This paper traces the cause of this debt crisis from the roles played by global ‘financialisation’ to how the Germany policies accelerated the crisis. The voice of the press will also be discussed together with how speculation and crisis affected the crisis…
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Indeed, despite Germany being at the centre of the origin of the European debt crisis, there were other players who had the authority to save the euro member countries from plunging into this crisis.
Manolopoulos (2011) refers to the European sovereign debt crisis as a financial crisis which has caused some Eurozone countries to have difficulties in refinancing respective government debts unless a third party intervenes. The decade preceding 2009 saw the Eurozone achieve much success economically with the European Central Bank, ECB achieving its policy objectives. The inflation was maintained at low with an almost equilibrium GDP. The use of a single currency reduced the cost of transactions with the greatest effect being on territories of countries where financial interactions were intense.
Nonetheless, Grahl (2011) noted that with a single currency, member countries lose control of their currencies. As such, the exchange rate becomes fixed and in times of competitiveness problems, the country would not devalue or allow depreciation of its currency. During the crisis of the sovereign debt crisis, Britain was cushioned against this because of not being a member of the Eurozone. Secondly, these countries lose the control of domestic interest rates which influence investment and consumption effectively affecting the economy. It would only be beneficial if the member economies move at par. But with discrepancies, with others in recession while others face inflation, this becomes costly. The average good performance of the Eurozone hid some of these misgivings and individual performances of these countries. For instance, countries negatively affected by the Eurozone debt crisis had inflation rates of above 2% despite the average inflation of the Germany, the largest economy in the Eurozone being always being lower than 2% (Grahl 2011). While Germany had gradual growth, the other countries had domestic booms and entered into debt crisis with Greece being the first casualty followed by Ireland, Portugal, Spain and Italy in that order, with their account deficits being traced back to 1999. These countries borrowed for their domestic financing from abroad such as the housing developments in Spain and Ireland and government spending in Italy financed by German household savings. These financing was given when these countries were unable to service these debts in the long run. Instead of financing human capital and productive projects that would lead to higher future returns, the investments were on public and private consumption and on wasteful construction projects. According to Conquest (2011), financial crises resulting from housing booms would normally lead to sovereign debt crisis. Grahl (2011) further argues that sovereign debt crisis would be further propelled by fears of government’s insolvency as it would fail to pay capital and interest on its bonds. Eventually, capital markets get closed and the governments forced to default. The local currency would then depreciate followed by
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t bonds loses value. Banks typically seek to earn income on funds that they are required to keep as capital reserves on loans through low risk investments such as U.S. Treasury Bonds and other sovereign debt instruments. In Europe, it is expected that the major banks may have excessive exposure to Greek, Spanish, Italian, Portuguese, and other bonds from countries who face an increasing risk of defaulting on their debt.
13 Print. 13 13 The European Sovereign Debt Crisis during 2010-2011 Background of the Financial Crisis The ‘Sovereign Debt Crisis’ is a serious havoc in the securities’ global markets, which make it difficult for universal “European Monetary Union” associates, to fund their budgets (Viana 2).
Defaulting loan creditors increased in number across the continent of Europe and this led most banks’ grappling with what their next move would be. The financial institutions of many European countries collapsed; there was increased government debt. This began in the early 2008 with the banking system of Iceland collapsing.
The sovereign Crisis began because of the dysfunction of the monetary union of the states within the Eurozone in addition to the politicizing of the economic control in Europe. The Impact of the European Sovereign Debt Crisis includes the reduction of the bond yield in the United Kingdom.
The crisis was preceded by clement fortunes of low risk premia, rapid growth in credit, abundant liquidity and growth in real estate bubbles (Jackson 1). Many financial institutions in Europe were rendered susceptible to asset market corrections by overstretching leveraging position.
However, Wallison (2012, p. 71) expressed the view that “in a true sovereign debt crisis, a country cannot meet its debt obligations, largely because it does not have enough of the currency in which its debt is denominated.” The European sovereign debt crisis began in 2008 with the banking crisis in Ireland with the contagion of the crisis spreading out to Greece, Ireland and Portugal in 2009 (Investopedia 2012).
From $36 trillion in 2000, the income from the fixed income securities rose to around $70 trillion in 2007. The funds offered lucrative returns which were even higher than the US treasury bonds in the global financial markets. Due to the high turnover of the fixed income securities in the global financial markets, the lenders overlooked the government regulation in order to tap the exorbitantly high returns from the investments and the borrowers flowed in excessively to avail such loans that did not demand adherence of strict credit parameters.
Many European countries under the Maastricht have clubbed together their monetary authorities under the rules and regulations of the European Central Bank (ECB). All these nations were combined together and were known as the European Monetary Union (EMU).
The euro’s value is deteriorating on a daily basis and the costs involved in protecting commercial bonds are on the increase. The values of capital goods have also been on the decline around the globe. There has been an increase in the investors’ fear concerning the market trends around Europe.
e governments of the few countries, notably Greece, Ireland and Portugal to address the financial debt crisis dating back to the year 2000 eventually became the major cause of the European sovereign debt crisis (Beirne and Fratzscher, 77). However, the major question that
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