European sovereign debt crisis.docx

European sovereign debt crisis.docx

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Europeansovereigndebtcrisis

Europeansovereigndebtcrisis

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Long-terminterestratesofallEurozonecountriesexceptEstonia（secondarymarketyieldsofgovernmentbondswithmaturitiesofclosetotenyears）.[1]Ayieldof6 %ormoreindicatesthatfinancialmarketshaveseriousdoubtsaboutcredit-worthiness.[2]

Partofaserieson:

Late-2000sfinancialcrisis

Majordimensions[show]

∙2000senergycrisis

∙Late-2000srecession

∙Automotiveindustrycrisisof2008–2010

∙Dodd–FrankWallStreetReformandConsumerProtectionAct

∙Europeansovereigndebtcrisis

∙FinancialCrisisInquiryCommission

∙Subprimecrisisimpacttimeline

∙Subprimemortgagecrisis

∙UnitedStateshousingbubble

∙UnitedStateshousingmarketcorrection

Countries[show]

∙Belgium

∙Greece

∙Hungary

∙Iceland

∙Ireland

∙Latvia

∙Russia

∙Spain

∙Ukraine

Summits[show]

∙34thG8summit（July2008）

∙2008G-20Washingtonsummit（November2008）

∙APECPeru2008（November2008）

∙2009G-20LondonSummit（April2009）

Legislation[show]

∙Banking（SpecialProvisions）Act2008

∙EconomicStimulusActof2008

∙EmergencyEconomicStabilizationActof2008

∙HousingandEconomicRecoveryActof2008

∙TermAsset-BackedSecuritiesLoanFacility

∙TroubledAssetReliefProgram（TARP）

∙2008EuropeanUnionstimulusplan

∙2008UnitedKingdombankrescuepackage

∙Chineseeconomicstimulusprogram

∙China–Japan–SouthKoreatrilateralsummit

∙AngloIrishBankCorporationAct2009

∙AmericanRecoveryandReinvestmentActof2009

∙GreenNewDeal

Companybailouts[show]

∙AmericanInternationalGroup（AIG）（US$150B）

∙Chrysler（US$4B）

Companyfailures[show]

（listedalphabetically）

∙ABCLearning

∙AllcoFinanceGroup

∙AmericanFreedomMortgage

∙AmericanHomeMortgage

∙Babcock&Brown

∙BearingPoint

∙BernardL.MadoffInvestmentSecuritiesLLC

∙CharterCommunications

∙Chrysler

oChryslerChapter11reorganization

∙CircuitCityStores

∙GeneralMotors

oGeneralMotorsChapter11reorganization

∙Icesave

∙KaupthingSinger&Friedlander

∙LehmanBrothers

oBankruptcyofLehmanBrothers

∙Linens'nThings

∙Mervyns

∙NetBank

∙NewCentury

∙SaabAutomobile

∙SentinelManagementGroup

∙TerraSecurities

oTerraSecuritiesscandal

∙Tweeter

∙WashingtonMutual

∙WaterfordWedgwood

∙YamatoLife

Causes[show]

∙Causesofthelate-2000sfinancialcrisis

∙Causesofthelate-2000srecession

∙CausesoftheUnitedStateshousingbubble

∙Creditratingagenciesandthesubprimecrisis

∙Governmentpoliciesandthesubprimemortgagecrisis

Solutions[show]

∙2008–2009Keynesianresurgence

∙EmergencyEconomicStabilizationActof2008

∙EconomicStimulusActof2008

∙AmericanRecoveryandReinvestmentActof2009

∙FederalReserveresponsestothesubprimecrisis

∙Governmentinterventionduringthesubprimemortgagecrisis

∙Nationalfiscalpolicyresponsetothelate2000srecession

∙Regulatoryresponsestothesubprimecrisis

∙Subprimemortgagecrisissolutionsdebate

∙Arabspring

∙Indignados

∙Occupymovement

∙v·

∙d·

∙e

Fromlate2009,fearsofasovereigndebtcrisisdevelopedamonginvestorsconcerningrisinggovernmentdebtlevelsacrosstheglobetogetherwithawaveofdowngradingofgovernmentdebtofcertainEuropeanstates.Concernsintensifiedearly2010andthereafter[3][4]makingitdifficultorimpossibleforGreece,IrelandandPortugaltore-financetheirdebts.On9May2010,Europe'sFinanceMinistersapprovedarescuepackageworth€750 billionaimedatensuringfinancialstabilityacrossEuropebycreatingtheEuropeanFinancialStabilityFacility（EFSF）.[5]InOctober2011eurozoneleadersagreedonanotherpackageofmeasuresdesignedtopreventthecollapseofmembereconomies.Thisincludedanagreementwithbankstoaccepta50%write-offofGreekdebtowedtoprivatecreditors,[6][7]increasingtheEFSFtoabout€1trillion,andrequiringEuropeanbankstoachieve9%capitalisation.[8]TorestoreconfidenceinEurope,EUleadersalsosuggestedtocreateacommonfiscalunionacrosstheeurozonewithstrictandenforceablerulesembeddedintheEUtreaties.[9][10]

Whilethesovereigndebtincreaseshavebeenmostpronouncedinonlyafeweurozonecountries,theyhavebecomeaperceivedproblemfortheareaasawhole.[11]Nevertheless,theEuropeancurrencyhasremainedstable.[12]Asofmid-November2011itwastradingevenslightlyhigheragainsttheEurobloc'smajortradingpartnersthanatthebeginningofthecrisis.[13][14]Thethreemostaffectedcountries,Greece,IrelandandPortugal,collectivelyaccountforsixpercentofeurozone'sgrossdomesticproduct（GDP）.[15]

Contents

 [hide] 

∙1Causes

o1.1Risinggovernmentdebtlevels

o1.2Tradeimbalances

o1.3Monetarypolicyinflexibility

o1.4Lossofconfidence

∙2Evolutionofthecrisis

o2.1Greece

o2.2Ireland

o2.3Portugal

o2.4Possiblespreadtoothercountries

▪2.4.1Belgium

▪2.4.2France

▪2.4.3Italy

▪2.4.4Spain

▪2.4.5UnitedKingdom

∙3Solutions

o3.1EUemergencymeasures

▪3.1.1EuropeanFinancialStabilityFacility（EFSF）

▪3.1.2EuropeanFinancialStabilisationMechanism（EFSM）

▪3.1.3Brusselsagreementandaftermath

o3.2ECBinterventions

o3.3Concertedactionofseveralcentralbanks

o3.4Reformandrecovery

∙4Proposedlong-termsolutions

o4.1EuropeanfiscalunionandrevisionoftheLisbonTreaty

o4.2Eurobonds

o4.3EuropeanStabilityMechanism（ESM）

o4.4Addresscurrentaccountimbalances

o4.5EuropeanMonetaryFund

o4.6SpeculationofthebreakupoftheEurozone

∙5Controversies

o5.1BreakingoftheEUtreaties

o5.2Actorsfuelingthecrisis

▪5.2.1Creditratingagencies

▪5.2.2Media

▪5.2.3Speculators

o5.3Doubtsabouteffectivenessofnon-Keynesianpolicies

o5.4Odiousdebt

o5.5Nationalstatistics

o5.6Finlandcollateral

∙6Politicalimpact

∙7Seealso

∙8References

∙9Externallinks

[edit]Causes

Publicdebt$and %GDP（2010）forselectedEuropeancountries

TheEuropeansovereigndebtcrisishasbeencreatedbyacombinationofcomplexfactorssuchas:

theglobalizationoffinance;easycreditconditionsduringthe2002-2008periodthatencouragedhigh-risklendingandborrowingpractices;internationaltradeimbalances;real-estatebubblesthathavesinceburst;slowgrowtheconomicconditions2008andafter;fiscalpolicychoicesrelatedtogovernmentrevenuesandexpenses;andapproachesusedbynationstobailouttroubledbankingindustriesandprivatebondholders,assumingprivatedebtburdensorsocializinglosses.[16][17]

Onenarrativedescribingthecausesofthecrisisbeginswiththesignificantincreaseinsavingsavailableforinvestmentduringthe2000-2007period.Duringthistime,theglobalpooloffixedincomesecuritiesincreasedfromapproximately$36trillionin2000to$70trillionby2007.This"GiantPoolofMoney"increasedassavingsfromhigh-growthdevelopingnationsenteredglobalcapitalmarkets.InvestorssearchingforhigheryieldsthanthoseofferedbyU.S.Treasurybondssoughtalternativesglobally.[18]Thetemptationofferedbythisreadilyavailablesavingsoverwhelmedthepolicyandregulatorycontrolmechanismsincountryaftercountryasglobalfixedincomeinvestorssearchedforyield,generatingbubbleafterbubbleacrosstheglobe.Whilethesebubbleshaveburstcausingassetprices（e.g.,housingandcommercialproperty）todecline,theliabilitiesowedtoglobalinvestorsremainatfullprice,generatingquestionsregardingthesolvencyofgovernmentsandtheirbankingsystems.[17]

HoweachEuropeancountryinvolvedinthiscrisisborrowedandinvestedthemoneyvaries.Forexample,Ireland'sbankslentthemoneytopropertydevelopers,generatingamassivepropertybubble.Whenthebubbleburst,Ireland'sgovernmentandtaxpayersassumedprivatedebts.InGreece,thegovernmentincreaseditscommitmentstopublicworkersintheformofextremelygenerouspayandpensionbenefits.Iceland'sbankingsystemgrewenormously,creatingdebtstoglobalinvestors（"externaldebts"）severaltimeslargerthanitsnationalGDP.[17]

Theinterconnectionintheglobalfinancialsystemmeansthatifonenationdefaultsonitssovereigndebtorentersintorecessionthatplacessomeoftheexternalprivatedebtatriskaswell,thebankingsystemsofcreditornationsfacelosses.Forexample,inOctober2011ItalianborrowersowedFrenchbanks$366billion（net）.ShouldItalybeunabletofinanceitself,theFrenchbankingsystemandeconomycouldcomeundersignificantpressure,whichinturnwouldaffectFrance'screditorsandsoon.Thisisreferredtoasfinancialcontagion.[19][20]Furthercreatinginterconnectionistheconceptofdebtprotection.Financialinstitutionsenterintocontractscalledcreditdefaultswaps（CDS）thatresultinpaymentorreceiptoffundsshoulddefaultoccuronaparticulardebtinstrumentorsecurity,suchasagovernmentbond.SincemultipleCDScanbepurchasedonthesamesecurity,thevalueofmoneychanginghandscanbemanytimeslargerthantheamountofdebtitself.Itisunclearwhatexposureeachcountry'sbankingsystemhastoCDS,whichcreatesanothertypeofuncertainty.[21]

Somepoliticians,notablyAngelaMerkel,havesoughttoattributesomeoftheblameforthecrisistohedgefundsandotherspeculatorsstatingthat"institutionsbailedoutwithpublicfundsareexploitingthebudgetcrisisinGreeceandelsewhere".[22][23][24][25][26]AlthoughsomefinancialinstitutionsclearlyprofitedfromthegrowingGreekgovernmentdebtintheshortrun,[27]there