Debit Crisis
What is The European Debt Crisis?
The European sovereign debt crisis started in 2008, with the collapse of Iceland's banking system, and spread primarily to Greece, Ireland and Portugal during 2009. The debt crisis led to a crisis of confidence for European businesses and economies.
The European debt crisis was caused due to the fall in interest rates where expectations of high inflation had previously kept these interest rates high. The bond buyers thought they were safe since the bonds they purchased was still issued by a governmental system apart of the European Monetary Union. However, the interest rates on the Italian, Greek and others government bonds had not been very different from the interest rates on the German government bonds for example. Governments then increased their borrowing as a result to the low interest rates. When growth slows, so do tax revenues – making high budget deficits unsustainable. Investors started responding by demanding higher yields on Greece’s bonds, which raised the cost of the country’s debt burden.
What did European Governments do?
The action taken by European government thus far has basically been a series of bailouts for their troubled economy. In the year of 2010, The European Union and International Monetary Fund payed out 110 billion euros to Greece. Their second bailout was in the middle of 2011 and that time it was worth approximately one hundred and seven billion dollars. Ireland and Portugal had also been receiving bailouts. As a result of this, the European member states created what is called the European Financial Stability Facility that would provide them with emergency lending to countries in financial difficulty.
The European Central Bank also became involved in this Debt Crisis. In August 2011, they announced a plan to purchase government bonds in order to keep yield from spiraling out of control once again. By December of 2011, The European Central Bank had provided 639 billion dollars . This money was available to their nations troubled banks at excessively low rates. Although what they did helped to stabilize the financial markets for the short time being, it seemed to be that they were just finding ways to avoid the bigger problem and they were not actually finding a true working solution. While smaller countries such as Greece were small enough to be saved by the European Central Bank, others such as Spain and Italy were not.
This crisis reached a turning point in 2012 when the President of the European Central Bank announced that they would be doing whatever it takes to keep the European countries together. Although this statement did not solve the problem completely, investors were fooled and felt more comfortable buying bonds once again. In turn, the lower yields have given them time to address their debt issues.
What is the current status of the crisis?
The yields of European bonds have sunken to very low levels. The high yields of 2010 to 2012 had attracted buyers which drove the prices up in markets such as Spain and Italy and that eventually brought the yields down. However, the crisis lives on in the form of a very slow growing economy and the increasing risk that Europe is going to sink into deflation.
Political Issues
The political implications of the crisis were devastating. Cutting down expenses to reduce the gap between revenues and their outlays had led to massive
protests from the public as well as the removal of the parties in power in the countries of Portugal and Italy. On an international level the crisis led to tensions between countries like Germany and Greece being the one with higher debt. Countries like Germany demanded for Greece and the other European countries involved in the Debt Crisis to reform their budgets which led to even more tension within the European Union. In the end, Greece agreed to cut their spending down while raising taxes. Germany did not want to be responsible for all of the European Union Nations and this created tension since there would be a possibility that one or more European countries would abandon their region's common currency.
Opinion-
Many people wonder why this was such a major problem across the globe and some people even question why the countries could not walk away from their debts and have a fresh start. Well I simply don't think that the solution would be that simple! European banks continue to stay one of the largest holders of government debt even though they reduced it throughout the second half of 2011 and that means that banks are required to keep a certain amount of what they gain on their balance relatively close to the amount of debt they still hold. A country simply cannot walk away from an issue that they caused for themselves and take advantage of other contries's resources unless they have something of equal compensation. However in my opinion, fiscal austerity does not HAVE to be the answer or solution per say. Germany pushing for higher taxes and lower spending earlier was problematic. As they government reduced spending that lead them to an even slower growth which meant that there would be lower tax revenues for countries to pay in their bills. If anything this made it more of a challenge for the countries in high debt to dig themselves out of their problem! Now that the possibility of an exit or escape for the Eurozone countries is much lower than it was in 2011, the problem still remains in it's place. And quite frankly, I believe it is likely to remain for several more years if not more as a result of the economic shock.