The Eurozone Debt Crisis - Example

Name Institution Tutor Date Introduction The Eurozone debt crisis is a financial crisis that has made it rather difficult or impossible for some European countries in the euro area to refund their government debts, maybe by the aid of third parties for example other money lending institutions, banks or nations. By late 2009, fears of debt crisis crept among investors due to the steadily increasing government debts. In 2010, the debt crisis had raised up public debt in euro, Europe’s common currency, zone to such levels that many investors feared that the euro would collapse1. The countries which were affected by the crisis included Greece, Ireland, Portugal, Spain and Italy. The bonds between these countries (Greece, Ireland, Portugal, Spain and Italy) and the European Union members, most considerably Germany, had drastically widened. On May 2nd, the European countries and the International Monetary Fund (IMF) gave a €110 billion loan to Greece. In return, Greece agreed to Eurozone measures and conditions. By May 2010, Europe’s Finance Ministers approved a rescue package totaling to 750 billion Euros. In July 2011, Greece was struggling for another bailout and the problems threatened to spread over into Italy and even Spain2. By August the same year, the European Central Bank (ECB) signaled it was ready to begin buying the Spanish and even Italian securities to counter the debt problem. However, the European Central Bank (ECB) would potentially have to buy up to half the Italian and Spanish trading debt, which was the largest risk-pulling support ever engineered in the whole of Europe3. Background information and causes Before the debt crisis of 2010- 2011, numerous governments of Europe, most notably were those of Greece, Ireland, Portugal, Spain and Italy, were able to service their deficits at low interest rates. Some had ended up accumulating unsustainable levels of public loans. Such reckless financial behavior was only made possible as the markets assumed that if the national financial situations worsened, the governments would be in a position to be bailed out by other European nations of the Eurozone in order to prevent a breakup of the Euro. The Euro came with a hidden bailout guarantee allowing governments to borrow excess loans4. Prepared with this assurance, many nations did not address structural troubles such as hostile labor markets or unstable interests. They papered over these tribulations with government deficits. As the fiscal crisis hit, national deficits increased steadily due to amplified public spending and falling incomes. Deficits increased not only in the bailout countries (Portugal, Italy, Ireland, Greece and Spain) but also in the governments that were to pay the cost of bailing out (most notably Germany)5. It was at this stage that market investors developed something better than implicit promises. They began to doubt if Germany and other governments would be able to bail out the likes of Portugal, Italy, Ireland, Greece and Spain governments, or rather willing to do the same. Interest rates for bonds of the governments of Portugal, Italy, Ireland, Greece and Spain soared to greater heights hence worsening the fiscal situation at the time. 6Finally, in May 2010, Eurozone countries had to make the assumed bailout guarantee into a clear one. They installed a 750 billion Euro recoup fund. The rescue fund was a partial term of three years7. At the end of October 2010, a chancellor Angela Merkel, of Germany, made it apparent that the term would be unlimited only if there was a transformation making private holders of the countries’ debts participated in the cost of the potential sovereign bailouts in future8. Germany then threatened to take away a section of the open bailout guarantee it assisted the private investors with in government debts. Investors could experience losses in bailouts following the year 2013. As a result of this progress, investors began to sell government bonds of Portugal, Italy, and Ireland, Greece and Spain governments and the yields improved. The market’s concentration shifted more of its attention to Ireland. The Irish countries had a projected deficit of about 32.5 percent of Gross Domestic Product (GDP) for the year 2010 and its total national debt stayed at 80 percent of Gross Domestic Product (GDP) after continued using of prop up its bankrupt banking system9. Not any one country in the Eurozone could fit this description- not even the most discreet (Germany) or the most miniature (Malta). While the European Central Bank aimed its key refunding rate for all Eurozone countries loaning from it, valid interest rates of all its associate states diverged uncontrollably. High inflation margin countries saw actual interest rates turn down stridently, even moving into negative region during much of the explosion. The fractional store structure of the financial system allowed a comparatively small amount of real deposits, cutback and reserves. With the reserve necessity set at 2 percent from 1999, the European Central Bank allowed €50 to be loaned out as a loan for every €1 a bank held in its vault10. The bank of England still allowed more extreme impending increases in credit. The implementation of the euro suddenly urged investors in Europe to buy more assets in the region and hence an increased capital flow in Europe and hence the crisis by initiating a capital surge within Europe among the member states of the Euro zone. Hence, the Euro zone debt crisis of 2010- 2011 was also contributed to by the irresponsible behavior by national governments and even investors in the Eurozone region. Debts and deficits by governments and investors in the Eurozone were so large that the countries were never thought of to be able to remain solvent. This brought about letting go of bonds in such countries as Greece, Ireland, Portugal and Spain, hence triggering the fiscal crisis. Significant policy responses to the crisis The European Union Council had a meeting in February 2011 but did not come up with an all-inclusive permanent resolution to the Euro zone debt crisis which many Europeans had anticipated for. Still, the European Union never agreed on a time limit to produce their report of such a way out at the next council in the next month. Furthermore, they presented the universal policy course of the subject matter of this long duration package. The European Union and the European countries in the Eurozone in specific are at last advancing to the solution of the Eurozone fiscal crisis which is with time being reflected in the soothing Euro zone monetary markets11. As constant strong actual financial indicators heightens prospects for upturn in the European Union, as well as significant structural reforms persist to be put into use in the essential marginal state, Spain, it is now not an inquiry of the Euro’s continued existence as no autonomous member (financially weak or strong) will ever stop using the Euro. It is no longer a matter of whether the Eurozone periphery will attain debt sustainability or not12. The 2010- 2011 fiscal crisis and the reaction to it have corrected numerous of the primary mistakes. The complete implementation by the European Union of the International Monetary Fund (IMF) set of guidelines in tackling the unsound fiscal policies and autonomous debts crises implies that regional financially fragile Eurozone members that joined the Euro untransformed, are currently being required to assume the type of structural monetary reforms that they were to have executed long before joining the Euro zone. As a product of this, these countries with ultimately shaky fiscal policies and private sectors gratitude were permitted to get worse beyond point of coming back, as evident in the incident of Greece, Ireland and probably Portugal13. Intensification of the fiscal aid ability of the momentary European financial stabilization fund (EFSF) was executed before March 2011 in addition to explanation of the set composition of the stable European stabilization mechanism (ESM). These adjustments suggested that the balance due sustainability focus over Greece and Ireland would be tackled through development extension as well as interest rate cut back on the two nations, Greece and Irelend, official segment liabilities and possible voluntary debts switch over at close to contemporary market rates of attracted private sector investment workers14. The most considerable way to go this problem is to impose actual or real sanctions on investors and sovereign countries that borrow and spend too much hence letting them realize that when their bonds start to skyrocket, they need to change their ways of operation. This is because a goal oriented investor or country should be in a position to understand that when they cannot repay the debts or deficits in time then the loaner would not be able to lend them any more money. The later resolution is probable to plea generally to politically aware Eurozone banking institutions willing to join support with their independent bankers throughout the impending next cycle of banking stress analysis. The European Union treaty to add onto incentives and sanctions to sovereigns that go above the 3 percent deficit or Gross Domestic Product that should be fully agreed upon by the European nations within the region underlying the Eurozone. This would in essence make lending countries and investors to have a powerful motivation take into consideration the useful considerations while purchasing bonds but not relying on other countries as Germany or taxpayers to bail them out of such debt crisis when the financial situation goes worse15. A market based way forward towards the solution of the debt crisis is being put forward to ensure its solution. This is by urging the government leaders and politicians to ensure stable government composition so as to ensure that their economic status is stable enough to ensure economic development. Funds are advised not to be mishandled by the government officials so as not to end up with deficits at the end of such financial undertaking making them not to end up with a negative or nonprofit making scheme. Hence, making the refund of such debt not easy or rather relying on other countries or the taxpayers’ money to bail them out of this financial massacre. The politicians are advised not to feel indispensible as their actions determine the entire life and financial and economic situation of the whole nation, Eurozone, European common currency and the entire exchange market16. Eurozone countries are urged not to default in such payment of their deficits or debts so as not to worsen the condition of the world’s greatest currency. Such defaults only weaken the state of the euro currency in the exchange market and hence making other currencies as the dollar to advance their states with the euro as yard stick for comparison. Such mistakes only bring down the Eurozone banking schemes which on the other end lead to a collapse in the economy of the individual member states of the Eurozone. The European Union member states met and agreed that there should be a financial boost so as to increase capital levels in banks, enhance a financial rescue scheme and thence provide a relief for the debt being suffered from by Greece. There was then a reimbursement of 100 billion Euros into banks so as to boost their levels of capital and thus a way forward to the solution of such a global financial crisis that could worsen the financial situations of such unstable Eurozone member states such as Greece, Ireland, Portugal, Spain and Italy17. Moral, economic and social obligations have been put into consideration so as to see a way forward to the solution of such a global financial crisis that may see to the worsening if the world’s greatest currency losing its worth and even causing adverse effects and consequences to the world currency exchange market. European financial stability facility has also been put forward to ensure a solution to such fiscal crisis. This has seen to the 440 billion Euro fund so as to arbitrate in the national debt markets and provide loans to governments that would intend to have their banks recapitalized so as to increase their individual capital levels to greater heights. Writing down of the Greek debts by 21% by the private sector is also another agreement that was passed so as to solve the situation at stake18. Conclusion: With Greece having a national debt of 300 billion Euros which surpasses its national economy and is predicted to reach 120 percent of the Gross Domestic Product (GDP), only worsens the financial status of such Euro zone nations and their economy and developments at large. As a result of this, a country such as Greece is forced to take austerity measures so as to reduce the deficit. This has forced the nation into such acts as increased indirect taxes on fuel, alcohol and tobacco, two year rise on retirement age and new but tough regulations governing tax evasion which has on the other hand triggered industrial action in the country. The Euro zone debt crisis is an essential case study for crisis management as it makes us to be acquainted with the nature of current crises and how to go about them. Bibliography "European Markets Surge". The Wall Street Journal. 10 May 2010. Retrieved 30th April 2012. "European fiscal union: what the experts say". The Guardian (2nd December 2011), London. George Matlock (16th February 2010). "Peripheral euro zone government bond spreads widen. Reuters. Retrieved 30th April 2012. "Leaders agree euro zone debt deal after late-night talks". BBC News. 27th October 2011. Retrieved 29th April 2012. Paul Krugman (25th February 2012). "European Crisis Realities". The New York Times. Retrieved 30 April 2012. Pidd, Helen (2nd December 2011). "Angela Merkel vows to create 'fiscal union' across eurozone" The Guardian, London. Retrieved 30th April 2012. Spiegel, D., 2011. "How the Euro Became Europe's Greatest Threat" Wearden, Graeme (20th September 2011). "EU debt crisis: Italy hit with rating downgrade". The Guardian, United Kingdom. Retrieved on 30th April, 2012. Willem Sels (27th February 2012). "Greek rescue package is no long term solution, says HSBC's Willem Sels" Investment Europe. Read More