European sovereign-debt crisis From Wikipedia, the free encyclopedia 20072012 global economic crisis Major dimensions[show] Countries[show]

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Long-term interest rates (secondary market yields of government bonds with maturities of close to ten years) of all eurozone countries except Estonia[1] A yield of 6% or more indicates that financial markets have serious doubts about credit-worthiness.[2] The European sovereign debt crisis (often referred to as the Eurozone crisis) is an ongoing financial crisis that has made it difficult or impossible for some countries in the euro area to repay or re-finance their government debt without the assistance of third parties.[3] From late 2009, fears of a sovereign debt crisis developed among investors as a result of the rising private and government debt levels around the world together with a wave of downgrading of government debt in some European states. Causes of the crisis varied by country. In several countries, private debts arising from a property bubble were transferred to sovereign debt as a result of banking system bailouts and government responses to slowing economies post-bubble. In Greece, unsustainable public sector wage and pension commitments drove the debt increase. The structure of the Eurozone as a monetary union (i.e., one currency) without fiscal union (e.g., different tax and public pension rules) contributed to the crisis and harmed the ability of European leaders to respond.[4][5] European banks own a significant amount of sovereign debt, such that concerns regarding the solvency of banking systems or sovereigns are negatively reinforcing.[6] Concerns intensified in early 2010 and thereafter,[7][8] leading Europe's finance ministers on 9 May 2010 to approve a rescue package worth 750 billion aimed at ensuring financial stability across Europe by creating the European Financial Stability Facility (EFSF).[9] In October 2011 and February 2012, eurozone leaders agreed on more measures designed to prevent the collapse of member economies, including an agreement whereby banks would accept a 53.5% write-off of Greek debt owed to private creditors,[10] increasing the EFSF to about 1 trillion, and requiring European banks to achieve 9% capitalisation.[11]

To restore confidence in Europe, the focus across all EU member states has been gradually to implement austerity measures. EU leaders agreed on adopting the Euro Plus Pact, consisting of political reforms to improve fiscal strength and competitiveness, as well as the Fiscal Compact, including the commitment of each participating country to introduce a balanced budget amendment as part of their national law/constitution.[12][13] Each of the eurozone countries being involved in a bailout program (Greece, Portugal and Ireland) was asked both to follow a program with fiscal consolidation/austerity, and to restore competitiveness through implementation of structural reforms and internal devaluation, i.e. lowering their relative production costs.[14] The European Central Bank (ECB) has done its part by lowering interest rates and providing cheap loans of more than one trillion Euros to maintain money flows between European banks. On 6 September 2012, the ECB calmed financial markets by announcing full support for all eurozone countries involved in a sovereign state bailout program from EFSF/ESM through so-called Outright Monetary Transactions.[15] It is hoped that these measures will decrease current account imbalances among eurozone member states and gradually lead to an end of the crisis. Many economists believing in Keynesian policies however, have criticized the extent of austerity measures for their negative impact on economic growth. In October 2012 also the International Monetary Fund (IMF) found that tax hikes and spending cuts have been doing more damage than expected.[16] Already a few months earlier, several European countries have called for a new growth strategy based on additional public investments, financed by growth-friendly taxes on property, land, wealth, and financial institutions. In June 2012, EU leaders agreed to moderately increase the funds of the European Investment Bank to kick-start infrastructure projects and increase loans to the private sector. A few months later 11 out of 17 eurozone countries agreed to introduce a new EU financial transaction tax to be collected from 1 January 2014.[17] While sovereign debt has risen substantially in only a few eurozone countries, it has become a perceived problem for the area as a whole,[18] leading to speculation of a possible breakup of the Eurozone. However, as of mid-November 2011, the Euro was even trading slightly higher against the bloc's major trading partners than at the beginning of the crisis,[19][20] before losing some ground in the following months[21][22] and again rebounding thereafter. Three countries significantly affected, Greece, Ireland and Portugal, collectively accounted for 6% of the eurozone's gross domestic product (GDP).[23] As of October 2012, the so-called Troika (European Commission, ECB and IMF) also negotiates with Spain and Cyprus about setting up an economic recovery program in return of financial loans from ESM.[24] The crisis has had a major impact on EU politics, leading to power shifts in several European countries, most notably in Greece, Ireland, Italy, Portugal, Spain, and France. Contents [hide] 1 Causes 1.1 Rising household and government debt levels 1.2 Trade imbalances 1.3 Structural problem of Eurozone system 1.4 Monetary policy inflexibility 1.5 Loss of confidence

2 Evolution of the crisis 2.1 Greece 2.2 Ireland 2.3 Portugal 2.4 Spain 2.5 Cyprus 2.6 Possible spread to other countries 2.6.1 Italy 2.6.2 Belgium 2.6.3 France 2.6.4 United Kingdom 2.6.5 Switzerland 2.6.6 Germany 2.6.7 Slovenia 3 Policy reactions 3.1 EU emergency measures 3.1.1 European Financial Stability Facility (EFSF) 3.1.2 European Financial Stabilisation Mechanism (EFSM) 3.1.3 Brussels agreement and aftermath 3.2 European Central Bank 3.3 European Stability Mechanism (ESM) 3.4 European Fiscal Compact 4 Economic reforms and recovery proposals 4.1 Direct loans to banks and banking regulation 4.2 Less austerity, more investment 4.3 Increase competitiveness

4.4 Address current account imbalances 4.5 Mobilization of credit 4.6 Commentary 5 Proposed long-term solutions 5.1 European fiscal union 5.2 European bank recovery and resolution authority 5.3 Eurobonds 5.4 European Monetary Fund 5.5 Drastic debt write-off financed by wealth tax 6 Controversies 6.1 EU treaty violations 6.2 Actors fueling the crisis 6.2.1 Credit rating agencies 6.2.2 Media 6.2.3 Speculators 6.3 Speculation about the breakup of the eurozone 6.4 Odious debt 6.5 National statistics 6.6 Collateral for Finland 7 Political impact 8 Projections 9 See also 10 References 11 External links [edit]Causes

Public debt $ and %GDP (2010) for selected European countries

Government debt of Eurozone, Germany and crisis countries compared to Eurozone GDP

Government deficit of Eurozone compared to USA and UK The European sovereign debt crisis resulted from a combination of complex factors, including the globalization of finance; easy credit conditions during the 20022008 period that encouraged high-risk lending and borrowing practices; the 20072012 global financial crisis; international trade imbalances; real-estate bubbles that have since burst; the 20082012 global recession; fiscal policy choices related to government revenues and expenses; and approaches used by nations to bail out troubled banking industries and private bondholders, assuming private debt burdens or socializing losses. [25][26] One narrative describing the causes of the crisis begins with the significant increase in savings available for investment during the 20002007 period when the global pool of fixed-income securities increased from approximately $36 trillion in 2000 to $70 trillion by 2007. This "Giant Pool of Money" increased as savings from highgrowth developing nations entered global capital markets. Investors searching for higher yields than those offered by U.S. Treasury bonds sought alternatives globally.[27] The temptation offered by such readily available savings overwhelmed the policy and regulatory control mechanisms in country after country, as lenders and borrowers put these savings to use, generating bubble after bubble across the globe. While these bubbles have burst, causing asset prices (e.g., housing and commercial property) to decline, the liabilities owed to global investors remain at full price, generating questions regarding the solvency of governments and their banking systems.[26] How each European country involved in this crisis borrowed and invested the money varies. For example, Ireland's banks lent the money to property developers, generating a massive property bubble. When the bubble burst, Ireland's government and taxpayers assumed private debts. In Greece, the government increased its commitments to public workers in the form of extremely generous wage and pension benefits, with the former doubling in real terms over 10 years.[4] Iceland's banking system grew enormously, creating debts to global investors (external debts) several times GDP.[26][28] The interconnection in the global financial system means that if one nation defaults on its sovereign debt or enters into recession putting some of the external private debt at risk, the banking systems of creditor nations face losses. For example, in October 2011, Italian borrowers owed French banks $366 billion (net). Should Italy be unable to finance itself, the French banking system and economy could come under significant pressure, which in turn would

affect France's creditors and so on. This is referred to as financial contagion.[6][29] Another factor contributing to interconnection is the concept of debt protection. Institutions entered into contracts called credit default swaps (CDS) that result in payment should default occur on a particular debt instrument (including government issued bonds). But, since multiple CDSs can be purchased on the same security, it is unclear what exposure each country's banking system now has to CDS.[30] Greece hid its growing debt and deceived EU officials with the help of derivatives designed by major banks.[31][32][33][34][35][36] Although some financial institutions clearly profited from the growing Greek government debt in the short run,[31] there was a long lead-up to the crisis. [edit]Rising household and government debt levels In 1992, members of the European Union signed the Maastricht Treaty, under which they pledged to limit their deficit spending and debt levels. However, a number of EU member states, including Greece and Italy, were able to circumvent these rules, failing to abide by their own internal guidelines, sidestepping best practice and ignoring internationally agreed standards.[37] This allowed the sovereigns to mask their deficit and debt levels through a combination of techniques, including inconsistent accounting, off-balance-sheet transactions [37] as well as the use of complex currency and credit derivatives structures.[38][39] The complex structures were designed by prominent U.S. investment banks, who received substantial fees in return for their services.[31] The adoption of the euro led to many Eurozone countries of different credit worthiness receiving similar and very low interest rates for their bonds during years preceding the crisis, which author Michael Lewis referred to as "a sort of implicit Germany guarantee."[4]

Public debt as a percent of GDP (2010) A number of economists have dismissed the popular belief that the debt crisis was caused by excessive social welfare spending. According to their analysis, increased debt levels were mostly due to the large bailout packages provided to the financial sector during the late-2000s financial crisis, and the global economic slowdown thereafter. The average fiscal deficit in the euro area in 2007 was only 0.6% before it grew to 7% during the financial crisis. In the same period, the average government debt rose from 66% to 84% of GDP. The authors also stressed that fiscal deficits in the euro area were stable or even shrinking since the early 1990s.[40] US economist Paul Krugman named Greece as the only country where fiscal irresponsibility is at the heart of the crisis.[41] Unprecedented household debt levels were another cause. The International Monetary Fund (IMF) reported in April 2012 that in advanced economies, during the five years preceding 2007, the ratio of household debt to income rose by an average of 39 percentage points, to 138 percent. In Denmark, Iceland, Ireland, the Netherlands, and Norway, debt peaked at more than 200 percent of household income. A surge in household debt to historic highs also occurred in emerging economies such as Estonia, Hungary, Latvia, and Lithuania. When house prices declined, many households saw their wealth shrink relative to their debt. By the end of 2011, real house prices had fallen from their peak by about 41% in Ireland, 29% in Iceland, 23% in Spain and the United States, and 21% in Denmark. Household defaults, underwater mortgages (where the loan balance exceeds the house value), foreclosures, and fire

sales were endemic to a number of economies as of 2012. Household deleveraging by paying off debts or defaulting on them has begun in some countries, which slows economic growth.[42][43] Either way, high debt levels alone may not explain the crisis. According to The Economist Intelligence Unit, the position of the euro area looked "no worse and in some respects, rather better than that of the US or the UK." The budget deficit for the euro area as a whole (see graph) is much lower and the euro area's government debt/GDP ratio of 86% in 2010 was about the same level as that of the US. Moreover, private-sector indebtedness across the euro area is markedly lower than in the highly leveraged Anglo-Saxon economies.[44] [edit]Trade imbalances

Current account balances relative to GDP (2010) Commentator and Financial Times journalist Martin Wolf has asserted that the root of the crisis was growing trade imbalances. He notes in the run-up to the crisis, from 1999 to 2007, Germany had a considerably better public debt and fiscal deficit relative to GDP than the most affected eurozone members. In the same period, these countries (Portugal, Ireland, Italy and Spain) had far worse balance of payments positions.[45][46] Whereas German trade surpluses increased as a percentage of GDP after 1999, the deficits of Italy, France and Spain all worsened. Paul Krugman wrote in 2009 that a trade deficit by definition requires a corresponding inflow of capital to fund it, which can drive down interest rates and stimulate the creation of bubbles: "For a while, the inrush of capital created the illusion of wealth in these countries, just as it did for American homeowners: asset prices were rising, currencies were strong, and everything looked fine. But bubbles always burst sooner or later, and yesterdays miracle economies have become todays basket cases, nations whose assets have evaporated but whose debts remain all too real."[47] A trade deficit can also be affected by changes in relative labor costs, which made southern nations less competitive and increased trade imbalances. Since 2001, Italy's unit labor costs rose 32% relative to Germany's.[48][49] Greek unit labor costs rose much faster than Germany's during the last decade.[50] However, most EU nations had increases in labor costs greater than Germany's.[51] Those nations that allowed "wages to grow faster than productivity" lost competitiveness.[46] Germany's restrained labor costs, while a debatable factor in trade imbalances,[51] are an important factor for its low unemployment rate.[52] More recently, Greece's trading position has improved;[53] in the period 2011 to 2012, imports dropped 20.9% while exports grew 16.9%, reducing the trade deficit by 42.8%.[53] Simon Johnson explains the hope for convergence in the Euro-zone and what went wrong. The euro locks countries into an exchange rate amounting to very big bet that their economies would converge in productivity. If not, workers would move to countries with greater productivity. Instead the opposite happened: the gap between German and Greek productivity increased resulting in a large current account surplus financed by capital flows. The capital flows could have been invested to increase productivity in the peripheral nations. Instead capital flows were squandered in consumption and consumptive investments.[54]

Further, Eurozone countries with sustained trade surpluses (i.e., Germany) do not see their currency appreciate relative to the other Eurozone nations due to a common currency, keeping their exports artificially cheap. Germany's trade surplus within the Eurozone declined in 2011 as its trading partners were less able to find financing necessary to fund their trade deficits, but Germany's trade surplus outside the Eurozone has soared as the euro declined in value relative to the dollar and other currencies.[55] [edit]Structural problem of Eurozone system There is a structural contradiction within the euro system, namely that there is a monetary union (common currency) without a fiscal union (e.g., common taxation, pension, and treasury functions).[56] In the Eurozone system, the countries are required to follow a similar fiscal path, but they do not have common treasury to enforce it. That is, countries with the same monetary system have freedom in fiscal policies in taxation and expenditure. So, even though there are some agreements on monetary policy and through European Central Bank, countries may not be able to or would simply choose not to follow it. This feature brought fiscal free riding of peripheral economies, especially represented by Greece, as it is hard to control and regulate national financial institutions. Furthermore, there is also a problem that the euro zone system has a difficult structure for quick response. Eurozone, having 17 nations as its members, require unanimous agreement for a decision making process. This would lead to failure in complete prevention of contagion of other areas, as it would be hard for the Eurozone to respond quickly to the problem.[57] In addition, as of June 2012 there was no "banking union" meaning that there was no Europe-wide approach to bank deposit insurance, bank oversight, or a joint means of recapitalization or resolution (wind-down) of failing banks.[58] Bank deposit insurance helps avoid bank runs. Recapitalization refers to injecting money into banks so that they can meet their immediate obligations and resume lending, as was done in 2008 in the U.S. via the Troubled Asset Relief Program.[59] Columnist Thomas L. Friedman wrote in June 2012: "In Europe, hyperconnectedness both exposed just how uncompetitive some of their economies were, but also how interdependent they had become. It was a deadly combination. When countries with such different cultures become this interconnected and interdependent when they share the same currency but not the same work ethics, retirement ages or budget discipline you end up with German savers seething at Greek workers, and vice versa."[60] [edit]Monetary policy inflexibility Further information: Economic and Monetary Union of the European Union Membership in the Eurozone established a single monetary policy, preventing individual member states from acting independently. In particular they cannot create Euros in order to pay creditors and eliminate their risk of default. Since they share the same currency as their (eurozone) trading partners, they cannot devalue their currency to make their exports cheaper, which in principle would lead to an improved balance of trade, increased GDP and higher tax revenues in nominal terms.[61] In the reverse direction moreover, assets held in a currency which has devalued suffer losses on the part of those holding them. For example, by the end of 2011, following a 25 percent fall in the rate of exchange and 5 percent rise in inflation, eurozone investors in Pound Sterling, locked in to euro exchange rates, had suffered an approximate 30 percent cut in the repayment value of this debt.[62]

[edit]Loss of confidence

Sovereign CDS prices of selected European countries (20102012). The left axis is in basis points; a level of 1,000 means it costs $1 million to protect $10 million of debt for five years. Prior to development of the crisis it was assumed by both regulators and banks that sovereign debt from the eurozone was safe. Banks had substantial holdings of bonds from weaker economies such as Greece which offered a small premium and seemingly were equally sound. As the crisis developed it became obvious that Greek, and possibly other countries', bonds offered substantially more risk. Contributing to lack of information about the risk of European sovereign debt was conflict of interest by banks that were earning substantial sums underwriting the bonds.[63] The loss of confidence is marked by rising sovereign CDS prices, indicating market expectations about countries' creditworthiness (see graph). Furthermore, investors have doubts about the possibilities of policy makers to quickly contain the crisis. Since countries that use the euro as their currency have fewer monetary policy choices (e.g., they cannot print money in their own currencies to pay debt holders), certain solutions require multi-national cooperation. Further, the European Central Bank has an inflation control mandate but not an employment mandate, as opposed to the U.S. Federal Reserve, which has a dual mandate. According to The Economist, the crisis "is as much political as economic" and the result of the fact that the euro area is not supported by the institutional paraphernalia (and mutual bonds of solidarity) of a state.[44] Heavy bank withdrawals have occurred in weaker Eurozone states such as Greece and Spain.[64] Bank deposits in the Eurozone are insured, but by agencies of each member government. If banks fail, it is unlikely the government will be able to fully and promptly honor their commitment, at least not in euros, and there is the possibility that they might abandon the euro and revert to a national currency; thus, euro deposits are safer in Dutch, German, or Austrian banks than they are in Greece or Spain.[65] As of June, 2012, many European banking systems were under significant stress, particularly Spain. A series of "capital calls" or notices that banks required capital contributed to a freeze in funding markets and interbank lending, as investors worried that banks might be hiding losses or were losing trust in one another.[66][67] In June 2012, as the euro hit new lows, there were reports that the wealthy were moving assets out of the Eurozone[68] and within the Eurozone from the South to the North. Between June 2011 and June 2012 Spain and Italy alone have lost 286 bn and 235 bn euros. Altogether Mediterranean countries have lost assets worth ten percent of GDP since capital flight started in end of 2010.[69] Mario Draghi, president of the European Central Bank, has called for an integrated European system of deposit insurance which would require European political institutions craft effective solutions for problems beyond the limits of the power of the European Central Bank.[70] As of June 6, 2012, closer integration of European banking appeared to be under consideration by political leaders.[71] Interest on long term sovereign debt In June, 2012, following negotiation of the Spanish bailout line of credit interest on long-term Spanish and Italian debt continued to rise rapidly, casting doubt on the efficacy of bailout packages as anything more than a stopgap

measure. The Spanish rate, over 6% before the line of credit was approved, approached 7%, a rough rule of thumb indicator of serious trouble.[72] Rating agency views On 5 December 2011, S&P placed its long-term sovereign ratings on 15 members of the eurozone on "CreditWatch" with negative implications; S&P wrote this was due to "systemic stresses from five interrelated factors: 1) Tightening credit conditions across the eurozone; 2) Markedly higher risk premiums on a growing number of eurozone sovereigns including some that are currently rated 'AAA'; 3) Continuing disagreements among European policy makers on how to tackle the immediate market confidence crisis and, longer term, how to ensure greater economic, financial, and fiscal convergence among eurozone members; 4) High levels of government and household indebtedness across a large area of the eurozone; and 5) The rising risk of economic recession in the eurozone as a whole in 2012. Currently, we expect output to decline next year in countries such as Spain, Portugal and Greece, but we now assign a 40% probability of a fall in output for the eurozone as a whole."[73] [edit]Evolution of the crisis

See also: 2000s European sovereign debt crisis timeline In the first few weeks of 2010, there was renewed anxiety about excessive national debt, with lenders demanding ever higher interest rates from several countries with higher debt levels, deficits and current account deficits. This in turn made it difficult for some governments to finance further budget deficits and service existing debt, particularly when economic growth rates were low, and when a high percentage of debt was in the hands of foreign creditors, as in the case of Greece and Portugal.[74] Some governments have focused on austerity measures (e.g., higher taxes and lower expenses) which has contributed to social unrest and significant debate among economists, many of whom advocate greater deficits when economies are struggling. Especially in countries where budget deficits and sovereign debts have increased sharply, a crisis of confidence has emerged with the widening of bond yield spreads and risk insurance on CDS between these countries and other EU member states, most importantly Germany.[75] By the end of 2011, Germany was estimated to have made more than 9 billion out of the crisis as investors flocked to safer but near zero interest rate German federal government bonds (bunds).[76] By July 2012 also the Netherlands, Austria and Finland benefited from zero or negative interest rates. Looking at short-term government bonds with a maturity of less than one year the list of beneficiaries also includes Belgium and France.[77] While Switzerland (and Denmark)[77] equally benefited from lower interest rates, the crisis also harmed its export sector due to a substantial influx of foreign capital and the resulting rise of the Swiss franc. In September 2011 the Swiss National Bank surprised currency traders by pledging that "it will no longer tolerate a euro-franc exchange rate below the minimum rate of 1.20 francs", effectively weakening the Swiss franc. This is the biggest Swiss intervention since 1978.[78] [edit]Greece Main article: Greek government-debt crisis

Greece's debt percentage since 1999 compared to the average of the eurozone.

100,000 people protest against the harsh austerity measures in front of parliament building in Athens, 29 May 2011 In the early mid-2000s, Greece's economy was one of the fastest growing in the eurozone and was associated with a large structural deficit.[79] As the world economy was hit by the global financial crisis in the late 2000s, Greece was hit especially hard because its main industries shipping and tourism were especially sensitive to changes in the business cycle. The government spent heavily to keep the economy functioning and the country's debt increased accordingly. On 23 April 2010, the Greek government requested an initial loan of 45 billion from the EU and International Monetary Fund (IMF), to cover its financial needs for the remaining part of 2010.[80][81] A few days later Standard & Poor's slashed Greece's sovereign debt rating to BB+ or "junk" status amid fears of default,[82] in which case investors were liable to lose 3050% of their money.[82] Stock markets worldwide and the euro currency declined in response to the downgrade.[83] On 1 May 2010, the Greek government announced a series of austerity measures[84] to secure a three year 110 billion loan.[85] This was met with great anger by the Greek public, leading to massive protests, riots and social unrest throughout Greece.[86] The Troika (EC, ECB and IMF), offered Greece a second bailout loan worth 130 billion in October 2011, but with the activation being conditional on implementation of further austerity measures and a debt restructure agreement. A bit surprisingly, the Greek prime minister George Papandreou first answered that call, by announcing a December 2011 referendum on the new bailout plan,[87][88] but had to back down amidst strong pressure from EU partners, who threatened to withhold an overdue 6 billion loan payment that Greece needed by mid-December.[87][89] On 10 November 2011 Papandreou instead opted to resign, following an agreement with the New Democracy party and the Popular Orthodox Rally, to appoint non-MP technocrat Lucas Papademos as new prime minister of an interim national union government, with responsibility for implementing the needed austerity measures to pave the way for the second bailout loan.[90][91] All the implemented austerity measures, have so far helped Greece bring down its primary deficit - i.e. fiscal deficit before interest payments - from 24.7bn (10.6% of GDP) in 2009 to just 5.2bn (2.4% of GDP) in 2011,[92][93] but as a side-effect they also contributed to a worsening of the Greek recession, which began in October 2008 and only became worse in 2010 and 2011.[94] The austerity relies primarily on tax increases which harms the private sector and economy.[95] Overall the Greek GDP had its worst decline in 2011 with 6.9%,[96] a year where the seasonal adjusted industrial output ended 28.4% lower than in 2005,[97][98] and with 111,000 Greek companies going bankrupt (27% higher than in 2010).[99][100] As a result, the seasonal adjusted unemployment rate also grew from 7.5% in September 2008 to a record high of 19.9% in November 2011, while the Youth unemployment rate during the same time rose from 22.0% to as high as 48.1%.[101][102] Youth unemployment ratio hit 13 percent in 2011.[103][104] Overall the share of the population living at "risk of poverty or social exclusion" did not increase noteworthily during the first 2 years of the crisis. The figure was measured to 27.6% in 2009 and 27.7% in 2010 (only being slightly worse

than the EU27-average at 23.4%),[105] but for 2011 the figure was now estimated to have risen sharply above 33%.[106] In February 2012, an IMF official negotiating Greek austerity measures admitted that excessive spending cuts were harming Greece.[92] Some economic experts argue that the best option for Greece and the rest of the EU, would be to engineer an orderly default, allowing Athens to withdraw simultaneously from the eurozone and reintroduce its national currency the drachma at a debased rate.[107][108] However, if Greece were to leave the euro, the economic and political consequences would be devastating. According to Japanese financial company Nomura an exit would lead to a 60% devaluation of the new drachma. Analysts at French bank BNP Paribas added that the fallout from a Greek exit would wipe 20% off Greece's GDP, increase Greece's debt-to-GDP ratio to over 200%, and send inflation soaring to 40%-50%.[109] Also UBS warned of hyperinflation, a bank run and even "military coups and possible civil war that could afflict a departing country".[110][111] Eurozone National Central Banks (NCBs) may lose up to 100bn in debt claims against the Greek national bank through the ECB's TARGET2 system. The Deutsche Bundesbank alone may have to write off 27bn.[112] To prevent all this from happening, the troika (EC, IMF and ECB) eventually agreed in February 2012 to provide a second bailout package worth 130 billion,[113] conditional on the implementation of another harsh austerity package, reducing the Greek spendings with 3.3bn in 2012 and another 10bn in 2013 and 2014.[93] For the first time, the bailout deal also included a debt restructure agreement with the private holders of Greek government bonds (banks, insurers and investment funds), to "voluntarily" accept a bond swap with a 53.5% nominal write-off, partly in short-term EFSF notes, partly in new Greek bonds with lower interest rates and the maturity prolonged to 1130 years (independently of the previous maturity).[10] The deal implies that previous Greek bond holders are being given, for 1000 of previous notional, 150 in PSI payment notes issued by the EFSF and 315 in New Greek Bonds issued by the Hellenic Republic, including a GDP-linked security. The latter represents a marginal coupon enhancement in case the Greek growth meets certain conditions. While the market price of the portfolio proposed in the exchange is of the order of 21% of the original face value (15% for the two EFSF PSI notes 1 and 2 years and 6% for the New Greek Bonds 11 to 30 years), the duration of the set of New Greek Bonds is slightly below 10 years.[114] On 9 March 2012 the International Swaps and Derivatives Association (ISDA) issued a communique calling the debt restructuring deal with its private sector involvement (PSI) a "Restructuring Credit Event" which will trigger payment of credit default swaps. According to Forbes magazine Greeces restructuring represents a default.[115][116] It is the world's biggest debt restructuring deal ever done, affecting some 206 billion of Greek government bonds.[117] The debt write-off had a size of 107 billion, and caused the Greek debt level to fall from roughly 350bn to 240bn in March 2012, with the predicted debt burden now showing a more sustainable size equal to 117% of GDP by 2020,[118] somewhat lower than the target of 120.5% initially outlined in the signed Memorandum with the Troika.[93][119][120] Critics such as the director of LSE's Hellenic Observatory argue that the billions of taxpayer euros are not saving Greece but financial institutions,[121] as "more than 80 percent of the rescue package is going to creditorsthat is to say, to banks outside of Greece and to the ECB."[122] The shift in liabilities from European banks to European taxpayers has been staggering. One study found that the public debt of Greece to foreign governments, including debt to the EU/IMF loan facility and debt through the eurosystem, increased from 47.8bn to 180.5bn (+132,7bn) between January 2010 and September 2011,[123] while the combined exposure of foreign banks to (public and private) Greek entities was reduced from well over 200bn in 2009 to around 80bn (-120bn) by mid-February 2012.[124]

Mid May 2012 the crisis and impossibility to form a new government after elections led to strong speculations Greece would have to leave the Eurozone shortly due.[125][126][127][128] This phenomenon became known as "Grexit" and started to govern international market behaviour.[129][130] The center-right's narrow victory in the June 17th election gives hope that a coalition will enable Greece to stay in the Euro-zone.[131] A victory by the anti-austerity axis could have been "an excuse to cut Greece out of the euro zone" according to the Wall Street Journal.[132] [edit]Ireland Main article: 20082012 Irish financial crisis

Ireland's debt percentage compared to Eurozone average since 1995

Irish government deficit compared to other European countries and the United States (20002013) The Irish sovereign debt crisis was not based on government over-spending, but from the state guaranteeing the six main Irish-based banks who had financed a property bubble. On 29 September 2008, Finance Minister Brian Lenihan, Jnr issued a two-year guarantee to the banks' depositors and bond-holders.[133] The guarantees were subsequently renewed for new deposits and bonds in a slightly different manner. In 2009, an National Asset Management Agency (NAMA), was created to acquire large property-related loans from the six banks at a marketrelated "long-term economic value".[134] Irish banks had lost an estimated 100 billion euros, much of it related to defaulted loans to property developers and homeowners made in the midst of the property bubble, which burst around 2007. The economy collapsed during 2008. Unemployment rose from 4% in 2006 to 14% by 2010, while the national budget went from a surplus in 2007 to a deficit of 32% GDP in 2010, the highest in the history of the eurozone, despite austerity measures.[26][135] With Ireland's credit rating falling rapidly in the face of mounting estimates of the banking losses, guaranteed depositors and bondholders cashed in during 2009-10, and especially after August 2010. (The necessary funds were borrowed from the central bank.) With yields on Irish Government debt rising rapidly it was clear that the Government would have to seek assistance from the EU and IMF, resulting in a 67.5 billion "bailout" agreement of 29 November 2010[136][137] Together with additional 17.5 billion coming from Ireland's own reserves and pensions, the government received 85 billion,[138] of which up to 34 billion was to be used to support the country's ailing financial sector (only about half of this was used in that way following stress tests conducted in 2011.[139] In return the government agreed to reduce its budget deficit to below three percent by 2015.[139] In April 2011, despite all the measures taken, Moody's downgraded the banks' debt to junk status.[140] In July 2011 European leaders agreed to cut the interest rate that Ireland was paying on its EU/IMF bailout loan from around 6% to between 3.5% and 4% and to double the loan time to 15 years. The move was expected to save the country between 600700 million euros per year.[141] On 14 September 2011, in a move to further ease Ireland's difficult financial situation, the European Commission announced it would cut the interest rate on its 22.5 billion loan

coming from the European Financial Stability Mechanism, down to 2.59 per cent which is the interest rate the EU itself pays to borrow from financial markets.[142] The Euro Plus Monitor report from November 2011 attests to Ireland's vast progress in dealing with its financial crisis, expecting the country to stand on its own feet again and finance itself without any external support from the second half of 2012 onwards.[143] According to the Centre for Economics and Business Research Ireland's export-led recovery "will gradually pull its economy out of its trough". As a result of the improved economic outlook, the cost of 10-year government bonds, has already fallen substantially since its record high at 12% in mid July 2011 (see the graph "Long-term Interest Rates"). At 24 July 2012 it was down at a sustainable 6.3%,[144] and it is expected to fall even further to a level of only 4% by 2015.[145] On 26 July 2012, for the first time since September 2010, Ireland was able to return to the financial markets selling over 5 billion in long-term government debt, with an interest rate of 5.9% for the 5-year bonds and 6.1% for the 8year bonds at sale.[146] [edit]Portugal Main article: 2010-2012 Portuguese financial crisis

Portugal's debt percentage compared to Eurozone average since 1999 According to a report by the Dirio de Notcias[147] Portugal had allowed considerable slippage in state-managed public works and inflated top management and head officer bonuses and wages in the period between the Carnation Revolution in 1974 and 2010. Persistent and lasting recruitment policies boosted the number of redundant public servants. Risky credit, public debt creation, and European structural and cohesion funds were mismanaged across almost four decades.[148] When the global crisis disrupted the markets and the world economy, together with the US credit crunch and the European sovereign debt crisis, Portugal, with all its structural problems, from the colossal public debt to the civil service's overcapacity to its endemic fantasist utopia of communist-inspired goals and ideologies implicitly enforced due to the Carnation Revolution of 1974, was one of the first and most affected economies to succumb. In the summer of 2010, Moody's Investors Service cut Portugal's sovereign bond rating,[3][149] which led to increased pressure on Portuguese government bonds.[150] In the first half of 2011, Portugal requested a 78 billion IMF-EU bailout package in a bid to stabilise its public finances.[151] These measures were put in place as a direct result of decades-long governmental overspending and an over bureaucratised civil service. After the bailout was announced, the Portuguese government headed by Pedro Passos Coelho managed to implement measures to improve the State's financial situation and the country started to be seen as moving on the right track. However, this also lead to a strong increase of the unemployment rate to over 15 percent in the second quarter 2012 and it is expected to rise even further in the near future.[152] Portugals debt was in September 2012 forecast by the Troika to peak at around 124% of GDP in 2014, followed by a firm downward trajectory after 2014. Previously the Troika had predicted it would peak at 118.5% of GDP in 2013, so the developments proved to be a bit worse than first anticipated, but the situation was described as fully sustainable

and progressing well. As a result from the slightly worse economic circumstances, the country has been given one more year to reduce the budget deficit to a level below 3% of GDP, moving the target year from 2013 to 2014. The budget deficit for 2012 has been forecast to end at 5%. The recession in the economy is now also projected to last until 2013, with GDP declining 3% in 2012 and 1% in 2013; followed by a return to positive real growth in 2014.[153] [edit]Spain See also: 20082012 Spanish financial crisis

Spain's debt percentage compared to Eurozone average since 1999 Spain had a comparatively low debt level among advanced economies prior to the crisis.[154] It's public debt relative to GDP in 2010 was only 60%, more than 20 points less than Germany, France or the US, and more than 60 points less than Italy, Ireland or Greece.[155][156] Debt was largely avoided by the ballooning tax revenue from the housing bubble, which helped accommodate a decade of increased government spending without debt accumulation.[157] When the bubble burst, Spain spent large amounts of money on bank bailouts. In May 2012, Bankia received a 19 billion euro bailout,[158] on top of the previous 4.5 billion euros to prop up Bankia.[159] Questionable accounting methods disguised bank losses.[160] During September 2012, regulators indicated that Spanish banks required 59 billion (USD $77 billion) in additional capital to offset losses from real estate investments.[161] The bank bailouts and the economic downturn increased the country's deficit and debt levels and led to a substantial downgrading of its credit rating. To build up trust in the financial markets, the government began to introduce austerity measures and it amended the Spanish Constitution in 2011 to require a balanced budget at both the national and regional level by 2020. The amendment states that public debt can not exceed 60% of GDP, though exceptions would be made in case of a natural catastrophe, economic recession or other emergencies.[162][163] As one of the largest eurozone economies (larger than Greece, Portugal and Ireland combined[164]) the condition of Spain's economy is of particular concern to international observers. Under pressure from the United States, the IMF, other European countries and the European Commission[165][166] the Spanish governments eventually succeeded in trimming the deficit from 11.2% of GDP in 2009 to an expected 5.4% in 2012.[164] Nevertheless, in June 2012, Spain became a prime concern for the Euro-zone[167] when interest on Spains 10-year bonds reached the 7% level and it faced difficulty in accessing bond markets. This led the Eurogroup on 9 June 2012 to granted Spain a credit line of up to 100 billion.[168] The funds will go directly to the Spanish banks to avoid adding to Spain's sovereign debt,[169][170][171] which is already expected to increase given a negative growth rate of 1.7%, 25% unemployment and falling housing prices.[164] In September 2012 the ECB took pressure from Spain when it announced its "unlimited bond-buying plan".[172][173] As of October 2012, the Troika (EC, ECB and IMF) is in negotiations with Spain to establish an economic recovery program that is required for additional financial loans from the ESM. Reportedly Spain, in addition to the 100bn "bank recapitalisation" package in June,[174] seeks financial support from a "Precautionary Conditioned Credit Line" (PPCL) package.[175] If Spain receives a PCCL package, irrespective to what extent it subsequently decides to draw on this established credit line, Spain would immediately qualify to receive "free" additional financial support from ECB, in the form of some unlimited yieldlowering bond purchases (OMT).[176][177]

[edit]Cyprus

Cyprus's debt percentage compared to Eurozone average since 1999 In September 2011, yields on Cyprus long-term bonds had risen above 12%, since the small island of 840,000 people was downgraded by all major credit ratings agencies following a devastating explosion at a power plant in July and slow progress with fiscal and structural reforms. Since January 2012, Cyprus is relying on a 2.5bn emergency loan from Russia to cover its budget deficit and re-finance maturing debt. The loan has an interest rate of 4.5% and it is valid for 4.5 years[178] though it is expected that Cyprus will be able to fund itself again by the first quarter of 2013.[179] On June 12, 2012 financial media reported that a bailout request by Cyprus was imminent. Despite its low population and small economy Cyprus has an off-shore banking industry which is disproportional to its economy.[72] A request was made to the European Financial Stability Facility or the European Stability Mechanism on June 25, 2012. It is anticipated that a bailout package would include requirements for fiscal reforms. The request follows a downgrade of Cyprus bonds to BB+ by Fitch, also on June 25, 2012, which disqualified bonds issued by Cyprus from being accepted as collateral by the European Central Bank.[180] On 13 March 2012 Moody's has slashed Cyprus's credit rating into Junk status, warning that the Cyprus government will have to inject fresh capital into its banks to cover losses incurred through Greece's debt swap. Cyprus's banks were highly exposed to Greek debt and so are disproportionately hit by the haircut taken by creditors.[181] It was reported on June 25, 2012 by The Financial Times that banks in Cyprus held 22 billion of Greek private sector debt.[180] As of October 2012, Cyprus so far applied both for a 6bn "sovereign bailout loan" and a 5bn "bank recapitalisation" package.[24] The Troika currently negotiates with Cyprus, about setting up an economic recovery programme in return of providing support with financial loans from ESM. Cyprus so far applied both for a 6bn "sovereign bailout loan" and a 5bn "bank recapitalisation" package.[24] [edit]Possible spread to other countries

Total financing needs of selected countries in % of GDP (20112013).

Economic data from Portugal, Italy, Ireland, Greece, United Kingdom, Spain, Germany, the EU and the eurozone for 2009.

The 2010 annual budget deficit and public debt, both relative to GDP for selected European countries.

Long-term interest rates of selected European countries.[1] Note that weak non-eurozone countries (Hungary, Romania) lack the sharp rise in interest rates characteristic of weak eurozone countries. One of the central concerns prior to the bailout was that the crisis could spread to several other countries after reducing confidence in other European economies. In July 2011 the UK Financial Policy Committee noted that "Market concerns remain over fiscal positions in a number of euro area countries and the potential for contagion to banking systems."[182] Besides Ireland, with a government deficit in 2010 of 32.4% of GDP, and Portugal at 9.1%, other countries such as Spain with 9.2% are also at risk.[183] For 2010, the OECD forecast $16 trillion would be raised in government bonds among its 30 member countries. Financing needs for the eurozone come to a total of 1.6 trillion, while the U.S. is expected to issue US$1.7 trillion more Treasury securities in this period,[184] and Japan has 213 trillion of government bonds to roll over.[185] Greece has been the notable example of an industrialised country that has faced difficulties in the markets because of rising debt levels but even countries such as the U.S., Germany and the UK, have had fraught moments as investors shunned bond auctions due to concerns about public finances and the economy.[186] As of October 2012 the contagion risk for other eurozone countries has greatly diminished due to a successful fiscal consolidation and implementation of structural reforms in the countries being most at risk. Together with various other policy measures taken by EU leaders and the ECB (see below) financial stability in the Eurozone has improved significantly. Looking at the average long term interest rates for September 2012, only 4 out of 17 eurozone countries (Greece, Portugal, Cyprus, Slovenia) still battled with rates higher than 6%.[187] [edit]Italy Italy's deficit of 4.6 percent of GDP in 2010 was similar to Germanys at 4.3 percent and less than that of the U.K. and France. Italy even has a surplus in its primary budget, which excludes debt interest payments. However, its debt has increased to almost 120 percent of GDP (U.S. $2.4 trillion in 2010) and economic growth was lower than the EU average for over a decade.[188] This has led investors to view Italian bonds more and more as a risky asset.[189] On the other hand, the public debt of Italy has a longer maturity and a substantial share of it is held domestically. Overall this makes the country more resilient to financial shocks, ranking better than France and Belgium.[190] About 300 billion euros of Italy's 1.9 trillion euro debt matures in 2012. It will therefore have to go to the capital markets for significant refinancing in the near-term.[191] On 15 July and 14 September 2011, Italy's government passed austerity measures meant to save 124 billion.[192][193] Nonetheless, by 8 November 2011 the Italian bond yield was 6.74 percent for 10-year bonds, climbing above the 7 percent level where the country is thought to lose access to financial markets.[194] On 11 November 2011, Italian 10-year borrowing costs fell sharply from 7.5 to 6.7 percent after Italian legislature approved further austerity measures and the formation of an emergency government to replace that of Prime Minister Silvio Berlusconi.[195]

The measures include a pledge to raise 15 billion from real-estate sales over the next three years, a two-year increase in the retirement age to 67 by 2026, opening up closed professions within 12 months and a gradual reduction in government ownership of local services.[189] The interim government expected to put the new laws into practice is led by former European Union Competition Commissioner Mario Monti.[189] As in other countries, the social effects have been severe, with child labour even re-emerging in poorer areas.[196] [edit]Belgium In 2010, Belgium's public debt was 100% of its GDPthe third highest in the eurozone after Greece and Italy[197] and there were doubts about the financial stability of the banks,[198] following the country's major financial crisis in 20082009. After inconclusive elections in June 2010, by November 2011[199] the country still had only a caretaker government as parties from the two main language groups in the country (Flemish and Walloon) were unable to reach agreement on how to form a majority government.[197] In November 2010 financial analysts forecast that Belgium would be the next country to be hit by the financial crisis as Belgium's borrowing costs rose.[198] However the government deficit of 5% was relatively modest and Belgian government 10-year bond yields in November 2010 of 3.7% were still below those of Ireland (9.2%), Portugal (7%) and Spain (5.2%).[198] Furthermore, thanks to Belgium's high personal savings rate, the Belgian Government financed the deficit from mainly domestic savings, making it less prone to fluctuations of international credit markets.[200] Nevertheless, on 25 November 2011, Belgium's long-term sovereign credit rating was downgraded from AA+ to AA by Standard and Poor[201] and 10-year bond yields reached 5.66%.[199] Shortly after, Belgian negotiating parties reached an agreement to form a new government. The deal includes spending cuts and tax rises worth about 11 billion, which should bring the budget deficit down to 2.8% of GDP by 2012, and to balance the books in 2015.[202] Following the announcement Belgium 10-year bond yields fell sharply to 4.6%.[203] [edit]France France's public debt in 2010 was approximately U.S. $2.1 trillion and 83% GDP, with a 2010 budget deficit of 7% GDP.[204] By 16 November 2011, France's bond yield spreads vs. Germany had widened 450% since July, 2011.[205] France's C.D.S. contract value rose 300% in the same period.[206] On 1 December 2011, France's bond yield had retreated and the country auctioned 4.3 billion worth of 10 year bonds at an average yield of 3.18%, well below the perceived critical level of 7%.[207] By early February 2012, yields on French 10 year bonds had fallen to 2.84%.[208] In April and May, 2012, France held a presidential election in which the winner Franois Hollande had opposed austerity measures, promising to eliminate France's budget deficit by 2017 by canceling recently enacted tax cuts and exemptions for the wealthy, raising the top tax bracket rate to 75% on incomes over a million euros, restoring the retirement age to 60 with a full pension for those who have worked 42 years, restoring 60,000 jobs recently cut from public education, regulating rent increases; and building additional public housing for the poor. In June, Hollande's Socialist Party won a supermajority in legislative elections capable of amending the French Constitution and enabling the immediate enactment of the promised reforms. French government bond interest rates fell 30% to record lows,[209] less than 50 basis points above German government bond rates.[210]

[edit]United Kingdom Main article: United Kingdom national debt According to the Financial Policy Committee "Any associated disruption to bank funding markets could spill over to UK banks."[182] The UK has the highest gross foreign debt of any European country (7.3 trillion; 117,580 per person) due in large part to its highly leveraged financial industry, which is closely connected with both the United States and the eurozone.[211] In 2012 the U.K. economy was in recession, being negatively impacted by reduced economic activity in Europe, and apprehensive regarding possible future impacts of the Eurozone crisis. The Bank of England made substantial funds available at reduced interest to U.K. banks for loans to domestic enterprises. The bank is also providing liquidity by purchase of large quantities of government bonds, a program which may be expanded.[212] Bank of England support of British banks with respect to the Eurozone crisis was backed by the British Treasury.[213] Bank of England governor Mervyn King stated in May 2012 that the Eurozone is "tearing itself apart without any obvious solution." He acknowledged that the Bank of England, the Financial Services Authority, and the British government were preparing contingency plans for a Greek exit from the euro or a collapse of the currency, but refused to discuss them to avoid adding to the panic.[214] Known contingency plans include emergency immigration controls to prevent millions of Greek and other EU residents from entering the country to seek work, and the evacuation of Britons from Greece during civil unrest.[215] A euro collapse would damage London's role as a major financial centre because of the increased risk to UK banks. The pound and gilts would likely benefit, however, as investors seek safer investments.[216] The London real estate market has similarly benefited from the crisis, with French, Greeks, and other Europeans buying property with capital moved out of their home countries,[217] and a Greek exit from the euro would likely increase such transfer of capital.[216] [edit]Switzerland Switzerland was affected by the Eurozone crisis as money was moved into Swiss assets seeking safety from the Eurozone crisis as well as by apprehension of further worsening of the crisis. This resulted in appreciation of the Swiss franc with respect to the euro and other currencies which drove down internal prices and raised the price of exports. Credit Suisse was required to increase its capitalization by the Swiss National Bank. The Swiss National Bank stated that the Swiss franc was massively overvalued, and that risk of deflation in Switzerland existed. It therefore announced that it would buy foreign currency in unlimited quantities if the euro/Swiss Franc exchange rate fell below 1.20 CHF.[218] Purchases of the euro have the effect of maintaining the value of the euro. Real estate values in Switzerland are extremely high, thus posing a possible risk.[212][219] [edit]Germany In relationship to the total amounts involved in the Eurozone crisis, the economy of Germany is relatively small and would be unable, even if it were willing, to guarantee payment of the sovereign debts of the rest of the Eurozone as Spain and even Italy and France are added to potentially defaulting nations. Thus, according to Chancellor Angela Merkel, German participation in rescue efforts are conditioned on negotiation of Eurozone reforms which have the potential to resolve the underlying imbalances which are driving the crisis.[220][221]

[edit]Slovenia Slovenia joined the European Union in 2004. When it also joined the Euro area three years later interest rates went down. This led Slovenian banks to finance a construction boom and privatization of state assets by sale to trusted members of the national elite. When the financial crisis hit the country construction has stalled and once-sound businesses began to struggle, leaving the banks with bad loans of more than 6 billion euros, or 12 percent, of their lending portfolio. Eventually the Slovenian government helped its banking sector unwind bad loans by guaranteeing as much as 4 billion euros - more than 11 percent of gross domestic product. This in turn led to rising borrowing costs for the government, with yields on its 10-year bonds rising above 6 percent. In 2012 the government proposed an austerity budget and plans to adopt labor market reforms to cover the costs of the crisis. Despite these recent difficulties Slovenia is nowhere close to actually requesting a bailout, according to the New York Times.[222][223] [edit]Policy reactions

[edit]EU emergency measures The table below provides an overview of the financial composition of all bailout programs being initiated for EU member states, since the financial crisis erupted in September 2008. Member states outside the eurozone (marked with yellow in the table) have no access to the funds provided by EFSF/ESM, but can be covered with rescue loans from EU's Balance of Payments programme (BoP), IMF and other funds. vte EU member (billion ) (billion ) (billion ) (billion ) (billion ) (billion ) (billion ) (billion ) (billion ) (billion ) Cyprus Dec.2012-Dec.2015 (negotiates) (negotiates) (negotiates) (negotiates) Time span World Bank[226] EIB / EBRD Bilateral loans[174] BoP[226] GLF[224] EFSM[174] EFSF[174] ESM[174] Bailout in total IMF[174][224][225][226]

Greece May 2010-Mar.2016 48.1 (20.1+19.8+8.2) 144.6 245.61 Hungary Nov.2008-Oct.2010 Ireland Nov.2010-Dec.2013 67.53 Latvia Dec.2008-Dec.2011 2.2[229][230] 2.9 out of 3.1 Portugal May 2011-May 2014 78 Romania I Romania II -

52.9

9.1 out of 12.5[227][228] 1.0 15.6 out of 20.02 22.5 4.8

5.5 out of 6.5 22.5 17.7

1.1 out of 1.7[229][230] 26 -

0.4[229][230] 0.1[229][230] 4.5 out of 7.54 1.0 13.4 26 52.9

0.0 out of 26 5.0 -

May 2009-June 2011 12.6 out of 13.6[231][232] 1.0 19.6 out of 20.65 Mar 2011-Mar 2013 0.0 out of 3.7[233][234] 0.0 out of 5.16 2.4 1.1 4.8

0.0 out of 1.4 48.5 60 out of 188.3

Spain I July 2012-Dec.2013 100[235] 60 out of 1007

Spain II Nov/Dec.2012-??? (negotiates) (negotiates) (negotiates)8 Total payment 60 Nov.2008-Mar.2016 490.8 119.4

1 Many sources list the first bailout was 110bn followed by the second on 130bn. When you deduct 2.7bn due to Ireland+Portugal+Slovakia opting out as creditors for the first bailout, and add the extra 8.2bn IMF has promised to pay Greece for the years in 2015-16, the total amount of bailout funds sums up to 245.6bn.[224] 2 Hungary recovered faster than expected, and thus did not receive the remaining 4.4bn bailout support scheduled for October 2009-October 2010.[226][236] IMF paid in total 7.6 out of 10.5 billion SDR,[227] equal to 9.1bn out of 12.5bn at current exchange rates.[228] 3 In Ireland the National Treasury Management Agency also paid 17.5bn for the program on behalf of the Irish government, increasing the bailout total to 85bn.[174] 4 Latvia recovered faster than expected, and thus did not receive the remaining 3.0bn bailout support originally scheduled for 2011.[229][230] 5 Romania recovered faster than expected, and thus did not receive the remaining 1.0bn bailout support originally scheduled for 2011.[231][232] 6 Romania had a precautionary credit line with 5.1bn available for two years (Mar 2011-Mar 2013) to draw money from if needed; but entirely avoided to draw on it.[226]

7 Spain's first 100bn support package has been earmarked only for recapitalisation of the financial sector. As of October 2012 it is estimated maximum 60bn will be needed for the purpose, but the remaining 40bn will stay avaialable as reserve until December 2013. 8 Spain currently negotiates and consider to accept signing a MoU to get a Precautionery Conditioned Credit Line or an Enhanced Conditioned Credit Line. If the line is created Spain plan not to draw any money from it, and are only interested to get it for precautionary reasons (to calm down markets; and to enable ECB to perform a yield lowering OMT).

[edit]European Financial Stability Facility (EFSF) Main article: European Financial Stability Facility On 9 May 2010, the 27 EU member states agreed to create the European Financial Stability Facility, a legal instrument[237] aiming at preserving financial stability in Europe by providing financial assistance to eurozone states in difficulty. The EFSF can issue bonds or other debt instruments on the market with the support of the German Debt Management Office to raise the funds needed to provide loans to eurozone countries in financial troubles, recapitalize banks or buy sovereign debt.[238] Emissions of bonds are backed by guarantees given by the euro area member states in proportion to their share in the paid-up capital of the European Central Bank. The 440 billion lending capacity of the facility is jointly and severally guaranteed by the eurozone countries' governments and may be combined with loans up to 60 billion from the European Financial Stabilisation Mechanism (reliant on funds raised by the European Commission using the EU budget as collateral) and up to 250 billion from the International Monetary Fund (IMF) to obtain a financial safety net up to 750 billion.[239] The EFSF issued 5 billion of five-year bonds in its inaugural benchmark issue 25 January 2011, attracting an order book of 44.5 billion. This amount is a record for any sovereign bond in Europe, and 24.5 billion more than the European Financial Stabilisation Mechanism (EFSM), a separate European Union funding vehicle, with a 5 billion issue in the first week of January 2011.[240] On 29 November 2011, the member state finance ministers agreed to expand the EFSF by creating certificates that could guarantee up to 30% of new issues from troubled euro-area governments, and to create investment vehicles that would boost the EFSFs firepower to intervene in primary and secondary bond markets.[241] Reception by financial markets Stocks surged worldwide after the EU announced the EFSF's creation. The facility eased fears that the Greek debt crisis would spread,[242] and this led to some stocks rising to the highest level in a year or more.[243] The euro made its biggest gain in 18 months,[244] before falling to a new four-year low a week later.[245] Shortly after the euro rose again as hedge funds and other short-term traders unwound short positions and carry trades in the currency.[246] Commodity prices also rose following the announcement.[247] The dollar Libor held at a nine-month high.[248] Default swaps also fell.[249] The VIX closed down a record almost 30%, after a record weekly rise the preceding week that prompted the bailout.[250] The agreement is interpreted as allowing the ECB to start buying government debt from the secondary market which is expected to reduce bond

yields.[251] As a result Greek bond yields fell sharply from over 10% to just over 5%.[252] Asian bonds yields also fell with the EU bailout.[253]) Usage of EFSF funds

Debt profile of Eurozone countries The EFSF only raises funds after an aid request is made by a country.[254] As of the end of July 2012, it has been activated various times. In November 2010, it financed 17.7 billion of the total 67.5 billion rescue package for Ireland (the rest was loaned from individual European countries, the European Commission and the IMF). In May 2011 it contributed one third of the 78 billion package for Portugal. As part of the second bailout for Greece, the loan was shifted to the EFSF, amounting to 164 billion (130bn new package plus 34.4bn remaining from Greek Loan Facility) throughout 2014.[255] On 20 July 2012, European finance ministers sanctioned the first tranche of a partial bail-out worth up to 100 billion for Spanish banks.[256] This leaves the EFSF with 148 billion[256] or an equivalent of 444 billion in leveraged firepower.[257] The EFSF is set to expire in 2013, running some months parallel to the permanent 500 billion rescue funding program called the European Stability Mechanism (ESM), which will start operating as soon as member states representing 90% of the capital commitments have ratified it. (see section: ESM) On 13 January 2012, Standard & Poors downgraded France and Austria from AAA rating, lowered Spain, Italy (and five other[258]) euro members further, and maintained the top credit rating for Finland, Germany, Luxembourg, and the Netherlands; shortly after, S&P also downgraded the EFSF from AAA to AA+.[258][259] [edit]European Financial Stabilisation Mechanism (EFSM) Main article: European Financial Stabilisation Mechanism On 5 January 2011, the European Union created the European Financial Stabilisation Mechanism (EFSM), an emergency funding programme reliant upon funds raised on the financial markets and guaranteed by the European Commission using the budget of the European Union as collateral.[260] It runs under the supervision of the Commission[261] and aims at preserving financial stability in Europe by providing financial assistance to EU member states in economic difficulty.[262] The Commission fund, backed by all 27 European Union members, has the authority to raise up to 60 billion[263] and is rated AAA by Fitch, Moody's and Standard & Poor's.[264][dead link][265] Under the EFSM, the EU successfully placed in the capital markets a 5 billion issue of bonds as part of the financial support package agreed for Ireland, at a borrowing cost for the EFSM of 2.59%.[266] Like the EFSF, the EFSM will also be replaced by the permanent rescue funding programme ESM, which is due to be launched in July 2012.[267] [edit]Brussels agreement and aftermath

On 26 October 2011, leaders of the 17 eurozone countries met in Brussels and agreed on a 50% write-off of Greek sovereign debt held by banks, a fourfold increase (to about 1 trillion) in bail-out funds held under the European Financial Stability Facility, an increased mandatory level of 9% for bank capitalisation within the EU and a set of commitments from Italy to take measures to reduce its national debt. Also pledged was 35 billion in "credit enhancement" to mitigate losses likely to be suffered by European banks. Jos Manuel Barroso characterised the package as a set of "exceptional measures for exceptional times".[11][268] The package's acceptance was put into doubt on 31 October when Greek Prime Minister George Papandreou announced that a referendum would be held so that the Greek people would have the final say on the bailout, upsetting financial markets.[269] On 3 November 2011 the promised Greek referendum on the bailout package was withdrawn by Prime Minister Papandreou. In late 2011, Landon Thomas in the New York Times noted that some, at least, European banks were maintaining high dividend payout rates and none were getting capital injections from their governments even while being required to improve capital ratios. Thomas quoted Richard Koo, an economist based in Japan, an expert on that country's banking crisis, and specialist in balance sheet recessions, as saying: I do not think Europeans understand the implications of a systemic banking crisis.... When all banks are forced to raise capital at the same time, the result is going to be even weaker banks and an even longer recession if not depression.... Government intervention should be the first resort, not the last resort. Beyond equity issuance and debt-to-equity conversion, then, one analyst "said that as banks find it more difficult to raise funds, they will move faster to cut down on loans and unload lagging assets" as they work to improve capital ratios. This latter contraction of balance sheets "could lead to a depression, the analyst said.[270] Reduced lending was a circumstance already at the time being seen in a "deepen[ing] crisis" in commodities trade finance in western Europe.[271] Final agreement on the second bailout package In a marathon meeting on 20/21 February 2012 the Eurogroup agreed with the IMF and the Institute of International Finance on the final conditions of the second bailout package worth 130 billion. The lenders agreed to increase the nominal haircut from 50% to 53.5%. EU Member States agreed to an additional retroactive lowering of the interest rates of the Greek Loan Facility to a level of just 150 basis points above the Euribor. Furthermore, governments of Member States where central banks currently hold Greek government bonds in their investment portfolio commit to pass on to Greece an amount equal to any future income until 2020. Altogether this should bring down Greece's debt to between 117%[118] and 120.5% of GDP by 2020.[119] [edit]European Central Bank

ECB Securities Markets Program (SMP) covering bond purchases from May 2010 till October 2012. The European Central Bank (ECB) has taken a series of measures aimed at reducing volatility in the financial markets and at improving liquidity.[272]

In May 2010 it took the following actions: It began open market operations buying government and private debt securities,[273] reaching 219.5 billion in February 2012,[274] though it simultaneously absorbed the same amount of liquidity to prevent a rise in inflation.[275] According to Rabobank economist Elwin de Groot, there is a natural limit of 300 billion the ECB can sterilize.[276] It reactivated the dollar swap lines[277] with Federal Reserve support.[278] It changed its policy regarding the necessary credit rating for loan deposits, accepting as collateral all outstanding and new debt instruments issued or guaranteed by the Greek government, regardless of the nation's credit rating. The move took some pressure off Greek government bonds, which had just been downgraded to junk status, making it difficult for the government to raise money on capital markets.[279] On 30 November 2011, the ECB, the U.S. Federal Reserve, the central banks of Canada, Japan, Britain and the Swiss National Bank provided global financial markets with additional liquidity to ward off the debt crisis and to support the real economy. The central banks agreed to lower the cost of dollar currency swaps by 50 basis points to come into effect on 5 December 2011. They also agreed to provide each other with abundant liquidity to make sure that commercial banks stay liquid in other currencies.[280] Long Term Refinancing Operation (LTRO) Though the ECB's main refinancing operations (MRO) are from repo auctions with a (bi)weekly maturity and monthly maturation, the ECB now conducts Long Term Refinancing Operations (LTROs), maturing after three months, six months, 12 months and 36 months. In 2003, refinancing via LTROs amounted to 45 bln euro which is about 20% of overall liquidity provided by the ECB.[281] The ECB's first supplementary longer-term refinancing operation (LTRO) with a six-month maturity was announced March 2008.[282] Previously the longest tender offered was three months. It announced two 3-month and one 6month full allotment of Long Term Refinancing Operations (LTROs). The first tender was settled 3 April, and was more than four times oversubscribed. The 25 billion auction drew bids amounting to 103.1 billion, from 177 banks. Another six-month tender was allotted on 9 July, again to the amount of 25 billion.[282] The first 12 month LTRO in June 2009 had close to 1100 bidders.[283] On 22 December 2011, the ECB[284] started the biggest infusion of credit into the European banking system in the euro's 13 year history. Under its Long Term Refinancing Operations (LTROs) it loaned 489 billion to 523 banks for an exceptionally long period of three years at a rate of just one percent.[285] Previous refinancing operations matured after three, six and twelve months.[283] The by far biggest amount of 325 billion was tapped by banks in Greece, Ireland, Italy and Spain.[286] This way the ECB tried to make sure that banks have enough cash to pay off 200 billion of their own maturing debts in the first three months of 2012, and at the same time keep operating and loaning to businesses so that a credit crunch does not choke off economic growth. It also hoped that banks would use some of the money to buy government bonds, effectively easing the debt crisis.[287] On 29 February 2012, the ECB held a second auction, LTRO2, providing 800 Eurozone banks with further 529.5 billion in cheap loans.[288] Net new borrowing under the

529.5 billion February auction was around 313 billion; out of a total of 256 billion existing ECB lending (MRO + 3m&6m LTROs), 215 billion was rolled into LTRO2.[289] ECB lending has largely replaced inter-bank lending. Spain has 365 billion and Italy has 281 billion of borrowings from the ECB (June 2012 data). Germany has 275 billion on deposit.[290] Resignations In September 2011, Jrgen Stark became the second German after Axel A. Weber to resign from the ECB Governing Council in 2011. Weber, the former Deutsche Bundesbank president, was once thought to be a likely successor to Jean-Claude Trichet as bank president. He and Stark were both thought to have resigned due to "unhappiness with the ECBs bond purchases, which critics say erode the banks independence". Stark was "probably the most hawkish" member of the council when he resigned. Weber was replaced by his Bundesbank successor Jens Weidmann, while Belgium's Peter Praet took Stark's original position, heading the ECB's economics department.[291] Money supply growth In April, 2012, statistics showed a growth trend in the M1 "core" money supply. Having fallen from an over 9% growth rate in mid-2008 to negative 1% +/- for several months in 2011, M1 core has built to a 2-3% range in early 2012. "'It is still early days but a further recovery in peripheral real M1 would suggest an end to recessions by late 2012,' said Simon Ward from Henderson Global Investors who collects the data." While attributing the money supply growth to ECB's LTRO policies, an analysis in The Telegraph said lending "continued to fall across the eurozone in March [and] ... [t]he jury is out on the ... three-year lending adventure (LTRO)".[292] Reorganization of the European banking system On June 16, 2012 the European Central Bank together with other European leaders hammered out plans for the ECB to become a bank regulator and to form a deposit insurance program to augment national programs. Other economic reforms promoting European growth and employment were also proposed.[293] Outright Monetary Transactions (OMTs) On 6 September 2012, the ECB announced to offer additional financial support in the form of some yield-lowering bond purchases (OMT), for all eurozone countries involved in a sovereign state bailout program from EFSF/ESM (at the point of time where the country regain/posses a complete market access).[15] A eurozone country can benefit from the program if -and for as long as- it is found to suffer from stressed bond yields at excessive levels; but only at the point of time where the country posses/regain a complete market access -and only if the country still comply with all terms in the signed Memorandum of Understanding (MoU) agreement.[15][172] Countries receiving a precautionary programme rather than a sovereign bailout, will per definition have complete market access and thus qualify for OMT support if also suffering from stressed interest rates on its government bonds. In regards of countries receiving a sovereign bailout (Ireland, Portugal and Greece), they will on the other hand not qualify for OMT support before they have regained complete market access, which will normally only happen after having received the last scheduled bailout disbursement.[15][294] Despite none OMT programmes were ready to start in September/October, the financial markets straight away took notice of the additionally planned OMT packages from ECB, and started slowly to price-in a decline of both short term and long term interest rates in all European countries previously suffering from stressed and elevated interest levels (as OMTs were regarded as an extra potential back-stop to

counter the frozen liquidity and highly stressed rates; and just the knowledge about their potential existence in the very near future helped to calm the markets). If Spain signs a negotiated Memorandum of Understanding with the Troika (EC, ECB and IMF) outlining ESM shall offer a precautionary programme with credit lines for the Spanish government to potentially draw on if needed (beside of the bank recapitalisation package they already applied for), this would qualify Spain also to receive the OMT support from ECB, as the sovereign state would still continue to operate with a complete market access with the precautionary conditioned credit line. In regards of Ireland, Portugal and Greece, they on the other hand have not yet regained complete market access, and thus do not yet qualify for OMT support.[294] Provided these 3 countries continue to comply with the programme conditions outlined in their signed Memorandum of Understanding, they will however qualify to receive OMT at the moment they regain complete market access (until the point of time where they no longer suffer from elevated/stressed interest rates).[15] [edit]European Stability Mechanism (ESM) Main article: European Stability Mechanism The European Stability Mechanism (ESM) is a permanent rescue funding programme to succeed the temporary European Financial Stability Facility and European Financial Stabilisation Mechanism in July 2012[267] but it had to be postponed until after the Federal Constitutional Court of Germany had confirmed the legality of the measures on 12 September 2012.[295][296] The permanent bailout fund is now expected to be up and running on 8 October 2012.[297] On 16 December 2010 the European Council agreed a two line amendment to the EU Lisbon Treaty to allow for a permanent bail-out mechanism to be established[298] including stronger sanctions. In March 2011, the European Parliament approved the treaty amendment after receiving assurances that the European Commission, rather than EU states, would play 'a central role' in running the ESM.[299][300] According to this treaty, the ESM will be an intergovernmental organisation under public international law and will be located in Luxembourg.[301][302] Such a mechanism serves as a "financial firewall." Instead of a default by one country rippling through the entire interconnected financial system, the firewall mechanism can ensure that downstream nations and banking systems are protected by guaranteeing some or all of their obligations. Then the single default can be managed while limiting financial contagion. [edit]European Fiscal Compact Main article: European Fiscal Compact

Public debt to GDP ratio for selected Eurozone countries and the UK - 2008 to 2011. Source Data: Eurostat. In March 2011 a new reform of the Stability and Growth Pact was initiated, aiming at straightening the rules by adopting an automatic procedure for imposing of penalties in case of breaches of either the 3% deficit or the 60% debt rules.[303][304] By the end of the year, Germany, France and some other smaller EU countries went a step further and vowed to create a fiscal union across the eurozone with strict and enforceable fiscal rules and automatic

penalties embedded in the EU treaties.[12][13] On 9 December 2011 at the European Council meeting, all 17 members of the eurozone and six countries that aspire to join agreed on a new intergovernmental treaty to put strict caps on government spending and borrowing, with penalties for those countries who violate the limits.[305] All other non-eurozone countries apart from the UK are also prepared to join in, subject to parliamentary vote.[267] The treaty will enter into force on 1 January 2013, if by that time 12 members of the euro area have ratified it.[306] Originally EU leaders planned to change existing EU treaties but this was blocked by British prime minister David Cameron, who demanded that the City of London be excluded from future financial regulations, including the proposed EU financial transaction tax.[307][308] By the end of the day, 26 countries had agreed to the plan, leaving the United Kingdom as the only country not willing to join.[309] Cameron subsequently conceded that his action had failed to secure any safeguards for the UK.[310] Britain's refusal to be part of the Franco-German fiscal compact to safeguard the eurozone constituted a de facto refusal (PM David Cameron vetoed the project) to engage in any radical revision of the Lisbon Treaty at the expense of British sovereignty: centrist analysts such as John Rentoul of The Independent concluded that "Any Prime Minister would have done as Cameron did".[311] [edit]Economic reforms and recovery proposals

[edit]Direct loans to banks and banking regulation On June 28, 2012 Eurozone leaders agreed to permit loans by the European Stability Mechanism to be made directly to stressed banks rather than through Eurozone states, to avoid adding to sovereign debt. The reform was linked to plans for banking regulation by the European Central Bank. The reform was immediately reflected by a reduction in yield of long-term bonds issued by member states such as Italy and Spain and a rise in value of the Euro.[312][313][314] [edit]Less austerity, more investment There has been substantial criticism over the austerity measures implemented by most European nations to counter this debt crisis. Some argue that an abrupt return to "'non-Keynesian' financial policies" is not a viable solution[315] and predict that deflationary policies now being imposed on countries such as Greece and Spain might prolong and deepen their recessions.[316] In a 2003 study that analyzed 133 IMF austerity programmes, the IMF's independent evaluation office found that policy makers consistently underestimated the disastrous effects of rigid spending cuts on economic growth.[317][318] In early 2012 an IMF official, who negotiated Greek austerity measures, admitted that spending cuts were harming Greece.[92][92] In October 2012, the IMF said that its forecasts for countries which implemented austerity programs have been consistently overoptimistic, suggesting that tax hikes and spending cuts have been doing more damage than expected, and countries which implemented fiscal stimulus, such as Germany and Austria, did better than expected.[16]

Despite years of draconian austerity measures Greece has failed to reach a balanced budget as public revenues remain low.

According to Keynesian economists "growth-friendly austerity" relies on the false argument that public cuts would be compensated for by more spending from consumers and businesses, a theoretical claim that has not materialized. The case of Greece shows that excessive levels of private indebtedness and a collapse of public confidence (over 90% of Greeks fear unemployment, poverty and the closure of businesses)[319] led the private sector to decrease spending in an attempt to save up for rainy days ahead. This led to even lower demand for both products and labor, which further deepened the recession and made it ever more difficult to generate tax revenues and fight public indebtedness.[320] According to Financial Times chief economics commentator Martin Wolf, "structural tightening does deliver actual tightening. But its impact is much less than one to one. A one percentage point reduction in the structural deficit delivers a 0.67 percentage point improvement in the actual fiscal deficit." This means that Ireland e.g. would require structural fiscal tightening of more than 12% to eliminate its 2012 actual fiscal deficit. A task that is difficult to achieve without an exogenous eurozone-wide economic boom.[321] Austerity is bound to fail if it relies largely on tax increases[322] instead of cuts in government expenditures coupled with encouraging "private investment and risk-taking, labor mobility and flexibility, an end to price controls, tax rates that encouraged capital formation ..." as Germany has done in the decade before the crisis.[323] Instead of public austerity, a "growth compact" centering on tax increases[320] and deficit spending is proposed. Since struggling European countries lack the funds to engage in deficit spending, German economist and member of the German Council of Economic Experts Peter Bofinger and Sony Kapoor of the global think tank Re-Define suggest providing 40 billion in additional funds to the European Investment Bank (EIB), which could then lend ten times that amount to the employment-intensive smaller business sector.[320] The EU is currently planning a possible 10 billion increase in the EIB's capital base. Furthermore the two suggest financing additional public investments by growthfriendly taxes on "property, land, wealth, carbon emissions and the under-taxed financial sector". They also called on EU countries to renegotiate the EU savings tax directive and to sign an agreement to help each other crack down on tax evasion and avoidance. Currently authorities capture less than 1% in annual tax revenue on untaxed wealth transferred between EU members.[320] According to the Tax Justice Network, worldwide, a global super-rich elite had between $21 and $32 trillion (up to 26,000bn Euros) hidden in secret tax havens by the end of 2010, resulting in a tax deficit of up to $280bn.[324][325] Apart from arguments over whether or not austerity, rather than increased or frozen spending, is a macroeconomic solution,[326] union leaders have also argued that the working population is being unjustly held responsible for the economic mismanagement errors of economists, investors, and bankers. Over 23 million EU workers have become unemployed as a consequence of the global economic crisis of 20072010, and this has led many to call for additional regulation of the banking sector across not only Europe, but the entire world.[327] In April, 2012, Olli Rehn, the European commissioner for economic and monetary affairs in Brussels, "enthusiastically announced to EU parliamentarians in mid-April that 'there was a breakthrough before Easter'. He said the European heads of state had given the green light to pilot projects worth billions, such as building highways in Greece." Other growth initiatives include "project bonds" wherein the EIB would "provide guarantees that safeguard private investors. In the pilot phase until 2013, EU funds amounting to 230 million are expected to mobilize investments of up to 4.6 billion." Der Spiegel also said: "According to sources inside the German government, instead of funding new highways, Berlin is interested in supporting innovation and programs to promote small and medium-sized businesses. To ensure that this is done as professionally as possible, the Germans would like to see the southern European countries receive their own state-owned development banks, modeled after Germany's [Marshall Plan-eraorigin] Kreditanstalt fr Wiederaufbau (KfW) banking group. It's hoped that this will get the economy moving in Greece and Portugal."[328]

[edit]Increase competitiveness See also: Euro Plus Pact

Relative change in unit labour costs, 20002011 Slow GDP growth rates correspond to slower growth in tax revenues and higher safety net spending, increasing deficits and debt levels. Indian-American journalist Fareed Zakaria described the factors slowing growth in the eurozone, writing in November 2011: "Europe's core problem [is] a lack of growth... Italy's economy has not grown for an entire decade. No debt restructuring will work if it stays stagnant for another decade... The fact is that Western economies with high wages, generous middle-class subsidies and complex regulations and taxes have become sclerotic. Now they face pressures from three fronts: demography (an aging population), technology (which has allowed companies to do much more with fewer people) and globalization (which has allowed manufacturing and services to locate across the world)." He advocated lower wages and steps to bring in more foreign capital investment.[329] British economic historian Robert Skidelsky disagreed saying it was excessive lending by banks, not deficit spending that created this crisis. Government's mounting debts are a response to the economic downturn as spending rises and tax revenues fall, not its cause.[330] To improve the situation, crisis countries must significantly increase their international competitiveness. Typically this is done by depreciating the currency, as in the case of Iceland, which suffered the largest financial crisis in 2008 2011 in economic history but has since vastly improved its position. Since eurozone countries cannot devalue their currency, policy makers try to restore competitiveness through internal devaluation, a painful economic adjustment process, where a country aims to reduce its unit labour costs.[14][331] German economist Hans-Werner Sinn noted in 2012 that Ireland was the only country that had implemented relative wage moderation in the last five years, which helped decrease its relative price/wage levels by 16%. Greece would need to bring this figure down by 31%, effectively reaching the level of Turkey.[332][333] Other economists argue that no matter how much Greece and Portugal drive down their wages, they could never compete with low-cost developing countries such as China or India. Instead weak European countries must shift their economies to higher quality products and services, though this is a long-term process and may not bring immediate relief.[334] Jeremy J. Siegel argues that the need to make labor competitive requires devaluation. This could be achieved by Greece leaving the Euro but that would lead to runs on the banks of Greece and other EU nations. Siegel argues that the only option left besides internal devaluation is for the devaluation of the Euro as a whole (parity with the dollar)--if it is to survive.[335] Progress

Eurozone economic health and adjustment progress 2011 (Source: Euro Plus Monitor)[336] On 15 November 2011, the Lisbon Council published the Euro Plus Monitor 2011. According to the report most critical eurozone member countries are in the process of rapid reforms. The authors note that "Many of those countries most in need to adjust [...] are now making the greatest progress towards restoring their fiscal balance and external competitiveness". Greece, Ireland and Spain are among the top five reformers and Portugal is ranked seventh among 17 countries included in the report (see graph).[336] [edit]Address current account imbalances

Current account imbalances (19972013) Regardless of the corrective measures chosen to solve the current predicament, as long as cross border capital flows remain unregulated in the euro area,[337] current account imbalances are likely to continue. A country that runs a large current account or trade deficit (i.e., importing more than it exports) must ultimately be a net importer of capital; this is a mathematical identity called the balance of payments. In other words, a country that imports more than it exports must either decrease its savings reserves or borrow to pay for those imports. Conversely, Germany's large trade surplus (net export position) means that it must either increase its savings reserves or be a net exporter of capital, lending money to other countries to allow them to buy German goods.[338] The 2009 trade deficits for Italy, Spain, Greece, and Portugal were estimated to be $42.96 billion, $75.31bn and $35.97bn, and $25.6bn respectively, while Germany's trade surplus was $188.6bn.[339] A similar imbalance exists in the U.S., which runs a large trade deficit (net import position) and therefore is a net borrower of capital from abroad. Ben Bernanke warned of the risks of such imbalances in 2005, arguing that a "savings glut" in one country with a trade surplus can drive capital into other countries with trade deficits, artificially lowering interest rates and creating asset bubbles.[340][341][342] A country with a large trade surplus would generally see the value of its currency appreciate relative to other currencies, which would reduce the imbalance as the relative price of its exports increases. This currency appreciation occurs as the importing country sells its currency to buy the exporting country's currency used to purchase the goods. Alternatively, trade imbalances can be reduced if a country encouraged domestic saving by restricting or penalizing the flow of capital across borders, or by raising interest rates, although this benefit is likely offset by slowing down the economy and increasing government interest payments.[343] Either way, many of the countries involved in the crisis are on the euro, so devaluation, individual interest rates and capital controls are not available. The only solution left to raise a country's level of saving is to reduce budget deficits and to change consumption and savings habits. For example, if a country's citizens saved more instead of consuming imports, this would reduce its trade deficit.[343] It has therefore been suggested that countries with large trade deficits (e.g. Greece) consume less and improve their exporting industries. On the other hand, export driven countries with a large trade surplus, such as Germany, Austria and the Netherlands would need to shift their economies more towards domestic services and increase wages to support domestic consumption.[45][344] In its

spring 2012 economic forecast, the European Commission finds "some evidence that the current-account rebalancing is underpinned by changes in relative prices and competitiveness positions as well as gains in export market shares and expenditure switching in deficit countries."[345] In May 2012 German finance minister Wolfgang Schuble has signaled support for a significant increase in German wages to help decrease current account imbalances within the eurozone.[346] [edit]Mobilization of credit A number of proposals were made in the summer of 2012 to purchase the debt of distressed European countries such as Spain and Italy. Markus Brunnermeier,[347] the economist Graham Bishop, and Daniel Gros were among those advancing proposals. Finding a formula which was not simply backed by Germany is central in crafting an acceptable and effective remedy.[348] [edit]Commentary U.S. President Barack Obama stated in June 2012: "Right now, [Europe's] focus has to be on strengthening their overall banking system...making a series of decisive actions that give people confidence that the banking system is solid...In addition, theyre going to have to look at how do they achieve growth at the same time as theyre carrying out structural reforms that may take two or three or five years to fully accomplish. So countries like Spain and Italy, for example, have embarked on some smart structural reforms that everybody thinks are necessary -- everything from tax collection to labor markets to a whole host of different issues. But they've got to have the time and the space for those steps to succeed. And if they are just cutting and cutting and cutting, and their unemployment rate is going up and up and up, and people are pulling back further from spending money because they're feeling a lot of pressure -- ironically, that can actually make it harder for them to carry out some of these reforms over the long term...[I]n addition to sensible ways to deal with debt and government finances, there's a parallel discussion that's taking place among European leaders to figure out how do we also encourage growth and show some flexibility to allow some of these reforms to really take root."[349] The Economist wrote in June 2012: "Outside Germany, a consensus has developed on what Mrs. Merkel must do to preserve the single currency. It includes shifting from austerity to a far greater focus on economic growth; complementing the single currency with a banking union (with euro-wide deposit insurance, bank oversight and joint means for the recapitalization or resolution of failing banks); and embracing a limited form of debt mutualization to create a joint safe asset and allow peripheral economies the room gradually to reduce their debt burdens. This is the refrain from Washington, Beijing, London and indeed most of the capitals of the euro zone. Why hasnt the continents canniest politician sprung into action?"[350] [edit]Proposed long-term solutions

[edit]European fiscal union Increased European integration giving a central body increased control over the budgets of member states was proposed on June 14, 2012 by Jens Weidmann President of the Deutsche Bundesbank,[351] expanding on ideas first proposed by Jean-Claude Trichet, former president of the European Central Bank. Control, including requirements that taxes be raised or budgets cut, would be exercised only when fiscal imbalances developed.[352]

This proposal is similar to contemporary calls by Angela Merkel for increased political and fiscal union which would "allow Europe oversight possibilities."[353] [edit]European bank recovery and resolution authority European banks are estimated to have incurred losses approaching 1 trillion between the outbreak of the financial crisis in 2007 and 2010. The European Commission approved some 4.5 billion in state aid for banks between October 2008 and October 2011, a sum which includes the value of taxpayer-funded recapitalizations and public guarantees on banking debts.[354] This has prompted some economists such as Joseph Stiglitz and Paul Krugman to note that Europe is not suffering from a sovereign debt crisis but rather from a banking crisis.[354] On 6 June 2012, the European Commission adopted a legislative proposal for a harmonized bank recovery and resolution mechanism. The proposed framework sets out the necessary steps and powers to ensure that bank failures across the EU are managed in a way which avoids financial instability.[355] The new legislation would give member states the power to impose losses, resulting from a bank failure, on the bondholders to minimize costs for taxpayers. The proposal is part of a new scheme in which banks will be compelled to bail-in their creditors whenever they fail, the basic aim being to prevent taxpayer-funded bailouts in the future. The public authorities would also be given powers to replace the management teams in banks even before the lender fails. Each institution would also be obliged to set aside at least one per cent of the deposits covered by their national guarantees for a special fund to finance the resolution of banking crisis starting in 2018.[354] [edit]Eurobonds Main article: Eurobonds A growing number of investors and economists say Eurobonds would be the best way of solving a debt crisis,[356] though their introduction matched by tight financial and budgetary coordination may well require changes in EU treaties.[356] On 21 November 2011, the European Commission suggested that eurobonds issued jointly by the 17 euro nations would be an effective way to tackle the financial crisis. Using the term "stability bonds", Jose Manuel Barroso insisted that any such plan would have to be matched by tight fiscal surveillance and economic policy coordination as an essential counterpart so as to avoid moral hazard and ensure sustainable public finances.[357][358] Germany remains largely opposed at least in the short term to a collective takeover of the debt of states that have run excessive budget deficits and borrowed excessively over the past years, saying this could substantially raise the country's liabilities.[359] [edit]European Monetary Fund On 20 October 2011, the Austrian Institute of Economic Research published an article that suggests transforming the EFSF into a European Monetary Fund (EMF), which could provide governments with fixed interest rate Eurobonds at a rate slightly below medium-term economic growth (in nominal terms). These bonds would not be tradable but could be held by investors with the EMF and liquidated at any time. Given the backing of all eurozone countries and the ECB "the EMU would achieve a similarly strong position vis-a-vis financial investors as the US where the Fed backs government bonds to an unlimited extent." To ensure fiscal discipline despite lack of market pressure, the EMF would operate according to strict rules, providing funds only to countries that meet fiscal and macroeconomic criteria.

Governments lacking sound financial policies would be forced to rely on traditional (national) governmental bonds with less favorable market rates.[360] The econometric analysis suggests that "If the short-term and long- term interest rates in the euro area were stabilized at 1.5% and 3%, respectively, aggregate output (GDP) in the euro area would be 5 percentage points above baseline in 2015". At the same time sovereign debt levels would be significantly lower with, e.g., Greece's debt level falling below 110% of GDP, more than 40 percentage points below the baseline scenario with market based interest levels. Furthermore, banks would no longer be able to unduly benefit from intermediary profits by borrowing from the ECB at low rates and investing in government bonds at high rates.[360] [edit]Drastic debt write-off financed by wealth tax

Overall debt levels in 2009 and write-offs necessary in the Eurozone, UK and U.S. to reach sustainable grounds. According to the Bank for International Settlements, the combined private and public debt of 18 OECD countries nearly quadrupled between 1980 and 2010, and will likely continue to grow, reaching between 250% (for Italy) and about 600% (for Japan) by 2040.[361] A BIS study released in June 2012 warns that budgets of most advanced economies, excluding interest payments, "would need 20 consecutive years of surpluses exceeding 2 per cent of gross domestic product - starting now - just to bring the debt-to-GDP ratio back to its pre-crisis level".[362] The same authors found in a previous study that increased financial burden imposed by aging populations and lower growth makes it unlikely that indebted economies can grow out of their debt problem if only one of the following three conditions is met:[363] government debt is more than 80 to 100 percent of GDP; non-financial corporate debt is more than 90 percent; private household debt is more than 85 percent of GDP. The Boston Consulting Group (BCG) adds that if the overall debt load continues to grow faster than the economy, then large-scale debt restructuring becomes inevitable. To prevent a vicious upward debt spiral from gaining momentum the authors urge policy makers to "act quickly and decisively" and aim for an overall debt level well below 180 percent for the private and government sector. This number is based on the assumption that governments, nonfinancial corporations, and private households can each sustain a debt load of 60 percent of GDP, at an interest rate of 5 percent and a nominal economic growth rate of 3 percent per year. Lower interest rates and/or higher growth would help reduce the debt burden further.[364] To reach sustainable levels the Eurozone must reduce its overall debt level by 6.1 trillion. According to BCG this could be financed by a one-time wealth tax of between 11 and 30 percent for most countries, apart from the crisis countries (particularly Ireland) where a write-off would have to be substantially higher. The authors admit that such programs would be "drastic", "unpopular" and "require broad political coordination and leadership" but they maintain that the longer politicians and central bankers wait, the more necessary such a step will be.[364]

Instead of a one-time write-off, German economist Harald Spehl has called for a 30 year debt-reduction plan, similar to the one Germany used after World War II to share the burden of reconstruction and development.[365] Similar calls have been made by political parties in Germany including the Greens and The Left.[366][367] [edit]Controversies

The European bailouts are largely about shifting exposure from banks and others, who otherwise are lined up for losses on the sovereign debt they have piled up, onto European taxpayers.[121][368][369][370][371][372] [edit]EU treaty violations Wikisource has original text related to this article: Consolidated version of the Treaty on the Functioning of the European Union No bail-out clause The EU's Maastricht Treaty contains juridical language which appears to rule out intra-EU bailouts. First, the no bailout clause (Article 125 TFEU) ensures that the responsibility for repaying public debt remains national and prevents risk premiums caused by unsound fiscal policies from spilling over to partner countries. The clause thus encourages prudent fiscal policies at the national level. The European Central Bank's purchase of distressed country bonds can be viewed as violating the prohibition of monetary financing of budget deficits (Article 123 TFEU). The creation of further leverage in EFSF with access to ECB lending would also appear to violate the terms of this article. Articles 125 and 123 were meant to create disincentives for EU member states to run excessive deficits and state debt, and prevent the moral hazard of over-spending and lending in good times. They were also meant to protect the taxpayers of the other more prudent member states. By issuing bail-out aid guaranteed by prudent eurozone taxpayers to rule-breaking eurozone countries such as Greece, the EU and eurozone countries also encourage moral hazard in the future.[373] While the no bail-out clause remains in place, the "no bail-out doctrine" seems to be a thing of the past.[374] Convergence criteria The EU treaties contain so called convergence criteria, specified in the protocols of the Treaties of the European Union. Concerning government finance the states have agreed that the annual government budget deficit should not exceed 3% of the gross domestic product (GDP) and that the gross government debt to GDP should not exceed 60% of the GDP (see protocol 12 and 13). For eurozone members there is the Stability and Growth Pact which contains the same requirements for budget deficit and debt limitation but with a much stricter regime. In the past, many European countries including Greece and Italy have substantially exceeded these criteria over a long period of time.[375] [edit]Actors fueling the crisis [edit]Credit rating agencies

Standard & Poor's Headquarters in Lower Manhattan, New York City The international U.S.-based credit rating agenciesMoody's, Standard & Poor's and Fitchwhich have already been under fire during the housing bubble[376][377] and the Icelandic crisis[378][379]have also played a central and controversial role[380] in the current European bond market crisis.[381] On one hand, the agencies have been accused of giving overly generous ratings due to conflicts of interest.[382] On the other hand, ratings agencies have a tendency to act conservatively, and to take some time to adjust when a firm or country is in trouble.[383] In the case of Greece, the market responded to the crisis before the downgrades, with Greek bonds trading at junk levels several weeks before the ratings agencies began to describe them as such.[79] According to a study by economists at St Gallen University credit rating agencies have fueled rising euro zone indebtedness by issuing more severe downgrades since the sovereign debt crisis unfolded in 2009. The authors concluded that rating agencies were not consistent in their judgments, on average rating Portugal, Ireland and Greece 2.3 notches lower than under pre-crisis standards, eventually forcing them to seek international aid.[384] European policy makers have criticized ratings agencies for acting politically, accusing the Big Three of bias towards European assets and fueling speculation.[385] Particularly Moody's decision to downgrade Portugal's foreign debt to the category Ba2 "junk" has infuriated officials from the EU and Portugal alike.[385] State owned utility and infrastructure companies like ANA Aeroportos de Portugal, Energias de Portugal, Redes Energticas Nacionais, and Brisa Auto-estradas de Portugal were also downgraded despite claims to having solid financial profiles and significant foreign revenue.[386][387][388][389] France too has shown its anger at its downgrade. French central bank chief Christian Noyer criticized the decision of Standard & Poor's to lower the rating of France but not that of the United Kingdom, which "has more deficits, as much debt, more inflation, less growth than us". Similar comments were made by high-ranking politicians in Germany. Michael Fuchs, deputy leader of the leading Christian Democrats, said: "Standard and Poor's must stop playing politics. Why doesn't it act on the highly indebted United States or highly indebted Britain?", adding that the latter's collective private and public sector debts are the largest in Europe. He further added: "If the agency downgrades France, it should also downgrade Britain in order to be consistent."[390] Credit rating agencies were also accused of bullying politicians by systematically downgrading eurozone countries just before important European Council meetings. As one EU source put it: "It is interesting to look at the downgradings and the timings of the downgradings ... It is strange that we have so many downgrades in the weeks of summits."[391] Regulatory reliance on credit ratings Think-tanks such as the World Pensions Council (WPC) have criticized European powers such as France and Germany for pushing for the adoption of the Basel II recommendations, adopted in 2005 and transposed in European Union law through the Capital Requirements Directive (CRD), effective since 2008. In essence, this forced European banks and more importantly the European Central Bank, e.g. when gauging the solvency of EU-based financial institutions, to rely heavily on the standardized assessments of credit risk marketed by only two private US firmsMoodys and S&P.[392]

Counter measures Due to the failures of the ratings agencies, European regulators obtained new powers to supervise ratings agencies.[380] With the creation of the European Supervisory Authority in January 2011 the EU set up a whole range of new financial regulatory institutions,[393] including the European Securities and Markets Authority (ESMA),[394] which became the EUs single credit-ratings firm regulator.[395] Credit-ratings companies have to comply with the new standards or will be denied operation on EU territory, says ESMA Chief Steven Maijoor.[396] Germany's foreign minister Guido Westerwelle has called for an "independent" European ratings agency, which could avoid the conflicts of interest that he claimed US-based agencies faced.[397] European leaders are reportedly studying the possibility of setting up a European ratings agency in order that the private U.S.-based ratings agencies have less influence on developments in European financial markets in the future.[398][399] According to German consultant company Roland Berger, setting up a new ratings agency would cost 300 million. On 30 January 2012, the company said it was already collecting funds from financial institutions and business intelligence agencies to set up an independent non-profit ratings agency by mid 2012, which could provide its first country ratings by the end of the year.[400] In April 2012, in a similar attempt, the Bertelsmann Stiftung presented a blueprint for establishing an international non-profit credit rating agency (INCRA) for sovereign debt, structured in way that management and rating decisions are independent from its financiers.[401] But attempts to regulate more strictly credit rating agencies in the wake of the European sovereign debt crisis have been rather unsuccessful. World Pensions Council (WPC) financial law and regulation experts have argued that the hastily drafted, unevenly transposed in national law, and poorly enforced EU rule on ratings agencies (Regulation EC N 1060/2009) has had little effect on the way financial analysts and economists interpret data or on the potential for conflicts of interests created by the complex contractual arrangements between credit rating agencies and their clients"[402] [edit]Media There has been considerable controversy about the role of the English-language press in regard to the bond market crisis.[403][404] Greek Prime Minister Papandreou is quoted as saying that there was no question of Greece leaving the euro and suggested that the crisis was politically as well as financially motivated. "This is an attack on the eurozone by certain other interests, political or financial".[405] The Spanish Prime Minister Jos Luis Rodrguez Zapatero has also suggested that the recent financial market crisis in Europe is an attempt to undermine the euro.[406][407] He ordered the Centro Nacional de Inteligencia intelligence service (National Intelligence Center, CNI in Spanish) to investigate the role of the "Anglo-Saxon media" in fomenting the crisis.[408][409][410][411][412][413][414] So far no results have been reported from this investigation. Other commentators believe that the euro is under attack so that countries, such as the U.K. and the U.S., can continue to fund their large external deficits and government deficits,[415] and to avoid the collapse of the US$.[416][417][418] The U.S. and U.K. do not have large domestic savings pools to draw on and therefore are dependent on external savings e.g. from China.[419][420] This is not the case in the eurozone, which is selffunding.[421][422] [edit]Speculators

Both the Spanish and Greek Prime Ministers have accused financial speculators and hedge funds of worsening the crisis by short selling euros.[423][424] German chancellor Merkel has stated that "institutions bailed out with public funds are exploiting the budget crisis in Greece and elsewhere."[425] The role of Goldman Sachs[426] in Greek bond yield increases is also under scrutiny.[427] It is not yet clear to what extent this bank has been involved in the unfolding of the crisis or if they have made a profit as a result of the sell-off on the Greek government debt market. In response to accusations that speculators were worsening the problem, some markets banned naked short selling for a few months.[428] [edit]Speculation about the breakup of the eurozone Further information: Grexit Economists, mostly from outside Europe and associated with Modern Monetary Theory and other post-Keynesian schools, condemned the design of the euro currency system from the beginning because it ceded national monetary and economic sovereignty but lacked a central fiscal authority. When faced with economic problems, they maintained, "Without such an institution, EMU would prevent effective action by individual countries and put nothing in its place."[429][430] US economist Martin Feldstein went so far to call the euro "an experiment that failed".[431] Some non-Keynesian economists, such as Luca A. Ricci of the IMF, contend the eurozone does not fulfill the necessary criteria for an optimum currency area, though it is moving in that direction.[336][432] As the debt crisis expanded beyond Greece, these economists continued to advocate, albeit more forcefully, the disbandment of the eurozone. If this was not immediately feasible, they recommended that Greece and the other debtor nations unilaterally leave the eurozone, default on their debts, regain their fiscal sovereignty, and re-adopt national currencies.[108][433][434][435][436] Bloomberg suggested in June 2011 that, if the Greek and Irish bailouts should fail, an alternative would be for Germany to leave the eurozone in order to save the currency through depreciation[437] instead of austerity. The likely substantial fall in the euro against a newly reconstituted Deutsche Mark would give a "huge boost" to its members' competitiveness.[438] Iceland, not part of the EU, is regarded as one of Europe's recovery success stories. It defaulted on its debt and drastically devalued its currency, which has effectively reduced wages by 50% making exports more competitive.[439] Lee Harris argues that floating exchange rates allows wage reductions by currency devaluations, a politically easier option than the economically equivalent but politically impossible method of lowering wages by political enactment.[440] Sweden's floating rate currency gives it a short term advantage, structural reforms and constraints account for longer-term prosperity. Labor concessions, a minimal reliance on public debt, and tax reform helped to further a pro-growth policy.[441] The The Wall Street Journal conjectured as well that Germany could return to the Deutsche Mark,[442] or create another currency union[443] with the Netherlands, Austria, Finland, Luxembourg and other European countries such as Denmark, Norway, Sweden, Switzerland and the Baltics.[444] A monetary union of these countries with current account surpluses would create the world's largest creditor bloc, bigger than China[445] or Japan. The Wall Street Journal added that without the German-led bloc, a residual euro would have the flexibility to keep interest rates low[446] and engage in quantitative easing or fiscal stimulus in support of a job-targeting economic policy[447] instead of inflation targeting in the current configuration.

Breakup vs. deeper integration However, there is opposition in this view. The national exits are expected to be an expensive proposition. The breakdown of the currency would lead to insolvency of several euro zone countries, a breakdown in intrazone payments. Having instability and the public debt issue still not solved, the contagion effects and instability would spread into the system.[448] Having that the exit of Greece would trigger the breakdown of the eurozone, this is not welcomed by many politicians, economists and journalists. According to Steven Erlanger from The New York Times, a Greek departure is likely to be seen as the beginning of the end for the whole euro zone project, a major accomplishment, whatever its faults, in the postwar construction of a Europe whole and at peace.[449] Likewise, the two big leaders of the Euro zone, German Chancellor Angela Merkel and former French President Nicolas Sarkozy have said on numerous occasions that they would not allow the eurozone to disintegrate and have linked the survival of the Euro with that of the entire European Union.[450][451] In September 2011, EU commissioner Joaqun Almunia shared this view, saying that expelling weaker countries from the euro was not an option: "Those who think that this hypothesis is possible just do not understand our process of integration".[452] The former ECB president JeanClaude Trichet also denounced the possibility of a return of the Deutsche Mark.[453] The challenges to the speculation about the breakup or salvage of the eurozone is rooted in its innate nature that the breakup or salvage of eurozone is not only an economical decision but also a critical political decision followed by complicated ramifications that "If Berlin pays the bills and tells the rest of Europe how to behave, it risks fostering destructive nationalist resentment against Germany and ....it would strengthen the camp in Britain arguing for an exita problem not just for Britons but for all economically liberal Europeans.[454] Solutions which involve greater integration of European banking and fiscal management and supervision of national decisions by European umbrella institutions can be criticized as Germanic domination of European political and economic life.[455] According to US author Ross Douthat "This would effectively turn the European Union into a kind of postmodern version of the old Austro-Hungarian Empire, with a Germanic elite presiding uneasily over a polyglot imperium and its restive local populations".[455] The Economist provides a somewhat modified approach to saving the euro in that "a limited version of federalization could be less miserable solution than break-up of the euro."[454] The recipe to this tricky combination of the limited federalization, greatly lies on mutualization for limiting the fiscal integration. In order for overindebted countries to stabilize the dwindling euro and economy, the overindebted countries require "access to money and for banks to have a "safe" euro-wide class of assets that is not tied to the fortunes of one country" which could be obtained by "narrower Eurobond that mutualises a limited amount of debt for a limited amount of time."[454] The proposition made by German Council of Economic Experts provides detailed blue print to mutualize the current debts of all eurozone economies above 60% of their GDP. Instead of the breakup and issuing new national governments bonds by individual euro-zone governments, "everybody, from Germany (debt: 81% of GDP) to Italy (120%) would issue only these joint bonds until their national debts fell to the 60% threshold. The new mutualized-bond market, worth some 2.3 trillion, would be paid off over the next 25 years. Each country would pledge a specified tax (such as a VAT surcharge) to provide the cash." However, so far German Chancellor Angela Merkel has opposed to all forms of mutualization.[454] The Hungarian-American business magnate George Soros warns in Does the Euro have a Future? that there is no escape from the gloomy scenario of a prolonged European recession and the consequent threat to the Eurozones political cohesion so long as the authorities persist in their current course. He argues that to save the Euro longterm structural changes are essential in addition to the immediate steps needed to arrest the crisis. The changes he recommends include even greater economic integration of the European Union.[456] Soros writes that a treaty is

needed to transform the European Financial Stability Fund into a full-fledged European Treasury. Following the formation of the Treasury, European Council could then ask the European Commission Bank to step into the breach and indemnify the European Commission Bank in advance against potential risks to the Treasurys solvency. Soros acknowledges that converting the EFSF into a European Treasury will necessitate a radical change of heart. In particular, he cautions, Germans will be wary of any such move, not least because many continue to believe that they have a choice between saving the Euro and abandoning it. Soros writes however that a collapse of European Union would precipitate an uncontrollable financial meltdown and thus the only way to avert another Great Depression is the formation of a European Treasury.[456] The British betting company Ladbrokes stopped taking bets on Greece exiting the Eurozone in May 2012 after odds fell to 1/3, and reported "plenty of support" for 33/1 odds for a complete disbanding of the Eurozone during 2012.[216] [edit]Odious debt Main article: Odious debt Some protesters, commentators such as Libration correspondent Jean Quatremer and the Lige based NGO Committee for the Abolition of the Third World Debt (CADTM) allege that the debt should be characterized as odious debt.[457] The Greek documentary Debtocracy,[458] and a book of the same title and content examine whether the recent Siemens scandal and uncommercial ECB loans which were conditional on the purchase of military aircraft and submarines are evidence that the loans amount to odious debt and that an audit would result in invalidation of a large amount of the debt.[459] [edit]National statistics In 1992, members of the European Union signed an agreement known as the Maastricht Treaty, under which they pledged to limit their deficit spending and debt levels. However, a number of EU member states, including Greece and Italy, were able to circumvent these rules and mask their deficit and debt levels through the use of complex currency and credit derivatives structures.[38][39] The structures were designed by prominent U.S. investment banks, who received substantial fees in return for their services and who took on little credit risk themselves thanks to special legal protections for derivatives counterparties.[38] Financial reforms within the U.S. since the financial crisis have only served to reinforce special protections for derivativesincluding greater access to government guaranteeswhile minimizing disclosure to broader financial markets.[460] The revision of Greeces 2009 budget deficit from a forecast of "68% of GDP" to 12.7% by the new Pasok Government in late 2009 (a number which, after reclassification of expenses under IMF/EU supervision was further raised to 15.4% in 2010) has been cited as one of the issues that ignited the Greek debt crisis. This added a new dimension in the world financial turmoil, as the issues of "creative accounting" and manipulation of statistics by several nations came into focus, potentially undermining investor confidence. The focus has naturally remained on Greece due to its debt crisis. There has however been a growing number of reports about manipulated statistics by EU and other nations aiming, as was the case for Greece, to mask the sizes of public debts and deficits. These have included analyses of examples in several countries[461][462][463][464] or have focused on Italy,[465] the United Kingdom,[466][467][468][469][470][471][472][473] Spain,[474] the United States,[475][476][477] and even Germany.[478][479]

[edit]Collateral for Finland On 18 August 2011, as requested by the Finnish parliament as a condition for any further bailouts, it became apparent that Finland would receive collateral from Greece, enabling it to participate in the potential new 109 billion support package for the Greek economy.[480] Austria, the Netherlands, Slovenia, and Slovakia responded with irritation over this special guarantee for Finland and demanded equal treatment across the eurozone, or a similar deal with Greece, so as not to increase the risk level over their participation in the bailout.[481] The main point of contention was that the collateral is aimed to be a cash deposit, a collateral the Greeks can only give by recycling part of the funds loaned by Finland for the bailout, which means Finland and the other eurozone countries guarantee the Finnish loans in the event of a Greek default.[482] After extensive negotiations to implement a collateral structure open to all eurozone countries, on 4 October 2011, a modified escrow collateral agreement was reached. The expectation is that only Finland will utilise it, due to i.a. requirement to contribute initial capital to European Stability Mechanism in one installment instead of five installments over time. Finland, as one of the strongest AAA countries, can raise the required capital with relative ease.[483] At the beginning of October, Slovakia and Netherlands were the last countries to vote on the EFSF expansion, which was the immediate issue behind the collateral discussion, with a mid-October vote.[484] On 13 October 2011 Slovakia approved euro bailout expansion, but the government has been forced to call new elections in exchange. In February 2012, the four largest Greek banks agreed to provide the 880 million in collateral to Finland in order to secure the second bailout program.[485] Finland's recommendation to the crisis countries is to issue asset-backed securities to cover the immediate need, a tactic successfully used in Finland's early 1990s recession,[486] in addition to spending cuts and bad banking. [edit]Political impact

Handling of the ongoing crisis has led to the premature end of a number of European national governments and impacted the outcome of many elections: Republic of Ireland February 2011 After a high deficit in the governments budget in 2010 and the uncertainty surrounding the proposed bailout from the International Monetary Fund, the 30th Dil (parliament) collapsed the following year, which led to a subsequent general election, collapse of the preceding government parties, Fianna Fil and the Green Party, the resignation of the Taoiseach (PM) Brian Cowen and the rise of the Fine Gael parliamentary party, which formed a government alongside the Labour Party in the 31st Dil, which led to a change of government and the appointment of Enda Kenny as Taoiseach. Portugal March 2011 Following the failure of parliament to adopt the government austerity measures, PM Jos Scrates and his government resigned, bringing about early elections in June 2011.[487][488] Finland April 2011 The approach to the Portuguese bailout and the EFSF dominated the April 2011 election debate and formation of the subsequent government.[489][490] Spain July 2011 Following the failure of the Spanish government to handle the economic situation, PM Jos Luis Rodrguez Zapatero announced early elections in November.[491] "It is convenient to hold elections this fall so a new

government can take charge of the economy in 2012, fresh from the balloting" he said.[492] Following the elections, Mariano Rajoy became PM. Slovenia September 2011 Following the failure of June referendums on measures to combat the economic crisis and the departure of coalition partners, the Borut Pahor government lost a motion of confidence and December 2011 early elections were set, following which Janez Jana became PM.[493] Slovakia October 2011 In return for the approval of the EFSF by her coalition partners, PM Iveta Radiov had to concede early elections in March 2012, following which Robert Fico became PM. Italy November 2011 Following market pressure on government bond prices in response to concerns about levels of debt, the Government of Silvio Berlusconi lost its majority, resigned and was replaced by the Government of Mario Monti.[195] Greece November 2011 After intense criticism from within his own party, the opposition and other EU governments, for his proposal to hold a referendum on the austerity and bailout measures, PM George Papandreou of the PASOK party announced his resignation in favour of a national unity government between three parties, of which only two currently remain in the coalition.[90] Following the vote in the Greek parliament on the austerity and bailout measures, which both leading parties supported but many MPs of these two parties voted against, Papandreou and Antonis Samaras expelled a total of 44 MPs from their respective parliamentary groups, leading to PASOK losing its parliamentary majority.[494] The early Greek legislative election, 2012 were the first time in the history of the country, at which the bipartisanship (consisted of PASOK and New Democracy parties), which ruled the country for over 40 years, collapsed in votes as a punishment for their support to the strict measures proposed by the country's foreign lenders and the Troika (consisted of the European Commission, the IMF and the European Central Bank). The popularity of PASOK dropped from 42.5% in 2010 to as low as 7% in some polls in 2012.[495] The extreme right-wing, radical left-wing, communist and populist political parties that have opposed the policy of strict measures, won the majority of the votes. Netherlands - April 2012 - After talks between the VVD, CDA and PVV over a new austerity package of about 14 billion euros failed, the Rutte cabinet collapsed. Early elections were called for 12 September 2012. To prevent fines from the EU - a new budget was demanded by April 30 - five different parties called the kunduz coalition forged together an emergency budget for 2013 in just two days.[496][497] France - May 2012 - The French presidential election, 2012 became the first time since 1981 that an incumbent failed to gain a second term, when Nicolas Sarkozy lost to Franois Hollande. [edit]Projections

Some investors with reasonably good track records expect that the crisis will run its course in 3 to 5 years. It is possible to invest in hedge funds which follow investment plans based on that projection. However, even they shy away from Greek investments.[498] [edit]See also