SUMMARY: European sovereign-debt crisis is still going on in some countries in eurozone, such as Greece, Spain, Ireland, Portugal. The origins of these crises started from Greece when the government borrowed a huge amount of money from foreign investors and was unable to repay. As a result, a financial crisis started to hit Greece as the starting point of the crisis over countries in Eurozone. While the old deutschmark (DM) bloc – Germany, France, etc. experience lower than average growth and inflation, the Eurozone experienced the contrary.
In general, instead of global factors as the causes of the crisis, the Eurozone itself should hold responsible for the start and spread of the crisis. I. INTRODUCTION European sovereign-debt crisis is still happening within Europe, which gave some of the countries in the euro area a hard time to re-finance their government debt unless they are supported by third parties. There are many factors that cause the ongoing European financial crisis. Many countries within Eurozone have been affected by sovereign debt crisis due to the raise of government debt level or private debt sector.
Although this ongoing crisis has happened in some of Eurozone countries, it gave a huge impact for the area as whole in general. This paper will be analyzed whether global factors or domestic factors are to be responsible for the origins and the spread of the ongoing crisis. II. The origins of European sovereign-debt crisis and causes: In 2008, the world hit crisis due to bad banking practices. Both Eurozone bank and American bank faced the same problems as they gave many people loans even they were not able to repay.
However, the crisis in Eurozone happened as a result of the system European Union deals and does their trade policies. During the period of 2002-2007, a major increase in savings was available for investment, which became one of the factors that caused the crisis. There are four main issues that we need to consider to analyze the roots of the crisis, which are the high level of government debt, trade imbalances, economic recession with high unemployment and loss of confidence. (Wikipedia) Since late 2009, the current Eurozone crises have been happening and spreading around the Eurozone.
Firstly, Greece debt crisis quickly transformed into crisis of the entire Eurozone is the result of the Greeks government borrowing a huge amount from foreign investors and banks. Consequently, how each European country was related to this crisis had a loan of and spent the money varies. The worst result from the sovereign debt crisis is when the nations have the only option of default. It is involved the interconnection in the global financial systems. It forces the banking systems of credits a big loss. In 2010, many economists believed that a high government debt level was the main factor of European crises.
That was quite a wrong statement as only Greek government borrowed big money from private and foreign bank and investors. The rest of European areas are related to other factor, mainly interacting with trade imbalance within EU countries and banking problems. Before the crisis, EU kept interest rate low and money was flowing from Northern are to Southern are of Europe. It is not about how much they can borrow; it is about how low the ECB made the interest rate. There are also concerns about lacking of growth and high unemployment in the Eurozone, especially among the Eurozone periphery.
Speaking of trade imbalances, the major result of it is based on the build-up of public debt in the periphery. The policy responses was failed to correct these imbalances. The main focus is about how to improve the competitiveness of these countries to reduce their cost of production and boost exports. The question is what role Eurozone countries help to lower their trade surpluses. Investors were threatened by higher interest rates from some governments with higher debt levels, deficits and current account deficits. Each country in Eurozone reacted differently with the crisis. III. GREECE:
Greece used to be one of the fastest growing in the Eurozone in the 2000s. However, in 2009, Greece started to hit the crisis as it is indebted heavily to eurozone countries and become one of three eurozone countries that have gone under two bail-out. Although the Greek economy is relatively small with direct damage of it defaulting on its debts may be soaked up by the eurozone (Financial Times, 2012). The need of financial support from EU and the IMF was requested in 2010 as a loan of 45bn. According to Carmen Reinhart – Co-author of This Time is Different; she believed that it was difficult for
Greece to get out of the crisis without restructuring. The problem of the Greek crisis is involved with fiscal problems, which can be income problem, profiling problem, servicing problem or balance sheet problem. As the government took benefit from the growth, they ran a large structural deficit. The restructuring happens more slowly with the support from the EU and IMF, therefore, the private bank from France, Switzerland, etc. which gave a loan to Greece, are not distressed with a huge haircut. As a result, Greece owned the IMF 28bn Euros, the EU 74bn Euros and had a market debt of 262 bn Euros, according to JP Morgan.
From 2000 to 2008, the Greek budget deficit was 5. 1% as a real number instead of 2. 9% of GDP (Marzinotto et al. 2010). In 2009, George Papandreou won the election with his promise of spending more on social causes and trying to reduce the loan that Greece faced. A short time later, he was unable to make the promise become true as the previous government “had been cooking the books”. The actual figure of budget deficit in 2009 is 12. 7%, which is twice as the announced figure. With what happened in Greece, they questioned whether or not the market was under-estimating or over-estimating the chance of the Greece exits from Eurozone.
According to Steven Saywell – Head of FX Strategy for European, he was against some of strategist, who thought of high chance for the Greece defaults. He mentioned that Europe was quite stable at the moment. At the early of 2012, there was intensity here because of the precedence. Many concerns about Greece might face the leave from Eurozone but there would be a huge impact if Greece defaults. IV. PORTUGAL: Despite of Greece preventing from default, “Portuguese debt looms over Europe”. A 78bn euros IMF-EU bailout package helped Portuguese public finances stable.
Portugal quickly become a victim under pressure from bond traders, speculators and rating agencies. In the early of 2010, Portugal had recovered from economics crisis at the best rate out of some countries in Eurozone. According to Michael Gallagher – Director of Research, IDEAGlobal, the problems is that the Portuguese program with the IMF run through 2013-2014 but you actually start selling later this year into early next year Firstly, they got a lot of redemption in 2013 and the IMF want to see one year clear funding ahead, guarantee funding ahead.
In 2010, speaking of international investment position, it would be extremely nervous as they have external debt; Portugal even had more problems than the Ireland or Greece. The Portuguese problems is not just fiscal problems, people have to look at in the contact of fiscal policy. However, if you look at the total public sector debt it’s very substantive and a lot of that was held abroad. Consequently, the desire for the foreigner reduce exposure of Portugal, it has not stopped at the current account.
It is breakdown, you see net-pot portfolio outflow, u need to see people receiving money, redemption, withdrawn money from the Portugal. Consequently, it’s very difficult for Portugal to get into the bond market either late of the semi 2013, second package of the IMF will be required. On economic round, it is quite clear for addition of PSI. It is better to do sooner rather than later. So we get to the end of this year, for example, the tradable Portuguese debt will be around 93bn Euros, which is about 50% of the total debt.
The reason is that EU-IMF loan and also for ECB will actually be substandard for that stage. The long it waits, the less point there is. Indeed, however, I think although economist would argue that Portuguese debt is unattainable. Remember, there’s also quite a lot of enterprises could be taken on broad, we could get 100% on GDP quite easily in term of government debt GDP ratio, although the economist are clear that EU politics argue against PSI and I think we’d like to see second long package of about 25bn euros to take the shoot till the end of 2014. V. IRELAND:
Government over-spending is not the case of Ireland. The problem of Ireland is about the boom of property. The loss of hundred million euros from Irish bank was involved extremely close with the defaulted loans to property developers and homeowners during the period of property bubbling. The rate of unemployment increased simultaneously with the raise of tax whereas civil service-related wages were stayed still. Instead of guaranteeing bank deposit and letting some private loans in the banks some loss, Ireland moved the debt to tax payer, left behind several negative impacts on Ireland’s credit worthiness.
Consequently, Irish government negotiated with the EU, the IMF and another three countries, which are United Kingdom, Denmark and Sweden. On 29 November 2010, agreement of 65. 7bn euros was signed as a bailout package for Ireland with several conditions. The government reached agreement of decreasing its budget deficit to less than three percent within 2015. The third quarter of 2011, European leaders made a decision to cut the interest rate of the EU/IMF loans from 6% to between 3. 5%-4% and double the time of return to 15 years. THE SPREAD OF THE CRISIS:
The crisis had been spreading around many countries in eurozone due to the consequence of reducing confidence between them. In 2011, each country in Eurozone hit crisis differently, started from Greece due to government over-spending. Subsequently, it turned to Ireland, Portugal, etc. and many countries in Eurozone. The crisis is not just about each individual country, it is about the Europe crisis as whole. The interest rate of developed world is extremely low, therefore, when the interest rate went up, it would affect the cost of credit and the growth as well. I. SPAIN: