2010 European sovereign debt crisis
Encyclopedia
From late 2009, fears of a sovereign debt crisis developed among investor
Investor
An investor is a party that makes an investment into one or more categories of assets --- equity, debt securities, real estate, currency, commodity, derivatives such as put and call options, etc...

s concerning some European states, intensifying in early 2010 and thereafter..

This crisis is analytically separate from the Late-2000s financial crisis
Late-2000s financial crisis
The late-2000s financial crisis is considered by many economists to be the worst financial crisis since the Great Depression of the 1930s...

, although the two phenomena are linked in their effects. The sovereign debt crisis refers to budget deficits that have been created by insufficient tax revenue, excessive spending, or both in several Mediterranean states including Greece, Italy, Spain, and Portugal. The financial crisis on the other hand began in the U.S. and in countries that imitated the problematic lending practices of the U.S., such as Iceland and Ireland. The two phenomena have become linked because many European banks held assets in financially troubled American banks, and because the need to bail out troubled banks has worsened the budget deficit for governments. The size of the budget deficits has frightened investors, who have demanded higher interest rates from struggling governments. This in turn makes it difficult for governments to finance further budget deficits and service existing high debt levels.

Especially in countries where government budget deficits and sovereign debts
Government debt
Government debt is money owed by a central government. In the US, "government debt" may also refer to the debt of a municipal or local government...

 have increased sharply, a crisis of confidence has emerged with the widening of bond
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...

 yield spread
Yield spread
In finance, the yield spread is the difference between the quoted rates of return on two different investments, usually of different credit quality.It is a compound of yield and spread....

s and risk insurance on credit default swap
Credit default swap
A credit default swap is similar to a traditional insurance policy, in as much as it obliges the seller of the CDS to compensate the buyer in the event of loan default...

s between these countries and other EU members, most importantly Germany.

While the sovereign debt increases have been most pronounced in only a few eurozone countries, they have become a perceived problem for the area as a whole.

Concern about rising government debt
Government debt
Government debt is money owed by a central government. In the US, "government debt" may also refer to the debt of a municipal or local government...

 levels across the globe together with a wave of downgrading of government debt for certain European states created alarm in financial markets. On 9 May 2010, Europe's Finance Ministers approved a rescue package worth
Euro
The euro is the official currency of the eurozone: 17 of the 27 member states of the European Union. It is also the currency used by the Institutions of the European Union. The eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,...

750 billion aimed at ensuring financial stability across Europe by creating the European Financial Stability Facility
European Financial Stability Facility
The European Financial Stability Facility is a special purpose vehicle financed by members of the eurozone to combat the European sovereign debt crisis. It was agreed by the 27 member states of the European Union on 9 May 2010, aiming at preserving financial stability in Europe by providing...

 (EFSF). In November 2010, as concerns started to resurface about the fiscal health of Ireland, Greece and Portugal, EU President Herman Van Rompuy said "If we don’t survive with the eurozone we will not survive with the European Union." To save the currency EU leaders suggested closer fiscal cooperation. In the event European Union leaders made a proposal to establish a single authority responsible for tax policy oversight and government spending coordination of EU member countries, temporarily called the European Treasury.

In October 2011, eurozone leaders meeting in Brussels agreed on a package of measures designed to prevent the collapse of member economies due to their spiralling debt. This included a proposal to write off 50% of Greek debt
Greek government debt crisis
From late 2009, fears of a sovereign debt crisis developed among investors concerning Greece's ability to meet its debt obligations due to strong increase in government debt levels. This lead to a crisis of confidence, indicated by a widening of bond yield spreads and risk insurance on credit...

 owed to private creditor
Creditor
A creditor is a party that has a claim to the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property or service to the second party under the assumption that the second party will return an equivalent property or...

s, increasing the EFSF to about €1 trillion and requiring European banks to achieve 9% capitalisation.

Despite the debt crisis in a number of eurozone countries the European currency remained stable, trading even slightly higher against the Euro bloc's major trading partners than at the beginning of the crisis. The three most affected countries, Greece, Ireland and Portugal, collectively account for six percent of eurozone's gross domestic product
Gross domestic product
Gross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....

 (GDP).

Eurozone sovereign debt concerns

Members of the European Union signed the Maastricht Treaty
Maastricht Treaty
The Maastricht Treaty was signed on 7 February 1992 by the members of the European Community in Maastricht, Netherlands. On 9–10 December 1991, the same city hosted the European Council which drafted the treaty...

, under which they pledged to limit their deficit spending and debt levels. However, a number of European Union member states, including Greece and Italy, were able to circumvent these rules and mask their deficit and debt levels through the use of complex currency and credit derivatives structures. The structures were designed by prominent U.S. investment banks, who received substantial fees in return for their services and who took on little credit risk themselves thanks to special legal protections for derivatives counterparties. Financial reforms within the U.S. since the financial crisis have only served to reinforce special protections for derivatives—including greater access to government guarantees—while minimizing disclosure to broader financial markets.

In the first weeks of 2010, there was renewed anxiety about excessive national debt. Some politicians, notably Angela Merkel
Angela Merkel
Angela Dorothea Merkel is the current Chancellor of Germany . Merkel, elected to the Bundestag from Mecklenburg-Vorpommern, has been the chairwoman of the Christian Democratic Union since 2000, and chairwoman of the CDU-CSU parliamentary coalition from 2002 to 2005.From 2005 to 2009 she led a...

, have sought to attribute some of the blame for the crisis to hedge funds and other speculators stating that "institutions bailed out with public funds are exploiting the budget crisis in Greece and elsewhere".

Although some financial institutions clearly profited from the growing Greek government debt in the short run, there was a long lead up to the crisis. EU politicians in Brussels turned a blind eye and gave Greece a fairly clean bill of health, even as the reality of economics suggested the Euro was in danger. Investors assumed they were implicitly lending to a strong Berlin when they bought eurobonds from weaker Athens. Historic enmity to Turkey led to high defense spending, and fuelled public deficits – financed primarily by German and French banks.

Bond market

Prior to development of the crisis it was assumed by both regulators and banks that sovereign debt from the Euro zone was safe. Banks had substantial holdings of bonds from weaker economies such as Greece which offered a small premium and seemingly were equally sound. As the crisis developed it became obvious that Greek, and possibly other countries', bonds offered substantially more risk. Contributing to lack of information about the risk of European sovereign debt was conflict of interest
Conflict of interest
A conflict of interest occurs when an individual or organization is involved in multiple interests, one of which could possibly corrupt the motivation for an act in the other....

 by banks that were earning substantial sums underwriting the bonds.

Greece

In the early-mid 2000s, Greece's economy was strong and the government took advantage by running a large deficit. As the world economy cooled in the late 2000s, Greece was hit especially hard because its main industries—shipping and tourism
Tourism in Greece
Greece attracts more than 17.5 million tourists each year, contributing 15% to the nation's Gross Domestic Product. Greece has been an attraction for international visitors since antiquity for its rich and long history, Mediterranean coastline and beaches...

—were especially sensitive to changes in the business cycle. As a result, the country's debt began to pile up rapidly. In early 2010, as concerns about Greece's national debt grew, policy makers suggested that emergency bailouts might be necessary.

On 23 April 2010, the Greek government requested that the EU/IMF bailout package (made of relatively high-interest loans) be activated. The IMF had said it was "prepared to move expeditiously on this request". The initial size of the loan package was and its first installment covered of Greek bonds that became due for repayment.

On 27 April 2010, Standard & Poor's
Standard & Poor's
Standard & Poor's is a United States-based financial services company. It is a division of The McGraw-Hill Companies that publishes financial research and analysis on stocks and bonds. It is well known for its stock-market indices, the US-based S&P 500, the Australian S&P/ASX 200, the Canadian...

 slashed Greece's sovereign debt rating to BB+ or "junk
High-yield debt
In finance, a high-yield bond is a bond that is rated below investment grade...

" status amid fears of default
Default (finance)
In finance, default occurs when a debtor has not met his or her legal obligations according to the debt contract, e.g. has not made a scheduled payment, or has violated a loan covenant of the debt contract. A default is the failure to pay back a loan. Default may occur if the debtor is either...

. The yield of the Greek two-year bond reached 15.3% in the secondary market. Standard & Poor's estimates that, in the event of default, investors would lose 30–50% of their money. Stock market
Stock market
A stock market or equity market is a public entity for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.The size of the world stock market was estimated at about $36.6 trillion...

s worldwide and the Euro currency declined in response to this announcement.
On 1 May 2010, a series of austerity
Austerity
In economics, austerity is a policy of deficit-cutting, lower spending, and a reduction in the amount of benefits and public services provided. Austerity policies are often used by governments to reduce their deficit spending while sometimes coupled with increases in taxes to pay back creditors to...

 measures was proposed. The proposal helped persuade Germany, the last remaining holdout, to sign on to a larger, 110 billion euro EU/IMF loan package over three years for Greece (retaining a relatively high interest of 5% for the main part of the loans, provided by the EU). On 5 May, a national strike was held in opposition to the planned spending cuts and tax increases. Protest on that date was widespread and turned violent in Athens, killing three people.

On 2 May 2010, the Eurozone countries and the International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...

 agreed to a loan for Greece, conditional on the implementation of harsh austerity measures. The Greek bail-out was followed by a €85 billion rescue package for Ireland in November, a €78 billion bail-out for Portugal in May 2011, then continuing efforts to meet the continuing crisis in Greece and other countries.

The November 2010 revisions of 2009 deficit and debt levels made accomplishment of the 2010 targets even harder, and indications signal a recession harsher than originally feared.

Japan, Italy and Belgium's creditors are mainly domestic institutions, but Greece and Portugal have a higher percent of their debt in the hands of foreign creditors, which is seen by certain analysts as more difficult to sustain. Greece, Portugal, and Spain have a 'credibility problem', because they lack the ability to repay adequately due to their low growth rate, high deficit, less FDI
Foreign direct investment
Foreign direct investment or foreign investment refers to the net inflows of investment to acquire a lasting management interest in an enterprise operating in an economy other than that of the investor.. It is the sum of equity capital,other long-term capital, and short-term capital as shown in...

, etc.

In May 2011, Greek public debt gained prominence as a matter of concern. The Greek people generally reject the austerity
Austerity
In economics, austerity is a policy of deficit-cutting, lower spending, and a reduction in the amount of benefits and public services provided. Austerity policies are often used by governments to reduce their deficit spending while sometimes coupled with increases in taxes to pay back creditors to...

 measures, and have expressed their dissatisfaction through angry street protests. In late June 2011, Greece's government proposed additional spending cuts worth 28bn euros (£25bn) over five years. The next 12 billion euros from the Eurozone bail-out package will be released when the proposal is passed, without which Greece would have had to default on loan repayments due in mid-July.

On 13 June 2011, Standard and Poor's downgraded Greece's sovereign debt rating to CCC, the lowest in the world, following the findings of a bilateral EU-IMF audit which called for further austerity measures. After the major political parties failed to reach consensus on the necessary measures to qualify for a further bailout package, and amidst riots and a general strike, Prime Minister George Papandreou
George Papandreou
Georgios A. Papandreou , commonly anglicised to George and shortened to Γιώργος in Greek, is a Greek politician who served as Prime Minister of Greece following his party's victory in the 2009 legislative election...

 proposed a re-shuffled cabinet, and asked for a vote of confidence in the parliament. The crisis sent ripples around the world, with major stock exchanges exhibiting losses.

Greece’s first adjustment plan was launched in March 2010 with 80 billion euros in support from the European governments and 30 billion euros from the IMF. This adjustment program hoped to reestablish the access to private capital markets by 2012. However it was soon found that this process would take longer than expected. In July 2011 there was a new package instilled in which an extra 109 billion euros in support of Greece which included a large privatization effort. Some believe that this will cause more debt for Greece. With this new package it is projected that there will be a 3.8% decline in 2011 but a .6% growth in 2012, following with a 3.5% increase in 2013, where it will eventually plateau in 2015 at 6.4%.

Some experts argue the best option for Greece and the rest of the EU should be to engineer an “orderly default
Default (finance)
In finance, default occurs when a debtor has not met his or her legal obligations according to the debt contract, e.g. has not made a scheduled payment, or has violated a loan covenant of the debt contract. A default is the failure to pay back a loan. Default may occur if the debtor is either...

” on Greece’s public debt which would allow Athens to withdraw simultaneously from the eurozone and reintroduce its national currency the drachma at a debased rate. Economists who favor this approach to solve the Greek debt crisis typically argue that a delay in organising an orderly default would wind up hurting EU lenders and neighboring European countries even more.

In the early hours of 27 October 2011, Eurozone
Eurozone
The eurozone , officially called the euro area, is an economic and monetary union of seventeen European Union member states that have adopted the euro as their common currency and sole legal tender...

 leaders and the IMF came to an agreement with banks to accept a 50% write-off of (some part of) Greek debt, the equivalent of €100 billion. The aim of the haircut is to reduce Greece's debt to 120% of GDP by 2020.

Spread beyond Greece

One of the central concerns prior to the bailout was that the crisis could spread beyond Greece. The crisis has reduced confidence in other European economies. Ireland, with a government deficit in 2010 of 32.4% of GDP, Spain with 9.2%, and Portugal at 9.1% are most at risk. According to the UK Financial Policy Committee
Financial Policy Committee
The Financial Policy Committee is an official committee of the Bank of England, modelled on the existing Monetary Policy Committee, that will be responsible for monitoring the economy of the United Kingdom. Focussing on the macro-economic and financial issues that may threaten long term growth...

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

Financing needs for the eurozone in 2010 come to a total of €1.6 trillion, while the US is expected to issue US$1.7 trillion more Treasury securities in this period, and Japan has of government bonds to roll over
Rollover (finance)
In foreign exchange trading a rollover is the action taking place at end of day, where all open positions with value date equals SPOT, will be rolled over to the next business day...

. According to Ferguson similarities between the U.S. and Greece should not be dismissed.

For 2010, the OECD forecasts $16,000bn will be raised in government bonds among its 30 member countries. Greece has been the notable example of an industrialised country that has faced difficulties in the markets because of rising debt levels. Even countries such as the US, Germany and the UK, have had fraught moments as investors shunned bond auctions due to concerns about public finances and the economy.

Ireland

The Irish sovereign debt crisis was not based on government over-spending, but from the state guaranteeing the six main Irish-based banks who had financed a property bubble. On 29 September 2008 the Finance Minister Brian Lenihan, Jnr
Brian Lenihan, Jnr
Brian Joseph Lenihan was an Irish Fianna Fáil politician and barrister who served in the government of Ireland as Minister for Justice, Equality and Law Reform from 2007 to 2008 and as Minister for Finance from 2008 to 2011...

 issued a one-year guarantee to the banks' depositors and bond-holders. He renewed it for another year in September 2009 soon after the launch of the National Asset Management Agency
National Asset Management Agency
The National Asset Management Agency is a body created by the Government of Ireland in late 2009. It is in response to the Irish financial crisis and the deflation of the Irish property bubble....

, a body designed to remove bad loans from the six banks.

The December 2009 hidden loans controversy
Anglo Irish Bank hidden loans controversy
The Anglo Irish Bank hidden loans controversy began in the Republic of Ireland in December 2008 when the chairman of Anglo Irish Bank, Ireland's third largest bank, admitted he had hidden a total of €87 million in loans from the bank, triggering a series of incidents which led to the eventual...

 within Anglo Irish Bank
Anglo Irish Bank
Anglo Irish Bank was a bank based in Ireland with its headquarters in Dublin from 1964 to 2011. It went into wind-down mode after nationalisation in 2009....

 had led to the resignations of three executives, including chief executive Seán FitzPatrick
Sean Fitzpatrick
Sean Fitzpatrick MNZM is a former rugby union footballer who represented New Zealand, and is widely regarded as one of the finest players ever to come from that country. He is also the son of former player Brian Fitzpatrick....

. A mysterious "Golden Circle" of ten businessmen are being investigated over shares they purchased in Anglo Irish Bank, using loans from the bank, in 2008. The Anglo Irish Bank Corporation Act 2009 was passed to nationalise Anglo Irish Bank
Anglo Irish Bank
Anglo Irish Bank was a bank based in Ireland with its headquarters in Dublin from 1964 to 2011. It went into wind-down mode after nationalisation in 2009....

 was voted through Dáil Éireann
Dáil Éireann
Dáil Éireann is the lower house, but principal chamber, of the Oireachtas , which also includes the President of Ireland and Seanad Éireann . It is directly elected at least once in every five years under the system of proportional representation by means of the single transferable vote...

 and passed through Seanad Éireann
Seanad Éireann
Seanad Éireann is the upper house of the Oireachtas , which also comprises the President of Ireland and Dáil Éireann . It is commonly called the Seanad or Senate and its members Senators or Seanadóirí . Unlike Dáil Éireann, it is not directly elected but consists of a mixture of members chosen by...

 without a vote on 20 January 2009. President
President of Ireland
The President of Ireland is the head of state of Ireland. The President is usually directly elected by the people for seven years, and can be elected for a maximum of two terms. The presidency is largely a ceremonial office, but the President does exercise certain limited powers with absolute...

 Mary McAleese
Mary McAleese
Mary Patricia McAleese served as the eighth President of Ireland from 1997 to 2011. She was the second female president and was first elected in 1997 succeeding Mary Robinson, making McAleese the world's first woman to succeed another as president. She was re-elected unopposed for a second term in...

 then signed the bill at Áras an Uachtaráin
Áras an Uachtaráin
Áras an Uachtaráin , formerly the Viceregal Lodge, is the official residence of the President of Ireland. It is located in the Phoenix Park on the northside of Dublin.-Origins:...

 the following day, confirming the bank's nationalisation.

In April 2010, following a marked increase in Irish 2-year bond yields, Ireland's NTMA
National Treasury Management Agency
The National Treasury Management Agency is the agency that manages the assets and liabilities of the Government of Ireland. It was established at the end of 1990 to borrow for the exchequer and manage the national debt...

 state debt agency said that it had "no major refinancing obligations" in 2010. Its requirement for in 2010 was matched by a cash balance, and it remarked: "We're very comfortably circumstanced". On 18 May the NTMA tested the market and sold a €1.5 billion issue that was three times oversubscribed.

By September 2010 the banks could not raise finance and the bank guarantee was renewed for a third year. This had a negative impact on Irish government bonds, government help for the banks rose to 32% of GDP, and so the government started negotiations with the ECB and the IMF, resulting in the €85 billion "bailout" agreement of 29 November 2010, of which €34 billion were used to support its ailing financial sector. In return the government agreed to reduce its budget deficit to below three percent by 2015. In February the government lost the ensuing Irish general election, 2011. In April 2011, despite all the measures taken, Moody's
Moody's
Moody's Corporation is the holding company for Moody's Analytics and Moody's Investors Service, a credit rating agency which performs international financial research and analysis on commercial and government entities. The company also ranks the credit-worthiness of borrowers using a standardized...

 downgraded the banks' debt to junk status.

The latest Euro Plus Monitor report (from November 2011) attests to Ireland's vast progress in dealing with its financial crisis, expecting the country to stand on its own feet again and finance itself without any external support from the second half of 2012 onwards. According to the Centre for Economics and Business Research Ireland's export-led recovery "will gradually pull its economy out of its trough". As a result of the improved economic outlook, the cost of 10-year government bonds, which has already fallen substantially since mid July 2011 (see the graph "Long-term Interest Rates"), is expected to fall further to 4 per cent by 2015.

Portugal

A report released in January 2011 by the Diário de Notícias
Diário de Notícias
Diário de Notícias is a Portuguese daily newspaper, founded in Lisbon, on December 29, 1864 by Tomás Quintino Antunes and Eduardo Coelho. It gradually became one of the best known Portuguese newspapers...

 and published in Portugal by Gradiva, demonstrated that in the period between the Carnation Revolution
Carnation Revolution
The Carnation Revolution , also referred to as the 25 de Abril , was a military coup started on 25 April 1974, in Lisbon, Portugal, coupled with an unanticipated and extensive campaign of civil resistance...

 in 1974 and 2010, the democratic Portuguese Republic government
Government of Portugal
The Government is one of the four sovereignty organs of the Portuguese Republic. It is also the organ that conducts politics in general in the country and is also the superior body in public administration...

s have encouraged over-expenditure and investment bubbles through unclear public-private partnerships and funding of numerous ineffective and unnecessary external consultancy and advisory of committees and firms. This allowed considerable slippage in state-managed public works
Public works
Public works are a broad category of projects, financed and constructed by the government, for recreational, employment, and health and safety uses in the greater community...

 and inflated top management and head officer bonuses and wages. Persistent and lasting recruitment policies boosted the number of redundant public servants. Risky credit
Credit (finance)
Credit is the trust which allows one party to provide resources to another party where that second party does not reimburse the first party immediately , but instead arranges either to repay or return those resources at a later date. The resources provided may be financial Credit is the trust...

, public debt creation, and European structural and cohesion funds were mismanaged across almost four decades. The Prime Minister Sócrates
José Sócrates
José Sócrates Carvalho Pinto de Sousa, GCIH , commonly known by José Sócrates , is a Portuguese politician who was the Prime Minister of Portugal from 12 March 2005 to 21 June 2011....

's cabinet was not able to forecast or prevent this in 2005, and later it was incapable of doing anything to improve the situation when the country was on the verge of bankruptcy by 2011.

Robert Fishman, in the New York Times article "Portugal's Unnecessary Bailout", points out that Portugal fell victim to successive waves of speculation by pressure from bond traders, rating agencies and speculators. In the first quarter of 2010, before markets pressure, Portugal had one of the best rates of economic recovery in the EU. From the perspective of Portugal's industrial orders, exports, entrepreneurial innovation and high-school achievement, the country matched or even surpassed its neighbors in Western Europe.

On 16 May 2011 the Eurozone leaders officially approved a €78 billion bailout package for Portugal. The bailout loan will be equally split between the European Financial Stabilisation Mechanism
European Financial Stabilisation Mechanism
The European Financial Stabilisation Mechanism is an emergency funding programme reliant upon funds raised on the financial markets and guaranteed by the European Commission using the budget of the European Union as collateral...

, the European Financial Stability Facility
European Financial Stability Facility
The European Financial Stability Facility is a special purpose vehicle financed by members of the eurozone to combat the European sovereign debt crisis. It was agreed by the 27 member states of the European Union on 9 May 2010, aiming at preserving financial stability in Europe by providing...

, and the International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...

.
According to the Portuguese finance minister, the average interest rate on the bailout loan is expected to be 5.1% As part of the bailout, Portugal agreed to eliminate its golden share
Golden Share
A Golden Share is a nominal share which is able to outvote all other shares in certain specified circumstances, often held by a government organization, in a government company undergoing the process of privatization and transformation into a stock-company....

 in Portugal Telecom
Portugal Telecom
Portugal Telecom is the largest telecommunications service provider in Portugal. Although it operates mainly in Portugal and Brazil, it has also a significant presence in Guinea-Bissau, Cape Verde, Mozambique, Timor-Leste, Angola, Kenya, the People's Republic of China, and São Tomé and...

 to pave the way for privatization. Portugal became the third Eurozone country, after Ireland and Greece, to receive a bailout package.

On 6 July 2011 it was confirmed that the ratings agency Moody's had cut Portugal's credit rating to junk status, Moody's also launched speculation that Portugal may follow Greece in requesting a second bailout.

Italy

Italy's deficit of 4.6 percent of GDP in 2010 was similar to Germany’s at 4.3 percent and less than that of the U.K. and France. Italy even has a surplus in its primary budget, which excludes debt interest payments. However, its debt has increased to almost 120 percent of GDP and economic growth was lower than the EU average for over a decade. This has led investors to view Italian bonds more and more as a risky asset. On the other hand, the public debt of Italy has a longer maturity and a big share of it is held domestically. Overall this makes the country more resilient to financial shocks, ranking better than France and Belgium.

On 15 July and 14 September 2011, Italy's government passed austerity measures meant to save 124 billion euro. Nonetheless, by 8 November 2011 the Italian bond yield was 6.74 percent for 10-year bonds, climbing above the 7 percent level where the country is thought to lose access to financial markets. On 11 November 2011, Italian 10-year borrowing costs fell sharply from 7.5 to 6.7 percent after Italian legislature approved further austerity measures and the formation of an emergency government to replace that of Prime Minister Silvio Berlusconi
Silvio Berlusconi
Silvio Berlusconi , also known as Il Cavaliere – from knighthood to the Order of Merit for Labour which he received in 1977 – is an Italian politician and businessman who served three terms as Prime Minister of Italy, from 1994 to 1995, 2001 to 2006, and 2008 to 2011. Berlusconi is also the...

. The measures include a pledge to raise 15 billion euros from real-estate sales over the next three years, a two-year increase in the retirement age to 67 by 2026, opening up closed professions within 12 months and a gradual reduction in government ownership of local services. The interim government expected to put the new laws into practice is led by former European Union Competition Commissioner Mario Monti
Mario Monti
Mario Monti is an Italian economist and academic who is Prime Minister of Italy, as well as Minister of Economy and Finance, since November 2011. Monti served as a European Commissioner from 1995 to 2004, with responsibility for the Internal Market, Services, Customs and Taxation from 1995 to 1999...

.

Spain

Shortly after the announcement of the EU's new "emergency fund" for eurozone countries in early May 2010, Spain's government announced new austerity measures designed to further reduce the country's budget deficit. The Spanish government had hoped to avoid such deep cuts, but weak economic growth as well as domestic and international pressure forced the government to expand on cuts already announced in January. As one of the largest eurozone economies the condition of Spain's economy is of particular concern to international observers, and faced pressure from the United States, the IMF, other European countries and the European Commission to cut its deficit more aggressively.

According to the Financial Times, Spain succeeded in trimming its deficit from 11.2% of GDP in 2009 to 9.2% in 2010. Spain's public debt (60.1% of GDP in 2010) is significantly lower than that of Greece (142.8%), Italy (119%), Portugal (93%), Ireland (96.2), and Germany (83.2%), France (81.7%) and the United Kingdom (80.0%).

Belgium

In 2010, Belgium's public debt was 100% of its GDP – the third highest in the eurozone after Greece and Italy and there were doubts about the financial stability of the banks. After inconclusive elections in June 2010, by November 2011 the country still had only a caretaker government as parties from the two main language groups in the country (Flemish and Walloon) were unable to reach agreement on how to form a majority government. Financial analysts forecast that Belgium would be the next country to be hit by the financial crisis as Belgium's borrowing costs rose.

However the government deficit of 5% was relatively modest and Belgian government 10-year bond yields in November 2010 of 3.7% were still below those of Ireland (9.2%), Portugal (7%) and Spain (5.2%). Furthermore, thanks to Belgium's high personal savings rate, the Belgian Government financed the deficit from mainly domestic savings, making it less prone to fluctuations of international credit markets. Nevertheless on 25 November 2011, Belgium's long-term sovereign credit rating was downgraded from AA+ to AA by Standard and Poor and 10-year bond yields reached 5.66%.

France

By 16 November 2011, France's bond yield spreads vs. Germany had widened 450% since July, 2011, making it a new "core country" under attack . France's C.D.S. contract value rose 300% in the same period

United Kingdom

According to the Financial Policy Committee "Any associated disruption to bank funding markets could spill over to UK banks." Bank of England
Bank of England
The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694, it is the second oldest central bank in the world...

 governor Mervyn King
Mervyn King (economist)
An ex-officio member of the Bank's interest-rate setting Monetary Policy Committee since its inception in 1997, Sir Mervyn is the only person to have taken part in every one of its monthly meetings to date. His voting style is often seen as "hawkish", a perspective that emphasises the dangers of...

 declared that the UK is very much at risk from a domino-fall of defaults and called on banks to build up more capital when financial conditions allowed.

Iceland

Iceland suffered the failure of its banking system and a subsequent economic crisis. After a sharp increase in public debts due to the banking failures, the government has been able to reduce the size of deficits each year. The effort has been made more difficult by a more sluggish recovery than earlier expected. Before the crash of the three largest commercial banks in Iceland, Glitnir
Glitnir (bank)
Glitnir was an international Icelandic bank. It was created by the state-directed merger of the country's three privately held banks - Alþýðubanki , Verzlunarbanki and Iðnaðarbanki - and one failing publicly held bank - Útvegsbanki - to form Íslandsbanki in 1990...

, Landsbanki
Landsbanki
Landsbanki, also commonly known as Landsbankinn in Iceland, is a private Icelandic bank with international operations...

 and Kaupthing
Kaupthing Bank
Kaupthing Bank was an international Icelandic bank, headquartered in Reykjavík, Iceland. It was formed by the merger of Kaupthing and Búnaðarbanki Íslands in 2003 and was the largest bank in Iceland....

, they jointly owed over 10 times Iceland's GDP. In October 2008, the Icelandic parliament passed emergency legislation to minimise the impact of the financial crisis. The Financial Supervisory Authority of Iceland used permission granted by the emergency legislation to take over the domestic operations of the three largest banks.

The foreign operations of the banks, however, went into receivership. As a result, the country has not been seriously affected by the European sovereign debt crisis from 2010. In large part this is due to the success of an IMF Stand-By Arrangement
IMF Stand-By Arrangement
The IMF Stand-By Arrangement is an economic program of the International Monetary Fund involving financial aid to a member state in need of financial assistance, normally arising from a financial crisis...

 in the country since November 2008. The government has enacted a program of medium term fiscal consolidation, based on expenditure cuts and broad based and significant tax hikes. As a result, central government debts have been stabilised at around 80–90 percent of GDP. Capital controls were also enacted and the work began to resurrect a sharply downsized domestic banking system on the ruins of its gargantuan international banking system, which the government was unable to bail out.

Despite a contentious debate with Britain and the Netherlands over the question of a state guarantee on the Icesave deposits of Landsbanki in these countries, credit default swap
Credit default swap
A credit default swap is similar to a traditional insurance policy, in as much as it obliges the seller of the CDS to compensate the buyer in the event of loan default...

s on Icelandic sovereign debt have steadily declined from over 1000 points prior to the crash in 2008 to around 200 points in June 2011. Further, on 9 June 2011, the Icelandic government successfully raised 1$ billion with a bond issue indicating that international investors are viewing positively the efforts of the government to consolidate the public finances and restructure the banking system, with two of the three biggest banks now in foreign hands.

Switzerland

In September 2011, the Swiss National Bank
Swiss National Bank
The Swiss National Bank is the central bank of Switzerland. It is responsible for Swiss monetary policy and for issuing Swiss franc banknotes.The names of the institution in the four official languages of the country are: ; ; ; ....

 weakened the Swiss franc
Swiss franc
The franc is the currency and legal tender of Switzerland and Liechtenstein; it is also legal tender in the Italian exclave Campione d'Italia. Although not formally legal tender in the German exclave Büsingen , it is in wide daily use there...

 to a floor of 1.20 francs per euro. The franc has been appreciating against the euro during to the crisis, harming Swiss exporters. The SNB surprised currency traders by pledging that "it will no longer tolerate a euro-franc exchange rate below the minimum rate of 1.20 francs." This is the biggest Swiss intervention since 1978.

European Financial Stability Facility (EFSF)

On 9 May 2010, the 27 member states
Member State of the European Union
A member state of the European Union is a state that is party to treaties of the European Union and has thereby undertaken the privileges and obligations that EU membership entails. Unlike membership of an international organisation, being an EU member state places a country under binding laws in...

 of the European Union agreed to create the European Financial Stability Facility
European Financial Stability Facility
The European Financial Stability Facility is a special purpose vehicle financed by members of the eurozone to combat the European sovereign debt crisis. It was agreed by the 27 member states of the European Union on 9 May 2010, aiming at preserving financial stability in Europe by providing...

, a legal instrument aiming at preserving financial stability in Europe by providing financial assistance to eurozone states in difficulty. The facility is jointly and severally guaranteed by the Eurozone countries' governments. The European Parliament
European Parliament
The European Parliament is the directly elected parliamentary institution of the European Union . Together with the Council of the European Union and the Commission, it exercises the legislative function of the EU and it has been described as one of the most powerful legislatures in the world...

, the European Council
European Council
The European Council is an institution of the European Union. It comprises the heads of state or government of the EU member states, along with the President of the European Commission and the President of the European Council, currently Herman Van Rompuy...

, and especially the European Commission
European Commission
The European Commission is the executive body of the European Union. The body is responsible for proposing legislation, implementing decisions, upholding the Union's treaties and the general day-to-day running of the Union....

, can all provide some support for the treasury while it is still being built.

In order to reach these goals the Facility is devised in the form of a special purpose vehicle
Special purpose entity
A special purpose entity is a legal entity created to fulfill narrow, specific or temporary objectives...

 (SPV) that will sell bond
Government bond
A government bond is a bond issued by a national government denominated in the country's own currency. Bonds are debt investments whereby an investor loans a certain amount of money, for a certain amount of time, with a certain interest rate, to a company or country...

s and use the money it raises to make loans up to a maximum of € 440 billion to eurozone nations in need. The new entity will sell debt only after an aid request is made by a country. The EFSF loans would complement loans backed by the lender of last resort International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...

, and in selected cases loans by the EFSF. The total safety net available would be therefore €750 billion, consisting of up to € 440 billion from EFSF, up to € 60 billion loan from the European Financial Stabilisation Mechanism
European Financial Stabilisation Mechanism
The European Financial Stabilisation Mechanism is an emergency funding programme reliant upon funds raised on the financial markets and guaranteed by the European Commission using the budget of the European Union as collateral...

 (reliant on guarantees given by the European Commission
European Commission
The European Commission is the executive body of the European Union. The body is responsible for proposing legislation, implementing decisions, upholding the Union's treaties and the general day-to-day running of the Union....

 using the EU budget as collateral) and € 250 billion loan backed by the IMF. The agreement is interpreted to allow the ECB to start buying government debt
Government debt
Government debt is money owed by a central government. In the US, "government debt" may also refer to the debt of a municipal or local government...

 from the secondary market which is expected to reduce bond
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...

 yields. (Greek bond yields fell from over 10% to just over 5%; Asian bonds yields also fell with the EU bailout.)

The German Bundestag voted 523 to 85 to approve the increase in the EFSF's available funds to €440bn (Germany's share €211bn), a victory for Merkel, though other possible ways to expand the EFSF and EMU powers were not addressed in the legislation. Wolfgang Schäuble
Wolfgang Schäuble
Wolfgang Schäuble is a German politician of the Christian Democratic Union , currently serving as the Federal Minister of Finance in the Second Cabinet Merkel....

, the German finance minister, and Philipp Rösler
Philipp Rösler
Philipp Rösler is a German politician, who, since 2011, has been the Federal Minister of Economics and Technology and the Vice Chancellor of Germany...

, the economics minister, were concurrently on record against leveraging
Leverage (finance)
In finance, leverage is a general term for any technique to multiply gains and losses. Common ways to attain leverage are borrowing money, buying fixed assets and using derivatives. Important examples are:* A public corporation may leverage its equity by borrowing money...

 the EFSF. In early October, Slovakia remained uncertain as to the approval, with "political turmoil in Bratislava
Bratislava
Bratislava is the capital of Slovakia and, with a population of about 431,000, also the country's largest city. Bratislava is in southwestern Slovakia on both banks of the Danube River. Bordering Austria and Hungary, it is the only national capital that borders two independent countries.Bratislava...

, the nation’s capital, exposing strains within the four-party ruling coalition". Mid-October Slovakia became the last country to give approval, though not before parliament speaker Richard Sulík
Richard Sulík
Richard Sulík is a Slovak economist, businessman and politician. He is the leader of the political party Freedom and Solidarity.- Life :...

 registered strong questions as to how "a poor but rule-abiding euro-zone state must bail out a serial violator with twice the per capita income, and triple the level of the pensions — a country which is in any case irretrievably bankrupt? How can it be that the no-bail clause of the Lisbon treaty has been ripped up?"

In July 2011, it was agreed during the EU summit that the EFSF will be given more powers to intervene in the secondary markets, thus dramatically socializing risk in the eurozone, which ends the crisis. Furthermore the EU agreed that Greece should receive EU loans at lower interest rates of 3.5%.

On November 29, 2011 the member state finance ministers agreed to expand the EFSF by creating certificates that could guarantee up to 30% of new issues from troubled euro-area governments and to create investment vehicles that would boost the EFSF’s firepower to intervene in primary and secondary bond markets

In Mid 2013 the EFSF will be replaced by a permanent rescue funding program called European Stability Mechanism
European Stability Mechanism
The European Stability Mechanism is a permanent rescue funding programme to succeed the temporary European Financial Stability Facility and European Financial Stabilisation Mechanism...

 (ESM). It will be established once the ratification process of its treaty is completed.

Reception by financial markets
After the EU announced to create the EFSF on 9 May 2010 stocks worldwide surged as fears that the Greek debt crisis would spread subsided, some rose the most in a year or more. The Euro made its biggest gain in 18 months, before falling to a new four-year low a week later. Shortly after the euro rose again as hedge funds and other short-term traders unwound short positions and carry trades in the currency. Commodity prices also rose following the announcement. The dollar Libor held at a nine-month high. Default swap
Swap (finance)
In finance, a swap is a derivative in which counterparties exchange certain benefits of one party's financial instrument for those of the other party's financial instrument. The benefits in question depend on the type of financial instruments involved...

s also fell. The VIX
VIX
VIX is the ticker symbol for the Chicago Board Options Exchange Market Volatility Index, a popular measure of the implied volatility of S&P 500 index options. Often referred to as the fear index or the fear gauge, it represents one measure of the market's expectation of stock market volatility over...

 closed down a record almost 30%, after a record weekly rise the preceding week that prompted the bailout.

International credit rating agencies consider that, while the aid package has so far averted a financial panic, eurozone countries such as Portugal may continue to have economic difficulties.

European Financial Stabilisation Mechanism (EFSM)

On 5 January 2011, the European Union created the European Financial Stabilisation Mechanism
European Financial Stabilisation Mechanism
The European Financial Stabilisation Mechanism is an emergency funding programme reliant upon funds raised on the financial markets and guaranteed by the European Commission using the budget of the European Union as collateral...

 (EFSM), an emergency funding programme reliant upon funds raised on the financial markets and guaranteed by the European Commission
European Commission
The European Commission is the executive body of the European Union. The body is responsible for proposing legislation, implementing decisions, upholding the Union's treaties and the general day-to-day running of the Union....

 using the budget of the European Union as collateral. It runs under the supervision of the Commission and aims at preserving financial stability in Europe by providing financial assistance to member states of the European Union in economic difficulty. The Commission fund, backed by all 27 European Union
European Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...

 members, has the authority to raise up to €60 billion and is rated AAA
Bond credit rating
In investment, the bond credit rating assesses the credit worthiness of a corporation's or government debt issues. It is analogous to credit ratings for individuals.-Table:...

 by Fitch, Moody's
Moody's
Moody's Corporation is the holding company for Moody's Analytics and Moody's Investors Service, a credit rating agency which performs international financial research and analysis on commercial and government entities. The company also ranks the credit-worthiness of borrowers using a standardized...

 and Standard & Poor's
Standard & Poor's
Standard & Poor's is a United States-based financial services company. It is a division of The McGraw-Hill Companies that publishes financial research and analysis on stocks and bonds. It is well known for its stock-market indices, the US-based S&P 500, the Australian S&P/ASX 200, the Canadian...

.

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

Like the EFSF also the EFSM will be replaced by the permanent rescue funding programme ESM, which is due to be launched in mid-2013.

Brussels agreement

On 26 October 2011, leaders of the 17 Eurozone countries met in Brussels to discuss a package aimed at addressing the crisis. After ten hours of discussions, a package was announced by the President of the European Commission, Jose Manuel Barroso, which proposed a 50% write-off of Greek sovereign debt held by banks, a fourfold increase (to about €1 trillion) in bail-out funds held under the European Financial Stability Facility
European Financial Stability Facility
The European Financial Stability Facility is a special purpose vehicle financed by members of the eurozone to combat the European sovereign debt crisis. It was agreed by the 27 member states of the European Union on 9 May 2010, aiming at preserving financial stability in Europe by providing...

, an increased mandatory level of 9% for bank capitalisation within the EU and a set of commitments from Italy to take measures to reduce its national debt. Also pledged was €35 billion in "credit enhancement" to mitigate losses likely to be suffered by European banks. He characterised the package as a set of "exceptional measures for exceptional times".

The deal was welcomed by Greek Prime Minister George Papandreou
George Papandreou
Georgios A. Papandreou , commonly anglicised to George and shortened to Γιώργος in Greek, is a Greek politician who served as Prime Minister of Greece following his party's victory in the 2009 legislative election...

, who said that "a new day" had come "not only for Greece but also for Europe". French President Nicolas Sarkosy said it represented a "credible, ambitious and comprehensive response" to the debt crisis. Christine Lagarde
Christine Lagarde
Christine Madeleine Odette Lagarde is a French lawyer and the managing director of the International Monetary Fund since July 5, 2011...

, head of the International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...

, said she was "encouraged by the substantial progress made on a number of fronts". Financial markets worldwide responded positively to news of an agreement being reached.

Italy's commitments to its Eurozone partners, presented by Silvio Berlusconi
Silvio Berlusconi
Silvio Berlusconi , also known as Il Cavaliere – from knighthood to the Order of Merit for Labour which he received in 1977 – is an Italian politician and businessman who served three terms as Prime Minister of Italy, from 1994 to 1995, 2001 to 2006, and 2008 to 2011. Berlusconi is also the...

 in the form of a letter, included reforms to pensions, €15bn in asset sales and liberalisation of employment law. However, Italian opposition leaders objected to these proposals and suggested that Berlusconi's political position was too weak for them to be taken seriously. After fierce pressure from financial markets and European peers, Italy agreed to have experts from the IMF and the European Commission monitor its progress with reforms of pensions, labour markets and privatisation.

Commentators suggested that the package agreed in Brussels might not be enough to ensure the long-term survival of the Euro without additional political integration within the Eurozone. It was also noted that the means by which the overall package would be funded were unclear. The package's acceptance was put into doubt on 31 October when Greek Prime Minister George Papandreou announced that a referendum would be held so that the Greek people would have the final say on the bailout, upsetting financial markets. On 3 November 2011 the promised Greek referendum on the bailout package was withdrawn by Prime Minister Papandreou.

ECB interventions

The European Central Bank
European Central Bank
The European Central Bank is the institution of the European Union that administers the monetary policy of the 17 EU Eurozone member states. It is thus one of the world's most important central banks. The bank was established by the Treaty of Amsterdam in 1998, and is headquartered in Frankfurt,...

 (ECB) has taken a series of measures aimed at reducing volatility in the financial markets and at improving liquidity:
  • First, it began open market operations buying government and private debt securities, reaching 200 billion euros by end of November 2011, though it simultaneously absorbed the same amount of liquidity to prevent a rise in inflation. If the ECB maintains its average rate of 11 billion additional purchases per week, it would reach 300 billion euros by mid-January, a level that Rabobank
    Rabobank
    Rabobank is a financial services provider with offices worldwide. Their main location is in the Netherlands. They are a global leader in Food and Agri financing and in sustainability-oriented banking...

     economist Elwin de Groot believes to be a “natural limit” the ECB can sterilize.
  • Second, it announced two 3-month and one 6-month full allotment of Long Term Refinancing Operations (LTRO's).
  • Thirdly, it reactivated the dollar swap lines with Federal Reserve support.


Subsequently, the member banks of the European System of Central Banks
European System of Central Banks
The European System of Central Banks is composed of the European Central Bank and the national central banks of all 27 European Union Member States.-Functions:...

 started buying government debt.

In September, 2011, Jürgen Stark
Jürgen Stark
Jürgen Stark is a German economist who has been a member of the Executive Board of the European Central Bank from June 2006, but announced in September 2011 he would resign later that year...

 became the second German after Axel A. Weber
Axel A. Weber
Axel Alfred Weber is a German economist, professor and banker. He teaches at the University of Chicago Booth School of Business and is a board member and prospective chairman of UBS...

 to resign from the ECB Governing Council in 2011. Weber, the former Deutsche Bundesbank
Deutsche Bundesbank
The Deutsche Bundesbank is the central bank of the Federal Republic of Germany and as such part of the European System of Central Banks . Due to its strength and former size, the Bundesbank is the most influential member of the ESCB. Both the Deutsche Bundesbank and the European Central Bank are...

 president, was once thought to be a likely successor to Jean-Claude Trichet
Jean-Claude Trichet
Jean-Claude Trichet is a French civil servant who was the president of the European Central Bank, a position he held from 2003 to 2011. He is also a member of the Board of Directors of the Bank for International Settlements...

 as bank president. He and Stark were both thought to have resigned due to "unhappiness with the ECB’s bond purchases, which critics say erode the bank’s independence". Stark was "probably the most hawkish" member of the council when he resigned. Weber was replaced by his Bundesbank successor Jens Weidmann
Jens Weidmann
Jens Weidmann is a German economist and president of the Deutsche Bundesbank. Before assuming the top Bundesbank position in 2011, from February 2006, he served as Head of Division IV in the Federal Chancellery...

 and "[l]eaders in Berlin plan to push for a German successor to Stark as well, news reports said".

Reform and recovery

Slow GDP growth rates correspond to slower growth in tax revenues and higher safety net spending, increasing deficits and debt levels. Fareed Zakaria
Fareed Zakaria
Fareed Rafiq Zakaria is an Indian-American journalist and author. From 2000 to 2010, he was a columnist for Newsweek and editor of Newsweek International. In 2010 he became Editor-At-Large of Time magazine...

 described the factors slowing growth in the Euro zone, writing in November 2011: "Europe's core problem [is] a lack of growth...Italy's economy has not grown for an entire decade. No debt restructuring will work if it stays stagnant for another decade...The fact is that Western economies - with high wages, generous middle-class subsidies and complex regulations and taxes - have become sclerotic. Now they face pressures from three fronts: demography (an aging population), technology (which has allowed companies to do much more with fewer people) and globalization (which has allowed manufacturing and services to locate across the world)." He advocated lower wages and steps to bring in more foreign capital investment.

Progress
On 15 November 2011 the Lisbon Council published the Euro Plus Monitor 2011. According to the report most critical eurozone member countries are in the process of rapid reforms. The authors note that "Many of those countries most in need to adjust [...] are now making the greatest progress towards restoring their fiscal balance and external competitiveness". Greece, Ireland and Spain are among the top five reformers and Portugal is ranked seventh among 17 countries included in the report.

Common fiscal policy (European Treasury)

In May 2010 the European Commissioner for Economic and Financial Affairs, Olli Rehn
Olli Rehn
Olli Ilmari Rehn is a Finnish politician, currently serving as European Commissioner for Economic and Financial Affairs. He had previously served as Commissioner for Enlargement...

, called for "absolutely necessary" deficit cuts by the heavily indebted countries of Spain and Portugal. The German government pressed other eurozone countries to adopt their own versions of a balanced budget law
Balanced Budget Amendment
A balanced-budget amendment is a constitutional rule requiring that the state cannot spend more than its income. It requires a balance between the projected receipts and expenditures of the government....

 to achieve a clear cap on new debt, strict budgetary discipline and balanced budgets in Europe. Debt breaks applied across the eurozone would imply much tighter fiscal discipline than the bloc’s existing rules requiring deficits of less than 3 per cent of GDP.

Angel Ubide from the Peterson Institute for International Economics suggested that long term stability in the eurozone requires a common fiscal policy
Fiscal policy
In economics and political science, fiscal policy is the use of government expenditure and revenue collection to influence the economy....

 rather than controls on portfolio investment. In exchange for cheaper funding from the EU, Greece and other countries, in addition to having already lost control over monetary policy and foreign exchange policy since the euro came into being, would therefore also lose control over domestic fiscal policy. Strong European Commission
European Commission
The European Commission is the executive body of the European Union. The body is responsible for proposing legislation, implementing decisions, upholding the Union's treaties and the general day-to-day running of the Union....

 oversight in the fields of taxation and budgetary policy and the enforcement mechanisms that go with it infringe the sovereignty of eurozone member states.

In March 2011 a new reform of the Stability and Growth Pact was initiated, aiming at straightening the rules by adopting an automatic procedure for imposing of penalties in case of breaches of either the deficit or the debt rules.

Eurobonds

On 21 November 2011, the European Commission suggested that eurobonds
Eurobonds
European bonds are suggested government bonds issued in Euros jointly by the 17 eurozone nations. Eurobonds are debt investments whereby an investor loans a certain amount of money, for a certain amount of time, with a certain interest rate, to the eurozone bloc as a whole, which then forwards the...

 issued jointly by the 17 euro nations would be an effective way to tackle the financial crisis. Using the term "stability bonds", Jose Manuel Barroso insisted that any such plan would have to be matched by tight fiscal surveillance and economic policy coordination as an essential counterpart so as to avoid moral hazard
Moral hazard
In economic theory, moral hazard refers to a situation in which a party makes a decision about how much risk to take, while another party bears the costs if things go badly, and the party insulated from risk behaves differently from how it would if it were fully exposed to the risk.Moral hazard...

 and ensure sustainable public finances.

Germany remains opposed to debt that would be jointly issued and underwritten by all 17 members of the currency bloc, saying it could substantially raise the country's liabilities in the debt crisis. However, a growing field of investors and economists say it would be the best way of solving the debt crisis.

Guy Verhofstadt
Guy Verhofstadt
Guy Verhofstadt is a Belgian politician who was the 47th Prime Minister of Belgium from 1999 to 2008. He is currently a Member of the European Parliament and leader of the Group of the Alliance of Liberals and Democrats for Europe.- Early career :...

, leader of the liberal ALDE group in the European parliament suggested following a proposal made by the "five wise economists" from the German Council of Economic Experts
German Council of Economic Experts
The German Council of Economic Experts or ' is a group of economists set up in 1963 to advise the German government and Parliament on economic policy issues. Every year the Council prepares the annual report which is published before or by November 15...

, on the creation of a European collective redemption fund. It would mutualise eurozone debt above 60%, combining it with a bold debt reduction scheme for countries not on life support from the EFSF.

The introduction of eurobonds matched by tight financial and budgetary coordination may well require changes in EU treaties, which is widely expected to be discussed at the 9 December EU summit.

European Stability Mechanism

The European Stability Mechanism (ESM) is a permanent rescue funding programme to succeed the temporary European Financial Stability Facility
European Financial Stability Facility
The European Financial Stability Facility is a special purpose vehicle financed by members of the eurozone to combat the European sovereign debt crisis. It was agreed by the 27 member states of the European Union on 9 May 2010, aiming at preserving financial stability in Europe by providing...

 and European Financial Stabilisation Mechanism
European Financial Stabilisation Mechanism
The European Financial Stabilisation Mechanism is an emergency funding programme reliant upon funds raised on the financial markets and guaranteed by the European Commission using the budget of the European Union as collateral...

 in mid-2013.

On 16 December 2010 the European Council agreed a two line amendment to the EU Lisbon Treaty
Treaty of Lisbon
The Treaty of Lisbon of 1668 was a peace treaty between Portugal and Spain, concluded at Lisbon on 13 February 1668, through the mediation of England, in which Spain recognized the sovereignty of Portugal's new ruling dynasty, the House of Braganza....

 to allow for a permanent bail-out mechanism to be established including stronger sanctions. In March 2011, the European Parliament approved the treaty amendment after receiving assurances that the European Commission
European Commission
The European Commission is the executive body of the European Union. The body is responsible for proposing legislation, implementing decisions, upholding the Union's treaties and the general day-to-day running of the Union....

, rather than EU states, would play 'a central role' in running the ESM. According to this treaty, the ESM will be an intergovernmental organisation under public international law and will be located in Luxembourg
Luxembourg
Luxembourg , officially the Grand Duchy of Luxembourg , is a landlocked country in western Europe, bordered by Belgium, France, and Germany. It has two principal regions: the Oesling in the North as part of the Ardennes massif, and the Gutland in the south...

.

Address current account imbalances

Regardless of the corrective measures chosen to solve the current predicament, as long as cross border capital flows remain unregulated in the Euro Area, asset bubbles and current account
Current account
In economics, the current account is one of the two primary components of the balance of payments, the other being the capital account. The current account is the sum of the balance of trade , net factor income and net transfer payments .The current account balance is one of two major...

 imbalances are likely to continue. For example, a country that runs a large current account or trade deficit (i.e., it imports more than it exports) must ultimately be a net importer of capital; this is a mathematical identity
Identity (mathematics)
In mathematics, the term identity has several different important meanings:*An identity is a relation which is tautologically true. This means that whatever the number or value may be, the answer stays the same. For example, algebraically, this occurs if an equation is satisfied for all values of...

 called the balance of payments
Balance of payments
Balance of payments accounts are an accounting record of all monetary transactions between a country and the rest of the world.These transactions include payments for the country's exports and imports of goods, services, financial capital, and financial transfers...

. In other words, a country that imports more than it exports must either decrease its savings reserves or borrow to pay for those imports. Conversely, Germany's large trade surplus (net export position) means that it must either increase its savings reserves or be a net exporter of capital, lending money to other countries to allow them to buy German goods.

The 2009 trade deficits for Italy, Spain, Greece, and Portugal were estimated to be $42.96 billion, $75.31B and $35.97B, and $25.6B respectively, while Germany's trade surplus was $188.6B. A similar imbalance exists in the U.S., which runs a large trade deficit (net import position) and therefore is a net borrower of capital from abroad. Ben Bernanke
Ben Bernanke
Ben Shalom Bernanke is an American economist, and the current Chairman of the Federal Reserve, the central bank of the United States. During his tenure as Chairman, Bernanke has overseen the response of the Federal Reserve to late-2000s financial crisis....

 warned of the risks of such imbalances in 2005, arguing that a "savings glut" in one country with a trade surplus can drive capital into other countries with trade deficits, artificially lowering interest rates and creating asset bubbles.

A country with a large trade surplus would generally see the value of its currency appreciate relative to other currencies, which would reduce the imbalance as the relative price of its exports increases. This currency appreciation occurs as the importing country sells its currency to buy the exporting country's currency used to purchase the goods. To reduce trade imbalances a country could encourage domestic saving by restricting or penalizing the flow of capital across borders, or by raising interest rates, although this benefit is likely offset by slowing down the economy and increasing government interest payments. Either way, many of the countries involved in the crisis are on the Euro, so individual interest rates and capital controls are not available. The only solution left to raise a country's level of saving is to reduce budget deficits and to change consumption and savings habits. For example, if a country's citizens saved more instead of consuming imports, this would reduce its trade deficit.

European Monetary Fund

On 20 October 2011, the Austrian Institute of Economic Research published an article that suggests to transform the EFSF into a European Monetary Fund (EMF), which could provide governments with fixed interest rate Eurobonds at a rate slightly below medium-term economic growth (in nominal terms). These bonds would not be tradable but could be held by investors with the EMF and liquidated at any time. Given the backing of the entire eurozone countries and the ECB "the EMU
Economic and Monetary Union of the European Union
The Economic and Monetary Union is an umbrella term for the group of policies aimed at converging the economies of members of the European Union in three stages so as to allow them to adopt a single currency, the euro. As such, it is largely synonymous with the eurozone.All member states of the...

 would achieve a similarly strong position vis-a-vis financial investors as the US where the Fed backs government bonds to an unlimited extent." To ensure fiscal discipline despite the lack of market pressure, the EMF would operate according to strict rules, providing funds only to countries that meet agreed on fiscal and macroeconomic criteria. Governments that lack sound financial policies would be forced to rely on traditional (national) governmental bonds with less favorable market rates.

Since investors would finance governments directly, banks were also no longer able to unduly benefit from intermediary rents by borrowing from the ECB at low rates and investing in government bonds at high rates. Econometric analysis suggests that a stable long-term interest rate of three percent in all eurozone countries would lead to higher nominal GDP growth rates and substantially lower sovereign debt levels by 2015, compared to the baseline scenario with market based interest levels.

Euro breakup

The school of economists who are, broadly, adherents of the post-Keynesian school of the Modern Monetary Theory condemned the introduction of the Euro currency from the beginning, on the basis that the Eurozone does not fulfill the necessary criteria for an optimum currency area
Optimum currency area
In economics, an optimum currency area , also known as an optimal currency region , is a geographical region in which it would maximize economic efficiency to have the entire region share a single currency. It describes the optimal characteristics for the merger of currencies or the creation of a...

, though it is moving in that direction. The latter view is supported also by non-Keynesian economists, such as Luca A. Ricci, of the IMF. Others have even declared an urgent need for more radical shift in perspective, "a new science of macroeconomics".

Weak individual countries leaving the Euro
As the debt crisis expanded beyond Greece, these economists continued to advocate, albeit more forcefully, the disbandment of the Eurozone. If this is not immediately feasible, they recommended that Greece and the other debtor nations unilaterally leave the Eurozone, default on their debts, regain their fiscal sovereignty, and re-adopt national currencies.

Two-currencies speculation
Bloomberg
Bloomberg L.P.
Bloomberg L.P. is an American privately held financial software, media, and data company. Bloomberg makes up one third of the $16 billion global financial data market with estimated revenue of $6.9 billion. Bloomberg L.P...

 has suggested that, if the Greek and Irish bailouts should fail, an alternative is for Germany to leave the eurozone in order to save the currency through depreciation
Depreciation (currency)
Currency depreciation is the loss of value of a country's currency with respect to one or more foreign reference currencies, typically in a floating exchange rate system. It is most often used for the unofficial increase of the exchange rate due to market forces, though sometimes it appears...

 instead of austerity. The likely substantial fall in the Euro against the newly reconstituted Deutsche Mark would give a "huge boost" to its members' competitiveness. Also The Wall Street Journal
The Wall Street Journal
The Wall Street Journal is an American English-language international daily newspaper. It is published in New York City by Dow Jones & Company, a division of News Corporation, along with the Asian and European editions of the Journal....

conjectures that Germany could return to the Deutsche Mark, or create another currency union
Currency union
A currency union is where two or more states share the same currency, though without there necessarily having any further integration such as an Economic and Monetary Union, which has in addition a customs union and a single market.There are three types of currency unions:#Informal - unilateral...

 with the Netherlands, Austria, Finland, Luxembourg and other European countries such as Denmark, Norway, Sweden, Switzerland and the Baltics. A monetary union of the mentioned current account surplus countries would create the world's largest creditor bloc that is bigger than China or Japan. The former president of the German Industries, Hans-Olaf Henkel suggested that "southern countries" could retain their competitiveness through a greater tolerance for inflation and corresponding regular devaluations, once they are freed of the "straitjacket of Germanic stability phobia". The Wall Street Journal added that without the German-led bloc a residual euro would have the flexibility to keep interest rate
Interest rate
An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...

s low and engage in quantitative easing
Quantitative easing
Quantitative easing is an unconventional monetary policy used by central banks to stimulate the national economy when conventional monetary policy has become ineffective. A central bank buys financial assets to inject a pre-determined quantity of money into the economy...

 or fiscal stimulus in support of a job-targeting economic policy instead of inflation targeting
Inflation targeting
Inflation targeting is an economic policy in which a central bank estimates and makes public a projected, or "target", inflation rate and then attempts to steer actual inflation towards the target through the use of interest rate changes and other monetary tools.Because interest rates and the...

 in the current configuration.

In early October 2011, policy expert Philippa Malmgren
Philippa Malmgren
Philippa "Pippa" Malmgren is a politics and policy expert who used to be Special Assistant to the President of the United States for Economic Policy on the National Economic Council and former member of the U.S. President's Working Group on Financial Markets...

 believed that "the Germans will announce they are re-introducing the Deutschmark" in the coming weeks. As of Mid November 2011, this has not happened. Former Federal Reserve chairman Alan Greenspan
Alan Greenspan
Alan Greenspan is an American economist who served as Chairman of the Federal Reserve of the United States from 1987 to 2006. He currently works as a private advisor and provides consulting for firms through his company, Greenspan Associates LLC...

 was more cautious when he answered the question whether the eurozone will split apart, "If you ask me starting from scratch, would they have been better off having a eurozone which included Germany, Austria, Luxembourg, Finland, the Netherlands, that would have worked." Greenspan later added Switzerland to the list.

In September 2011, Joaquín Almunia
Joaquín Almunia
Joaquín Almunia Amann is a Spanish politician and prominent member of the European Commission, currently responsible for Competition under the second mandate of President Barroso. He was previously responsible for Economic and Monetary Affairs in Barroso's previous mandate...

, an EU commissioner, "lashed out" against the bloc of Germany, Netherlands, Finland, Austria, saying that expelling weaker countries from the euro was not an option: "Those who think that this hypothesis is possible just do not understand our process of integration". Also ECB president Jean-Claude Trichet
Jean-Claude Trichet
Jean-Claude Trichet is a French civil servant who was the president of the European Central Bank, a position he held from 2003 to 2011. He is also a member of the Board of Directors of the Bank for International Settlements...

 denounced the possibility of a return of the deutsche mark and defended the price stability of the euro.

Complete Euro break up via return to European Currency Unit (ECU)
Before the Euro was formed, a basket of European currencies called ECU was quoted alongside the national currencies. Financial Times Alphaville analysed a Nomura research, which suggested that Eurozone countries could redefine Euro as the weighted basket of the 17 Euro countries national currencies, which it called ECU-2.

Breaking of the EU treaties 'no bail-out clause'

The Maastricht Treaty
Maastricht Treaty
The Maastricht Treaty was signed on 7 February 1992 by the members of the European Community in Maastricht, Netherlands. On 9–10 December 1991, the same city hosted the European Council which drafted the treaty...

 of EU contains juridical language which appears to rule out intra-EU bailouts. First, the “no bail-out” clause (Article 125 TFEU) ensures that the responsibility for repaying public debt remains national and prevents risk premiums caused by unsound fiscal policies from spilling over to partner countries. The clause thus encourages prudent fiscal policies at the national level.

The European Central Bank
European Central Bank
The European Central Bank is the institution of the European Union that administers the monetary policy of the 17 EU Eurozone member states. It is thus one of the world's most important central banks. The bank was established by the Treaty of Amsterdam in 1998, and is headquartered in Frankfurt,...

 purchase of distressed country bonds can be viewed to break the prohibition of monetary financing of budget deficits (Article 123 TFEU). The creation of further leverage in EFSF with access to ECB lending would also appear to break this Article.

The Articles 125 and 123 were meant to create disincentive for EU member states to run excessive deficits and state debt, and prevent the moral hazard
Moral hazard
In economic theory, moral hazard refers to a situation in which a party makes a decision about how much risk to take, while another party bears the costs if things go badly, and the party insulated from risk behaves differently from how it would if it were fully exposed to the risk.Moral hazard...

 of over-spend and lending in good times. They were also meant to protect the taxpayers of the other more prudent member states. By issuing bail out aid guaranteed by the prudent Eurozone taxpayers to rule-breaking Eurozone countries such as Greece, the EU and Eurozone countries encourage moral hazard also in the future. While the no bail-out clause remains in place, the "no bail-out doctrine" seems to be a thing of the past.

Breaking of the EU treaties 'convergence criteria'

The EU treaties
Treaties of the European Union
The Treaties of the European Union are a set of international treaties between the European Union member states which sets out the EU's constitutional basis. They establish the various EU institutions together with their remit, procedures and objectives...

 contain so called convergence criteria. Concerning government finance the states have agreed that the annual government budget deficit should not exceed 3% of the gross domestic product
Gross domestic product
Gross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....

 (GDP) and that the gross government debt
Government debt
Government debt is money owed by a central government. In the US, "government debt" may also refer to the debt of a municipal or local government...

 to GDP should not exceed 60% of the GDP. For Eurozone
Eurozone
The eurozone , officially called the euro area, is an economic and monetary union of seventeen European Union member states that have adopted the euro as their common currency and sole legal tender...

 members there is the Stability and Growth Pact
Stability and Growth Pact
The Stability and Growth Pact is an agreement among the 27 Member states of the European Union that take part in the Eurozone, to facilitate and maintain the stability of the Economic and Monetary Union...

 which contains the same requirements for budget deficit and debt limitation but with a much stricter regime. Nevertheless the main crisis states Greece and Italy (status November 2011) have exceeded these criteria execessively over a long period of time.

Doubts about effectiveness of non-Keynesian policies

There has been some criticism over the austerity measures implemented by most European nations to counter this debt crisis. Some argue that an abrupt return to "non-Keynesian" financial policies is not a viable solution and predict the deflationary policies now being imposed on countries such as Greece and Italy might prolong and deepen their recessions. Nouriel Roubini
Nouriel Roubini
Nouriel Roubini is an American economist. He claims to have predicted both the collapse of the United States housing market and the worldwide recession which started in 2008. He teaches at New York University's Stern School of Business and is the chairman of Roubini Global Economics, an economic...

 said the new credit available to the heavily indebted countries did not equate to an immediate revival of economic fortunes: "While money is available now on the table, all this money is conditional on all these countries doing fiscal adjustment and structural reform."

Apart from arguments over whether or not austerity, rather than increased or frozen spending, is a macroeconomic solution, union leaders have also argued that the working population is being unjustly held responsible for the economic mismanagement errors of economists, investors, and bankers. Over 23 million EU workers have become unemployed as a consequence of the global economic crisis of 2007–2010, while thousands of bankers across the EU have become millionaires despite collapse or nationalization (ultimately paid for by taxpayers) of institutions they worked for during the crisis, a fact that has led many to call for additional regulation of the banking sector across not only Europe, but the entire world.

Odious debt

Some protesters, commentators such as Libération
Libération
Libération is a French daily newspaper founded in Paris by Jean-Paul Sartre and Serge July in 1973 in the wake of the protest movements of May 1968. Originally a leftist newspaper, it has undergone a number of shifts during the 1980s and 1990s...

 correspondent Jean Quatremer and the Liège
Liège
Liège is a major city and municipality of Belgium located in the province of Liège, of which it is the economic capital, in Wallonia, the French-speaking region of Belgium....

 based NGO Committee for the Abolition of the Third World Debt
Committee for the Abolition of the Third World Debt
The Committee for the Abolition of the Third World Debt is an international network of activists who strive to develop and implement radical alternatives that would contribute to the maintenance, and indeed retrieval, of fundamental human rights all over the world.Through such actions as the...

 (CADTM) allege that the debt should be characterized as odious debt
Odious debt
In international law, odious debt is a legal theory that holds that the national debt incurred by a regime for purposes that do not serve the best interests of the nation, should not be enforceable. Such debts are, thus, considered by this doctrine to be personal debts of the regime that incurred...

. The Greek documentary Debtocracy
Debtocracy
Debtocracy is a 2011 documentary film by Katerina Kitidi and Aris Hatzistefanou. The documentary mainly focuses on two points: the causes of the Greek debt crisis in 2010 and possible future solutions that could be given to the problem that are not currently being considered by the government of...

examines whether the recent Siemens scandal and uncommercial ECB loans which were conditional on the purchase of military aircraft and submarines are evidence that the loans amount to odious debt
Odious debt
In international law, odious debt is a legal theory that holds that the national debt incurred by a regime for purposes that do not serve the best interests of the nation, should not be enforceable. Such debts are, thus, considered by this doctrine to be personal debts of the regime that incurred...

 and that an audit would result in invalidation of a large amount of the debt.

Controversy about national statistics

In 1992, members of the European Union signed an agreement known as the Maastricht Treaty
Maastricht Treaty
The Maastricht Treaty was signed on 7 February 1992 by the members of the European Community in Maastricht, Netherlands. On 9–10 December 1991, the same city hosted the European Council which drafted the treaty...

, under which they pledged to limit their deficit spending and debt levels. However, a number of European Union member states, including Greece and Italy, were able to circumvent these rules and mask their deficit and debt levels through the use of complex currency and credit derivatives structures. The structures were designed by prominent U.S. investment banks, who received substantial fees in return for their services and who took on little credit risk themselves thanks to special legal protections for derivatives counterparties. Financial reforms within the U.S. since the financial crisis have only served to reinforce special protections for derivatives—including greater access to government guarantees—while minimizing disclosure to broader financial markets.

The revision of Greece’s 2009 budget deficit from a forecast of "6–8% of GDP" to 12.7% by the new Pasok Government in late 2009 (a number which, after reclassification of expenses under IMF/EU supervision was further raised to 15.4% in 2010) has been cited as one of the issues that ignited the Greek debt crisis.

This added a new dimension in the world financial turmoil, as the issues of "creative accounting" and manipulation of statistics by several nations came into focus, potentially undermining investor confidence.

The focus has naturally remained on Greece due to its debt crisis, however there has been a growing number of reports about manipulated statistics by EU and other nations aiming, as was the case for Greece, to mask the sizes of public debts and deficits. These have included analyses of examples in several countries
or have focused on Italy,

the United Kingdom,
Spain,

the United States,
and even Germany.

Credit rating agencies

The international U.S. based credit rating agencies – Moody's
Moody's
Moody's Corporation is the holding company for Moody's Analytics and Moody's Investors Service, a credit rating agency which performs international financial research and analysis on commercial and government entities. The company also ranks the credit-worthiness of borrowers using a standardized...

, Standard & Poor's
Standard & Poor's
Standard & Poor's is a United States-based financial services company. It is a division of The McGraw-Hill Companies that publishes financial research and analysis on stocks and bonds. It is well known for its stock-market indices, the US-based S&P 500, the Australian S&P/ASX 200, the Canadian...

 and Fitch
Fitch Ratings
The Fitch Group is a majority-owned subsidiary of FIMALAC, headquartered in Paris. Fitch Ratings, Fitch Solutions and Algorithmics, are part of the Fitch Group....

 – have played a central and controversial role in the current European bond market crisis. As with the housing bubble and the Icelandic crisis, the ratings agencies have been under fire. The agencies have been accused of giving overly generous ratings due to conflicts of interest. Ratings agencies also have a tendency to act conservatively, and to take some time to adjust when a firm or country is in trouble.

In the case of Greece, the market responded to the crisis before the downgrades, with Greek bonds trading at junk levels several weeks before the ratings agencies began to describe them as such. In a response to the downgrading of Greek governmental bonds the ECB announced on 3 May that it will accept as collateral all outstanding and new debt instruments issued or guaranteed by the Greek government, regardless of the nation's credit rating.

Government officials have criticized the ratings agencies. Following downgrades of Greece, Spain and Portugal that roiled financial markets, Germany's foreign minister Guido Westerwelle said that traders should not take global rating agencies "too seriously" and called for an "independent" European rating agency, which could avoid the conflicts of interest that he claimed US-based agencies faced. European leaders are reportedly studying the possibility of setting up a European ratings agency in order that the private U.S.-based ratings agencies have less influence on developments in European financial markets in the future. According to German consultant company Roland Berger
Roland Berger
-References:...

, setting up a new ratings agency would cost €300 million and could be operating by 2014.

Due to the failures of the ratings agencies, European regulators will be given new powers to supervise ratings agencies. With the creation of the European Supervisory Authority in January 2011 the European Union set up a whole range of new financial regulatory institutions, including the European Securities and Markets Authority
European Securities and Markets Authority
The European Securities and Markets Authority is a European Union financial regulatory institution and European Supervisory Authority located in Paris....

 (ESMA), which became the EU’s single credit-ratings firm regulator. Credit-ratings companies have to comply with the new standards or be denied operation on EU territory, says ESMA Chief Steven Maijoor.

But attempts to regulate more strictly credit rating agencies in the wake of the European sovereign debt crisis have been rather unsuccessful. Some European financial law and regulation experts have argued that the hastily drafted, unevenly transposed in national law, and poorly enforced EU rule on rating agencies (Règlement CE n° 1060/2009) has had little effect on the way financial analysts and economists interpret data or on the potential for conflicts of interests created by the complex contractual arrangements between credit rating agencies and their clients"

Media

There has been considerable controversy about the role of the English-language press in the regard to the bond market crisis. The Spanish Prime Minister José Luis Rodríguez Zapatero
José Luis Rodríguez Zapatero
José Luis Rodríguez Zapatero is a member of the Spanish Socialist Workers' Party . He was elected for two terms as Prime Minister of Spain, in the 2004 and 2008 general elections. On 2 April 2011 he announced he will not stand for re-election in 2012...

 has suggested that the recent financial market crisis in Europe is an attempt to undermine the euro in order that countries, such as the U.K. and the U.S., can continue to fund their large external deficits, which are matched by large government deficits
Government budget by country
This article includes a chart representing revenues, expenditures and resulting deficit or surplus of government budget. The countries are ranked by budget revenues. The data is taken mainly from CIA World Factbook....

. The U.S. and U.K. do not have large domestic savings pools to draw on and therefore are dependent on external savings e.g. from China. This is not the case in the eurozone which is self funding. In March 2011, The Economist Intelligence Unit wondered why the euro area is in crisis at all, given "its position looks no worse and in some respects, rather better than that of the US or the UK." The budget deficit for the euro area as a whole is much lower and the euro area's government debt/GDP ratio of 86% in 2010 was about the same level as that of the US. Moreover, private-sector indebtedness across the euro area as a whole is markedly lower than in the highly leveraged Anglo-Saxon economies. The authors conclude that the crisis "is as much political as economic" and the result of the fact that the euro area is not supported by the institutional paraphernalia
Paraphernalia
In modern usage, the word paraphernalia most commonly refers to apparatus, equipment, or furnishing used in or necessary for a particular activity as in, "Beth is such an avid sports fan that her walls are covered with baseball paraphernalia"....

 (and mutual bonds of solidarity) of a state.

Zapatero ordered the Centro Nacional de Inteligencia
Centro Nacional de Inteligencia
The National Intelligence Center is the Spanish official intelligence agency. Its headquarters are located in the A-6 motorway near Madrid. The CNI is the successor of the Centro Superior de Información de la Defensa, Higher Centre for Defense Intelligence. Its main target areas are North Africa...

 intelligence service (National Intelligence Center, CNI in Spanish) to investigate the role of the "Anglo-Saxon
Anglo-Saxon
Anglo-Saxon may refer to:* Anglo-Saxons, a group that invaded Britain** Old English, their language** Anglo-Saxon England, their history, one of various ships* White Anglo-Saxon Protestant, an ethnicity* Anglo-Saxon economy, modern macroeconomic term...

 media" in fomenting the crisis. No results have so far been reported from this investigation.

Greek Prime Minister Papandreou is quoted as saying that there was no question of Greece leaving the euro and suggested that the ­crisis was politically as well as financially motivated. "This is an attack on the eurozone by certain other interests, political or financial".

Role of speculators

Financial speculators and hedge fund
Hedge fund
A hedge fund is a private pool of capital actively managed by an investment adviser. Hedge funds are only open for investment to a limited number of accredited or qualified investors who meet criteria set by regulators. These investors can be institutions, such as pension funds, university...

s engaged in selling euros have also been accused by both the Spanish and Greek Prime Ministers of worsening the crisis. German chancellor Merkel has stated that "institutions bailed out with public funds are exploiting the budget crisis in Greece and elsewhere."

The role of Goldman Sachs
Goldman Sachs
The Goldman Sachs Group, Inc. is an American multinational bulge bracket investment banking and securities firm that engages in global investment banking, securities, investment management, and other financial services primarily with institutional clients...

 in Greek bond yield increases is also under scrutiny. It is not yet clear to what extent this bank has been involved in the unfolding of the crisis or if they have made a profit as a result of the sell-off on the Greek government debt market.

According to The Wall Street Journal
The Wall Street Journal
The Wall Street Journal is an American English-language international daily newspaper. It is published in New York City by Dow Jones & Company, a division of News Corporation, along with the Asian and European editions of the Journal....

 hedge-funds managers already launched a concerted attack on the euro in early 2010. On February 8 the boutique research and brokerage firm Monness, Crespi, Hardt & Co. hosted an exclusive "idea dinner" at a private townhouse in Manhattan, where a small group of hedge-fund managers from SAC Capital Advisors LP, Soros Fund Management LLC
Soros Fund Management
Soros Fund Management LLC is an American, privately held, hedge fund management firm founded in 1969 by George Soros. In 2010 it was reported to be one of the most profitable firms in the hedge fund industry, averaging a 20% annual rate of return over four decades.-Overview:Soros Fund Management...

, Green Light Capital Inc., Brigade Capital Management LLC and others eventually agreed that Greek government bonds represented the weakest link of the euro and that Greek contagion could soon spread to infect all sovereign debt in the world. Three days later the euro was hit with a wave of selling, triggering a decline that brought the currency below $1.36. On 8 June, exactly four months after the dinner, the Euro hit a four year low at $1.19 before it started to rise again. Traders estimate that bets for and against the euro account for a huge part of the daily three trillion dollar global currency market.

In response to accusations that speculators were worsening the problem, some markets banned naked short selling
Naked short selling
Naked short selling, or naked shorting, is the practice of short-selling a financial instrument without first borrowing the security or ensuring that the security can be borrowed, as is conventionally done in a short sale. When the seller does not obtain the shares within the required time frame,...

 for a few months.

Finland collateral

On 18 August 2011, as requested by the Finnish parliament as a condition for any further bailouts, it became apparent that Finland would receive collateral
Collateral (finance)
In lending agreements, collateral is a borrower's pledge of specific property to a lender, to secure repayment of a loan.The collateral serves as protection for a lender against a borrower's default - that is, any borrower failing to pay the principal and interest under the terms of a loan obligation...

 from Greece, enabling it to participate in the potential new €109 billion support package for the Greek economy. Austria, the Netherlands, Slovenia, and Slovakia responded with irritation over this special guarantee for Finland and demanded equal treatment across the Eurozone, or a similar deal with Greece, so as not to increase the risk level over their participation in the bailout. The main point of contention was that the collateral is aimed to be a cash deposit, a collateral the Greeks can only give by recycling part of the funds loaned by Finland for the bailout, which means Finland and the other Eurozone countries guarantee the Finnish loans in the event of a Greek default.

After extensive negotiations to implement a collateral structure open to all Eurozone countries, on 4 October 2011, a modified escrow collateral agreement was reached. The expectation is that only Finland will utilise it, due to i.a. requirement to contribute initial capital to European Stability Mechanism
European Stability Mechanism
The European Stability Mechanism is a permanent rescue funding programme to succeed the temporary European Financial Stability Facility and European Financial Stabilisation Mechanism...

 in one installment instead of five installments over time. Finland, as one of the strongest AAA countries, can raise the required capital with relative ease.

At the beginning of October, Slovakia and Netherlands were the last countries to vote on the EFSF expansion, which was the immediate issue behind the collateral discussion, with a mid-October vote. However, as of 10 October, Slovakia's government was still deeply split over the issue. On 13 October 2011 Slovakia approved Euro bailout expansion, but the government has been forced to call new elections
Slovak parliamentary election, 2012
A parliamentary election will take place in Slovakia on 10 March 2012. The election follows the fall of Prime Minister Iveta Radičová's Slovak Democratic and Christian Union – Democratic Party-led coalition in October 2011 over a no confidence vote her government failed because of its support for...

 in exchange.

Political impact

Handling of the ongoing crisis led to the premature end of a number of European national Governments and impacted the outcome of many elections
  • Finland
    Finland
    Finland , officially the Republic of Finland, is a Nordic country situated in the Fennoscandian region of Northern Europe. It is bordered by Sweden in the west, Norway in the north and Russia in the east, while Estonia lies to its south across the Gulf of Finland.Around 5.4 million people reside...

     - April 2011 - The approach to the Portuguese bailout and the EFSF dominated the April 2011 election
    Finnish parliamentary election, 2011
    An election to the Eduskunta was held on 17 April 2011 after the termination of the previous parliamentary term. Advance voting, which included voting by Finnish expatriates, was held between 6 and 12 April with a turnout of 31.2%....

     debate and formation of the subsequent government.
  • Greece
    Greece
    Greece , officially the Hellenic Republic , and historically Hellas or the Republic of Greece in English, is a country in southeastern Europe....

     - November 2011 - Following widespread criticism of a referendum
    Referendum
    A referendum is a direct vote in which an entire electorate is asked to either accept or reject a particular proposal. This may result in the adoption of a new constitution, a constitutional amendment, a law, the recall of an elected official or simply a specific government policy. It is a form of...

     proposal on austerity and bailout measures, from within his party, the opposition and other EU governments, PM George Papandreou
    George Papandreou
    Georgios A. Papandreou , commonly anglicised to George and shortened to Γιώργος in Greek, is a Greek politician who served as Prime Minister of Greece following his party's victory in the 2009 legislative election...

     announced plans for his resignation in favour of a national unity government
  • Ireland
    Republic of Ireland
    Ireland , described as the Republic of Ireland , is a sovereign state in Europe occupying approximately five-sixths of the island of the same name. Its capital is Dublin. Ireland, which had a population of 4.58 million in 2011, is a constitutional republic governed as a parliamentary democracy,...

     - November 2010 - In return for its support for the IMF bailout and consequent austerity budget, the junior party in the coalition government, the Green Party set a time-limit on its support for the Cowen Government
    Government of the 30th Dáil
    The 30th Dáil was elected at the 2007 general election on 24 May 2007 and first met on 14 June when President Mary McAleese appointed Bertie Ahern as Taoiseach, on the nomination of Dáil Éireann...

     which set the path to early elections in Feb 2011
  • Italy
    Italy
    Italy , officially the Italian Republic languages]] under the European Charter for Regional or Minority Languages. In each of these, Italy's official name is as follows:;;;;;;;;), is a unitary parliamentary republic in South-Central Europe. To the north it borders France, Switzerland, Austria and...

     - November 2011 - Following market pressure on Government bond prices in response to concerns about levels of debt, the Government of Silvio Berlusconi
    Silvio Berlusconi
    Silvio Berlusconi , also known as Il Cavaliere – from knighthood to the Order of Merit for Labour which he received in 1977 – is an Italian politician and businessman who served three terms as Prime Minister of Italy, from 1994 to 1995, 2001 to 2006, and 2008 to 2011. Berlusconi is also the...

     lost its majority and his impending resignation was announced by the President.
  • Latvia
    Latvia
    Latvia , officially the Republic of Latvia , is a country in the Baltic region of Northern Europe. It is bordered to the north by Estonia , to the south by Lithuania , to the east by the Russian Federation , to the southeast by Belarus and shares maritime borders to the west with Sweden...

     - February 2009 - Following a severe economic downturn, riots and criticism of the Governments handling of the crisis, PM Ivars Godmanis
    Ivars Godmanis
    Ivars Godmanis is a Latvian politician and currently 1 of the 8 Latvian MEPs in the European parliament. He was the first Prime Minister of Latvia after the country became independent from the Soviet Union, and he became a Prime Minister for the second time in December 2007.Godmanis served as...

     and his government resigned and there were subsequent changes to the constitutional election process.
  • Portugal
    Portugal
    Portugal , officially the Portuguese Republic is a country situated in southwestern Europe on the Iberian Peninsula. Portugal is the westernmost country of Europe, and is bordered by the Atlantic Ocean to the West and South and by Spain to the North and East. The Atlantic archipelagos of the...

     - March 2011 - Following the failure of parliament to adopt the government austerity measures, PM José Sócrates
    José Sócrates
    José Sócrates Carvalho Pinto de Sousa, GCIH , commonly known by José Sócrates , is a Portuguese politician who was the Prime Minister of Portugal from 12 March 2005 to 21 June 2011....

     and his government resigned and this led to early elections in June 2011
    Portuguese legislative election, 2011
    A general election was held in Portugal on 5 June 2011 to elect all 230 members of the Assembly of the Republic. Pedro Passos Coelho led the center-right Social Democratic Party to victory over the Socialist Party, led by incumbent Prime Minister José Sócrates...

  • Slovakia
    Slovakia
    The Slovak Republic is a landlocked state in Central Europe. It has a population of over five million and an area of about . Slovakia is bordered by the Czech Republic and Austria to the west, Poland to the north, Ukraine to the east and Hungary to the south...

     - October 2011 - In return for the approval of the EFSF by her coalition partners, PM Iveta Radičová
    Iveta Radicová
    Iveta Radičová is the Prime Minister of Slovakia and a member of the Slovak Democratic and Christian Union – Democratic Party. She was sworn into office on 8 July 2010 as the head of a four-party center-right coalition government following the 2010 Slovak parliamentary election, until the fall of...

     had to concede early elections in March 2012
    Slovak parliamentary election, 2012
    A parliamentary election will take place in Slovakia on 10 March 2012. The election follows the fall of Prime Minister Iveta Radičová's Slovak Democratic and Christian Union – Democratic Party-led coalition in October 2011 over a no confidence vote her government failed because of its support for...

  • Slovenia
    Slovenia
    Slovenia , officially the Republic of Slovenia , is a country in Central and Southeastern Europe touching the Alps and bordering the Mediterranean. Slovenia borders Italy to the west, Croatia to the south and east, Hungary to the northeast, and Austria to the north, and also has a small portion of...

     - September 2011 - Following the failure of June referendums
    Slovenian referendum, 2011
    Three referendums were held in Slovenia on 5 June 2011. The questions asked were:* one on the reform of the pension system ;* on opening secret service archives; and* on stronger...

     on measures to combat the economic crisis and the departure of coalition partners, the Borut Pahor
    Borut Pahor
    Borut Pahor is a Slovenian politician who has been Prime Minister of Slovenia since 2008. A longtime president of the Social Democrats party, Pahor served several terms as a member of the National Assembly and was its chairman from 2000 to 2004. In 2004, Pahor was elected as member of the European...

     government lost a motion of confidence and December 2011 early elections
    Slovenian parliamentary election, 2011
    A parliamentary election for the 90 deputies to the National Assembly of Slovenia will be held on 4 December 2011. This will be the first early election in Slovenia's history.-Background:...

     were set.

See also

  • 2000s European sovereign debt crisis timeline
  • 2000s commodities boom
    2000s commodities boom
    The 2000s commodities boom is the rise in many physical commodity prices which occurred during the decade of the 2000s , following the Great Commodities Depression of the 1980s and 1990s...

  • Crisis situations and protests in Europe since 2000
    Crisis situations and protests in Europe since 2000
    List of crises situations and major protests in countries of Europe since year 2000.- 2011 :*2011 England riots in August*2011 Kosovo border clashes from July onwards, involving Kosovan Police and KFOR against Kosovan Serb demonstrators*2011 E...

  • FRED (Federal Reserve Economic Data)
  • List of countries by credit rating
  • Late-2000s recession in Europe

External links

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