European Sovereign Debt Crisis - Essay Example

In addition, the crisis led to a downtown in the equity market and increased demand for gold because of loss of confidence in the Euro by investors. The states within the European market should learn from the consequences of sovereign default so that their economic condition is kept at check. To prevent debt crises, various financial institutions and policy makers in countries have used policies and strategies of stabilizing the economy, which include regulation of financial credit and national balance sheet management.

Introduction The world economy is controlled by various financial and political forces, which should be regulated to avoid sovereign debt crises and defaults. The European Sovereign Debt Crisis illustrates the failure of financial institutions, which stretched across the world. Governments, which face such crises, may announce sovereign default leading to economic consequences. This paper gives a critical discussion of the European Foreign Debt Crisis of 2010/2011, its impact in the bond market and the lessons, which the Eurozone states would learn, from sovereign defaulters such as Russia and Argentina.

A critical analysis of the effectiveness of economic policies and the impact of sovereign debt crises on the financial landscape is also provided in this paper. Part A: European Sovereign Debt Crisis The recent European Sovereign Debt Crisis of 2010/2011 has many features in common with the financial stresses experienced in the early 1990s in the world economy. The features of the sovereign debt crises such as low risk on premiums, long duration of credit growth, abundant liquidity, high asset prices, strong leveraging, and real estate bubbles are experienced in the European Sovereign Debt Crisis which began in 2008 with the collapse of the banking system of Iceland.

As a result, there is a lot of uncertainty of banks on the creditworthiness of the institutions in which they had heavily invested. As a result, there is reduced investments by banks in various institutions in the United Kingdom as demonstrated by Brearley (2010, p. 36). Moreover the recent European Sovereign Debt Crisis has caused a big liquidity problem among the European banks. Because of the liquidity problem, the European banks are failing to rollover their debts. The European Sovereign Debt Crisis may be viewed as a mere liquidity problem by policy makers and financial institutions like the previous crises which would cause eventual collapse of the financial institutions.

Estenssoro (2010, p. 4), explains the beginning of the recent European Foreign Debt Crisis by showing that the emergency concerned with the solvency of various financial institutions in Europe demonstrated a serious economic problem policy makers thought that it was unlikely for the financial systems in Europe to fail. From the point of view of Blundell-Wignall and Slovik (2010, p. 12), the European economy was believed to be immune to the financial turbulences because it was considered to be thriving through the good financial positions of businesses and households in addition to the growth in export.

In September 2008 when the recent crisis began, these perceptions changed drastically with evaporation of valuations of the financial firms, which caused panic within the stock markets. At this point, the collapse of the financial institutions became a real threat to the stakeholders of the financial and manufacturing sectors. The sovereign debt