlookfortheGreekeconomy,withreturnofagovernmentstructuralsurplusin2012,returnofrealGDPgrowthin
2014,andadeclineoftheunemploymentratein2015,[98]itwaspossiblefortheGreekgovernmenttoreturntothebondmarket
duringthecourseof2014,forthepurposetofullyfunditsnewextrafinancinggapsbyadditionalprivatecapital.Atotalof6.1bn
wasreceivedfromthesaleofthreeyearandfiveyearbondsin2014,andtheGreekgovernmentnowplanstocoveritsforecast
financinggapfor2015byadditionalsaleofsevenyearandtenyearbondsin2015.[99]
ThelatestrecalculationoftheseasonallyadjustedquarterlyGDPfiguresfortheGreekeconomy,revealedthatithadbeenhitby
threedistinctrecessionsintheturmoiloftheGlobalFinancialCrisis:[100]
Q32007untilQ42007(duration=2quarters)
Q22008untilQ12009(duration=4quarters,referredtoasbeingpartoftheGreatRecession)
Q32009untilQ42013(duration=18quarters,referredtoasbeingpartoftheEurozonecrisis)
Greeceexperiencedpositiveeconomicgrowthineachofthethreefirstquartersof2014.[100]Thereturnofeconomicgrowth,along
withthenowexistingunderlyingstructuralbudgetsurplusofthegeneralgovernment,buildthebasisforthedebttoGDPratioto
startasignificantdeclineinthecomingyearsahead,[101]whichwillhelpensurethatGreecewillbelabelled"debtsustainable"and
fullyregaincompleteaccesstoprivatelendingmarketsin2015.[a]WhiletheGreekgovernmentdebtcrisisherebyisforecast
officiallytoendin2015,manyofitsnegativerepercussions(i.e.ahighunemploymentrate)areforecaststilltobefeltduringmany
ofthesubsequentyears.[101]
Duringthesecondhalfof2014,theGreekgovernmentagainnegotiatedwiththeTroika.Thenegotiationswerethistimeabouthow
tocomplywiththeprogrammerequirements,toensureactivationofthepaymentofitslastscheduledeurozonebailouttranchein
December2014,andaboutapotentialupdateofitsremainingbailoutprogrammefor201516.Whencalculatingtheimpactofthe
2015fiscalbudgetpresentedbytheGreekgovernment,therewereadisagreement,withthecalculationsoftheGreekgovernment
showingitfullycompliedwiththegoalsofitsagreed"Midtermfiscalplan201316",whiletheTroikacalculationswereless
optimisticandreturnedanotcoveredfinancinggapat2.5bn(beingrequiredtobecoveredbyadditionalausteritymeasures).As
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theGreekgovernmentinsistedtheircalculationsweremoreaccuratethanthosepresentedbytheTroika,theysubmittedan
unchangedfiscalbudgetbillon21November,tobevotedforbytheparliamenton7December.TheEurogroupwasscheduledto
meetanddiscusstheupdatedreviewoftheGreekbailoutprogrammeon8December(tobepublishedonthesameday),andthe
potentialadjustmentstotheremainingprogrammefor201516.TherewererumoursinthepressthattheGreekgovernmenthas
proposedimmediatelytoendthepreviouslyagreedandcontinuingIMFbailoutprogrammefor201516,replacingitwiththe
transferof11bnunusedbankrecapitalizationfundscurrentlyheldasreservebytheHellenicFinancialStabilityFund(HFSF),
alongwithestablishmentofanewprecautionaryEnhancedConditionsCreditLine(ECCL)issuedbytheEuropeanStability
Mechanism.TheECCLinstrumentisoftenusedasafollowupprecautionarymeasure,whenastatehasexiteditssovereignbailout
programme,withtransfersonlytakingplaceifadversefinancial/economiccircumstancesmaterialize,butwiththepositiveeffect
thatithelpcalmdownfinancialmarketsasthepresenceofthisextrabackupguaranteemechanismmakeitsaferforinvestorsto
invest.[104]
ThepositiveeconomicoutlookforGreecebasedonthereturnofseasonallyadjustedrealGDPgrowthacrossthefirstthree
quartersof2014wasreplacedbyanewfourthrecessionstartinginQ42014.[105]Thisnewfourthrecessionwaswidelyassessed
asbeingdirectrelatedtotheprematuresnapparliamentaryelectioncalledbytheGreekparliamentinDecember2014andthe
followingformationofaSyrizaledgovernmentrefusingtoacceptrespectingthetermsofitscurrentbailoutagreement.Therising
politicaluncertaintyofwhatwouldfollowcausedtheTroikatosuspendallscheduledremainingaidtoGreeceunderitscurrent
programme,untilsuchtimeastheGreekgovernmenteitheracceptedthepreviouslynegotiatedconditionalpaymenttermsor
alternativelycouldreachamutuallyacceptedagreementofsomenewupdatedtermswithitspubliccreditors.[106]Thisrift,causeda
renewedincreasinglygrowingliquiditycrisis(bothfortheGreekgovernmentandGreekfinancialsystem),resultinginplummeting
stockpricesattheAthensStockExchangewhileinterestratesfortheGreekgovernmentattheprivatelendingmarketspikedto
levelsonceagainmakingitinaccessibleasanalternativefundingsource.
Facedbythethreatofasovereigndefaultandpotentialresultingexitoftheeurozone,somefinalattemptsweremadebytheGreek
governmentinMay2015,tosettleanagreementwiththeTroikaaboutsomeadjustedtermsforGreecetocomplywithinorderto
activatethetransferofthefrozenbailoutfundsinitscurrentprogramme.TheEurogrouprecentlygrantedasixmonthtechnical
extensionofitscurrentbailoutprogrammetoGreece(nowsettoexpirebytheendofJune2015),whichmeanthetimewindowto
completenegotiationsandsubsequentlyimplementtheconditionalmeasurestounlocktheremainingbailouttransfersnowisvery
short.ExpectationsarethatGreeceinadditionwillneedafollowupsupportprogrammestarting1July2015.TheTroika
announcedtheirpremisetoofferGreece(andbeginnegotiationsabout)establishmentofafollowupprogramme,wouldbeaprior
successfulcompletionoftherenegotiatedcurrentprogramme.
OnJuly5th,2015,thecitizensofGreecevoteddecisively(a61%to39%decisionwith62.5%voterturnout)torejectareferendum
thatwouldhavegivenGreecemorebailouthelpfromotherEUmembersinreturnforincreasedausteritymeasures.Asaresultof
thisvote,Greece'sfinanceministerYanisVaroufakissteppeddownonJuly6th.NegotiationsbetweenGreeceandotherEurozone
memberswillcontinueinthefollowingdaystoprocurefundsfromtheEuropeanCentralBankinordertopreventaneconomic
collapseinthecountry.[107][108]
Ireland
Mainarticle:Post2008Irisheconomicdownturn
TheIrishsovereigndebtcrisiswasnotbasedongovernmentoverspending,butfromthestateguaranteeingthesixmainIrish
basedbankswhohadfinancedapropertybubble.On29September2008,FinanceMinisterBrianLenihan,Jnrissuedatwoyear
guaranteetothebanks'depositorsandbondholders.[109]Theguaranteesweresubsequentlyrenewedfornewdepositsandbondsin
aslightlydifferentmanner.In2009,aNationalAssetManagementAgency(NAMA)wascreatedtoacquirelargepropertyrelated
loansfromthesixbanksatamarketrelated"longtermeconomicvalue".[110]
Irishbankshadlostanestimated100billioneuros,muchofitrelatedtodefaultedloanstopropertydevelopersandhomeowners
madeinthemidstofthepropertybubble,whichburstaround2007.Theeconomycollapsedduring2008.Unemploymentrosefrom
4%in2006to14%by2010,whilethenationalbudgetwentfromasurplusin2007toadeficitof32%GDPin2010,thehighestin
thehistoryoftheeurozone,despiteausteritymeasures.[4][111]
WithIreland'screditratingfallingrapidlyinthefaceofmountingestimatesofthebankinglosses,guaranteeddepositors,and
bondholderscashedinduring200910,andespeciallyafterAugust2010.(Thenecessaryfundswereborrowedfromthecentral
bank.)WithyieldsonIrishGovernmentdebtrisingrapidlyitwasclearthattheGovernmentwouldhavetoseekassistancefromthe
EUandIMF,resultingina67.5billion"bailout"agreementof29November2010[112]Togetherwithadditional17.5billion
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comingfromIreland'sownreservesandpensions,thegovernmentreceived
85billion,[113]ofwhichupto34billionwastobeusedtosupportthe
country'sfailingfinancialsector(onlyabouthalfofthiswasusedinthatway
followingstresstestsconductedin2011).[114]Inreturnthegovernmentagreed
toreduceitsbudgetdeficittobelowthreepercentby2015.[114]InApril2011,
despiteallthemeasurestaken,Moody'sdowngradedthebanks'debttojunk
status.[115]
InJuly2011EuropeanleadersagreedtocuttheinterestratethatIrelandwas
payingonitsEU/IMFbailoutloanfromaround6%tobetween3.5%and4%
andtodoubletheloantimeto15years.Themovewasexpectedtosavethe
countrybetween600700millioneurosperyear.[116]On14September2011,
inamovetofurthereaseIreland'sdifficultfinancialsituation,theEuropean
Commissionannounceditwouldcuttheinterestrateonits22.5billionloan
comingfromtheEuropeanFinancialStabilityMechanism,downto2.59per
centwhichistheinterestratetheEUitselfpaystoborrowfromfinancial
markets.[117]
DebtofIrelandcomparedtoeurozoneaveragesince
1999
TheEuroPlusMonitorreportfromNovember2011atteststoIreland'svast
progressindealingwithitsfinancialcrisis,expectingthecountrytostandonits
ownfeetagainandfinanceitselfwithoutanyexternalsupportfromthesecondhalfof2012
onwards.[118]AccordingtotheCentreforEconomicsandBusinessResearchIreland's
exportledrecovery"willgraduallypullitseconomyoutofitstrough".Asaresultofthe
improvedeconomicoutlook,thecostof10yeargovernmentbondshasfallenfromits
recordhighat12%inmidJuly2011tobelow4%in2013(seethegraph"Longterm
InterestRates").
On26July2012,forthefirsttimesinceSeptember2010,Irelandwasabletoreturntothe
financialmarketssellingover5billioninlongtermgovernmentdebt,withaninterestrate
of5.9%forthe5yearbondsand6.1%forthe8yearbondsatsale.[119]InDecember2013,
afterthreeyearsonfinanciallifesupport,IrelandfinallylefttheEU/IMFbailout
programme,althoughitretainedadebtof22.5billiontotheIMF,whichinAugust2014
earlyrepaymentof15billionwasbeingconsidered,whichwouldsavethecountry375
millioninsurcharges.[120]Despitetheendofthebailoutthecountry'sunemploymentrateremainshighandpublicsectorwagesare
stillaround20%lowerthanatthebeginningofthecrisis.[121]Governmentdebtreached123.7%ofGDPin2013.[122]
On13March2013,Irelandmanagedtoregaincompletelendingaccessonfinancialmarkets,whenitsuccessfullyissued5bnof
10yearmaturitybondsatayieldof4.3%.[123]IrelandendeditsbailoutprogrammeasscheduledinDecember2013,withoutany
needforadditionalfinancialsupport.[103]
Portugal
Mainarticle:201014Portuguesefinancialcrisis
AccordingtoareportbytheDiriodeNotcias[124]Portugalhadallowedconsiderableslippageinstatemanagedpublicworksand
inflatedtopmanagementandheadofficerbonusesandwagesintheperiodbetweentheCarnationRevolutionin1974and2010.
Persistentandlastingrecruitmentpoliciesboostedthenumberofredundantpublicservants.Riskycredit,publicdebtcreation,and
Europeanstructuralandcohesionfundsweremismanagedacrossalmostfourdecades.[125]Whentheglobalcrisisdisruptedthe
marketsandtheworldeconomy,togetherwiththeUSsubprimemortgagecrisisandtheeurozonecrisis,Portugalwasoneofthe
firstandmostaffectedeconomiestosuccumb.
Inthesummerof2010,Moody'sInvestorsServicecutPortugal'ssovereignbondrating,[126]whichledtoanincreasedpressureon
Portuguesegovernmentbonds.[127]
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Inthefirsthalfof2011,Portugalrequesteda78billionIMFEUbailoutpackageinabidtostabiliseitspublicfinances.[128]These
measureswereputinplaceasadirectresultofdecadeslonggovernmentaloverspendingandanoverbureaucratisedcivilservice.
Afterthebailoutwasannounced,thePortuguesegovernmentheadedbyPedroPassosCoelhomanagedtoimplementmeasuresto
improvetheState'sfinancialsituationandthecountrystartedtobeseenasmovingontherighttrack.Thisalsoledtoastrong
increaseoftheunemploymentratetoover15percentinthesecondquarter2012anditisexpectedtoriseevenfurtherinthenear
future.[129]
Portugal'sdebtwasinSeptember2012forecastbytheTroikatopeakataround124%ofGDPin2014,followedbyafirm
downwardtrajectoryafter2014.PreviouslytheTroikahadpredicteditwouldpeakat118.5%ofGDPin2013,sothedevelopments
provedtobeabitworsethanfirstanticipated,butthesituationwasdescribedasfullysustainableandprogressingwell.Asaresult,
fromtheslightlyworseeconomiccircumstances,thecountryhasbeengivenonemoreyeartoreducethebudgetdeficittoalevel
below3%ofGDP,movingthetargetyearfrom2013to2014.Thebudgetdeficitfor2012hasbeenforecasttoendat5%.The
recessionintheeconomyisnowalsoprojectedtolastuntil2013,withGDP
declining3%in2012and1%in2013followedbyareturntopositivereal
growthin2014.[130]
Aspartofthebailoutprogramme,Portugalwasrequiredtoregaincomplete
accesstofinancialmarketsbySeptember2013.Thefirststeptowardsthis
targetwassuccessfullytakenon3October2012,whenthecountrymanagedto
regainpartialmarketaccessbysellingabondserieswith3yearmaturity.Once
Portugalregainscompletemarketaccess,measuredasthemomentit
successfullymanagetosellabondserieswithafull10yearmaturity,itis
expectedtobenefitfrominterventionsbytheECB,whichannouncedreadiness
toimplementextendedsupportintheformofsomeyieldloweringbond
purchases(OMTs),[130]aimingtobringgovernmentalinterestratesdownto
sustainablelevels.ApeakforthePortuguese10yeargovernmentalinterest
rateshappenedon30January2012,whereitreached17.3%aftertherating
agencieshadcutthegovernmentscreditratingto"noninvestmentgrade"(also
referredtoas"junk").[131]AsofDecember2012,ithasbeenmorethanhalved
toonly7%.[132]Asuccessfulreturntothelongtermlendingmarketwasmade
bytheissuingofa5yearmaturitybondseriesinJanuary2013,[133]andthe
stateregainedcompletelendingaccesswhenitsuccessfullyissueda10year
maturitybondserieson7May2013.[103][134]
DebtofPortugalcomparedtoeurozoneaverage
since1999
AccordingtotheFinancialTimesspecialreportonthefutureoftheEuropeanUnion,the
Portuguesegovernmenthas"madeprogressinreforminglabourlegislation,cutting
previouslygenerousredundancypaymentsbymorethanhalfandfreeingsmalleremployers
fromcollectivebargainingobligations,allcomponentsofPortugal's78billionbailout
program".[94]Additionally,unitlabourcostshavefallensince2009,workingpracticesare
liberalizing,andindustriallicensingisbeingstreamlined.[94]
On18May2014PortugallefttheEUbailoutmechanismwithoutadditionalneedfor
support,[28]asithadalreadyregainedacompleteaccesstolendingmarketsbackinMay
2013,[103]andwithitslatestissuingofa10yeargovernmentbondbeingsuccessfully
[135]
completedwitharateaslowas3.59%.
Portugalstillhasmanytoughyearsahead.
DuringthecrisisPortugal'sgovernmentdebtincreasedfrom93to139percentofGDP.[135]Itmaytakeuntil2040thatthecountry
willhavepaidoffEUloansandeventuallyreachasustainabledebtlevelof60percent.[136]On3August2014,BancodePortugal
announcedthecountry'ssecondbiggestbankBancoEspiritoSantowouldbesplitintwoafterlosingtheequivalentof$4.8billion
inthefirst6monthsof2014,sendingitssharesdownby89percent.
Spain
Seealso:200814Spanishfinancialcrisis
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Spainhadacomparativelylowdebtlevelamongadvancedeconomiespriortothecrisis.[137]ItspublicdebtrelativetoGDPin2010
wasonly60%,morethan20pointslessthanGermany,FranceortheUS,andmorethan60pointslessthanItaly,Irelandor
Greece.[138][139]Debtwaslargelyavoidedbytheballooningtaxrevenuefrom
thehousingbubble,whichhelpedaccommodateadecadeofincreased
governmentspendingwithoutdebtaccumulation.[140]Whenthebubbleburst,
Spainspentlargeamountsofmoneyonbankbailouts.InMay2012,Bankia
receiveda19billioneurobailout,[141]ontopoftheprevious4.5billioneurosto
propupBankia.[142]Questionableaccountingmethodsdisguisedbanklosses.
[143]DuringSeptember2012,regulatorsindicatedthatSpanishbanksrequired
59billion(US$77billion)inadditionalcapitaltooffsetlossesfromrealestate
investments.[144]
Thebankbailoutsandtheeconomicdownturnincreasedthecountry'sdeficit
anddebtlevelsandledtoasubstantialdowngradingofitscreditrating.To
builduptrustinthefinancialmarkets,thegovernmentbegantointroduce
austeritymeasuresandin2011itpassedalawincongresstoapprovean
amendmenttotheSpanishConstitutiontorequireabalancedbudgetatboththe
nationalandregionallevelby2020.[145]Theamendmentstatesthatpublicdebt
DebtofSpaincomparedtoeurozoneaveragesince
cannotexceed60%ofGDP,thoughexceptionswouldbemadeincaseofa
1999
naturalcatastrophe,economicrecessionorotheremergencies.[146][147]Asone
ofthelargesteurozoneeconomies(largerthanGreece,PortugalandIreland
combined[148])theconditionofSpain'seconomyisofparticularconcerntointernationalobservers.UnderpressurefromtheUnited
States,theIMF,otherEuropeancountriesandtheEuropeanCommission[149][150]theSpanishgovernmentseventuallysucceededin
trimmingthedeficitfrom11.2%ofGDPin2009toan7.1%in2013.[151]
Nevertheless,inJune2012,SpainbecameaprimeconcernfortheEurozone[152]wheninterestonSpain's10yearbondsreached
the7%levelanditfaceddifficultyinaccessingbondmarkets.ThisledtheEurogroupon9June2012tograntSpainafinancial
supportpackageofupto100billion.[153]ThefundswillnotgodirectlytoSpanishbanks,butbetransferredtoagovernment
ownedSpanishfundresponsibletoconducttheneededbankrecapitalisations(FROB),andthusitwillbecountedforasadditional
sovereigndebtinSpain'snationalaccount.[154][155][156]AneconomicforecastinJune2012highlightedtheneedforthearranged
bankrecapitalisationsupportpackage,astheoutlookpromisedanegativegrowthrateof1.7%,unemploymentrisingto25%,anda
continueddecliningtrendforhousingprices.[148]InSeptember2012theECBremovedsomeofthepressurefromSpainon
financialmarkets,whenitannouncedits"unlimitedbondbuyingplan",tobeinitiatedifSpainwouldsignanewsovereignbailout
packagewithEFSF/ESM.[157][158]
AccordingtothelatestdebtsustainabilityanalysispublishedbytheEuropeanCommissioninOctober2012,thefiscaloutlookfor
Spain,ifassumingthecountrywillsticktothefiscalconsolidationpathandtargetsoutlinedbythecountry'scurrentEDP
programme,willresultinadebttoGDPratioreachingitsmaximumat110%in2018followedbyadecliningtrendin
subsequentyears.Inregardsofthestructuraldeficitthesameoutlookhaspromised,thatitwillgraduallydeclinetocomplywith
themaximum0.5%levelrequiredbytheFiscalCompactin2022/2027.[159]
ThoughSpainissufferingwith27%unemploymentandaneconomysettoshrinkby1.4%in2013,MarianoRajoy'sconservative
governmenthaspledgedtospeedupreforms,accordingtotheFinancialTimesspecialreportonthefutureoftheEuropeanUnion.
[160]"Madridisreviewingitslabourmarketandpensionreformsandhaspromisedbytheendofthisyeartoliberalizeitsheavily
regulatedprofessions."[94]ButSpainisbenefitingfromimprovedlabourcostcompetitiveness.[94]"Theyhavenotlostexport
marketshare,"saysEricChaney,chiefeconomistatAxa.[94]"Ifcreditstartsflowingagain,Spaincouldsurpriseus."[94]
On23January2014,asforeigninvestorconfidenceinthecountryhasbeenrestored,SpainformallyexitedtheEU/IMFbailout
mechanism.[161]
Cyprus
Mainarticle:201213Cypriotfinancialcrisis
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TheeconomyofthesmallislandofCypruswith840,000peoplewashitbyseveralhugeblowsinandaround2012including,
amongstotherthings,the22billionexposureofCypriotbankstotheGreek
debthaircut,thedowngradingoftheCyprioteconomyintojunkstatusby
internationalratingagenciesandtheinabilityofthegovernmenttorefundits
stateexpenses.[162]
On25June2012,theCypriotGovernmentrequestedabailoutfromthe
EuropeanFinancialStabilityFacilityortheEuropeanStabilityMechanism,
citingdifficultiesinsupportingitsbankingsectorfromtheexposuretothe
Greekdebthaircut.[163]
On30NovembertheTroika(theEuropeanCommission,theInternational
MonetaryFund,andtheEuropeanCentralBank)andtheCypriotGovernment
hadagreedonthebailouttermswithonlytheamountofmoneyrequiredforthe
bailoutremainingtobeagreedupon.[164]Bailouttermsincludestrongausterity
measures,includingcutsincivilservicesalaries,socialbenefits,allowances
andpensionsandincreasesinVAT,tobacco,alcoholandfueltaxes,taxeson
lotterywinnings,property,andhigherpublichealthcarecharges.[165][166][167]
DebtofCypruscomparedtoeurozoneaveragesince
AttheinsistenceoftheEUnegotiators,atfirsttheproposalalsoincludedan
1999
unprecedentedoneofflevyof6.7%fordepositsupto100.000and9.9%for
higherdepositsonalldomesticbankaccounts.[168]Followingpublicoutcry,the
eurozonefinanceministerswereforcedtochangethelevy,excludingdepositsoflessthan100,000,andintroducingahigher
15.6%levyondepositsofabove100,000($129,600)inlinewiththeEUminimumdepositguarantee.[169]Thisreviseddeal
wasalsorejectedbytheCypriotparliamenton19March2013with36votesagainst,19abstentionsandonenotpresentforthe
vote.[170]
Thefinalagreementwassettledon25March2013,withtheproposaltoclosethemosttroubledLaikiBank,whichhelped
significantlytoreducetheneededloanamountfortheoverallbailoutpackage,sothat10bnwassufficientwithoutneedfor
imposingagenerallevyonbankdeposits.[171]Thefinalconditionsforactivationofthebailoutpackagewasoutlinedbythe
Troika'sMoUagreement,whichwasendorsedinfullbytheCypriotHouseofRepresentativeson30April2013.Itincludes:[171]
[172]
1. RecapitalisationoftheentirefinancialsectorwhileacceptingaclosureoftheLaikibank,
2. ImplementationoftheantimoneylaunderingframeworkinCypriotfinancialinstitutions,
3. FiscalconsolidationtohelpbringdowntheCypriotgovernmentalbudgetdeficit,
4. Structuralreformstorestorecompetitivenessandmacroeconomicimbalances,
5. Privatizationprogramme.
TheCypriotdebttoGDPratioisonthisbackgroundnowforecastedonlytopeakat126%in2015andsubsequentlydeclineto
105%in2020,andthusconsideredtoremainwithinsustainableterritory.[172]
AlthoughthebailoutsupportprogrammefeaturesufficientfinancialtransfersuntilMarch2016,Cyprusbeganslowlytoregainits
accesstotheprivatelendingmarketsalreadyinJune2014.Atthispointoftime,thegovernmentsold0.75bnofbondswithafive
yearmaturity,tothetuneofa4.85%yield.Acontinuedsellingofbondswithatenyearmaturity,whichwouldequalaregainof
completeaccesstotheprivatelendingmarket(andmarktheendoftheerawithneedforbailoutsupport),isexpectedtohappen
sometimein2015.[173]TheCypriotministeroffinancerecentlyconfirmed,thatthegovernmentplantoissuetwonewEuropean
MediumTermNote(EMTN)bondsin2015,likelyshortlyaheadoftheexpiryofanother1.1bnbondon1Julyandasecond
expiryofa0.9bnbondon1November.[174]Asannouncedinadvance,theCypriotgovernmentissued1bnofsevenyearbonds
witha4.0%yieldbytheendofApril2015.[175][176]
Policyreactions
Mainarticle:PolicyreactionstotheEurozonecrisis
EUemergencymeasures
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ThetablebelowprovidesanoverviewofthefinancialcompositionofallbailoutprogramsbeinginitiatedforEUmemberstates,
sincetheGlobalFinancialCrisiseruptedinSeptember2008.EUmemberstatesoutsidetheeurozone(markedwithyellowinthe
table)havenoaccesstothefundsprovidedbyEFSF/ESM,butcanbecoveredwithrescueloansfromEU'sBalanceofPayments
programme(BoP),IMFandbilateralloans(withanextrapossibleassistancefromtheWorldbank/EIB/EBRDifclassifiedasa
developmentcountry).SinceOctober2012,theESMasapermanentnewfinancialstabilityfundtocoveranyfuturepotential
bailoutpackageswithintheeurozone,haseffectivelyreplacedthenowdefunctGLF+EFSM+EFSFfunds.Wheneverpledged
fundsinascheduledbailoutprogramwerenottransferredinfull,thetablehasnotedthisbywriting"YoutofX".
IMF[177]
World
Bank
[178]
[178]
(billion)
(billion
)
EIB/
EBRD
Bilateral [177]
BoP[178]
GLF[179]
EFSM[177]
EFSF[177]
ESM[177]
(billion)
(billion)
(billion)
(billion)
Bailout
intotal
EU
member
Time
span
CyprusI1
Dec.2011
Dec.2012
2.5
CyprusII2
May2013
Mar.2016
1.0
9.0
Greece
I+II3
May2010
Jun.2015
32.1outof
48.1
52.9
130.9outof
144.6
215.9out
of245.63
Aug.2015
(new
(new
commitments)
?4
GreeceIII4 Dec.2018 commitments)
(billion
)
(billion)
(billion
)
(billion
)
2.51
10.02
Hungary5
Nov.2008
Oct.2010
9.1outof
12.5
1.0
5.5outof
6.5
15.6out
of20.05
Ireland6
Nov.2010
Dec.2013
22.5
4.8
22.5
18.4
68.26
Latvia7
Dec.2008
Dec.2011
1.1outof
1.7
0.4
0.1
0.0outof2.2
2.9outof
3.1
4.5out
of7.57
Portugal 8
May2011
Jun2014
26.5outof
27.4
24.3outof
25.6
26.0
76.8out
of79.08
RomaniaI9
May2009
Jun2011
12.6outof
13.6
1.0
1.0
5.0
19.6out
of20.69
Romania
II10
Mar2011
Jun2013
0.0outof
3.6
1.15
0.0outof
1.4
1.15out
of6.1510
Romania
III11
Oct2013
Sep2015
0.0outof
2.0
2.5
0.0outof
2.0
2.5out
of6.511
Spain12
July2012
Dec.2013
41.3outof
100
41.3out
of10012
Nov.2008
Mar.2016
104.9
6.05
1.1
7.3
13.4
52.9
46.8
175.3
50.3
458.05
Total
payment
1
CyprusreceivedinlateDecember2011a2.5bnbilateralemergencybailoutloanfromRussia,tocoveritsgovernmentalbudgetdeficitsandarefinancingofmaturing
governmentaldebtsuntil31December2012.[180][181][182]Initiallythebailoutloanwassupposedtobefullyrepaidin2016,butaspartofestablishmentofthelaterfollowing
secondCypriotbailoutprogramme,Russiaacceptedadelayedrepaymentineightbiannualtranchesthroughout20182021whilealsoloweringitsrequestedinterestratefrom
4.5%to2.5%.[183]
2
WhenitbecameevidentCyprusneededanadditionalbailoutloantocoverthegovernment'sfiscaloperationsthroughout20132015,ontopofadditionalfundingneedsfor
recapitalizationoftheCypriotfinancialsector,negotiationsforsuchanextrabailoutpackagestartedwiththeTroikainJune2012.[184][185][186]InDecember2012apreliminary
estimateindicated,thattheneededoverallbailoutpackageshouldhaveasizeof17.5bn,comprising10bnforbankrecapitalisationand6.0bnforrefinancingmaturingdebt
plus1.5bntocoverbudgetdeficitsin2013+2014+2015,whichintotalwouldhaveincreasedtheCypriotdebttoGDPratiotoaround140%.[187]Thefinalagreedpackage
howeveronlyentaileda10bnsupportpackage,financedpartlybyIMF(1bn)andESM(9bn),[188]becauseitwaspossibletoreachafundsavingagreementwiththeCypriot
authorities,featuringadirectclosureofthemosttroubledLaikiBankandaforcedbailinrecapitalisationplanforBankofCyprus.[189][190]
ThefinalconditionsforactivationofthebailoutpackagewasoutlinedbytheTroika'sMoUagreementinApril2013,andinclude:1)Recapitalisationoftheentirefinancialsector
whileacceptingaclosureoftheLaikibank,2)ImplementationoftheantimoneylaunderingframeworkinCypriotfinancialinstitutions,3)Fiscalconsolidationtohelpbring
downtheCypriotgovernmentalbudgetdeficit,4)Structuralreformstorestorecompetitivenessandmacroeconomicimbalances,5)Privatizationprogramme.TheCypriotdebt
toGDPratioisonthisbackgroundnowforecastedonlytopeakat126%in2015andsubsequentlydeclineto105%in2020,andthusconsideredtoremainwithinsustainable
territory.The10bnbailoutcomprise4.1bnspendondebtliabilities(refinancingandamortization),3.4bntocoverfiscaldeficits,and2.5bnforthebankrecapitalization.These
amountswillbepaidtoCyprusthroughregulartranchesfrom13May2013until31March2016.Accordingtotheprogrammethiswillbesufficient,asCyprusduringthe
programmeperiodinadditionwill:Receive1.0bnextraordinaryrevenuefromprivatizationofgovernmentassets,ensureanautomaticrolloverof1.0bnmaturingTreasury
Billsand1.0bnofmaturingbondsheldbydomesticcreditors,bringdownthefundingneedforbankrecapitalizationwith8.7bnofwhich0.4bnisreinjectionoffutureprofit
earnedbytheCyprusCentralBank(injectedinadvanceattheshorttermbysellingitsgoldreserve)and8.3bnoriginfromthebailinofcreditorsinLaikibankandBankof
Cyprus.[191]Theforcedautomaticrolloverofmaturingbondsheldbydomesticcreditorswereconductedin2013,andequaledaccordingtosomecreditratingagenciesa
"selectivedefault"or"restrictivedefault",mainlybecauseofthefactthatthefixedyieldsofthenewbondsdidnotreflectthemarketrateswhilematuritiesatthesametime
automaticallywereextended.[183]
3
Manysourceslistthefirstbailoutwas110bnfollowedbythesecondon130bn.Whenyoudeduct2.7bnduetoIreland+Portugal+Slovakiaoptingoutascreditorsforthe
firstbailout,andaddtheextra8.2bnIMFhaspromisedtopayGreecefortheyearsin201516(throughaprogrammeextensionimplementedinDecember2012),thetotal
amountofbailoutfundssumsupto245.6bn.[179][192]Thefirstbailoutresultedinapayoutof20.1bnfromIMFand52.9bnfromGLF,duringthecourseofMay2010until
December2011,[179]andthenitwastechnicallyreplacedbyasecondbailoutpackagefor20122016,whichhadasizeof172.6bn(28bnfromIMFand144.6bnfrom
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EFSF),asitincludedtheremainingcommittedamountsfromthefirstbailoutpackage.[193]AllcommittedIMFamountsweremadeavailabletotheGreekgovernmentfor
financingitscontinuedoperationofpublicbudgetdeficitsandtorefinancematuringpublicdebtheldbyprivatecreditorsandIMF.ThepaymentsfromEFSFwereearmarkedto
finance35.6bnofPSIrestructuredgovernmentdebt(aspartofadealwhereprivateinvestorsinreturnacceptedanominalhaircut,lowerinterestratesandlongermaturitiesfor
theirremainingprincipal),48.2bnforbankrecapitalization,[192]11.3bnforasecondPSIdebtbuyback,[194]whiletheremaining49.5bnweremadeavailabletocover
continuedoperationofpublicbudgetdeficits.[195]ThecombinedprogrammewasscheduledtoexpireinMarch2016,afterIMFhadextendedtheirprogrammeperiodwithextra
loantranchesfromJanuary2015toMarch2016(asameantohelpGreeceservicethetotalsumofinterestsaccruingduringthelifespanofalreadyissuedIMFloans),whilethe
EurogroupatthesametimeoptedtoconducttheirreimbursementanddeferralofinterestsoutsidetheirbailoutprogrammeframeworkwiththeEFSFprogrammestillbeing
plannedtoendinDecember2014.[196]
DuetotherefusalbytheGreekgovernmenttocomplywiththeagreedconditionaltermsforreceivingacontinuedflowofbailouttransfers,bothIMFandtheEurogroupoptedto
freezetheirprogrammessinceAugust2014.Toavoidatechnicalexpiry,theEurogrouppostponedtheexpirydateforitsfrozenprogrammeto30June2015,pavingtheway
withinthisnewdeadlineforthepossibilityoftransfertermsfirsttoberenegotiatedandthenfinallycompliedwithtoensurecompletionoftheprogramme.[196]AsGreece
withdrewunilaterallyfromtheprocessofsettlingrenegotiatedtermsandtimeextensionforthecompletionoftheprogramme,itexpireduncompletedon30June2015.Hereby,
Greecelostthepossibilitytoextract13.7bnofremainingfundsfromtheEFSF(1.0bnunusedPSIandBondInterestfacilities,10.9bnunusedbankrecapitalizationfundsand
a1.8bnfrozentrancheofmacroeconomicsupport),[197][198]andalsolosttheremainingSDR13.561bnofIMFfunds[199](beingequalto16.0bnaspertheSDRexchangerate
on5Jan2012[200]),althoughthoselostIMFfundsmightberecoupedifGreecesettlesanagreementforanewthirdbailoutprogrammewithESM.
4
AnewthirdbailoutprogrammewithdurationuntilDecember2018,jointlycoveredbyfundsfromIMFandESMwithatotalvalueestimatedtobearound85bn,[201]was
approvedtobenegotiatedon17July2015,[202]andisexpectedtobehammeredoutindetailswithalaunchinAugust2015.[203]IMF'stransferofthe"remainderofitsfrozen
I+IIprogramme"dependsonasuccessfulsettlementofanegotiatedthirdprogramme,andwilllikelystillbeconductedinparallelthroughouttheremaininglifespanoftheold
programme(Aug.2015toMar.2016),butcouldpotentiallyalsobetransferredtobecomeadirectpartofthenewthirdprogramme.IMFhasbeeninvitedbyESMalsoto
contributewithnewadditionalfundsinthethirdbailoutprogramme.Duetoamatterofurgency,EFSMimmediatelyconductsatemporary7.16bnemergencytransfertoGreece
on20July2015,whichwillbefullyovertakenbyESMwhentheplannedforthirdprogrammehasbeendraftedandsigned.[204][205]Duetobeingtemporarybridgefinancing
andnotpartofanofficialbailoutprogramme,thetabledonotdisplaythisspecialtypeofEFSMtransfer.
5
Hungaryrecoveredfasterthanexpected,andthusdidnotreceivetheremaining4.4bnbailoutsupportscheduledforOctober2009October2010.[178][206]IMFpaidintotal
7.6outof10.5billionSDR,[207]equalto9.1bnoutof12.5bnatcurrentexchangerates.[208]
6
InIrelandtheNationalTreasuryManagementAgencyalsopaid17.5bnfortheprogramonbehalfoftheIrishgovernment,ofwhich10bnwereinjectedbytheNational
PensionsReserveFundandtheremaining7.5bnpaidby"domesticcashresources",[209]whichhelpedincreasetheprogramtotalto85bn.[177]Asthisextraamountby
technicaltermsisaninternalbailin,ithasnotbeenaddedtothebailouttotal.Asof31March2014allcommittedfundshadbeentransferred,withEFSFevenpaing0.7bn
more,sothatthetotalamountoffundshadbeenmarginallyincreasedfrom67.5bnto68.2bn.[210]
7
Latviarecoveredfasterthanexpected,andthusdidnotreceivetheremaining3.0bnbailoutsupportoriginallyscheduledfor2011.[211][212]
PortugalcompleteditssupportprogrammeasscheduledinJune2014,onemonthlaterthaninitiallyplannedduetoawaitingaverdictbyitsconstitutionalcourt,butwithout
askingforestablishmentofanysubsequentprecautionarycreditlinefacility.[213]Bytheendoftheprogrammeallcommittedamountshadbeentransferred,exceptforthelast
trancheof2.6bn(1.7bnfromEFSMand0.9bnfromIMF),[214]whichthePortuguesegovernmentdeclinedtoreceive.[215][216]ThereasonwhytheIMFtransfersstillmounted
toslightlymorethantheinitiallycommitted26bn,wasduetoitspaymentwithSDR'sinsteadofeuroandsomefavorabledevelopmentsintheEURSDRexchangerate
comparedtothebeginningoftheprogramme.[217]InNovember2014,Portugalreceiveditslastdelayed0.4bntranchefromEFSM(postprogramme),[218]herebybringingits
totaldrawnbailoutamountupat76.8bnoutof79.0bn.
9
Romaniarecoveredfasterthanexpected,andthusdidnotreceivetheremaining1.0bnbailoutsupportoriginallyscheduledfor2011.[219][220]
10
Romaniahadaprecautionarycreditlinewith5.0bnavailabletodrawmoneyfromifneeded,duringtheperiodMarch2011June2013butentirelyavoidedtodrawonit.[221]
Duringtheperiod,theWorldBankhoweversupportedwithatransferof0.4bnasaDPL3developmentloanprogrammeand0.75bnasresultsbasedfinancing
forsocialassistanceandhealth.[224]
[222][178][223]
11
Romaniahadasecond4bnprecautionarycreditlineestablishedjointlybyIMFandEU,ofwhichIMFaccountsforSDR1.75134bn=2bn,whichisavailabletodraw
moneyfromifneededduringtheperiodfromOctober2013to30September2015.InadditiontheWorldBankalsomade1bnavailableunderaDevelopmentPolicyLoanwith
adeferreddrawdownoptionvalidfromJanuary2013throughDecember2015.[225]TheWorldBankwillthroughouttheperiodalsocontinueprovidingearliercommitted
developmentprogrammesupportof0.891bn,[226][227]butthisextratransferisnotaccountedforas"bailoutsupport"inthethirdprogrammeduetobeing"earliercommitted
amounts".InApril2014,theWorldBankincreasedtheirsupportbyaddingthetransferofafirst0.75bnFiscalEffectivenessandGrowthDevelopmentPolicyLoan,[228]with
thefinalsecondFEGDPLtranchon0.75bn(worthabout$1bn)tobecontractedinthefirstpartof2015.[229]Nomoneyhadbeendrawnfromtheprecautionarycreditline,as
ofMay2014.
12
Spain's100bnsupportpackagehasbeenearmarkedonlyforrecapitalisationofthefinancialsector.[230]InitiallyanEFSFemergencyaccountwith30bnwasavailable,but
nothingwasdrawn,anditwascancelledagaininNovember2012afterbeingsupersededbytheregularESMrecapitalisationprogramme.[231]ThefirstESMrecapitalisation
tranchof39.47bnwasapproved28November,[232][233]andtransferredtothebankrecapitalisationfundoftheSpanishgovernment(FROB)on11December2012.[231]A
secondtranchfor"category2"bankson1.86nwasapprovedbytheCommissionon20December,[234]andfinallytransferredbyESMon5February2013.[235]"Category3"
bankswerealsosubjectforapossiblethirdtranchinJune2013,incasetheyfailedbeforethentoacquiresufficientadditionalcapitalfundingfromprivatemarkets.[159]During
January2013,all"category3"bankshowevermanagedtofullyrecapitalisethroughprivatemarketsandthuswillnotbeinneedforanyStateaid.Theremaining58.7bnofthe
initialsupportpackageisthusnotexpectedtobeactivated,butwillstayavailableasafundwithprecautionarycapitalreservestopossiblydrawuponifunexpectedthingshappen
until31December2013.[230][236]Intotal41.3bnoutoftheavailable100bnwastransferred.[237]Uponthescheduledexitoftheprogramme,nofollowupassistancewas
requested.[238]
EuropeanFinancialStabilityFacility(EFSF)
Mainarticle:EuropeanFinancialStabilityFacility
On9May2010,the27EUmemberstatesagreedtocreatetheEuropeanFinancialStabilityFacility,alegalinstrument[239]aiming
atpreservingfinancialstabilityinEuropebyprovidingfinancialassistancetoeurozonestatesindifficulty.TheEFSFcanissue
bondsorotherdebtinstrumentsonthemarketwiththesupportoftheGermanDebtManagementOfficetoraisethefundsneeded
toprovideloanstoeurozonecountriesinfinancialtroubles,recapitalisebanksorbuysovereigndebt.[240]
Emissionsofbondsarebackedbyguaranteesgivenbytheeuroareamemberstatesinproportiontotheirshareinthepaidup
capitaloftheEuropeanCentralBank.The440billionlendingcapacityofthefacilityisjointlyandseverallyguaranteedbythe
eurozonecountries'governmentsandmaybecombinedwithloansupto60billionfromtheEuropeanFinancialStabilisation
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Mechanism(reliantonfundsraisedbytheEuropeanCommissionusingtheEUbudgetascollateral)andupto250billionfrom
theInternationalMonetaryFund(IMF)toobtainafinancialsafetynetupto750billion.[241]
TheEFSFissued5billionoffiveyearbondsinitsinauguralbenchmarkissue25January2011,attractinganorderbookof44.5
billion.ThisamountisarecordforanysovereignbondinEurope,and24.5billionmorethantheEuropeanFinancialStabilisation
Mechanism(EFSM),aseparateEuropeanUnionfundingvehicle,witha5billionissueinthefirstweekofJanuary2011.[242]
On29November2011,thememberstatefinanceministersagreedtoexpandtheEFSFbycreatingcertificatesthatcouldguarantee
upto30%ofnewissuesfromtroubledeuroareagovernments,andtocreateinvestmentvehiclesthatwouldboosttheEFSF's
firepowertointerveneinprimaryandsecondarybondmarkets.[243]
Receptionbyfinancialmarkets
StockssurgedworldwideaftertheEUannouncedtheEFSF'screation.ThefacilityeasedfearsthattheGreekdebtcrisiswould
spread,[244]andthisledtosomestocksrisingtothehighestlevelinayearormore.[245]Theeuromadeitsbiggestgainin18
months,[246]beforefallingtoanewfouryearlowaweeklater.[247]Shortlyaftertheeuroroseagainashedgefundsandothershort
termtradersunwoundshortpositionsandcarrytradesinthecurrency.[248]Commoditypricesalsorosefollowingthe
announcement.[249]
ThedollarLiborheldataninemonthhigh.[250]Defaultswapsalsofell.[251]TheVIXcloseddownarecordalmost30%,aftera
recordweeklyrisetheprecedingweekthatpromptedthebailout.[252]TheagreementisinterpretedasallowingtheECBtostart
buyinggovernmentdebtfromthesecondarymarket,whichisexpectedtoreducebondyields.[253]Asaresult,Greekbondyields
fellsharplyfromover10%tojustover5%.[254]AsianbondsyieldsalsofellwiththeEUbailout.[255])
UsageofEFSFfunds
TheEFSFonlyraisesfundsafteranaidrequestismadebyacountry.[256]AsoftheendofJuly2012,ithasbeenactivatedvarious
times.InNovember2010,itfinanced17.7billionofthetotal67.5billionrescuepackageforIreland(therestwasloanedfrom
individualEuropeancountries,theEuropeanCommissionandtheIMF).InMay2011itcontributedonethirdofthe78billion
packageforPortugal.AspartofthesecondbailoutforGreece,theloanwasshiftedtotheEFSF,amountingto164billion(130bn
newpackageplus34.4bnremainingfromGreekLoanFacility)throughout2014.[257]On20July2012,Europeanfinanceministers
sanctionedthefirsttrancheofapartialbailoutworthupto100billionforSpanishbanks.[258]ThisleavestheEFSFwith
148billion[258]oranequivalentof444billioninleveragedfirepower.[259]
TheEFSFissettoexpirein2013,runningsomemonthsparalleltothepermanent500billionrescuefundingprogramcalledthe
EuropeanStabilityMechanism(ESM),whichwillstartoperatingassoonasmemberstatesrepresenting90%ofthecapital
commitmentshaveratifiedit.(seesection:ESM)
On13January2012,Standard&Poor'sdowngradedFranceandAustriafromAAArating,loweredSpain,Italy(andfiveother[260])
euromembersfurther.Shortlyafter,S&PalsodowngradedtheEFSFfromAAAtoAA+.[260][261]
EuropeanFinancialStabilisationMechanism(EFSM)
Mainarticle:EuropeanFinancialStabilisationMechanism
On5January2011,theEuropeanUnioncreatedtheEuropeanFinancialStabilisationMechanism(EFSM),anemergencyfunding
programmereliantuponfundsraisedonthefinancialmarketsandguaranteedbytheEuropeanCommissionusingthebudgetofthe
EuropeanUnionascollateral.[262]ItrunsunderthesupervisionoftheCommission[263]andaimsatpreservingfinancialstabilityin
EuropebyprovidingfinancialassistancetoEUmemberstatesineconomicdifficulty.[264]TheCommissionfund,backedbyall27
EuropeanUnionmembers,hastheauthoritytoraiseupto60billion[265]andisratedAAAbyFitch,Moody'sandStandard&
Poor's.[266]
UndertheEFSM,theEUsuccessfullyplacedinthecapitalmarketsan5billionissueofbondsaspartofthefinancialsupport
packageagreedforIreland,ataborrowingcostfortheEFSMof2.59%.[267]
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LiketheEFSF,theEFSMwasreplacedbythepermanentrescuefundingprogrammeESM,whichwaslaunchedinSeptember
2012.[268]
Brusselsagreementandaftermath
On26October2011,leadersofthe17eurozonecountriesmetinBrusselsandagreedona50%writeoffofGreeksovereigndebt
heldbybanks,afourfoldincrease(toabout1trillion)inbailoutfundsheldundertheEuropeanFinancialStabilityFacility,an
increasedmandatorylevelof9%forbankcapitalisationwithintheEUandasetofcommitmentsfromItalytotakemeasuresto
reduceitsnationaldebt.Alsopledgedwas35billionin"creditenhancement"tomitigatelosseslikelytobesufferedbyEuropean
banks.JosManuelBarrosocharacterisedthepackageasasetof"exceptionalmeasuresforexceptionaltimes".[269][270]
Thepackage'sacceptancewasputintodoubton31OctoberwhenGreekPrimeMinisterGeorgePapandreouannouncedthata
referendumwouldbeheldsothattheGreekpeoplewouldhavethefinalsayonthebailout,upsettingfinancialmarkets.[271]On3
November2011thepromisedGreekreferendumonthebailoutpackagewaswithdrawnbyPrimeMinisterPapandreou.
Inlate2011,LandonThomasintheNewYorkTimesnotedthatsome,atleast,Europeanbanksweremaintaininghighdividend
payoutratesandnoneweregettingcapitalinjectionsfromtheirgovernmentsevenwhilebeingrequiredtoimprovecapitalratios.
ThomasquotedRichardKoo,aneconomistbasedinJapan,anexpertonthatcountry'sbankingcrisis,andspecialistinbalance
sheetrecessions,assaying:
IdonotthinkEuropeansunderstandtheimplicationsofasystemicbankingcrisis....Whenallbanksareforcedtoraise
capitalatthesametime,theresultisgoingtobeevenweakerbanksandanevenlongerrecessionifnot
depression....Governmentinterventionshouldbethefirstresort,notthelastresort.
Beyondequityissuanceanddebttoequityconversion,then,oneanalyst"saidthatasbanksfinditmoredifficulttoraisefunds,
theywillmovefastertocutdownonloansandunloadlaggingassets"astheyworktoimprovecapitalratios.Thislattercontraction
ofbalancesheets"couldleadtoadepression",theanalystsaid.[272]Reducedlendingwasacircumstancealreadyatthetimebeing
seenina"deepen[ing]crisis"incommoditiestradefinanceinwesternEurope.[273]
Finalagreementonthesecondbailoutpackage
Inamarathonmeetingon20/21February2012theEurogroupagreedwiththeIMFandtheInstituteofInternationalFinanceonthe
finalconditionsofthesecondbailoutpackageworth130billion.Thelendersagreedtoincreasethenominalhaircutfrom50%to
53.5%.EUMemberStatesagreedtoanadditionalretroactiveloweringoftheinterestratesoftheGreekLoanFacilitytoalevelof
just150basispointsaboveEuribor.Furthermore,governmentsofMemberStateswherecentralbankscurrentlyholdGreek
governmentbondsintheirinvestmentportfoliocommittopassontoGreeceanamountequaltoanyfutureincomeuntil2020.
AltogetherthisshouldbringdownGreece'sdebttobetween117%[70]and120.5%ofGDPby2020.[72]
EuropeanCentralBank
TheEuropeanCentralBank(ECB)hastakenaseriesofmeasuresaimedatreducingvolatilityinthefinancialmarketsandat
improvingliquidity.[274]
InMay2010ittookthefollowingactions:
Itbeganopenmarketoperationsbuyinggovernmentandprivatedebtsecurities,[275]reaching219.5billioninFebruary
2012,[276]thoughitsimultaneouslyabsorbedthesameamountofliquiditytopreventariseininflation.[277]Accordingto
RabobankeconomistElwindeGroot,thereisa"naturallimit"of300billiontheECBcansterilise.[278]
Itreactivatedthedollarswaplines[279]withFederalReservesupport.[280]
Itchangeditspolicyregardingthenecessarycreditratingforloandeposits,acceptingascollateralalloutstandingandnew
debtinstrumentsissuedorguaranteedbytheGreekgovernment,regardlessofthenation'screditrating.
ThemovetooksomepressureoffGreekgovernmentbonds,whichhadjustbeendowngradedtojunkstatus,makingitdifficultfor
thegovernmenttoraisemoneyoncapitalmarkets.[281]
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On30November2011,theECB,theUSFederalReserve,thecentralbanksof
Canada,Japan,BritainandtheSwissNationalBankprovidedglobalfinancial
marketswithadditionalliquiditytowardoffthedebtcrisisandtosupportthe
realeconomy.Thecentralbanksagreedtolowerthecostofdollarcurrency
swapsby50basispointstocomeintoeffecton5December2011.Theyalso
agreedtoprovideeachotherwithabundantliquiditytomakesurethat
commercialbanksstayliquidinothercurrencies.[282]
Withtheaimofboostingtherecoveryintheeurozoneeconomybylowering
interestratesforbusinesses,theECBcutitsbankratesinmultiplestepsin
20122013,reachinganhistoriclowof0.25%inNovember2013.Thelowered
borrowingrateshavealsocausedtheeurotofallinrelationtoothercurrencies,
whichishopedwillboostexportsfromtheeurozoneandfurtheraidthe
recovery.[27]
Withinflationfallingto0.5%inMay2014,theECBagaintookmeasuresto
ECBSecuritiesMarketsProgram(SMP)covering
stimulatetheeurozoneeconomy,whichgrewatjust0.2%duringthefirst
bondpurchasessinceMay2010
quarterof2014.[283](Deflationorverylowinflationencouragesholdingcash,
causingadecreaseinpurchases.)On5June,thecentralbankcuttheprime
interestrateto0.15%,andsetthedepositrateat0.10%.[284]Thelattermoveinparticularwasseenas"aboldandunusualmove",
asanegativeinterestratehadneverbeentriedonawidescalebefore.[283]Additionally,theECBannounceditwouldofferlong
termfouryearloansatthecheaprate(normallytherateisprimarilyforovernightlending),butonlyiftheborrowingbanksmet
strictconditionsdesignedtoensurethefundsendedupinthehandsofbusinessesinsteadof,forexample,beingusedtobuylow
riskgovernmentbonds.[283]Collectively,themovesareaimedatavoidingdeflation,devaluingtheeurotomakeexportationmore
viable,andatincreasing"realworld"lending.[283][284]
StockmarketsreactedstronglytotheECBratecuts.TheGermanDAXindex,forexample,setarecordhighthedaythenewrates
wereannounced.[284]Meanwhile,theeurobrieflyfelltoafourmonthlowagainstthedollar.[283]However,duetothe
unprecedentednatureofthenegativeinterestrate,thelongtermeffectsofthestimulusmeasuresarehardtopredict.[284]Bank
presidentMarioDraghisignalledthecentralbankwaswillingtodowhateverittakestoturnaroundtheeurozoneeconomies,
remarking"Arewefinished?Theanswerisno."[283]Helaidthegroundworkforlargescalebondrepurchasing,acontroversialidea
knownasquantitativeeasing.[284]
Resignations
InSeptember2011,JrgenStarkbecamethesecondGermanafterAxelA.WebertoresignfromtheECBGoverningCouncilin
2011.Weber,theformerDeutscheBundesbankpresident,wasoncethoughttobealikelysuccessortoJeanClaudeTrichetasbank
president.HeandStarkwereboththoughttohaveresigneddueto"unhappinesswiththeECB'sbondpurchases,whichcriticssay
erodethebank'sindependence".Starkwas"probablythemosthawkish"memberofthecouncilwhenheresigned.Weberwas
replacedbyhisBundesbanksuccessorJensWeidmann,whileBelgium'sPeterPraettookStark'soriginalposition,headingthe
ECB'seconomicsdepartment.[285]
LongTermRefinancingOperation(LTRO)
Seealso:European_Central_BankLongterm_refinancing_operation
On22December2011,theECB[286]startedthebiggestinfusionofcreditintotheEuropeanbankingsystemintheeuro's13year
history.UnderitsLongTermRefinancingOperations(LTROs)itloaned489billionto523banksforanexceptionallylongperiod
ofthreeyearsatarateofjustonepercent.[287]Previousrefinancingoperationsmaturedafterthree,six,andtwelvemonths.[288]
Thebyfarbiggestamountof325billionwastappedbybanksinGreece,Ireland,ItalyandSpain.[289]
ThiswaytheECBtriedtomakesurethatbankshaveenoughcashtopayoff200billiontheirownmaturingdebtsinthefirstthree
monthsof2012,andatthesametimekeepoperatingandloaningtobusinessessothatacreditcrunchdoesnotchokeoffeconomic
growth.Italsohopedthatbankswouldusesomeofthemoneytobuygovernmentbonds,effectivelyeasingthedebtcrisis.[290]On
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29February2012,theECBheldasecondauction,LTRO2,providing800eurozonebankswithfurther529.5billionincheap
loans.[291]Netnewborrowingunderthe529.5billionFebruaryauctionwasaround313billionoutofatotalof256billion
existingECBlending(MRO+3m&6mLTROs),215billionwasrolledintoLTRO2.[292]
ECBlendinghaslargelyreplacedinterbanklending.Spainhas365billionandItalyhas281billionofborrowingsfromtheECB
(June2012data).Germanyhas275billionondeposit.[293]
ReorganizationoftheEuropeanbankingsystem
On16June2012theEuropeanCentralBanktogetherwithotherEuropeanleadershammeredoutplansfortheECBtobecomea
bankregulatorandtoformadepositinsuranceprogramtoaugmentnationalprograms.Othereconomicreformspromoting
Europeangrowthandemploymentwerealsoproposed.[294]
OutrightMonetaryTransactions(OMTs)
On6September2012,theECBannouncedtoofferadditionalfinancialsupportintheformofsomeyieldloweringbondpurchases
(OMT),foralleurozonecountriesinvolvedinasovereignstatebailoutprogramfromEFSF/ESM.[13]Aeurozonecountrycan
benefitfromtheprogramifandforaslongasitisfoundtosufferfromstressedbondyieldsatexcessivelevelsbutonlyatthe
pointoftimewherethecountrypossesses/regainsacompletemarketaccessandonlyifthecountrystillcomplieswithalltermsin
thesignedMemorandumofUnderstanding(MoU)agreement.[13][157]Countriesreceivingaprecautionaryprogrammeratherthana
sovereignbailoutwill,bydefinition,havecompletemarketaccessandthusqualifyforOMTsupportifalsosufferingfromstressed
interestratesonitsgovernmentbonds.Inregardsofcountriesreceivingasovereignbailout(Ireland,PortugalandGreece),they
willontheotherhandnotqualifyforOMTsupportbeforetheyhaveregainedcompletemarketaccess,whichwillnormallyonly
happenafterhavingreceivedthelastscheduledbailoutdisbursement.[13][102]DespitenoneOMTprogrammeswerereadytostartin
September/October,thefinancialmarketsstraightawaytooknoticeoftheadditionallyplannedOMTpackagesfromECB,and
startedslowlytopriceinadeclineofbothshorttermandlongterminterestratesinallEuropeancountriespreviouslysuffering
fromstressedandelevatedinterestlevels(asOMTswereregardedasanextrapotentialbackstoptocounterthefrozenliquidity
andhighlystressedratesandjusttheknowledgeabouttheirpotentialexistenceintheverynearfuturehelpedtocalmthemarkets).
EuropeanStabilityMechanism(ESM)
Mainarticle:EuropeanStabilityMechanism
TheEuropeanStabilityMechanism(ESM)isapermanentrescuefundingprogrammetosucceedthetemporaryEuropeanFinancial
StabilityFacilityandEuropeanFinancialStabilisationMechanisminJuly2012[268]butithadtobepostponeduntilafterthe
FederalConstitutionalCourtofGermanyhadconfirmedthelegalityofthemeasureson12September2012.[295][296]The
permanentbailoutfundenteredintoforcefor16signatorieson27September2012.ItbecameeffectiveinEstoniaon4October
2012afterthecompletionoftheirratificationprocess.[297]
On16December2010theEuropeanCouncilagreedatwolineamendmenttotheEULisbonTreatytoallowforapermanentbail
outmechanismtobeestablished[298]includingstrongersanctions.InMarch2011,theEuropeanParliamentapprovedthetreaty
amendmentafterreceivingassurancesthattheEuropeanCommission,ratherthanEUstates,wouldplay'acentralrole'inrunning
theESM.[299][300]TheESMisanintergovernmentalorganisationunderpublicinternationallaw.ItislocatedinLuxembourg.[301]
[302]
Suchamechanismservesasa"financialfirewall".Insteadofadefaultbyonecountryripplingthroughtheentireinterconnected
financialsystem,thefirewallmechanismcanensurethatdownstreamnationsandbankingsystemsareprotectedbyguaranteeing
someoralloftheirobligations.Thenthesingledefaultcanbemanagedwhilelimitingfinancialcontagion.
EuropeanFiscalCompact
Mainarticle:EuropeanFiscalCompact
InMarch2011anewreformoftheStabilityandGrowthPactwasinitiated,aimingatstraighteningtherulesbyadoptingan
automaticprocedureforimposingofpenaltiesincaseofbreachesofeitherthe3%deficitorthe60%debtrules.[303]Bytheendof
theyear,Germany,FranceandsomeothersmallerEUcountrieswentastepfurtherandvowedtocreateafiscalunionacrossthe
eurozonewithstrictandenforceablefiscalrulesandautomaticpenaltiesembeddedintheEUtreaties.[304][305]On9December2011
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attheEuropeanCouncilmeeting,all17membersoftheeurozoneandsixcountriesthataspiretojoinagreedonanew
intergovernmentaltreatytoputstrictcapsongovernmentspendingandborrowing,withpenaltiesforthosecountrieswhoviolate
thelimits.[306]AllothernoneurozonecountriesapartfromtheUKarealsopreparedtojoinin,subjecttoparliamentaryvote.[268]
Thetreatywillenterintoforceon1January2013,ifbythattime12membersoftheeuroareahaveratifiedit.[307]
OriginallyEUleadersplannedtochangeexistingEUtreatiesbutthiswas
blockedbyBritishprimeministerDavidCameron,whodemandedthattheCity
ofLondonbeexcludedfromfuturefinancialregulations,includingthe
proposedEUfinancialtransactiontax.[308][309]Bytheendoftheday,26
countrieshadagreedtotheplan,leavingtheUnitedKingdomastheonly
countrynotwillingtojoin.[310]Cameronsubsequentlyconcededthathisaction
hadfailedtosecureanysafeguardsfortheUK.[311]Britain'srefusaltobepart
ofthefiscalcompacttosafeguardtheeurozoneconstitutedadefactorefusal
(PMDavidCameronvetoedtheproject)toengageinanyradicalrevisionofthe
LisbonTreaty.JohnRentoulofTheIndependentconcludedthat"AnyPrime
MinisterwouldhavedoneasCamerondid".[312]
Economicreformsandrecoveryproposals
PublicdebttoGDPratioforselectedeurozone
countriesandtheUK2008to2011.SourceData:
Eurostat.
Mainarticle:Economicreformsandrecoveryproposalsregardingthe
Eurozonecrisis
Directloanstobanksandbankingregulation
On28June2012eurozoneleadersagreedtopermitloansbytheEuropeanStabilityMechanismtobemadedirectlytostressed
banksratherthanthrougheurozonestates,toavoidaddingtosovereigndebt.Thereformwaslinkedtoplansforbankingregulation
bytheEuropeanCentralBank.Thereformwasimmediatelyreflectedbyareductioninyieldoflongtermbondsissuedbymember
statessuchasItalyandSpainandariseinvalueoftheEuro.[313][314][315]
Country
Banksrecapitalised
Portugal
BancoBPI,CaixaGeraldeDepositos,MillenniumBCP
Ireland
AlliedIrishBank,AngloIrishBank,BankofIreland
Greece
AlphaBank,Eurobank,NationalBankofGreece,PiraeusBank
Spain
BancodeValencia,Bankia,CatalunyaCaixa,Novagalicia
Lessausterity,moreinvestment
TherehasbeensubstantialcriticismovertheausteritymeasuresimplementedbymostEuropeannationstocounterthisdebtcrisis.
USeconomistandNobellaureatePaulKrugmanarguesthatanabruptreturnto"'nonKeynesian'financialpolicies"isnotaviable
solution[316]Pointingathistoricalevidence,hepredictsthatdeflationarypoliciesnowbeingimposedoncountriessuchasGreece
andSpainwillprolonganddeepentheirrecessions.[317]Togetherwithover9,000signatoriesof"AManifestoforEconomicSense"
[318]KrugmanalsodismissedthebeliefofausterityfocusingpolicymakerssuchasEUeconomiccommissionerOlliRehnand
mostEuropeanfinanceministers[319]that"budgetconsolidation"revivesconfidenceinfinancialmarketsoverthelongerhaul.[320]
[321]Ina2003studythatanalysed133IMFausterityprogrammes,theIMF'sindependentevaluationofficefoundthatpolicy
makersconsistentlyunderestimatedthedisastrouseffectsofrigidspendingcutsoneconomicgrowth.[322][323]Inearly2012anIMF
official,whonegotiatedGreekausteritymeasures,admittedthatspendingcutswereharmingGreece.[42][42]InOctober2012,the
IMFsaidthatitsforecastsforcountrieswhichimplementedausterityprogrammeshavebeenconsistentlyoveroptimistic,
suggestingthattaxhikesandspendingcutshavebeendoingmoredamagethanexpected,andcountrieswhichimplementedfiscal
stimulus,suchasGermanyandAustria,didbetterthanexpected.[324]AccordingtohistorianFlorianSchuifromUniversityofSt.
Gallennoausterityprogramhaseverworked.SchuiparticularlynotesWinstonChurchill'sattemptin1925andHeinrichBrning's
attemptin1930duringtheWeimarRepublic.Bothledtodisastrousconsequences.[325]
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AccordingtoKeynesianeconomists"growthfriendlyausterity"reliesonthefalseargumentthatpubliccutswouldbecompensated
forbymorespendingfromconsumersandbusinesses,atheoreticalclaimthat
hasnotmaterialised.[326]ThecaseofGreeceshowsthatexcessivelevelsof
privateindebtednessandacollapseofpublicconfidence(over90%ofGreeks
fearunemployment,povertyandtheclosureofbusinesses)[327]ledtheprivate
sectortodecreasespendinginanattempttosaveupforrainydaysahead.This
ledtoevenlowerdemandforbothproductsandlabour,whichfurtherdeepened
therecessionandmadeitevermoredifficulttogeneratetaxrevenuesandfight
publicindebtedness.[328]AccordingtoFinancialTimeschiefeconomics
commentatorMartinWolf,"structuraltighteningdoesdeliveractualtightening.
Despiteyearsofdraconianausteritymeasures
Butitsimpactismuchlessthanonetoone.Aonepercentagepointreductionin
Greecehasfailedtoreachabalancedbudgetas
thestructuraldeficitdeliversa0.67percentagepointimprovementintheactual
publicrevenuesremainlow.
fiscaldeficit."ThismeansthatIrelande.g.wouldrequirestructuralfiscal
tighteningofmorethan12%toeliminateits2012actualfiscaldeficit.Atask
thatisdifficulttoachievewithoutanexogenouseurozonewideeconomicboom.[329]AccordingtotheEuroplusMonitorReport
2012,nocountryshouldtightenitsfiscalreinsbymorethan2%ofGDPinoneyear,toavoidrecession.[330]
Insteadofpublicausterity,a"growthcompact"centringontaxincreases[328]anddeficitspendingisproposed.Sincestruggling
Europeancountrieslackthefundstoengageindeficitspending,GermaneconomistandmemberoftheGermanCouncilof
EconomicExpertsPeterBofingerandSonyKapooroftheglobalthinktankReDefinesuggestproviding40billioninadditional
fundstotheEuropeanInvestmentBank(EIB),whichcouldthenlendtentimesthatamounttotheemploymentintensivesmaller
businesssector.[328]TheEUiscurrentlyplanningapossible10billionincreaseintheEIB'scapitalbase.Furthermore,thetwo
suggestfinancingadditionalpublicinvestmentsbygrowthfriendlytaxeson"property,land,wealth,carbonemissionsandthe
undertaxedfinancialsector".TheyalsocalledonEUcountriestorenegotiatetheEUsavingstaxdirectiveandtosignan
agreementtohelpeachothercrackdownontaxevasionandavoidance.Currentlyauthoritiescapturelessthan1%inannualtax
revenueonuntaxedwealthtransferredbetweenEUmembers.[328]AccordingtotheTaxJusticeNetwork,worldwide,aglobal
superrichelitehadbetween$21and$32trillion(upto26,000bnEuros)hiddeninsecrettaxhavensbytheendof2010,resulting
inataxdeficitofupto$280bn.[331][332]
Apartfromargumentsoverwhetherornotausterity,ratherthanincreasedorfrozenspending,isamacroeconomicsolution,[333]
unionleadershavealsoarguedthattheworkingpopulationisbeingunjustlyheldresponsiblefortheeconomicmismanagement
errorsofeconomists,investors,andbankers.Over23millionEUworkershavebecomeunemployedasaconsequenceoftheglobal
economiccrisisof20072010,andthishasledmanytocallforadditionalregulationofthebankingsectoracrossnotonlyEurope,
buttheentireworld.[334]
IntheturmoiloftheGlobalFinancialCrisis,thefocusacrossallEUmemberstateshasbeengraduallytoimplementausterity
measures,withthepurposeofloweringthebudgetdeficitstolevelsbelow3%ofGDP,sothatthedebtlevelwouldeitherstay
beloworstartdeclinetowardsthe60%limitdefinedbytheStabilityandGrowthPact.Tofurtherrestoretheconfidencein
Europe,23outof27EUcountriesalsoagreedtoadopttheEuroPlusPact,consistingofpoliticalreformstoimprovefiscalstrength
andcompetitiveness25outof27EUcountriesalsodecidedtoimplementtheFiscalCompactwhichincludethecommitmentof
eachparticipatingcountrytointroduceabalancedbudgetamendmentaspartoftheirnationallaw/constitution.TheFiscalCompact
isadirectsuccessorofthepreviousStabilityandGrowthPact,butitismorestrict,notonlybecausecriteriacompliancewillbe
securedthroughitsintegrationintonationallaw/constitution,butalsobecauseitstartingfrom2014willrequireallratifying
countriesnotinvolvedinongoingbailoutprogrammes,tocomplywiththenewstrictcriteriaofonlyhavingastructuraldeficitof
eithermaximum0.5%or1%(dependingonthedebtlevel).[304][305]Eachoftheeurozonecountriesbeinginvolvedinabailout
programme(Greece,Portugal,andIreland)wasaskedbothtofollowaprogrammewithfiscalconsolidation/austerity,andto
restorecompetitivenessthroughimplementationofstructuralreformsandinternaldevaluation,i.e.loweringtheirrelative
productioncosts.[335]Themeasuresimplementedtorestorecompetitivenessintheweakestcountriesareneeded,notonlytobuild
thefoundationforGDPgrowth,butalsoinordertodecreasethecurrentaccountimbalancesamongeurozonememberstates.[336]
[337]
Germanyhascomeunderpressureduetonothavingagovernmentbudgetdeficitandfundingitbyborrowingmore.Asoflate
2014,thegovernment(federalandstate)hasspentlessthanitreceivesinrevenue,forthethirdyearinarow,despiteloweconomic
growth.[338]The2015budgetincludesasurplusforthefirsttimesince1969.Currentprojectionsarethatby2019thedebtwillbe
lessthanrequiredbytheStabilityandGrowthPact.Germanofficialshaveresistedpressuretoincreasethedebt,sayingthattoo
muchdeficitspendingiswhatcausedthecurrentEuropeanproblems.
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IthasbeenalongknownbeliefthatausteritymeasureswillalwaysreducetheGDPgrowthintheshortterm.Onereasonadduced
forEuropeneverthelesschosingthepathofausteritymeasuresisthattheyhave,inthemediumandlongterm,beenfoundto
benefitandprosperGDPgrowth,ascountrieswithhealthydebtlevelsinreturnwillberewardedbythefinancialmarketswith
higherconfidenceandlowerinterestrates.SomeeconomistsbelievinginKeynesianpoliciescriticisedthetimingandamountof
austeritymeasuresbeingcalledforinthebailoutprogrammes,astheyarguedsuchextensivemeasuresshouldnotbeimplemented
duringthecrisisyearswithanongoingrecession,butifpossibledelayeduntiltheyearsaftersomepositiverealGDPgrowthhad
returned.InOctober2012,areportpublishedbyInternationalMonetaryFund(IMF)alsofound,thattaxhikesandspendingcuts
duringthemostrecentdecadehadindeeddamagedtheGDPgrowthmoreseverely,comparedtowhathadbeenexpectedand
forecastedinadvance(basedonthe"GDPdamageratios"previouslyrecordedinearlierdecadesandunderdifferenteconomic
scenarios).[324]Alreadyahalfyearearlier,severalEuropeancountriesasaresponsetotheproblemwithsubduedGDPgrowthin
theeurozone,likewisehadcalledfortheimplementationofanewreinforcedgrowthstrategybasedonadditionalpublic
investments,tobefinancedbygrowthfriendlytaxesonproperty,land,wealth,andfinancialinstitutions.InJune2012,EUleaders
agreedasafirststeptomoderatelyincreasethefundsoftheEuropeanInvestmentBank,inordertokickstartinfrastructure
projectsandincreaseloanstotheprivatesector.Afewmonthslater11outof17eurozonecountriesalsoagreedtointroduceanew
EUfinancialtransactiontaxtobecollectedfrom1January2014.[339]
Progress
InApril2012,OlliRehn,theEuropeancommissionerforeconomicandmonetaryaffairsinBrussels,"enthusiasticallyannounced
toEUparliamentariansinmidAprilthat'therewasabreakthroughbeforeEaster'.HesaidtheEuropeanheadsofstatehadgiven
thegreenlighttopilotprojectsworthbillions,suchasbuildinghighwaysinGreece."[340]Othergrowthinitiativesinclude"project
bonds"whereintheEIBwould"provideguaranteesthatsafeguardprivateinvestors.Inthepilotphaseuntil2013,EUfunds
amountingto230millionareexpectedtomobiliseinvestmentsofupto4.6billion."[340]DerSpiegelalsosaid:"Accordingto
sourcesinsidetheGermangovernment,insteadoffundingnewhighways,Berlinisinterestedinsupportinginnovationand
programstopromotesmallandmediumsizedbusinesses.Toensurethatthisisdoneasprofessionallyaspossible,theGermans
wouldliketoseethesouthernEuropeancountriesreceivetheirownstateowneddevelopmentbanks,modeledafterGermany's
[MarshallPlaneraorigin]KfW[KreditanstaltfrWiederaufbau]bankinggroup.It'shopedthatthiswillgettheeconomymoving
inGreeceandPortugal."[340]
Inmultiplestepsduring20122013,theECBlowereditsbankratetohistoricallows,reaching0.25%inNovember2013.Soon
aftertherateswereshavedto0.15%,thenon4September2014thecentralbankshockedfinancialmarketsbycuttingtherazorthin
ratesbyafurthertwothirdsfrom0.15%to0.05%,thelowestonrecord.[341]Themovesweredesignedtomakeitcheaperforbanks
toborrowfromtheECB,withtheaimthatlowercostofmoneywouldbepassedontobusinessestakingoutloans,boosting
investmentintheeconomy.Theloweredborrowingratescausedtheeurotofallinrelationtoothercurrencies,whichitwashoped
wouldboostexportsfromtheeurozone.[27]
Increasecompetitiveness
Seealso:EuroPlusPact
Crisiscountriesmustsignificantlyincreasetheirinternationalcompetitivenesstogenerateeconomicgrowthandimprovetheir
termsoftrade.IndianAmericanjournalistFareedZakarianotesinNovember2011thatnodebtrestructuringwillworkwithout
growth,evenmoresoasEuropeancountries"facepressuresfromthreefronts:demography(anagingpopulation),technology
(whichhasallowedcompaniestodomuchmorewithfewerpeople)andglobalisation(whichhasallowedmanufacturingand
servicestolocateacrosstheworld)".[342]
Incaseofeconomicshocks,policymakerstypicallytrytoimprovecompetitivenessbydepreciatingthecurrency,asinthecaseof
Iceland,whichsufferedthelargestfinancialcrisisin20082011ineconomichistorybuthassincevastlyimproveditsposition.
Eurozonecountriescannotdevaluetheircurrency.
Internaldevaluation
Asaworkaroundmanypolicymakerstrytorestorecompetitivenessthroughinternaldevaluation,apainfuleconomicadjustment
process,whereacountryaimstoreduceitsunitlabourcosts.[335][343]GermaneconomistHansWernerSinnnotedin2012that
Irelandwastheonlycountrythathadimplementedrelativewagemoderationinthelastfiveyears,whichhelpeddecreaseits
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relativeprice/wagelevelsby16%.Greecewouldneedtobringthisfiguredownby31%,effectivelyreachingthelevelofTurkey.
[344][345]By2012,wagesinGreecehavebeencuttoalevellastseeninthelate1990s.Purchasingpowerdroppedevenmoretothe
levelof1986.[346]Similarly,wagesinItalyhavehita25yearlowandconsumptionhasfallentothelevelof1950.[347]
OthereconomistsarguethatnomatterhowmuchGreeceandPortugaldrivedowntheirwages,theycouldnevercompetewithlow
costdevelopingcountriessuchasChinaorIndia.InsteadweakEuropean
countriesmustshifttheireconomiestohigherqualityproductsandservices,
thoughthisisalongtermprocessandmaynotbringimmediaterelief.[348][349]
Fiscaldevaluation
Anotheroptionwouldbetoimplementfiscaldevaluation,basedonanidea
originallydevelopedbyJohnMaynardKeynesin1931.[350][351]Accordingto
thisneoKeynesianlogic,policymakerscanincreasethecompetitivenessofan
economybyloweringcorporatetaxburdensuchasemployer'ssocialsecurity
contributions,whileoffsettingthelossofgovernmentrevenuesthroughhigher
taxesonconsumption(VAT)andpollution,i.e.bypursuinganecologicaltax
reform.[352][353][354]
Germanyhassuccessfullypusheditseconomiccompetitivenessbyincreasing
thevalueaddedtax(VAT)bythreepercentagepointsin2007,andusingpartof
Relativechangeinunitlabourcosts,20002012
theadditionalrevenuestoloweremployer'sunemploymentinsurance
contribution.Portugalhastakenasimilarstance[354]andalsoFranceappearsto
followthissuit.InNovember2012FrenchpresidentFranoisHollandeannouncedplanstoreducetaxburdenofthecorporate
sectorby20billionwithinthreeyears,whileincreasingthestandardVATfrom19.6%to20%andintroducingadditionaleco
taxesin2016.TominimisenegativeeffectsofsuchpoliciesonpurchasingpowerandeconomicactivitytheFrenchgovernment
willpartlyoffsetthetaxhikesbydecreasingemployees'socialsecuritycontributionsby10billionandbyreducingthelower
VATforconveniencegoods(necessities)from5.5%to5%.[355]
Progress
On15November2011,theLisbonCouncilpublishedtheEuroPlusMonitor
2011.Accordingtothereportmostcriticaleurozonemembercountriesarein
theprocessofrapidreforms.Theauthorsnotethat"Manyofthosecountries
mostinneedtoadjust[...]arenowmakingthegreatestprogresstowards
restoringtheirfiscalbalanceandexternalcompetitiveness".Greece,Irelandand
SpainareamongthetopfivereformersandPortugalisrankedseventhamong
17countriesincludedinthereport(seegraph).[356]
InitsEuroPlusMonitorReport2012,publishedinNovember2012,theLisbon
Councilfindsthattheeurozonehasslightlyimproveditsoverallhealth.With
theexceptionofGreece,alleurozonecrisiscountriesareeitherclosetothe
pointwheretheyhaveachievedthemajoradjustmentorarelikelytogetthere
overthecourseof2013.PortugalandItalyareexpectedtoprogresstothe
turnaroundstageinspring2013,possiblyfollowedbySpaininautumn,while
thefateofGreececontinuestohanginthebalance.Overall,theauthorssuggest
thatiftheeurozonegetsthroughthecurrentacutecrisisandstaysonthereform
path"itcouldeventuallyemergefromthecrisisasthemostdynamicofthe
majorWesterneconomies".[330]
Eurozoneeconomichealthandadjustmentprogress
20112012(Source:EuroPlusMonitor)[330]
TheEuroPlusMonitorupdatefromspring2013notesthattheeurozoneremainsontherighttrack.Accordingtotheauthors,
almostallvulnerablecountriesinneedofadjustment"areslashingtheirunderlyingfiscaldeficitsandimprovingtheirexternal
competitivenessatanimpressivespeed",forwhichtheyexpectedtheeurozonecrisistobeoverbytheendof2013.[357]
Addresscurrentaccountimbalances
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Regardlessofthecorrectivemeasureschosentosolvethecurrentpredicament,aslongascrossbordercapitalflowsremain
unregulatedintheeuroarea,[358]currentaccountimbalancesarelikelyto
continue.Acountrythatrunsalargecurrentaccountortradedeficit(i.e.,
importingmorethanitexports)mustultimatelybeanetimporterofcapital
thisisamathematicalidentitycalledthebalanceofpayments.Inotherwords,a
countrythatimportsmorethanitexportsmusteitherdecreaseitssavings
reservesorborrowtopayforthoseimports.Conversely,Germany'slargetrade
surplus(netexportposition)meansthatitmusteitherincreaseitssavings
reservesorbeanetexporterofcapital,lendingmoneytoothercountriesto
allowthemtobuyGermangoods.[359]
The2009tradedeficitsforItaly,Spain,Greece,andPortugalwereestimatedto
be$42.96billion,$75.31bnand$35.97bn,and$25.6bnrespectively,while
Germany'stradesurpluswas$188.6bn.[360]Asimilarimbalanceexistsinthe
US,whichrunsalargetradedeficit(netimportposition)andthereforeisanet
borrowerofcapitalfromabroad.BenBernankewarnedoftherisksofsuch
imbalancesin2005,arguingthata"savingsglut"inonecountrywithatrade
surpluscandrivecapitalintoothercountrieswithtradedeficits,artificially
loweringinterestratesandcreatingassetbubbles.[361][362][363]
Acountrywithalargetradesurpluswouldgenerallyseethevalueofits
currencyappreciaterelativetoothercurrencies,whichwouldreducethe
imbalanceastherelativepriceofitsexportsincreases.Thiscurrency
appreciationoccursastheimportingcountrysellsitscurrencytobuythe
exportingcountry'scurrencyusedtopurchasethegoods.Alternatively,trade
imbalancescanbereducedifacountryencourageddomesticsavingby
restrictingorpenalisingtheflowofcapitalacrossborders,orbyraisinginterest
rates,althoughthisbenefitislikelyoffsetbyslowingdowntheeconomyand
increasinggovernmentinterestpayments.[364]
Currentaccountimbalances(19972014)
Eitherway,manyofthecountriesinvolvedinthecrisisareontheeuro,so
devaluation,individualinterestrates,andcapitalcontrolsarenotavailable.The
onlysolutionlefttoraiseacountry'slevelofsavingistoreducebudgetdeficits
andtochangeconsumptionandsavingshabits.Forexample,ifacountry's
citizenssavedmoreinsteadofconsumingimports,thiswouldreduceitstrade
Animatedgraphofcurrentaccountimbalancessince
deficit.[364]Ithasthereforebeensuggestedthatcountrieswithlargetrade
1999
deficits(e.g.,Greece)consumelessandimprovetheirexportingindustries.On
theotherhand,exportdrivencountrieswithalargetradesurplus,suchas
Germany,AustriaandtheNetherlandswouldneedtoshifttheireconomiesmoretowardsdomesticservicesandincreasewagesto
supportdomesticconsumption.[365][366]
Economicevidenceindicatesthecrisismayhavemoretodowithtradedeficits(whichrequireprivateborrowingtofund)than
publicdebtlevels.EconomistPaulKrugmanwroteinMarch2013:"...thereallystrongrelationshipwithinthe[eurozonecountries]
isbetweeninterestspreadsandcurrentaccountdeficits,whichisinlinewiththeconclusionmanyofushavereached,thattheeuro
areacrisisisreallyabalanceofpaymentscrisis,notadebtcrisis".[367]AFebruary2013paperfromfoureconomistsconcluded
that,"Countrieswithdebtabove80%ofGDPandpersistentcurrentaccount[trade]deficitsarevulnerabletoarapidfiscal
deterioration...."[368][369][370]
Progress
Initsspring2012economicforecast,theEuropeanCommissionfinds"someevidencethatthecurrentaccountrebalancingis
underpinnedbychangesinrelativepricesandcompetitivenesspositionsaswellasgainsinexportmarketsharesandexpenditure
switchingindeficitcountries".[371]InMay2012GermanfinanceministerWolfgangSchublehassignalledsupportfora
significantincreaseinGermanwagestohelpdecreasecurrentaccountimbalanceswithintheeurozone.[372]
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AccordingtotheEuroPlusMonitorReport2013,thecollectivecurrentaccountofGreece,Ireland,Italy,Portugal,andSpainis
improvingrapidlyandisexpectedtobalancebymid2013.Thereafterthesecountriesasagroupwouldnolongerneedtoimport
capital.[357]In2014,thecurrentaccountsurplusoftheeurozoneasawholealmostdoubledcomparedtothepreviousyear,reaching
anewrecordhighof227.9bnEuros.[373]
Mobilisationofcredit
Severalproposalsweremadeinmid2012topurchasethedebtofdistressedEuropeancountriessuchasSpainandItaly.Markus
Brunnermeier,[374]theeconomistGrahamBishop,andDanielGroswereamongthoseadvancingproposals.Findingaformula,
whichwasnotsimplybackedbyGermany,iscentralincraftinganacceptableandeffectiveremedy.[375]
Commentary
USPresidentBarackObamastatedinJune2012:"Rightnow,[Europe's]focushastobeonstrengtheningtheiroverallbanking
system...makingaseriesofdecisiveactionsthatgivepeopleconfidencethatthebankingsystemissolid...Inaddition,they're
goingtohavetolookathowdotheyachievegrowthatthesametimeasthey'recarryingoutstructuralreformsthatmaytaketwoor
threeorfiveyearstofullyaccomplish.SocountrieslikeSpainandItaly,forexample,haveembarkedonsomesmartstructural
reformsthateverybodythinksarenecessaryeverythingfromtaxcollectiontolabourmarketstoawholehostofdifferentissues.
Butthey'vegottohavethetimeandthespaceforthosestepstosucceed.Andiftheyarejustcuttingandcuttingandcutting,and
theirunemploymentrateisgoingupandupandup,andpeoplearepullingbackfurtherfromspendingmoneybecausethey're
feelingalotofpressureironically,thatcanactuallymakeitharderforthemtocarryoutsomeofthesereformsoverthelong
term...[I]nadditiontosensiblewaystodealwithdebtandgovernmentfinances,there'saparalleldiscussionthat'stakingplace
amongEuropeanleaderstofigureouthowdowealsoencouragegrowthandshowsomeflexibilitytoallowsomeofthesereforms
toreallytakeroot."[376]
TheEconomistwroteinJune2012:"OutsideGermany,aconsensushasdevelopedonwhatMrs.Merkelmustdotopreservethe
singlecurrency.Itincludesshiftingfromausteritytoafargreaterfocusoneconomicgrowthcomplementingthesinglecurrency
withabankingunion(witheurowidedepositinsurance,bankoversightandjointmeansfortherecapitalisationorresolutionof
failingbanks)andembracingalimitedformofdebtmutualisationtocreateajointsafeassetandallowperipheraleconomiesthe
roomgraduallytoreducetheirdebtburdens.ThisistherefrainfromWashington,Beijing,London,andindeedmostofthecapitals
oftheeurozone.Whyhasn'tthecontinent'scanniestpoliticiansprungintoaction?"[377]
Proposedlongtermsolutions
Mainarticle:ProposedlongtermsolutionsfortheEuropeansovereigndebtcrisis
Europeanfiscalunion
ThecrisisispressuringtheEurotomovebeyondaregulatorystateandtowardsamorefederalEUwithfiscalpowers.[378]
IncreasedEuropeanintegrationgivingacentralbodyincreasedcontroloverthebudgetsofmemberstateswasproposedon14June
2012byJensWeidmannPresidentoftheDeutscheBundesbank,[379]expandingonideasfirstproposedbyJeanClaudeTrichet,
formerpresidentoftheEuropeanCentralBank.Control,includingrequirementsthattaxesberaisedorbudgetscut,wouldbe
exercisedonlywhenfiscalimbalancesdeveloped.[380]ThisproposalissimilartocontemporarycallsbyAngelaMerkelfor
increasedpoliticalandfiscalunionwhichwould"allowEuropeoversightpossibilities".[381]
Europeanbankrecoveryandresolutionauthority
Europeanbanksareestimatedtohaveincurredlossesapproaching1trillionbetweentheoutbreakofthefinancialcrisisin2007
and2010.TheEuropeanCommissionapprovedsome4.5trillioninstateaidforbanksbetweenOctober2008andOctober2011,a
sumwhichincludesthevalueoftaxpayerfundedrecapitalisationsandpublicguaranteesonbankingdebts.[382]Thishasprompted
someeconomistssuchasJosephStiglitzandPaulKrugmantonotethatEuropeisnotsufferingfromasovereigndebtcrisisbut
ratherfromabankingcrisis.[382]
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On6June2012,theEuropeanCommissionadoptedalegislativeproposalforaharmonisedbankrecoveryandresolution
mechanism.TheproposedframeworksetsoutthenecessarystepsandpowerstoensurethatbankfailuresacrosstheEUare
managedinawaythatavoidsfinancialinstability.[383]Thenewlegislationwouldgivememberstatesthepowertoimposelosses,
resultingfromabankfailure,onthebondholderstominimisecostsfortaxpayers.Theproposalispartofanewschemeinwhich
bankswillbecompelledto"bailin"theircreditorswhenevertheyfail,thebasicaimbeingtopreventtaxpayerfundedbailoutsin
thefuture.[384]Thepublicauthoritieswouldalsobegivenpowerstoreplacethemanagementteamsinbanksevenbeforethelender
fails.Eachinstitutionwouldalsobeobligedtosetasideatleastonepercentofthedepositscoveredbytheirnationalguaranteesfor
aspecialfundtofinancetheresolutionofbankingcrisisstartingin2018.[382]
Eurobonds
Mainarticle:Eurobonds
AgrowingnumberofinvestorsandeconomistssayEurobondswouldbethebestwayofsolvingadebtcrisis,[385]thoughtheir
introductionmatchedbytightfinancialandbudgetarycoordinationmaywellrequirechangesinEUtreaties.[385]On21November
2011,theEuropeanCommissionsuggestedthateurobondsissuedjointlybythe17euronationswouldbeaneffectivewaytotackle
thefinancialcrisis.Usingtheterm"stabilitybonds",JoseManuelBarrosoinsistedthatanysuchplanwouldhavetobematchedby
tightfiscalsurveillanceandeconomicpolicycoordinationasanessentialcounterpartsoastoavoidmoralhazardandensure
sustainablepublicfinances.[386][387]
Germanyremainslargelyopposedatleastintheshorttermtoacollectivetakeoverofthedebtofstatesthathaverunexcessive
budgetdeficitsandborrowedexcessivelyoverthepastyears,sayingthiscouldsubstantiallyraisethecountry'sliabilities.
EuropeanMonetaryFund
On20October2011,theAustrianInstituteofEconomicResearchpublishedanarticlethatsuggeststransformingtheEFSFintoa
EuropeanMonetaryFund(EMF),whichcouldprovidegovernmentswithfixedinterestrateEurobondsatarateslightlybelow
mediumtermeconomicgrowth(innominalterms).Thesebondswouldnotbetradablebutcouldbeheldbyinvestorswiththe
EMFandliquidatedatanytime.GiventhebackingofalleurozonecountriesandtheECB,"theEMUwouldachieveasimilarly
strongpositionvisvisfinancialinvestorsastheUSwheretheFedbacksgovernmentbondstoanunlimitedextent".Toensure
fiscaldisciplinedespitelackofmarketpressure,theEMFwouldoperateaccordingtostrictrules,providingfundsonlytocountries
thatmeetfiscalandmacroeconomiccriteria.Governmentslackingsoundfinancialpolicieswouldbeforcedtorelyontraditional
(national)governmentalbondswithlessfavourablemarketrates.[388]
Theeconometricanalysissuggeststhat"Iftheshorttermandlongterminterestratesintheeuroareawerestabilisedat1.5%and
3%,respectively,aggregateoutput(GDP)intheeuroareawouldbe5percentagepointsabovebaselinein2015".Atthesametime,
sovereigndebtlevelswouldbesignificantlylowerwith,e.g.,Greece'sdebtlevelfallingbelow110%ofGDP,morethan40
percentagepointsbelowthebaselinescenariowithmarketbasedinterestlevels.Furthermore,bankswouldnolongerbeableto
benefitundulyfromintermediaryprofitsbyborrowingfromtheECBatlowratesandinvestingingovernmentbondsathighrates.
[388]
Debtwriteofffinancedbywealthtax
AccordingtotheBankforInternationalSettlements,thecombinedprivateand
publicdebtof18OECDcountriesnearlyquadrupledbetween1980and2010,
andwilllikelycontinuetogrow,reachingbetween250%(forItaly)andabout
600%(forJapan)by2040.[389]ABISstudyreleasedinJune2012warnsthat
budgetsofmostadvancedeconomies,excludinginterestpayments,"would
need20consecutiveyearsofsurplusesexceeding2percentofgrossdomestic
productstartingnowjusttobringthedebttoGDPratiobacktoitspre
crisislevel".[390]Thesameauthorsfoundinapreviousstudythatincreased
financialburdenimposedbyageingpopulationsandlowergrowthmakesit
unlikelythatindebtedeconomiescangrowoutoftheirdebtproblemifonlyone
ofthefollowingthreeconditionsismet:[391]
governmentdebtismorethan80to100%ofGDP
Overalldebtlevelsin2009andwriteoffsnecessary
intheeurozone,UKandUStoreachsustainable
grounds.
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nonfinancialcorporatedebtismorethan90percent
privatehouseholddebtismorethan85%ofGDP.
Thefirstcondition,suggestedbyaninfluentialpaperwrittenbyKennethRogoff&CarmenReinharthasbeendisputeddueto
majorcalculationerrors.Infact,theaverageGDPgrowthatpublicdebt/GDPratiosover90%isnotdramaticallydifferentfrom
whendebt/GDPratiosarelower.[392]
TheBostonConsultingGroup(BCG)addsthatiftheoveralldebtloadcontinuestogrowfasterthantheeconomy,thenlargescale
debtrestructuringbecomesinevitable.Topreventaviciousupwarddebtspiralfromgainingmomentumtheauthorsurgepolicy
makersto"actquicklyanddecisively"andaimforanoveralldebtlevelwellbelow180%fortheprivateandgovernmentsector.
Thisnumberisbasedontheassumptionthatgovernments,nonfinancialcorporations,andprivatehouseholdscaneachsustaina
debtloadof60%ofGDP,ataninterestrateof5percentandanominaleconomicgrowthrateof3percentperyear.Lowerinterest
ratesand/orhighergrowthwouldhelpreducethedebtburdenfurther.[393]
Toreachsustainablelevelstheeurozonemustreduceitsoveralldebtlevelby6.1trillion.AccordingtoBCG,thiscouldbe
financedbyaonetimewealthtaxofbetween11and30%formostcountries,apartfromthecrisiscountries(particularlyIreland)
whereawriteoffwouldhavetobesubstantiallyhigher.Theauthorsadmitthatsuchprogrammeswouldbe"drastic","unpopular"
and"requirebroadpoliticalcoordinationandleadership"buttheymaintainthatthelongerpoliticiansandcentralbankerswait,the
morenecessarysuchastepwillbe.[393]
Insteadofaonetimewriteoff,GermaneconomistHaraldSpehlhascalledfora30yeardebtreductionplan,similartotheone
GermanyusedafterWorldWarIItosharetheburdenofreconstructionanddevelopment.[394]Similarcallshavebeenmadeby
politicalpartiesinGermanyincludingtheGreensandTheLeft.[395][396]
Debtwriteoffbasedoninternationalagreement
In2015HansWernerSinn,presidentofGermanIfoInstituteforEconomicResearch,calledforadebtreliefforGreece.[397]In
addition,economistsfromLondonSchoolofEconomicssuggestedadebtreliefsimilartotheLondonagreement.In1953,private
sectorlendersaswellasgovernmentsagreedtowriteoffabouthalfofWestGermanysoutstandingdebtthiswasfollowedbythe
beginningofGermany's"economicmiracle"(orWirtschaftswunder).Accordingtothisagreement,WestGermanyhadtomake
repaymentsonlywhenitwasrunningatradesurplus,thatis"whenithadearnedthemoneytopayup,ratherthanhavingtoborrow
more,ordipintoitsforeigncurrencyreserves.Itsrepaymentswerealsolimitedto3%ofexportearnings."AsLSEresearchers
note,thishadtheeffectthat,Germanyscreditorshadanincentivetobuythecountrysgoods,sothatitwouldbeabletoaffordto
paythem.[76]
Taxesoncapital,positionofThomasPiketty
AccordingtotheFrencheconomistThomasPiketty,authorofthebestsellingbook[398]CapitalintheTwentyFirstCentury(2013),
therearethreemethodsforreducingthedebtofEuropeancountries:taxesoncapital,inflationandausterity.AccordingtoPiketty,
theworstsolutionisausterityforbothefficiencyandjusticearguments.Nextcomesinflation,whichdevaluatesnominalassets(for
examplecash)butnot'real'economicassets(suchasrealestatesorbusinesscapital)inflationwouldthereforepenalizethosewho
donotinvesttheirmoneyproperlyinfavourof'real'propertyholders.Finally,Pikettyfavourstaxesoncapitalanddescribesan
example:inthesimplifiedcaseofaflattax(asopposedtoprogressivetaxwhichishigheronlargerfortunes)of15percenton
privatewealth,thestatewouldgainnearlyayear'sworthnationalincomeallowingforanimmediatereimboursementofpublic
debt.[399]
Controversies
Mainarticle:ControversiessurroundingtheEurozonecrisis
TheEuropeanbailoutsarelargelyaboutshiftingexposurefrombanksandothers,whootherwisearelinedupforlossesonthe
sovereigndebttheyhavepiledup,ontoEuropeantaxpayers.[75][78][400][401][402][403]
EUtreatyviolations
Nobailoutclause
Wikisourcehasoriginal
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TheEU'sMaastrichtTreatycontainsjuridicallanguagethatappearstoruleoutintraEU
bailouts.First,the"nobailout"clause(Article125TFEU)ensuresthattheresponsibility
forrepayingpublicdebtremainsnationalandpreventsriskpremiumscausedbyunsound
fiscalpoliciesfromspillingovertopartnercountries.Theclausethusencouragesprudent
fiscalpoliciesatthenationallevel.
textrelatedtothisarticle:
Consolidatedversionof
theTreatyonthe
Functioningofthe
EuropeanUnion
TheEuropeanCentralBank'spurchaseofdistressedcountrybondscanbeviewedasviolatingtheprohibitionofmonetary
financingofbudgetdeficits(Article123TFEU).ThecreationoffurtherleverageinEFSFwithaccesstoECBlendingwouldalso
appeartoviolatethetermsofthisarticle.
Articles125and123weremeanttocreatedisincentivesforEUmemberstatestorunexcessivedeficitsandstatedebt,andprevent
themoralhazardofoverspendingandlendingingoodtimes.Theywerealsomeanttoprotectthetaxpayersoftheothermore
prudentmemberstates.Byissuingbailoutaidguaranteedbyprudenteurozonetaxpayerstorulebreakingeurozonecountriessuch
asGreece,theEUandeurozonecountriesalsoencouragemoralhazardinthefuture.[404]Whilethenobailoutclauseremainsin
place,the"nobailoutdoctrine"seemstobeathingofthepast.[405]
Convergencecriteria
TheEUtreatiescontainsocalledconvergencecriteria,specifiedintheprotocolsoftheTreatiesoftheEuropeanUnion.Asregards
governmentfinance,thestatesagreedthattheannualgovernmentbudgetdeficitshouldnotexceed3%ofgrossdomesticproduct
(GDP)andthatthegrossgovernmentdebttoGDPshouldnotexceed60%ofGDP(seeprotocol12and13).Foreurozonemembers
thereistheStabilityandGrowthPact,whichcontainsthesamerequirementsforbudgetdeficitanddebtlimitationbutwithamuch
stricterregime.Inthepast,manyEuropeancountrieshavesubstantiallyexceededthesecriteriaoveralongperiodoftime.[406]
Around2005mosteurozonemembersviolatedthepact,resultinginnoactiontakenagainstviolators.
Actorsfuellingthecrisis
Creditratingagencies
TheinternationalUSbasedcreditratingagenciesMoody's,Standard&Poor'sandFitch
whichhavealreadybeenunderfireduringthehousingbubble[407][408]andtheIcelandic
crisis[409][410]havealsoplayedacentralandcontroversialrole[411]inthecurrentEuropean
bondmarketcrisis.[412]Ononehand,theagencieshavebeenaccusedofgivingoverly
generousratingsduetoconflictsofinterest.[413]Ontheotherhand,ratingsagencieshavea
tendencytoactconservatively,andtotakesometimetoadjustwhenafirmorcountryisin
trouble.[414]InthecaseofGreece,themarketrespondedtothecrisisbeforethedowngrades,
withGreekbondstradingatjunklevelsseveralweeksbeforetheratingsagenciesbeganto
describethemassuch.[29]
Standard&Poor'sHeadquartersin
LowerManhattan,NewYorkCity
AccordingtoastudybyeconomistsatStGallenUniversitycreditratingagencieshave
fuelledrisingeurozoneindebtednessbyissuingmoreseveredowngradessincethe
sovereigndebtcrisisunfoldedin2009.Theauthorsconcludedthatratingagencieswerenotconsistentintheirjudgments,on
averageratingPortugal,Ireland,andGreece2.3notcheslowerthanunderprecrisisstandards,eventuallyforcingthemtoseek
internationalaid.[415]Onasidenote:asofendofNovember2013onlythreecountriesintheeurozoneretainAAAratingsfrom
Standard&Poor,i.e.Germany,FinlandandLuxembourg.[416]
Europeanpolicymakershavecriticisedratingsagenciesforactingpolitically,accusingtheBigThreeofbiastowardsEuropean
assetsandfuellingspeculation.[417]ParticularlyMoody'sdecisiontodowngradePortugal'sforeigndebttothecategoryBa2"junk"
hasinfuriatedofficialsfromtheEUandPortugalalike.[417]StateownedutilityandinfrastructurecompanieslikeANA
AeroportosdePortugal,EnergiasdePortugal,RedesEnergticasNacionais,andBrisaAutoestradasdePortugalwerealso
downgradeddespiteclaimstohavingsolidfinancialprofilesandsignificantforeignrevenue.[418][419][420][421]
Francetoohasshownitsangeratitsdowngrade.FrenchcentralbankchiefChristianNoyercriticisedthedecisionofStandard&
Poor'stolowertheratingofFrancebutnotthatoftheUnitedKingdom,which"hasmoredeficits,asmuchdebt,moreinflation,
lessgrowththanus".SimilarcommentsweremadebyhighrankingpoliticiansinGermany.MichaelFuchs,deputyleaderofthe
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leadingChristianDemocrats,said:"StandardandPoor'smuststopplayingpolitics.Whydoesn'titactonthehighlyindebted
UnitedStatesorhighlyindebtedBritain?",addingthatthelatter'scollectiveprivateandpublicsectordebtsarethelargestin
Europe.Hefurtheradded:"IftheagencydowngradesFrance,itshouldalsodowngradeBritaininordertobeconsistent."[422]
Creditratingagencieswerealsoaccusedofbullyingpoliticiansbysystematicallydowngradingeurozonecountriesjustbefore
importantEuropeanCouncilmeetings.AsoneEUsourceputit:"Itisinterestingtolookatthedowngradingsandthetimingsofthe
downgradings...Itisstrangethatwehavesomanydowngradesintheweeksofsummits."[423]
Regulatoryrelianceoncreditratings
ThinktankssuchastheWorldPensionsCouncil(WPC)havecriticisedEuropeanpowerssuchasFranceandGermanyforpushing
fortheadoptionoftheBaselIIrecommendations,adoptedin2005andtransposedinEuropeanUnionlawthroughtheCapital
RequirementsDirective(CRD),effectivesince2008.Inessence,thisforcedEuropeanbanksandmoreimportantlytheEuropean
CentralBank,e.g.whengaugingthesolvencyofEUbasedfinancialinstitutions,torelyheavilyonthestandardisedassessmentsof
creditriskmarketedbyonlytwoprivateUSfirmsMoody'sandS&P.[424]
Countermeasures
Duetothefailuresoftheratingsagencies,Europeanregulatorsobtainednewpowerstosuperviseratingsagencies.[411]Withthe
creationoftheEuropeanSupervisoryAuthorityinJanuary2011theEUsetupawholerangeofnewfinancialregulatory
institutions,[425]includingtheEuropeanSecuritiesandMarketsAuthority(ESMA),[426]whichbecametheEU'ssinglecredit
ratingsfirmregulator.[427]CreditratingscompanieshavetocomplywiththenewstandardsorwillbedeniedoperationonEU
territory,saysESMAChiefStevenMaijoor.[428]
Germany'sforeignministerGuidoWesterwellecalledforan"independent"Europeanratingsagency,whichcouldavoidthe
conflictsofinterestthatheclaimedUSbasedagenciesfaced.[429]Europeanleadersarereportedlystudyingthepossibilityofsetting
upaEuropeanratingsagencyinorderthattheprivateUSbasedratingsagencieshavelessinfluenceondevelopmentsinEuropean
financialmarketsinthefuture.[430][431]AccordingtoGermanconsultantcompanyRolandBerger,settingupanewratingsagency
wouldcost300million.On30January2012,thecompanysaiditwasalreadycollectingfundsfromfinancialinstitutionsand
businessintelligenceagenciestosetupanindependentnonprofitratingsagencybymid2012,whichcouldprovideitsfirstcountry
ratingsbytheendoftheyear.[432]InApril2012,inasimilarattempt,theBertelsmannStiftungpresentedablueprintfor
establishinganinternationalnonprofitcreditratingagency(INCRA)forsovereigndebt,structuredinwaythatmanagementand
ratingdecisionsareindependentfromitsfinanciers.[433]
Butattemptstoregulatecreditratingagenciesmorestrictlyinthewakeoftheeurozonecrisishavebeenratherunsuccessful.World
PensionsCouncil(WPC)financiallawandregulationexpertshavearguedthatthehastilydrafted,unevenlytransposedinnational
law,andpoorlyenforcedEUruleonratingsagencies(RegulationECN1060/2009)hashadlittleeffectonthewayfinancial
analystsandeconomistsinterpretdataoronthepotentialforconflictsofinterestscreatedbythecomplexcontractualarrangements
betweencreditratingagenciesandtheirclients"[434]
Media
TherehasbeenconsiderablecontroversyabouttheroleoftheEnglishlanguagepressinregardtothebondmarketcrisis.[435][436]
GreekPrimeMinisterPapandreouisquotedassayingthattherewasnoquestionofGreeceleavingtheeuroandsuggestedthatthe
crisiswaspoliticallyaswellasfinanciallymotivated."Thisisanattackontheeurozonebycertainotherinterests,politicalor
financial".[437]TheSpanishPrimeMinisterJosLuisRodrguezZapaterohasalsosuggestedthattherecentfinancialmarketcrisis
inEuropeisanattempttounderminetheeuro.[438][439]HeorderedtheCentroNacionaldeInteligenciaintelligenceservice
(NationalIntelligenceCentre,CNIinSpanish)toinvestigatetheroleofthe"AngloSaxonmedia"infomentingthecrisis.[440][441]
[442][443][444][445][446]Sofar,noresultshavebeenreportedfromthisinvestigation.
Othercommentatorsbelievethattheeuroisunderattacksothatcountries,suchastheUKandtheUS,cancontinuetofundtheir
largeexternaldeficitsandgovernmentdeficits,[447]andtoavoidthecollapseoftheUS$.[448][449][450]TheUSandUKdonothave
largedomesticsavingspoolstodrawonandthereforearedependentonexternalsavingse.g.fromChina.[451][452]Thisisnotthe
caseintheeurozone,whichisselffunding.[453][454][455]
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Speculators
BoththeSpanishandGreekPrimeMinistershaveaccusedfinancialspeculatorsandhedgefundsofworseningthecrisisbyshort
sellingeuros.[456][457]GermanchancellorMerkelhasstatedthat"institutionsbailedoutwithpublicfundsareexploitingthebudget
crisisinGreeceandelsewhere".[458]
TheroleofGoldmanSachs[459]inGreekbondyieldincreasesisalsounderscrutiny.[460]Itisnotyetcleartowhatextentthisbank
hasbeeninvolvedintheunfoldingofthecrisisoriftheyhavemadeaprofitasaresultoftheselloffontheGreekgovernmentdebt
market.
Inresponsetoaccusationsthatspeculatorswereworseningtheproblem,somemarketsbannednakedshortsellingforafew
months.[461]
Speculationaboutthebreakupoftheeurozone
Furtherinformation:Greekwithdrawalfromtheeurozone
Someeconomists,mostlyfromoutsideEuropeandassociatedwithModernMonetaryTheoryandotherpostKeynesianschools,
condemnedthedesignoftheeurocurrencysystemfromthebeginningbecauseitcedednationalmonetaryandeconomic
sovereigntybutlackedacentralfiscalauthority.Whenfacedwitheconomicproblems,theymaintained,"Withoutsuchan
institution,EMUwouldpreventeffectiveactionbyindividualcountriesandputnothinginitsplace."[462][463]USeconomistMartin
Feldsteinwentsofartocalltheeuro"anexperimentthatfailed".[464]SomenonKeynesianeconomists,suchasLucaA.Ricciof
theIMF,contendthattheeurozonedoesnotfulfilthenecessarycriteriaforanoptimumcurrencyarea,thoughitismovinginthat
direction.[356][465]
AsthedebtcrisisexpandedbeyondGreece,theseeconomistscontinuedtoadvocate,albeitmoreforcefully,thedisbandmentofthe
eurozone.Ifthiswasnotimmediatelyfeasible,theyrecommendedthatGreeceandtheotherdebtornationsunilaterallyleavethe
eurozone,defaultontheirdebts,regaintheirfiscalsovereignty,andreadoptnationalcurrencies.[60][61][466][467][468]Bloomberg
suggestedinJune2011that,iftheGreekandIrishbailoutsshouldfail,analternativewouldbeforGermanytoleavetheeurozone
tosavethecurrencythroughdepreciation[469]insteadofausterity.Thelikelysubstantialfallintheeuroagainstanewly
reconstitutedDeutscheMarkwouldgivea"hugeboost"toitsmembers'competitiveness.[470]
Iceland,notpartoftheEU,isregardedasoneofEurope'srecoverysuccessstories.Itdefaultedonitsdebtanddrasticallydevalued
itscurrency,whichhaseffectivelyreducedwagesby50%makingexportsmorecompetitive.[471]LeeHarrisarguesthatfloating
exchangeratesallowswagereductionsbycurrencydevaluations,apoliticallyeasieroptionthantheeconomicallyequivalentbut
politicallyimpossiblemethodofloweringwagesbypoliticalenactment.[472]Sweden'sfloatingratecurrencygivesitashortterm
advantage,structuralreformsandconstraintsaccountforlongertermprosperity.Labourconcessions,aminimalrelianceonpublic
debt,andtaxreformhelpedtofurtheraprogrowthpolicy.[473]
TheWallStreetJournalconjecturedaswellthatGermanycouldreturntotheDeutscheMark,[474]orcreateanothercurrencyunion
[475]withtheNetherlands,Austria,Finland,LuxembourgandotherEuropeancountriessuchasDenmark,Norway,Sweden,
Switzerland,andtheBaltics.[476]Amonetaryunionofthesecountrieswithcurrentaccountsurpluseswouldcreatetheworld's
largestcreditorbloc,biggerthanChina[477]orJapan.TheWallStreetJournaladdedthatwithouttheGermanledbloc,aresidual
eurowouldhavetheflexibilitytokeepinterestrateslow[478]andengageinquantitativeeasingorfiscalstimulusinsupportofa
jobtargetingeconomicpolicy[479]insteadofinflationtargetinginthecurrentconfiguration.
Breakupvs.deeperintegration
Thereisoppositioninthisview.Thenationalexitsareexpectedtobeanexpensiveproposition.Thebreakdownofthecurrency
wouldleadtoinsolvencyofseveraleurozonecountries,abreakdowninintrazonepayments.Havinginstabilityandthepublicdebt
issuestillnotsolved,thecontagioneffectsandinstabilitywouldspreadintothesystem.[480]HavingthattheexitofGreecewould
triggerthebreakdownoftheeurozone,thisisnotwelcomedbymanypoliticians,economistsandjournalists.AccordingtoSteven
ErlangerfromTheNewYorkTimes,a"Greekdepartureislikelytobeseenasthebeginningoftheendforthewholeeurozone
project,amajoraccomplishment,whateveritsfaults,inthepostWarconstructionofaEurope"wholeandatpeace".[481]Likewise,
thetwobigleadersoftheEurozone,GermanChancellorAngelaMerkelandformerFrenchpresidentNicolasSarkozyhavesaidon
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numerousoccasionsthattheywouldnotallowtheeurozonetodisintegrateandhavelinkedthesurvivaloftheEurowiththatofthe
entireEuropeanUnion.[482][483]InSeptember2011,EUcommissionerJoaqunAlmuniasharedthisview,sayingthatexpelling
weakercountriesfromtheeurowasnotanoption:"Thosewhothinkthatthishypothesisispossiblejustdonotunderstandour
processofintegration".[484]TheformerECBpresidentJeanClaudeTrichetalsodenouncedthepossibilityofareturnofthe
DeutscheMark.[485]
Thechallengestothespeculationaboutthebreakuporsalvageoftheeurozoneisrootedinitsinnatenaturethatthebreakupor
salvageofeurozoneisnotonlyaneconomicdecisionbutalsoacriticalpoliticaldecisionfollowedbycomplicatedramifications
that"IfBerlinpaysthebillsandtellstherestofEuropehowtobehave,itrisksfosteringdestructivenationalistresentmentagainst
Germanyand...itwouldstrengthenthecampinBritainarguingforanexitaproblemnotjustforBritonsbutforalleconomically
liberalEuropeans.[486]SolutionswhichinvolvegreaterintegrationofEuropeanbankingandfiscalmanagementandsupervisionof
nationaldecisionsbyEuropeanumbrellainstitutionscanbecriticisedasGermanicdominationofEuropeanpoliticalandeconomic
life.[487]AccordingtoUSauthorRossDouthat"ThiswouldeffectivelyturntheEuropeanUnionintoakindofpostmodernversion
oftheoldAustroHungarianEmpire,withaGermanicelitepresidinguneasilyoverapolyglotimperiumanditsrestivelocal
populations".[487]
TheEconomistprovidesasomewhatmodifiedapproachtosavingtheeurointhat"alimitedversionoffederalisationcouldbeless
miserablesolutionthanbreakupoftheeuro".[486]Therecipetothistrickycombinationofthelimitedfederalisation,greatlylieson
mutualisationforlimitingthefiscalintegration.Inorderforoverindebtedcountriestostabilisethedwindlingeuroandeconomy,
theoverindebtedcountriesrequire"accesstomoneyandforbankstohavea"safe"eurowideclassofassetsthatisnottiedtothe
fortunesofonecountry"whichcouldbeobtainedby"narrowerEurobondthatmutualisesalimitedamountofdebtforalimited
amountoftime".[486]ThepropositionmadebyGermanCouncilofEconomicExpertsprovidesdetailedblueprinttomutualisethe
currentdebtsofalleurozoneeconomiesabove60%oftheirGDP.Insteadofthebreakupandissuingnewnationalgovernments
bondsbyindividualeurozonegovernments,"everybody,fromGermany(debt:81%ofGDP)toItaly(120%)wouldissueonly
thesejointbondsuntiltheirnationaldebtsfelltothe60%threshold.Thenewmutualisedbondmarket,worthsome2.3trillion,
wouldbepaidoffoverthenext25years.Eachcountrywouldpledgeaspecifiedtax(suchasaVATsurcharge)toprovidethe
cash."Sofar,GermanChancellorAngelaMerkelhasopposedallformsofmutualisation.[486]
TheHungarianAmericanbusinessmagnateGeorgeSoroswarnsin"DoestheEurohaveaFuture?"thatthereisnoescapefromthe
"gloomyscenario"ofaprolongedEuropeanrecessionandtheconsequentthreattotheEurozone'spoliticalcohesionsolongas"the
authoritiespersistintheircurrentcourse".HearguesthattosavetheEurolongtermstructuralchangesareessentialinadditionto
theimmediatestepsneededtoarrestthecrisis.Thechangesherecommendsincludeevengreatereconomicintegrationofthe
EuropeanUnion.[488]SoroswritesthatatreatyisneededtotransformtheEuropeanFinancialStabilityFundintoafullfledged
EuropeanTreasury.FollowingtheformationoftheTreasury,theEuropeanCouncilcouldthenauthorisetheECBto"stepintothe
breach",withriskstotheECB'ssolvencybeingindemnified.SorosacknowledgesthatconvertingtheEFSFintoaEuropean
Treasurywillnecessitate"aradicalchangeofheart".Inparticular,hecautions,Germanswillbewaryofanysuchmove,notleast
becausemanycontinuetobelievethattheyhaveachoicebetweensavingtheEuroandabandoningit.Soroswritesthatacollapse
oftheEuropeanUnionwouldprecipitateanuncontrollablefinancialmeltdownandthus"theonlyway"toavert"anotherGreat
Depression"istheformationofaEuropeanTreasury.[488]
TheBritishbettingcompanyLadbrokesstoppedtakingbetsonGreeceexitingtheeurozoneinMay2012afteroddsfellto1/3,and
reported"plentyofsupport"for33/1oddsforacompletedisbandingoftheeurozoneduring2012.[489]
Odiousdebt
Mainarticle:Odiousdebt
Someprotesters,commentatorssuchasLibrationcorrespondentJeanQuatremerandtheLigebasedNGOCommitteeforthe
AbolitionoftheThirdWorldDebt(CADTM)allegethatthedebtshouldbecharacterisedasodiousdebt.[490]TheGreek
documentaryDebtocracy,[491]andabookofthesametitleandcontentexaminewhethertherecentSiemensscandaland
uncommercialECBloanswhichwereconditionalonthepurchaseofmilitaryaircraftandsubmarinesareevidencethattheloans
amounttoodiousdebtandthatanauditwouldresultininvalidationofalargeamountofthedebt.[492]
Manipulateddebtanddeficitstatistics
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In1992,membersoftheEuropeanUnionsignedanagreementknownastheMaastrichtTreaty,underwhichtheypledgedtolimit
theirdeficitspendinganddebtlevels.SomeEUmemberstates,includingGreeceandItaly,wereabletocircumventtheserulesand
masktheirdeficitanddebtlevelsthroughtheuseofcomplexcurrencyandcreditderivativesstructures.[493][494]Thestructures
weredesignedbyprominentUSinvestmentbanks,whoreceivedsubstantialfeesinreturnfortheirservicesandwhotookonlittle
creditriskthemselvesthankstospeciallegalprotectionsforderivativescounterparties.[493]FinancialreformswithintheU.S.since
thefinancialcrisishaveonlyservedtoreinforcespecialprotectionsforderivativesincludinggreateraccesstogovernment
guaranteeswhileminimisingdisclosuretobroaderfinancialmarkets.[495]
TherevisionofGreece's2009budgetdeficitfromaforecastof"68%ofGDP"to12.7%bythenewPasokGovernmentinlate
2009(anumberwhich,afterreclassificationofexpensesunderIMF/EUsupervisionwasfurtherraisedto15.4%in2010)hasbeen
citedasoneoftheissuesthatignitedtheGreekdebtcrisis.
Thisaddedanewdimensionintheworldfinancialturmoil,astheissuesof"creativeaccounting"andmanipulationofstatisticsby
severalnationscameintofocus,potentiallyundermininginvestorconfidence.
ThefocushasnaturallyremainedonGreeceduetoitsdebtcrisis.TherehavebeenreportsaboutmanipulatedstatisticsbyEUand
othernationsaiming,aswasthecaseforGreece,tomaskthesizesofpublicdebtsanddeficits.Thesehaveincludedanalysesof
examplesinseveralcountries[496][497][498][499][500]orhavefocusedonItaly,[501]theUnitedKingdom,[502][503][504][505][506][507][508]
Spain,[509][510][511]theUnitedStates,[512][513][514][515]andevenGermany.[516][517][518]
CollateralforFinland
On18August2011,asrequestedbytheFinnishparliamentasaconditionforanyfurtherbailouts,itbecameapparentthatFinland
wouldreceivecollateralfromGreece,enablingittoparticipateinthepotentialnew109billionsupportpackagefortheGreek
economy.[519]Austria,theNetherlands,Slovenia,andSlovakiarespondedwithirritationoverthisspecialguaranteeforFinlandand
demandedequaltreatmentacrosstheeurozone,orasimilardealwithGreece,soasnottoincreasetherisklevelovertheir
participationinthebailout.[520]Themainpointofcontentionwasthatthecollateralisaimedtobeacashdeposit,acollateralthe
GreekscanonlygivebyrecyclingpartofthefundsloanedbyFinlandforthebailout,whichmeansFinlandandtheothereurozone
countriesguaranteetheFinnishloansintheeventofaGreekdefault.[519]
Afterextensivenegotiationstoimplementacollateralstructureopentoalleurozonecountries,on4October2011,amodified
escrowcollateralagreementwasreached.TheexpectationisthatonlyFinlandwillutiliseit,due,inpart,toarequirementto
contributeinitialcapitaltoEuropeanStabilityMechanisminoneinstalmentinsteadoffiveinstalmentsovertime.Finland,asone
ofthestrongestAAAcountries,canraisetherequiredcapitalwithrelativeease.[521]
AtthebeginningofOctober,SlovakiaandNetherlandswerethelastcountriestovoteontheEFSFexpansion,whichwasthe
immediateissuebehindthecollateraldiscussion,withamidOctobervote.[522]On13October2011Slovakiaapprovedeurobailout
expansion,butthegovernmenthasbeenforcedtocallnewelectionsinexchange.
InFebruary2012,thefourlargestGreekbanksagreedtoprovidethe880millionincollateraltoFinlandtosecurethesecond
bailoutprogramme.[523]
Finland'srecommendationtothecrisiscountriesistoissueassetbackedsecuritiestocovertheimmediateneed,atactic
successfullyusedinFinland'searly1990srecession,[524]inadditiontospendingcutsandbadbanking.
Politicalimpact
ThehandlingofthecrisishasledtotheprematureendofseveralEuropeannationalgovernmentsandinfluencedtheoutcomeof
manyelections:
IrelandFebruary2011Afterahighdeficitinthegovernment'sbudgetin2010andtheuncertaintysurroundingthe
proposedbailoutfromtheInternationalMonetaryFund,the30thDil(parliament)collapsedthefollowingyear,whichledto
asubsequentgeneralelection,collapseoftheprecedinggovernmentparties,FiannaFilandtheGreenParty,theresignation
oftheTaoiseachBrianCowenandtheriseoftheFineGaelparty,whichformedagovernmentalongsidetheLabourPartyin
the31stDil,whichledtoachangeofgovernmentandtheappointmentofEndaKennyasTaoiseach.
PortugalMarch2011Followingthefailureofparliamenttoadoptthegovernmentausteritymeasures,PMJosScrates
andhisgovernmentresigned,bringingaboutearlyelectionsinJune2011.[525][526]
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FinlandApril2011TheapproachtothePortuguesebailoutandtheEFSFdominatedtheApril2011electiondebateand
formationofthesubsequentgovernment.[527][528]
SpainJuly2011FollowingthefailureoftheSpanishgovernmenttohandletheeconomicsituation,PMJosLuis
RodrguezZapateroannouncedearlyelectionsinNovember.[529]"Itisconvenienttoholdelectionsthisfallsoanew
governmentcantakechargeoftheeconomyin2012,freshfromtheballoting,"hesaid.[530]Followingtheelections,Mariano
RajoybecamePM.
SloveniaSeptember2011FollowingthefailureofJunereferendumsonmeasurestocombattheeconomiccrisisandthe
departureofcoalitionpartners,theBorutPahorgovernmentlostamotionofconfidenceandDecember2011earlyelections
wereset,followingwhichJanezJanabecamePM.[531]Afterayearofrigoroussavingmeasures,andalsoduetocontinuous
openingofideologicalquestion,thecentrerightgovernmentofJanez
Janawasoustedon27February2013bynominationofAlenkaBratuek
asthePMdesignatedofanewcentreleftcoalitiongovernment.[532]
SlovakiaOctober2011InreturnfortheapprovaloftheEFSFbyher
coalitionpartners,PMIvetaRadiovhadtoconcedeearlyelectionsin
March2012,followingwhichRobertFicobecamePM.
ItalyNovember2011Followingmarketpressureongovernment
bondpricesinresponsetoconcernsaboutlevelsofdebt,therightwing
cabinet,ofthelongtimePrimeMinisterSilvioBerlusconi,lostits
majority:Berlusconiresignedon12Novemberandfourdayslaterwas
replacedbythetechnocraticgovernmentofMarioMonti.[533]
GreeceNovember2011Afterintensecriticismfromwithinhisown
party,theoppositionandotherEUgovernments,forhisproposaltohold
areferendumontheausterityandbailoutmeasures,PMGeorge
PapandreouofthePASOKpartyannouncedhisresignationinfavourofa
nationalunitygovernmentbetweenthreeparties,ofwhichonlytwo
currentlyremaininthecoalition.[40]FollowingthevoteintheGreek
parliamentontheausterityandbailoutmeasures,whichbothleading
partiessupportedbutmanyMPsofthesetwopartiesvotedagainst,
UnscheduledchangeofgovernmentsinEuro
PapandreouandAntonisSamarasexpelledatotalof44MPsfromtheir
countries(markedred)duetocrisis
respectiveparliamentarygroups,leadingtoPASOKlosingits
parliamentarymajority.[534]TheearlyGreeklegislativeelection,2012
werethefirsttimeinthehistoryofthecountry,atwhichthebipartisanship(consistedofPASOKandNewDemocracy
parties),whichruledthecountryforover40years,collapsedinvotesasapunishmentfortheirsupporttothestrictmeasures
proposedbythecountry'sforeignlendersandtheTroika(consistedoftheEuropeanCommission,theIMFandtheEuropean
CentralBank).ThepopularityofPASOKdroppedfrom42.5%in2010toaslowas7%insomepollsin2012.[535]The
radicalrightwing,extremeleftwing,communistandpopulistpoliticalpartiesthathaveopposedthepolicyofstrict
measures,wonthemajorityofthevotes.
NetherlandsApril2012AftertalksbetweentheVVD,CDAandPVVoveranewausteritypackageofabout14billion
eurosfailed,theRuttecabinetcollapsed.Earlyelectionswerecalledfor12September2012.TopreventfinesfromtheEU
anewbudgetwasdemandedby30AprilfivedifferentpartiescalledtheKunduzcoalitionforgedtogetheranemergency
budgetfor2013injusttwodays.[536]
FranceMay2012TheFrenchpresidentialelection,2012becamethefirsttimesince1981thatanincumbentfailedto
gainasecondterm,whenNicolasSarkozylosttoFranoisHollande.
Seealso
2000scommoditiesboom
CrisissituationsandunrestinEuropesince2000
FederalReserveEconomicData
GreatRecession
GreatRecessioninEurope
Listofacronyms:Europeansovereigndebtcrisis
Listofcountriesbycreditrating
Listofprotagonists:Europeansovereigndebtcrisis
Wikinewshasrelated
news:European
Commissionwarns
Eurozoneeconomyto
shrinkfurther
Notes
a. AccordingtoECB'sdefinition,asovereignstatewillhavemanagedtoregaincompleteaccesstoprivatelendingmarkets,whenitsucceeds
toissuenewgovernmentbondswithatenyearmaturity.[102][103]
32/53
8/14/2015
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Furtherreading
Foremny,D.,&VonHagen,J.(2012).Fiscalfederalismintimesofcrisis(http://papers.ssrn.com/sol3/papers.cfm?
abstract_id=2155524),CEPRDiscussionPapers9154,C.E.P.R.DiscussionPapers.
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AdocumentarybytheInstitutd'EtudesEuropennesoftheUniversitLibredeBruxelles
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v=ri_WPlisM4k) AdocumentarybytheInstitutd'EtudesEuropennesoftheUniversitLibredeBruxelles
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ConventionalWisdoms
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EurostatStatisticsExplained:Structureofgovernmentdebt
(http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Structure_of_government_debt)(October2011data)
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Magazine,9February2011
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Wolf,Martin,"Creditorscanhuffbuttheyneeddebtors"(http://www.ft.com/intl/cms/s/0/e71ab1d6049d11e1ac2a
00144feabdc0.html#axzz1cYDHnKg3),FinancialTimes,1November20117:28pm.
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(http://www.cepr.net/documents/publications/greece201202.pdf)CenterforEconomicandPolicyResearch,February2012
"Liquidityonlybuystime"WhereareEuropeanexpertsforalongtermandholisticapproach?InterviewwithLiuOlin:
TheEuroCrisis.AChineseEconomist'sView.(03/2012)(http://99faces.tv/liuolin/?
preview=true&preview_id=2542&preview_nonce=a5f23749b4)
MichaelLewisHowtheFinancialCrisisCreatedaNewThirdWorldOctober2011
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snbchf.com,October2012
"LeavingtheEuro:APracticalGuide"byRogerBootle,winnerofthe2012WolfsonEconomicsPrize
(http://www.policyexchange.org.uk/images/WolfsonPrize/wolfson%20economics%20prize%20winning%20entry.pdf)
"BreakingtheDeadlock:APathOutoftheCrisis"
(http://ineteconomics.org/sites/inet.civicactions.net/files/INET%20Council%20on%20the%20Euro%20Zone%20Crisis%20
%2023712.pdf)
TheEurozoneCrisisCanAusterityFosterGrowth?(http://www.cfoinsight.com/uploads/media/EurozoneCrisiswebinars
20120718.pdf)TheWorldBank'sChiefEconomistEMEA,IndermitGil,aboutpotentialramifications,CFOInsight
Magazine,July2012
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(http://mercatus.org/sites/default/files/deRugy_RelativeEffects_v1.pdf)MercatusResearch,March2013
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