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Current International Debt Crisis (Greece Crisis) - Essay Example

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Current International Debt Crisis (Spain Crisis) Contents Contents 2 Euro zone Crisis 3 Spain Economy before and after the Crisis 3 Sovereign Risk and its Effect on Spain 7 Whether Spain should leave the Euro zone to save the Euro Currency from a German Tax payer’s point of view 7 References 9 Euro zone Crisis The debt crisis has affected all the countries that belong to the European Union since 2009…
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Current International Debt Crisis (Greece Crisis)
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"Current International Debt Crisis (Greece Crisis)"

Download file to see previous pages The countries had fallen into a debt trap and there was problem of cash crunch and liquidity crisis in the banking sector. Thus the Euro zone faced both fiscal and monetary policy problems along with a slowdown of the economies. The main reason behind this is the common monetary policy that these countries have owning to the adoption of the Euro currency across the entire zone but different fiscal policies for each of the countries. The countries of this zone had decided to limit their borrowings to a certain designated level but they could not restrict the borrowings to that level (Feldstein, 1997, p.31). Thus there was a problem of convergence for all the countries that came under this zone. Spain Economy before and after the Crisis Since the year 2004, in the post election era, the economy of Spain has experienced a steady growth rate. This was followed with a boom in the housing market clubbed with a hike in the oil prices. However, the trade deficit of the country continued to increase along with an increase in the rates of inflation. The housing bubble that took place in Spain faced a set back and the country fell into a complete debt trap which led to this financial crisis. This continued till 2011, with the trade deficit accounting for, as high as 8.5% of the GDP. The country faced a rating downgrade along with the crisis in the banking sector due to shortage of liquidity. The growth rate of Spain encountered a sharp decline from the year 2008, in the post financial crisis period of the US. From the above graph it is evident that the growth rate of the country started falling drastically after this period and hit the bottom in the year 2009. However, even after recovering from it in 2011 it again faced a jolt in the pre 2012 period owing to the euro zone crisis (Weisbrot and Montecino, 2010, p. 9). The reasons behind this fall in the growth rates was the over valuation of the exports of the country, the attempts of the government of Spain to cut the spending and the bursting of the housing market bubble. During the 2004, post election period, the country had faced a decrease in the unemployment rate which reflected the prosperity of the economy of Spain. However the rate of unemployed rose sharply and reached the peak in 27.2 % in March 2013 and it had mainly affected the youth of the country. The lack of flexibility in the labour market was the chief reason for such employment conditions. The above graph shows that the Spanish government has presented a deficit budget since the year 2009 and this budget deficit was 9.4% in 2012. This had happened mainly because of the huge debt burden that the country had entangled itself into. The country had to provide for the high percentage of unemployed people in the country (Tremlett, 2011, p.1). Along with this the tax revenue also decreased due to the presence of recession in the economy. The debt that the government of Spain owed also had a drastic increase which is shown in the graph below. The condition of the monetary system of Spain was such that the rate of interest for long term bonds was at 7% which almost touched the critical level. The Spanish government did not have the capacity for Seigniorage. Hence the Spanish money markets faced with the problem of liquidity which in turn increased the rates of interests. The inflation rate also went below the critical level marked in ...Download file to see next pagesRead More
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