European sovereign debt crisis

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It has been suggested that PIGS (economics) be merged into this article or section. (Discuss) Proposed since November 2011.

Sovereign credit default swap prices of selected European countries from June 2010 till September 2011. 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.

Part of a series on:

Late-2000s financial crisis

Major dimensions[show]

Countries[show]

Summits[show]

Legislation[show]

Company bailouts[show]

Company failures[show]

Causes[show]

Solutions[show]

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From late 2009, fears of a sovereign debt crisis developed among investors concerning some European [1][2] states, intensifying in early 2010 and thereafter. . This crisis is analytically separate from the Late-2000s financial crisis, although the two phenomena are linked in their effects. The sovereign debt crisis refers to budget deficits that have been created by insufficient tax revenue, excessive spending, or both in several Mediterranean states including Greece, Italy, Spain, and Portugal. The financial crisis on the other hand began in the U.S. and in countries that imitated the problematic lending practices of the U.S., such as Iceland and Ireland. The two phenomena have become linked because many European banks held assets in financially troubled American banks, and because the need to bail out troubled banks has worsened the budget deficit for governments. The size of the budget deficits has frightened investors, who have demanded higher interest rates from struggling governments. This in turn makes it difficult for governments to finance further budget deficits and service existing high debt levels. Especially in countries where government 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 credit [3][4] default swaps between these countries and other EU members, most importantly Germany. While the sovereign debt increases have been most pronounced in only a few eurozone countries, they [5] have become a perceived problem for the area as a whole. Concern about rising government debt levels across the globe together with a wave of downgrading of government debt for certain European states created alarm in financial markets. On 9 May 2010, Europe's Finance Ministers approved a rescue package worth 750 billion aimed at ensuring financial [6] stability across Europe by creating the European Financial Stability Facility (EFSF). In October 2011, eurozone leaders meeting in Brussels agreed on a package of measures designed to prevent the collapse of member economies due to their spiralling debt. This included a proposal to write off 50% of Greek debt owed to private creditors, increasing the EFSF to about 1 trillion and requiring European banks to achieve 9% capitalisation.

Despite the debt crisis in a number of eurozone countries the European currency remained [7] stable, trading even slightly higher against the Euro bloc's major trading partners than at the beginning [8][9] of the crisis. The three most affected countries, Greece, Ireland and Portugal, collectively account for [10] six percent of eurozone's gross domestic product (GDP).
Contents
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1 Eurozone sovereign debt concerns

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1.1 Bond market 1.2 Greece 1.3 Spread beyond Greece

1.3.1 Ireland 1.3.2 Portugal 1.3.3 Italy 1.3.4 Spain 1.3.5 Belgium 1.3.6 France

1.4 Other European countries

2 Solutions

1.4.1 United Kingdom 1.4.2 Iceland 1.4.3 Switzerland

2.1 EU emergency measures

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2.1.1 European Financial Stability Facility (EFSF) 2.1.2 European Financial Stabilisation Mechanism (EFSM)

2.2 ECB interventions 2.3 Reform and recovery 2.4 Eurobonds

3 Proposed long-term solutions

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3.1 Common fiscal policy (European Treasury) 3.2 European Stability Mechanism 3.3 European Monetary Fund 3.4 Address slow economic growth 3.5 Euro breakup

4 Controversies

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4.1 Breaking of the EU treaties 'no bail-out clause' 4.2 Breaking of the EU treaties 'convergence criteria' 4.3 Doubts about effectiveness of non-Keynesian policies 4.4 Odious debt 4.5 Controversy about national statistics 4.6 Credit rating agencies 4.7 Media 4.8 Role of speculators 4.9 Finland collateral

5 Political impact 6 See also 7 References 8 External links

[edit]Eurozone

sovereign debt concerns

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 European Union member states, including Greece and Italy, were able to circumvent these rules and mask their deficit and debt levels through the [11][12] use of complex currency and credit derivatives structures. 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 [11] counterparties. Financial reforms within the U.S. since the financial crisis have only served to reinforce special protections for derivativesincluding greater access to government guaranteeswhile [13] minimizing disclosure to broader financial markets. In the first weeks of 2010, there was renewed anxiety about excessive national debt. Some politicians, notably Angela Merkel, have sought to attribute some of the blame for the crisis to hedge funds and other speculators stating that "institutions bailed out with public funds are exploiting the budget crisis in Greece [14][15][16][17][18] and elsewhere". Although some financial institutions clearly profited from the growing Greek government debt in the short [19] run, there was a long lead up to the crisis. EU politicians in Brussels turned a blind eye and gave Greece a fairly clean bill of health, even as the reality of economics suggested the Euro was in danger. Investors assumed they were implicitly lending to a strong Berlin when they bought eurobonds from weaker Athens. Historic enmity to Turkey led to high defense spending, and fuelled public deficits [clarification needed][20] financed primarily by German and French banks. [edit]Bond

market

Prior to development of the crisis it was assumed by both regulators and banks that sovereign debt from the Euro zone 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 [21] banks that were earning substantial sums underwriting the bonds. [edit]Greece Main article: Greek government debt crisis In the early-mid 2000s, Greece's economy was strong and the government took advantage by running a large deficit. As the world economy cooled in the late 2000s, Greece was hit especially hard because its main industriesshipping and tourismwere especially sensitive to changes in the business cycle. As a result, the country's debt began to pile up rapidly. In early 2010, as concerns about Greece's national debt grew, policy makers suggested that emergency bailouts might be necessary. On 23 April 2010, the Greek government requested that the EU/IMF bailout package (made of relatively [22] high-interest loans) be activated. The IMF had said it was "prepared to move expeditiously on this request". The initial size of the loan package was 45 billion ($61 billion) and its first installment [23] covered 8.5 billion of Greek bonds that became due for repayment. On 27 April 2010, Standard & Poor's slashed Greece's sovereign debt rating to BB+ or "junk" status amid [24][25] fears of default. The yield of the Greek two-year bond reached 15.3% in the secondary [26] market. Standard & Poor's estimates that, in the event of default, investors would lose 3050% of their [24] [27] money. Stock markets worldwide and the Euro currency declined in response to this announcement.

Former Prime Minister George Papandreou and European Commission President Jos Manuel Barroso after their meeting in Brussels on 20 June 2011.

On 1 May 2010, a series of austerity measures was proposed. The proposal helped persuade Germany, the last remaining holdout, to sign on to a larger, 110 billion euro EU/IMF loan package over

[28]

three years for Greece (retaining a relatively high interest of 5% for the main part of the loans, provided [29] by the EU). On 5 May, a national strike was held in opposition to the planned spending cuts and tax [29] increases. Protest on that date was widespread and turned violent in Athens, killing three people. On 2 May 2010, the Eurozone countries and the International Monetary Fund agreed to a 110 billion loan for Greece, conditional on the implementation of harsh austerity measures. The Greek bail-out was followed by a 85 billion rescue package for Ireland in November, a 78 billion bail-out for Portugal in May 2011, then continuing efforts to meet the continuing crisis in Greece and other countries. The November 2010 revisions of 2009 deficit and debt levels made accomplishment of the 2010 targets [30] even harder, and indications signal a recession harsher than originally feared. Japan, Italy and Belgium's creditors are mainly domestic institutions, but Greece and Portugal have a higher percent of their debt in the hands of foreign creditors, which is seen by certain analysts as more difficult to sustain. Greece, Portugal, and Spain have a 'credibility problem', because they lack the ability [31] to repay adequately due to their low growth rate, high deficit, less FDI, etc. In May 2011, Greek public debt gained prominence as a matter of concern. The Greek people generally reject the austerity measures, and have expressed their dissatisfaction through angry street protests. In late June 2011, Greece's government proposed additional spending cuts worth 28bn euros (25bn) over five years. The next 12 billion euros from the Eurozone bail-out package will be released when the proposal is passed, without which Greece would have had to default on loan repayments due in [33] mid-July. On 13 June 2011, Standard and Poor's downgraded Greece's sovereign debt rating to CCC, the lowest in the world, following the findings of a bilateral EU-IMF audit which called for further austerity [34] measures. After the major political parties failed to reach consensus on the necessary measures to qualify for a further bailout package, and amidst riots and a general strike, Prime Minister George Papandreou proposed a re-shuffled cabinet, and asked for a vote of confidence in the [35][36] [37] parliament. The crisis sent ripples around the world, with major stock exchanges exhibiting losses. Greeces first adjustment plan was launched in March 2010 with 80 billion euros in support from the European governments and 30 billion euros from the IMF. This adjustment program hoped to reestablish the access to private capital markets by 2012. However it was soon found that this process would take longer than expected. In July 2011 there was a new package instilled in which an extra 109 billion euros in support of Greece which included a large privatization effort. Some believe that this will cause more debt for Greece. With this new package it is projected that there will be a 3.8% decline in 2011 but a .6% growth in 2012, following with a 3.5% increase in 2013, where it will eventually plateau in 2015 at [citation needed] 6.4%. Some experts argue the best option for Greece and the rest of the EU should be to engineer an orderly default on Greeces public debt which would allow Athens to withdraw simultaneously from the [38][39] eurozone and reintroduce its national currency the drachma at a debased rate. Economists who favor this approach to solve the Greek debt crisis typically argue that a delay in organising an orderly [40] default would wind up hurting EU lenders and neighboring European countries even more. In the early hours of 27 October 2011, Eurozone leaders and the IMF came to an agreement with banks [41][42][43] [41] to accept a 50% write-off of (some part of) Greek debt, the equivalent of 100 billion. The aim of [41][44][45] the haircut is to reduce Greece's debt to 120% of GDP by 2020.
[32]

[edit]Spread

beyond Greece

Public debt as a percent of GDP (2010).

The government surplus or deficit of Belgium, Greece, France, Hungary, Iceland, Italy, Portugal, Spain and the UK against the Eurozone and the United States (2001-2011).

Long-term interest rates of selected European countries (secondary market yields of government bonds with maturities of close to ten years).[46] Note that weak non-eurozone countries (Hungary, Romania) lack the sharp rise in interest rates characteristic of weak eurozone countries. A yield of 6 % or more indicates that financial markets have serious doubts about credit-worthiness.[47]

A graph showing the economic data from Portugal, Italy, Ireland, Greece, United Kingdom, Spain, Germany, the EU and the eurozone for 2009. The data is taken from Eurostat.

One of the central concerns prior to the bailout was that the crisis could spread beyond Greece. The crisis has reduced confidence in other European economies. Ireland, with a government deficit in 2010 of [48] 32.4% of GDP, Spain with 9.2%, and Portugal at 9.1% are most at risk. According to the UK Financial Policy Committee "Market concerns remain over fiscal positions in a number of euro area countries and [49] the potential for contagion to banking systems." Financing needs for the eurozone in 2010 come to a total of 1.6 trillion, while the US is expected to issue [50] US$1.7 trillion more Treasury securities in this period, and Japan has 213 trillion of government bonds [51] to roll over. According to Ferguson similarities between the U.S. and Greece should not be [52] dismissed. For 2010, the OECD forecasts $16,000bn will be raised in government bonds among its 30 member countries. Greece has been the notable example of an industrialised country that has faced difficulties in the markets because of rising debt levels. Even countries such as the US, Germany and the UK, have had fraught moments as investors shunned bond auctions due to concerns about public finances and the [53] economy. [edit]Ireland Main article: 20082011 Irish financial crisis 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 the Finance Minister Brian Lenihan, Jnr issued a one-year guarantee to the banks' depositors and bondholders. He renewed it for another year in September 2009 soon after the launch of the National Asset Management Agency, a body designed to remove bad loans from the six banks. The December 2009 hidden loans controversy within Anglo Irish Bank had led to the resignations of three executives, including chief executiveSen FitzPatrick. A mysterious "Golden Circle" of ten businessmen are being investigated over shares they purchased in Anglo Irish Bank, using loans from the bank, in 2008. The Anglo Irish Bank Corporation Act 2009 was passed to nationalise Anglo Irish Bank was voted throughDil ireann and passed through Seanad ireann without a vote on 20 January [54] 2009. President Mary McAleese then signed the bill at ras an Uachtarin the following day, confirming [55] the bank's nationalisation. In April 2010, following a marked increase in Irish 2-year bond yields, Ireland's NTMA state debt agency said that it had "no major refinancing obligations" in 2010. Its requirement for 20 billion in 2010 was [56] matched by a 23 billion cash balance, and it remarked: "We're very comfortably circumstanced". On [57] 18 May the NTMA tested the market and sold a 1.5 billion issue that was three times oversubscribed. By September 2010 the banks could not raise finance and the bank guarantee was renewed for a third year. This had a negative impact on Irish government bonds, government help for the banks rose to 32% of GDP, and so the government started negotiations with the ECB and the IMF, resulting in the 85 billion [58][59] "bailout" agreement of 29 November 2010 , of which 34 billion were used to support its ailing [60] financial sector. In return the government agreed to reduce its budget deficit to below three percent by [60] 2015. In February the government lost the ensuing Irish general election, 2011. In April 2011, despite [61] all the measures taken, Moody's downgraded the banks' debt to junk status.

The latest 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 [62] external support from the second half of 2012 onwards. 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, which has already fallen substantially since mid July 2011 (see the graph "Long-term Interest Rates"), is expected to fall further to [63] 4 per cent by 2015. [edit]Portugal A report released in January 2011 by the Dirio de Notcias and published in Portugal by Gradiva, demonstrated that in the period between the Carnation Revolution in 1974 and 2010, the democratic Portuguese Republic governments have encouraged over-expenditure and investment bubbles through unclear public-private partnerships and funding of numerous ineffective and unnecessary external consultancy and advisory of committees and firms. This allowed considerable slippage in statemanaged public works and inflated top management and head officer bonuses and wages. Persistent and lasting recruitment policies boosted the number of redundant public servants. Risky credit, public debtcreation, and European structural and cohesion funds were mismanaged across almost four decades. The Prime Minister Scrates's cabinet was not able to forecast or prevent this in 2005, and later it was incapable of doing anything to improve the situation when the country was on the verge of [65] bankruptcy by 2011. Robert Fishman, in the New York Times article "Portugal's Unnecessary Bailout", points out that Portugal fell victim to successive waves of speculation by pressure from bond traders, rating agencies and [66] speculators. In the first quarter of 2010, before markets pressure, Portugal had one of the best rates of economic recovery in the EU. From the perspective of Portugal's industrial orders, exports, entrepreneurial innovation and high-school achievement, the country matched or even surpassed its [66] neighbors in Western Europe. On 16 May 2011 the Eurozone leaders officially approved a 78 billion bailout package for Portugal. The bailout loan will be equally split between the European Financial Stabilisation Mechanism, the European [67] Financial Stability Facility, and the International Monetary Fund. According to the Portuguese finance [68] minister, the average interest rate on the bailout loan is expected to be 5.1% As part of the bailout, Portugal agreed to eliminate its golden share in Portugal Telecom to pave the way for [69][70] privatization. Portugal became the third Eurozone country, after Ireland and Greece, to receive a bailout package. On 6 July 2011 it was confirmed that the ratings agency Moody's had cut Portugal's credit rating to junk status, Moody's also launched speculation that Portugal may follow Greece in requesting a second [71] bailout. [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 and economic growth was lower than the EU average for over a decade. This has led investors to view Italian bonds more and more [72] as a risky asset. On the other hand, the public debt of Italy has a longer maturity and a big share of it is
[64]

held domestically. Overall this makes the country more resilient to financial shocks, ranking better than [73] France and Belgium. On 15 July and 14 September 2011, Italy's government passed austerity measures meant to save 124 [74][75] billion euro. 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 [76] markets. 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 [77] government to replace that of Prime Minister Silvio Berlusconi. The measures include a pledge to raise 15 billion euros 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 [72] ownership of local services. The interim government expected to put the new laws into practice is led [72] by former European Union Competition CommissionerMario Monti. [edit]Spain Main article: 20082011 Spanish financial crisis Shortly after the announcement of the EU's new "emergency fund" for eurozone countries in early May 2010, Spain's government announced new austerity measures designed to further reduce the country's [78] budget deficit. The Spanish government had hoped to avoid such deep cuts, but weak economic growth as well as domestic and international pressure forced the government to expand on cuts already announced in January. As one of the largest eurozone economies the condition of Spain's economy is of particular concern to international observers, and faced pressure from the United States, the IMF, other [79][80] European countries and the European Commission to cut its deficit more aggressively. According to the Financial Times, Spain succeeded in trimming its deficit from 11.2% of GDP in 2009 to [81] 9.2% in 2010. Spain's public debt (60.1% of GDP in 2010) is significantly lower than that of Greece (142.8%), Italy (119%), Portugal (93%), Ireland (96.2), and Germany (83.2%), France (81.7%) and the [82][83] United Kingdom (80.0%). [edit]Belgium Main article: 20082009 Belgian financial crisis In 2010, Belgium's public debt was 100% of its GDP the third highest in the eurozone after Greece and [84] [85] Italy and there were doubts about the financial stability of the banks. After inconclusive elections in [86] June 2010, by November 2011 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 [84] to form a majority government. Financial analysts forecast that Belgium would be the next country to be [85] hit by the financial crisis as Belgium's borrowing costs rose. 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 [85] (5.2%). 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 [87] markets. Nevertheless on 25 November 2011, Belgium's long-term sovereign credit rating was [88] [86] downgraded from AA+ to AA by Standard and Poor and 10-year bond yields reached 5.66%. [edit]France

By 16 November 2011, France's bond yield spreads vs. Germany had widened 450% since July, 2011, [89] making it a new "core country" under attack . France's C.D.S. contract value rose 300% in the same [90] period [edit]Other

European countries

[edit]United Kingdom According to the Financial Policy Committee "Any associated disruption to bank funding markets could [49] spill over to UK banks." Bank of England governor Mervyn King declared that the UK is very much at risk from a domino-fall of defaults and called on banks to build up more capital when financial conditions allowed. [edit]Iceland Main article: 20082011 Icelandic financial crisis Iceland suffered the failure of its banking system and a subsequent economic crisis. After a sharp increase in public debts due to the banking failures, the government has been able to reduce the size of deficits each year. The effort has been made more difficult by a more sluggish recovery than earlier [91] expected. Before the crash of the three largest commercial banks in Iceland, Glitnir, Landsbankiand Kaupthing, they jointly owed over 10 times Iceland's GDP. In October 2008, the Icelandic parliament passed emergency legislation to minimise the impact of the financial crisis. The Financial Supervisory Authority of Iceland used permission granted by the emergency legislation to [92] take over the domestic operations of the three largest banks. The foreign operations of the banks, however, went into receivership. As a result, the country has not been seriously affected by the European sovereign debt crisis from 2010. In large part this is due to the success of an IMF Stand-By Arrangement in the country since November 2008. The government has enacted a program of medium term fiscal consolidation, based on expenditure cuts and broad based and significant tax hikes. As a result, central government debts have been stabilised at around 8090 percent [93] of GDP. Capital controls were also enacted and the work began to resurrect a sharply downsized domestic banking system on the ruins of its gargantuan international banking system, which the [94][95] government was unable to bail out. Despite a contentious debate with Britain and the Netherlands over the question of a state guarantee on the Icesave deposits of Landsbanki in these countries, credit default swaps on Icelandic sovereign debt have steadily declined from over 1000 points prior to the crash in 2008 to around 200 points in June 2011. Further, on 9 June 2011, the Icelandic government successfully raised 1$ billion with a bond issue indicating that international investors are viewing positively the efforts of the government to consolidate the public finances and restructure the banking system, with two of the three biggest banks now in foreign [94][95] hands. [edit]Switzerland In September 2011, the Swiss National Bank weakened the Swiss franc to a floor of 1.20 francs per [96] euro. The franc has been appreciating against the euro during to the crisis, harming Swiss exporters. The SNB surprised currency traders by pledging that "it will no longer tolerate a euro-franc exchange rate below the minimum rate of 1.20 francs." This is the biggest Swiss intervention since 1978. [edit]Solutions

[edit]EU

emergency measures

[edit]European Financial Stability Facility (EFSF) On 9 May 2010, the 27 member states of the European Union agreed to create the European Financial [97] Stability Facility, a legal instrument aiming at preserving financial stability in Europe by providing financial assistance to eurozone states in difficulty. The facility is jointly and severally guaranteed by the Eurozone countries' governments. The European Parliament, the European Council, and especially [98] the European Commission, can all provide some support for the treasury while it is still being built. In order to reach these goals the Facility is devised in the form of a special purpose vehicle (SPV) that will sell bonds and use the money it raises to make loans up to a maximum of 440 billion to eurozone [99] nations in need. The new entity will sell debt only after an aid request is made by a country. The EFSF loans would complement loans backed by the lender of last resort International Monetary Fund, and in selected cases loans by the EFSF. The total safety net available would be therefore 750 billion, consisting of up to 440 billion from EFSF, up to 60 billion loan from theEuropean Financial Stabilisation Mechanism (reliant on guarantees given by the European Commission using the EU budget [100][101] as collateral) and 250 billion loan backed by the IMF. The agreement is interpreted to allow the ECB to start buying government debt from the secondary market which is expected to [102] [103] reduce bond yields. (Greek bond yields fell from over 10% to just over 5%; Asian bonds yields also [104] fell with the EU bailout. ) The German Bundestag voted 523 to 85 to approve the increase in the EFSF's available funds to 440bn (Germany's share 211bn), a victory for Merkel, though other possible ways to expand the EFSF and EMU powers were not addressed in the legislation. Wolfgang Schuble, the German finance minister, and Philipp Rsler, the economics minister, were concurrently on record againstleveraging the EFSF. In early October, Slovakia remained uncertain as to the approval, with "political turmoil in Bratislava, the [105] nations capital, exposing strains within the four-party ruling coalition". Mid-October Slovakia became the last country to give approval, though not before parliament speaker Richard Sulk registered strong questions as to how "a poor but rule-abiding euro-zone state must bail out a serial violator with twice the per capita income, and triple the level of the pensions a country which is in any case irretrievably [106] bankrupt? How can it be that the no-bail clause of the Lisbon treaty has been ripped up?" In July 2011, it was agreed during the EU summit that the EFSF will be given more powers to intervene in the secondary markets, thus dramatically socializing risk in the eurozone, which ends the [107] crisis. Furthermore the EU agreed that Greece should receive EU loans at lower interest rates of [108] 3.5%. On November 29, 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 In Mid 2013 the EFSF will be replaced by a permanent rescue funding program called European Stability Mechanism (ESM). It will be established once the ratification process of its treaty is completed. Reception by financial markets After the EU announced to create the EFSF on 9 May 2010 stocks worldwide surged as fears that the [109] [110] Greek debt crisis would spread subsided, some rose the most in a year or more. The Euro made

its biggest gain in 18 months, before falling to a new four-year low a week later. Shortly after the euro rose again as hedge funds and other short-term traders unwound short positions and carry trades in [113] [114] the currency. Commodity prices also rose following the announcement. The dollar Libor held at a [115] [116] nine-month high. Default swaps also fell. The VIX closed down a record almost 30%, after a record [117] weekly rise the preceding week that prompted the bailout. International credit rating agencies consider that, while the aid package has so far averted a financial [118] panic, eurozone countries such as Portugal may continue to have economic difficulties. [edit]European Financial Stabilisation Mechanism (EFSM) 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 [119] and guaranteed by the European Commission using the budget of the European Union as collateral. It [120] runs under the supervision of the Commission and aims at preserving financial stability in Europe by [121] providing financial assistance to member states of the European Union in economic difficulty. The Commission fund, backed by all 27 European Union members, has the authority to raise up to [122] [123][124] 60 billion and is rated AAA by Fitch, Moody's and Standard & Poor's. Under the EFSM, the EU successfully placed in the capital markets a 5 billion issue of bonds as part of [125] the financial support package agreed for Ireland, at a borrowing cost for the EFSM of 2.59%. Like the EFSF also the EFSM will be replaced by the permanent rescue funding programme ESM, which is due to be launched in mid-2013. [edit]ECB

[111]

[112]

interventions

The European Central Bank (ECB) has taken a series of measures aimed at reducing volatility in the [126] financial markets and at improving liquidity: First, it began open market operations buying government and private debt securities worth 183 [127] billion euros (as of mid November 2011). Second, it announced two 3-month and one 6-month full allotment of Long Term Refinancing Operations (LTRO's). Thirdly, it reactivated the dollar swap lines
[128]

with Federal Reserve support.

[129]

Subsequently, the member banks of the European System of Central Banks started buying government [130] debt. 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 and "[l]eaders in Berlin plan to push for a [131] German successor to Stark as well, news reports said". [edit]Reform

and recovery

See also: Euro Plus Pact

In May 2010 the European Commissioner for Economic and Financial Affairs, Olli Rehn, called for [132] "absolutely necessary" deficit cuts by the heavily indebted countries of Spain and Portugal. 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 [133][134] deficit or the debt rules. Brussels agreement On 26 October 2011, leaders of the 17 Eurozone countries met in Brussels to discuss a package aimed at addressing the crisis. After ten hours of discussions, a package was announced by the President of the European Commission, Jose Manuel Barroso, which proposed 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. He characterised the [135][136] package as a set of "exceptional measures for exceptional times". The deal was welcomed by Greek Prime Minister George Papandreou, who said that "a new day" had [135] come "not only for Greece but also for Europe". French President Nicolas Sarkosy said it represented [137] a "credible, ambitious and comprehensive response" to the debt crisis. Christine Lagarde, head of the International Monetary Fund, said she was "encouraged by the substantial progress made on a [135] number of fronts". Financial markets worldwide responded positively to news of an agreement being [138] reached. Italy's commitments to its Eurozone partners, presented by Silvio Berlusconi in the form of a letter, included reforms to pensions, 15bn in asset sales and liberalisation of employment law. However, Italian opposition leaders objected to these proposals and suggested that Berlusconi's political position was too [139] weak for them to be taken seriously. After fierce pressure from financial markets and European peers, Italy agreed to have experts from the IMF and the European Commission monitor its progress with [140] reforms of pensions, labour markets and privatisation. Commentators suggested that the package agreed in Brussels might not be enough to ensure the long[141][142] term survival of the Euro without additional political integration within the Eurozone. It was also [143] noted that the means by which the overall package would be funded were unclear. 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 [144] bailout, upsetting financial markets. On 3 November 2011 the promised Greek referendum on the bailout package was withdrawn by Prime Minister Papandreou. Progress 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 [145] reformers and Portugal is ranked seventh among 17 countries included in the report. [edit]Eurobonds Main article: Eurobonds

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 hazardand ensure [146][147] sustainable public finances. Germany remains opposed to debt that would be jointly issued and underwritten by all 17 members of the currency bloc, saying it could substantially raise the country's liabilities in the debt crisis. However, a [148] growing field of investors and economists say it would be the best way of solving the debt crisis. Guy Verhofstadt, leader of the liberal ALDE group in the European parliament suggested following a proposal made by the five wise economists from the German Council of Economic Experts, on the creation of a European collective redemption fund. It would mutualise eurozone debt above 60%, [148] combining it with a bold debt reduction scheme for countries not on life support from the EFSF. The introduction of eurobonds matched by tight financial and budgetary coordination may well require [148] changes in EU treaties, which is widely expected to be discussed at the 9 December EU summit. [edit]Proposed

long-term solutions

Problem of remaining current account imbalances Regardless of the corrective measures chosen to solve the current predicament, as long as cross border [149] [150] capital flows remain unregulated in the Euro Area, asset bubbles and current accountimbalances are likely to continue. For example, a country that runs a large current account or trade deficit (i.e., it imports 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 [151] goods. The 2009 trade deficits for Italy, Spain, Greece, and Portugal were estimated to be $42.96 billion, [152] $75.31B and $35.97B, and $25.6B respectively, while Germany's trade surplus was $188.6B. 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 [153][154] deficits, artificially lowering interest rates and creating asset bubbles. 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. To reduce trade imbalances a country could encourage 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 [155] payments. Either way, many of the countries involved in the crisis are on the Euro, so 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 [155] country's citizens saved more instead of consuming imports, this would reduce its trade deficit.

[edit]Common

fiscal policy (European Treasury)

In November 2010, as concerns started to resurface about the fiscal health of Ireland, Greece and Portugal, EU President Herman Van Rompuy said "If we dont survive with the eurozone we will not [156] survive with the European Union." To save the currency EU leaders suggested closer cooperation. In the event European Union leaders made a proposal to establish a single authority responsible for tax policy oversight and government spending coordination of EU member countries, temporarily called [157] the European Treasury. Angel Ubide from the Peterson Institute for International Economics suggested that long term stability in [158] the eurozone requires a common fiscal policy rather than controls on portfolio investment. In exchange for cheaper funding from the EU, Greece and other countries, in addition to having already lost control over monetary policy and foreign exchange policy since the euro came into being, would therefore also lose control over domestic fiscal policy. Strong European Commission oversight in the fields of taxation and budgetary policy and the enforcement mechanisms that go with it infringe the sovereignty of [159] eurozone member states. [edit]European

Stability Mechanism

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 mid2013. On 16 December 2010 the European Council agreed a two line amendment to the EU Lisbon Treaty to [160] allow for a permanent bail-out mechanism to be established 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 [161][162] ESM. According to this treaty, the ESM will be an intergovernmental organisation under public [163][164] international law and will be located in Luxembourg. [edit]European

Monetary Fund

On 20 October 2011, the Austrian Institute of Economic Research published an article that suggests to transform 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 the entire 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 the lack of market pressure, the EMF would operate according to strict rules, providing funds only to countries that meet agreed on fiscal and macroeconomic criteria. Governments that lack sound financial policies would be forced to rely on traditional (national) [165] governmental bonds with less favorable market rates. Since investors would finance governments directly, banks were also no longer able to unduly benefit from intermediary rents by borrowing from the ECB at low rates and investing in government bonds at high rates. Econometric analysis suggests that a stable long-term interest rate of three percent in all eurozone countries would lead to higher nominal GDP growth rates and substantially lower sovereign [165] debt levels by 2015, compared to the baseline scenario with market based interest levels.

[edit]Address

slow economic growth

Private sector bankers and economists warned that the threat from a double dip recession has not faded. Stephen Roach, chairman of Morgan Stanley Asia, warned about this threat saying "When you have a vulnerable post-crisis economic recovery and crises reverberating in the aftermath of that, you have some [166] very serious risks to the global business cycle." Slow GDP growth rates correspond to slower growth in tax revenues and higher safety net spending, increasing deficits and debt levels. Fareed Zakaria described the factors slowing growth in the Euro zone, 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 [167] lower wages and steps to bring in more foreign capital investment. [edit]Euro

breakup

Weak individual countries leaving the Euro The school of economists who are, broadly, adherents of the post-Keynesian school of the Modern [168] Monetary Theory condemned the introduction of the Euro currency from the beginning, on the basis that the Eurozone does not fulfill the necessary criteria for an optimum currency area, though it is moving [145] in that direction. The latter view is supported also by non-Keynesian economists, such as Luca A. [169] Ricci, of the IMF. Others have even declared an urgent need for more radical shift in perspective, "a [170] new science of macroeconomics". As the debt crisis expanded beyond Greece, these economists continued to advocate, albeit more forcefully, the disbandment of the Eurozone. If this is not immediately feasible, they recommended that Greece and the other debtor nations unilaterally leave the Eurozone, default on their debts, regain their [171][172] fiscal sovereignty, and re-adopt national currencies. Two-currencies speculation Bloomberg has suggested that, if the Greek and Irish bailouts should fail, an alternative is for Germany to [173] leave the eurozone in order to save the currency through depreciation instead of austerity. The likely substantial fall in the Euro against the newly reconstituted Deutsche Mark would give a "huge boost" to its [174] members' competitiveness. Also The Wall Street Journal conjectures that Germany could return to the [175] [176] Deutsche Mark, or create another currency union with the Netherlands, Austria, Finland, Luxembourg and other European countries such as Denmark, Norway, Sweden, Switzerland and the [177] Baltics. A monetary union of the mentioned current account surplus countries would create the world's [178] largest creditor bloc that is bigger than China or Japan. The former president of the German Industries, Hans-Olaf Henkel suggested that "southern countries" could retain their competitiveness through a greater tolerance for inflation and corresponding regular devaluations, once they are freed of [179] the "straitjacket of Germanic stability phobia". The Wall Street Journal added that without the German[180] led bloc a residual euro would have the flexibility to keepinterest rates low and engage in quantitative [181] easing or fiscal stimulus in support of a job-targeting economic policy instead of inflation targeting in the current configuration.

In early October 2011, policy expert Philippa Malmgren believed that "the Germans will announce they are re-introducing the Deutschmark" in the coming weeks. As of Mid November 2011, this has not happened. Former Federal Reserve chairman Alan Greenspan was more cautious when he answered the question whether the eurozone will split apart, "If you ask me starting from scratch, would they have been better off having a eurozone which included Germany, Austria, Luxembourg, Finland, the Netherlands, [183] that would have worked." Greenspan later added Switzerland to the list. In September 2011, Joaqun Almunia, an EU commissioner, "lashed out" against the bloc of Germany, Netherlands, Finland, Austria, 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". Also ECB president Jean-Claude Trichet denounced the possibility of a return of the deutsche mark and [185] defended the price stability of the euro. Complete Euro break up via return to European Currency Unit (ECU) Before the Euro was formed, a basket of European currencies called ECU was quoted alongside the national currencies. Financial Times Alphaville analysed a Nomura research, which suggested that Eurozone countries could redefine Euro as the weighted basket of the 17 Euro countries national [186] currencies, which it called ECU-2. [edit]Controversies [edit]Breaking
[184]

[182]

of the EU treaties 'no bail-out clause'

The Maastricht Treaty of EU contains juridical language which appears to rule out intra-EU bailouts. First, the no bail-out 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 purchase of distressed country bonds can be viewed to break the prohibition of monetary financing of budget deficits (Article 123 TFEU). The creation of further leverage inEFSF with access to ECB lending would also appear to break this Article. The Articles 125 and 123 were meant to create disincentive for EU member states to run excessive deficits and state debt, and prevent the moral hazard of over-spend 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 the prudent Eurozone taxpayers to rule-breaking Eurozone countries such as Greece, the [187] EU and Eurozone countries encourage moral hazard also in the future. While the no bail-out clause [188] remains in place, the "no bail-out doctrine" seems to be a thing of the past. [edit]Breaking

of the EU treaties 'convergence criteria'

The EU treaties contain so called convergence criteria. 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. 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. Nevertheless the main crisis states Greece and Italy (status November 2011) have exceeded these criteria execessively over a long period of time. [edit]Doubts

about effectiveness of non-Keynesian policies

There has been some 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 and predict the deflationary policies now being imposed on countries such as Greece and [189] Italy might prolong and deepen their recessions. Nouriel Roubini said the new credit available to the heavily indebted countries did not equate to an immediate revival of economic fortunes: "While money is available now on the table, all this money is conditional on all these countries doing fiscal adjustment and [190] structural reform." Apart from arguments over whether or not austerity, rather than increased or frozen spending, is a [191] macroeconomic solution, 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 2007 2010, while thousands of bankers across the EU have become millionaires despite collapse or nationalization (ultimately paid for by taxpayers) of institutions they worked for during the crisis, a fact that has led many to call for additional regulation of the banking sector across not only Europe, but the entire [192] world. [edit]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 [193] characterized as odious debt. The Greek documentary Debtocracy examines 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. [edit]Controversy

about 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 European Union member states, including Greece and Italy, were able to circumvent these rules and mask their deficit and [11][12] debt levels through the use of complex currency and credit derivatives structures. 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 [11] counterparties. Financial reforms within the U.S. since the financial crisis have only served to reinforce special protections for derivativesincluding greater access to government guaranteeswhile [13] minimizing disclosure to broader financial markets. 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, however there has 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 [194] [195] [196] [197] [198] several countries or have focused on Italy, the United

Kingdom, [211] [212] Germany. [edit]Credit

[199][200] [201] [202] [203] [204] [205] [206]

Spain,

[207]

the United States,

[208] [209] [210]

and even

rating agencies

The international U.S. based credit rating agencies Moody's, Standard & Poor's and Fitch have played [213] [214] [215] a central and controversial role in the current European bond market crisis. As with the housing [216][217] [218][219] bubble and the Icelandic crisis, the ratings agencies have been under fire. The agencies [220] have been accused of giving overly generous ratings due to conflicts of interest. Ratings agencies also have a tendency to act conservatively, and to take some time to adjust when a firm or country is in [221] trouble. In the case of Greece, the market responded to the crisis before the downgrades, with Greek bonds [213] trading at junk levels several weeks before the ratings agencies began to describe them as such. In a response to the downgrading of Greek governmental bonds the ECB announced on 3 May that it will accept as collateral all outstanding and new debt instruments issued or guaranteed by the Greek [222] government, regardless of the nation's credit rating. Government officials have criticized the ratings agencies. Following downgrades of Greece, Spain and Portugal that roiled financial markets, Germany's foreign minister Guido Westerwelle said that traders should not take global rating agencies "too seriously" and called for an "independent" European rating agency, which could avoid the conflicts of interest that he claimed US-based agencies [213][223] faced. 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 [224][225] European financial markets in the future. According to German consultant company Roland Berger, [226] setting up a new ratings agency would cost 300 million and could be operating by 2014. Due to the failures of the ratings agencies, European regulators will be given new powers to supervise [214] ratings agencies. With the creation of the European Supervisory Authority in January 2011 the [227] European Union set up a whole range of new financial regulatory institutions, including the European [228] Securities and Markets Authority (ESMA), which became the EUs single credit-ratings firm [229] regulator. Credit-ratings companies have to comply with the new standards or be denied operation on [230] EU territory, says ESMA Chief Steven Maijoor. But attempts to regulate more strictly credit rating agencies in the wake of the European sovereign debt crisis have been rather unsuccessful. Some European financial law and regulation experts have argued that the hastily drafted, unevenly transposed in national law, and poorly enforced EU rule on rating agencies (Rglement CE 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 [231] arrangements between credit rating agencies and their clients" [edit]Media This section may contain inappropriate or misinterpreted citations that do not verify the text. Please help improve this article by checking for inaccuracies. (help, talk, get involved!) (November 2011) There has been considerable controversy about the role of the English-language press in the regard to [232][233] the bond market crisis. The Spanish Prime Minister Jos Luis Rodrguez Zapatero has suggested [234][235] that the recent financial market crisis in Europe is an attempt to undermine the euro in order that

countries, such as the U.K. and the U.S., can continue to fund their large external deficits research?] [236] [original research?][237] , which are matched by large government deficits. 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 [238][239] [240][241] China. This is not the case in the eurozone which is self funding. Zapatero 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 [242][243][244][245][246][247][248] crisis. No results have so far been reported from this investigation. 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 [249] eurozone by certain other interests, political or financial". [edit]Role

[original

of speculators

Financial speculators and hedge funds engaged in selling euros have also been accused by both the [250][251] Spanish and Greek Prime Ministers of worsening the crisis. German chancellor Merkel has stated [252] that "institutions bailed out with public funds are exploiting the budget crisis in Greece and elsewhere." The role of Goldman Sachs in Greek bond yield increases is also under scrutiny. 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. According to The Wall Street Journal hedge-funds managers already launched a concerted attack on the euro in early 2010. On February 8 the boutique research and brokerage firm Monness, Crespi, Hardt & Co. hosted an exclusive "idea dinner" at a private townhouse in Manhattan, where a small group of hedge-fund managers from SAC Capital Advisors LP, Soros Fund Management LLC, Green Light Capital Inc., Brigade Capital Management LLC and others eventually agreed that Greek government bonds represented the weakest link of the euro and that Greek contagion could soon spread to infect all sovereign debt in the world. Three days later the euro was hit with a wave of selling, triggering a decline [255] that brought the currency below $1.36. On 8 June, exactly four months after the dinner, the Euro hit a [256] four year low at $1.19 before it started to rise again. Traders estimate that bets for and against the [255] euro account for a huge part of the daily three trillion dollar global currency market. In response to accusations that speculators were worsening the problem, some markets banned naked [257] short selling for a few months. [edit]Finland
[253] [254]

collateral

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 [258] potential new 109 billion support package for the Greek economy. 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 [259] their participation in the bailout. 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 [260][261] of a Greek default. 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 [262] raise the required capital with relative ease. 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 [263] [105] vote. However, as of 10 October, Slovakia's government was still deeply split over the issue. On 13 October 2011 Slovakia approved Euro bailout expansion, but the government has been forced to call new elections in exchange. [edit]Political

impact

Handling of the ongoing crisis led to the premature end of a number of European national Governments and impacted the outcome of many elections Finland - April 2011 - The approach to the Portuguese bailout and the EFSF dominated the April 2011 election debate and formation of the subsequent government. Greece - November 2011 - Following widespread criticism of a referendum proposal on austerity and bailout measures, from within his party, the opposition and other EU governments, PM George Papandreou announced plans for his resignation in favour of a national unity government Ireland - November 2010 - In return for its support for the IMF bailout and consequent austerity budget, the junior party in the coalition government, the Green Party set a time-limit on its support for the Cowen Government which set the path to early elections in Feb 2011 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 and his impending resignation was announced by the President. Latvia - February 2009 - Following a severe economic downturn, riots and criticism of the Governments handling of the crisis, PM Ivars Godmanis and his government resigned and there were subsequent changes to the constitutional election process. Portugal - March 2011 - Following the failure of parliament to adopt the government austerity measures, PM Jos Scrates and his government resigned and this led to early elections in June 2011 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 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.

Euro crisis is impacting Indian economy and expected to get worse India Infoline News Service / 08:26 , Nov 17, 2011 The direct impact of the euro crisis is not so great as it might have been once . Fifty per cent of Indian finance professionals feel that the euro crisis is already having an impact on their business while a further 33% say they expect it to. This was the result of the "Treasury Verdict" session taken by a live audience poll of senior treasury and finance professionals at EuroFinance's 9th annual Cash, Treasury and Risk Management conference in India and sponsored by J.P. Morgan Treasury Services. The poll gave the audience a series of choices to the question 'Is the euro crisis having a negative impact on your business?' to which 29% replied yes some impact and 21% yes considerable impact. A further 33% replied not yet but I expect it to, while just 17% said there was "no sign of any impact". Andrew Sawers, EuroFinances editorial director, comments "The direct impact of the euro crisis is not so great as it might have been once because the share of India's exports that goes to Europe has declined over the last decade. But there is also a very real indirect impact arising from negative global sentiment and uncertainty." Sawers added:"The world is looking to Europe to resolve this huge problem." Over 350 senior treasury and finance professionals gathered in Mumbai on 15-16 November to discuss the future of corporate treasury within the context of the current economic uncertainty.

inance Minister Pranab Mukherjee on Monday said the Euro Zone crisis is impacting the country's growth and will

hurt exports in coming months. "The recent development in the euro zone has heightened uncertainty in financial markets. India's short-term growth prospects have been adversely impacted," he said while inaugurating the India International Trade Fair in New Delhi. The minister further said the tendency of certain developed countries to adopt protectionist measures during a downturn would have a bearing on India's exports, which have reported impressive growth so far this year.

India's export sector has performed well this year. I must add that the tendency of some developed countries to
resort to protectionist measures in the face of downturn of their economy is a matter of grave concern, not only to our exports, but also to the recovery of the world as a whole," he said. "If the Euro Zone crisis prolongs, growth in exports will be impacted," he added. Industrial production slipped to a two-year low of 1.9 per cent in September. Overall economic growth in the first quarter of the fiscal stood at 7.7 per cent, the lowest rate experienced in 18 months.

The Reserve Bank of India has already revised its growth projection for 2011-12 downward to 7.6 per cent from 8.5
per cent in the previous fiscal, mainly on account of the global economic slowdown and stubborn domestic inflation. Headline inflation remained near the double-digit mark for the 11th consecutive month in October, registering a rate of 9.73 per cent. With regard to exports, India recorded an increase of 46 per cent in outbound shipments during the April-October period of FY'12.

However, a substantial deceleration was witnessed in October, with the growth rate slipping to 10.8 per cent.
The Euro Zone has been facing sovereign debt problems that could snowball into a major financial crisis. The 27-nation European Union is India's largest trade partner and export market and problems there would have a direct bearing on the country's shipments.

he world over, shoplifters are giving the retail industry a gigantic headache. A $119-billion headache! According to

the Global Retail Theft Barometer for 2011, globally shrinkage rose to $119 billion in 2011, up 6.6 per cent of total sales since the last survey in 2010. 'Shrinkage' or 'shrink' is inventory loss caused by crime or administrative error. It is measured as a percentage of retail sales value. The average shrinkage stands at 1.45 per cent of total sales in 43 countries in 2011, compared to 1.36 per cent in 2010.

Almost 35.9 per cent of retailers globally reported that actual and attempted shoplifting rose last year and 24 per cent suffered higher employee theft. The costs of retail crime-plus-loss prevention were $128 billion in 2011 equivalent to $199.89 per family. ($66.27 per individual). After a dip in shrinkage last year (2009-10), shrinkage has risen in the 12-months ending June 2011 as a result of increased shoplifting, higher employee fraud, and organised retail crime, the Global Retail Theft Barometer for 2011 says.

(Reuters) - The world's major central banks acted jointly on Wednesday to provide cheaper dollar funding to European banks facing a credit crunch as the euro zone's debt crisis drove EU ministers to urge more IMF help to avert financial disaster.
The emergency move by the U.S. Federal Reserve, the European Central Bank, and the central banks of Japan, Britain, Canada and Switzerland recalled coordinated action to stabilise global markets in the 2008 financial crisis after the collapse of Lehman Brothers. In Italy, now the focal point of the euro debt crisis, the Treasury started emergency cash tenders for banks which have been squeezed particularly hard as Rome's borrowing costs have soared towards 8 percent, a level seen as unaffordable in the long term. The euro and European shares surged on the central bank action, which came after euro zone finance ministers agreed to ramp up the firepower of their bailout fund but acknowledged they may have to turn to the International Monetary Fund for more help. In a policy shift by Europe's main paymaster, Finance Minister Wolfgang Schaeuble said Germany was open to increasing the IMF's resources through bilateral loans or more special drawing rights, reversing the stance Berlin took earlier this month at the Cannes G20 summit. The new openness to a bigger IMF role came as Germany presses its EU partners to agree next week on treaty changes to create coercive powers to make euro zone countries change their budgets if they breach EU deficit and debt rules. "The economic and monetary union will either have to be completed through much deeper integration or we will have to accept a gradual disintegration of over half a century of European integration," Economic and Monetary Affairs Commissioner Olli Rehn told the European Parliament. Two years into Europe's debt crisis, investors are fleeing the euro zone bond market, European banks are dumping government debt, south European banks are bleeding deposits and a recession looms, fuelling doubts about the survival of the single currency. Euro zone leaders have agreed belatedly on one half-measure after another but have failed to restore confidence and some analysts now see a December 9 Brussels summit as a make-or-break moment for the euro.

Finance ministers agreed on Tuesday night on detailed plans to leverage the European Financial Stability Mechanism, but could not say by how much because of rapidly worsening market conditions, prompting them to look to the IMF. "We are now looking at a true financial crisis -- that is a broad-based disruption in financial markets," Christian Noyer, France's central bank governor and a governing council member of the European Central Bank, told a conference in Singapore. Italian and Spanish bond yields resumed their inexorable climb towards unsustainable levels on Wednesday, as markets assessed the rescue fund boost as inadequate, but fell back on news of the central banks' joint action. "It must also be remembered that the EFSF is already funding at very wide levels (high borrowing costs) over Germany, struggled in its last auction to raise the required funds and would have its rating put under severe pressure by any rating downgrade of France," Rabobank strategists said in a note. "This must call into question any plans related to the EFSF. It is yesterday's solution and the market has simply moved on." IMF TO MATCH? The 17-nation Eurogroup adopted detailed plans to insure the first 20-30 percent of new bond issues for countries having funding difficulties and to create co-investment funds to attract foreign investors to buy euro zone government bonds. Both schemes would be operational by January with about 250 billion euros from the euro zone's EFSF bailout fund available to leverage after funding a second rescue programme for Greece, Eurogroup chairman Jean-Claude Juncker said. The aim was for the IMF to match and support the new firepower of the EFSF, Juncker told a news conference. But with China and other major sovereign funds cautious about investing more in euro zone debt, EFSF chief Klaus Regling said he did not expect investors to commit major amounts to the leveraging options in the next days or weeks, and he could not put a figure on the final size of the leveraged fund. "It is really not possible to give one number for leveraging because it is a process. We will not give out 100 billion next month, we will need money as we go along," Regling said. Most analysts agree that only more radical measures such as massive intervention by the ECB to buy government bonds directly or indirectly can staunch the crisis. The prospects of drawing the IMF more deeply into supporting the euro zone are uncertain. Several big economies are sceptical of European calls for more resources for the global lender. The United States, Japan and other Asian states are hesitant to chip in unless Europe commits to first use its own resources to fix the problem and peripheral euro zone states map out more concrete steps on fiscal and economic reforms. "Nobody wants to spend money on something they doubt would work," a G20 official said. "That goes not only for Europe but for any other country outside Europe. The threshold for seeking IMF help is quite high. Those seeking help need to be willing to give up some of their jurisdiction on fiscal policy and willing to undergo painful reform. Mere pledges and speeches won't do." MONTI DENIES IMF BID

New Italian Prime Minister Mario Monti said he had received a very positive reaction from the euro zone ministers to his fiscal plans, although he was told to take extra deficit cutting measures beyond an austerity plan already adopted to meet its balanced budget promise in 2013. He also said he had met the head of the IMF's European department on Wednesday but Italy had not considered taking help from the Fund. Reuters reported on Tuesday that Italian and IMF officials have held preliminary discussions on some form of financial support for Rome, although no decision has been taken, according to sources familiar with the talks. Italian bond yields are now above the levels at which Greece, Ireland and Portugal were forced to apply for EU/IMF bailouts, and Rome has a wall of issuance due from late January to roll over maturing debt. The Eurogroup ministers agreed to release their portion of an 8 billion euro aid payment to Greece, the sixth instalment of 110 billion euros of EU/IMF loans agreed last year and necessary to help Athens stave off the immediate threat of default. Juncker said the money would be released by mid-December, once the IMF signs off on its portion early next month. G20 leaders promised this month to boost the global lender's warchest. However, another G20 source said policymakers had made no progress since then in efforts to boost IMF resources, which at current levels may not be sufficient to overcome the crisis. EU sources said one option being explored is for euro system central banks to lend to the IMF so it can in turn lend to Italy and Spain while applying IMF borrowing conditions. With Germany opposed to the idea of the ECB providing liquidity to the EFSF or acting as a lender of last resort, the euro zone needs a way of calming markets and fast. The ECB shows no sign yet of responding to widespread calls to massively increase its bond-buying although EU officials said it may have to shift, even if the EFSF gained IMF help. A Reuters poll of economists showed a 40 percent chance of the ECB stepping up purchases with freshly printed money within six months, something it has opposed so far. The poll forecast a 60 percent chance of an ECB rate cut to 1.0 percent next week and a big majority of economists said they expect the central bank to announce new long-term liquidity tenders to help keep banks afloat at its next meeting on Dec 8. (Additional reporting by Marius Zaharia in London, Erik Kirschbaum in Berlin, Robin Emmott and John O'Donnell in Brussels, Saeed Azhar and Kevin Lim in Singapore; Writing by Paul Taylor/Mike Peacock; Editing by Janet McBride/Ruth Pitchford)

NEW YORK (AP) The tremors from Europe's financial upheaval have reached U.S. shores, rattling consumers and companies. The consequences have been limited so far. Yet the United States and Europe are so closely linked that any slowdown across the Atlantic is felt here. U.S. makers of cars, solar panels, drugs, clothes and computer equipment have all reported effects from Europe's turmoil.

Worries that Europe's crisis could worsen and spread are spooking investors and consumers just as the holiday shopping season nears. Some fear U.S. consumers could rein in spending. Europe's sputtering growth is already dragging on some U.S. companies' profits and could further slow the U.S. economy. The crisis "seems to be coming to a head right at the time the U.S. economy is at its most vulnerable," said Mark Vitner, an economist at Wells Fargo. It's affecting companies like Marlin Steel Wire Products, a 34-employee business based in Baltimore that's been seeking a $4 million contract from a German manufacturer for an industrial steel wire project. Marlin's CEO, Drew Greenblatt, says the German firm is in "pause mode" because of Europe's turmoil. The German company had promised the order by early November. Marlin's overall sales are growing briskly. But sales to Europe have been sinking. "If they were ordering like they customarily do, we would have hired more guys," Greenblatt said. The European Union is the No. 1 U.S. trading partner. Nearly $475 billion in goods crossed between the regions in the first nine months of 2011. About 14 percent of revenue for the 500 biggest U.S. companies roughly $1.3 trillion comes from Europe. The U.S. economy is especially vulnerable to the European crisis because it's growing so weakly and facing other risks, such as weak hiring, stagnant pay, high energy costs, a wide trade deficit and potentially steep government spending cuts. "It won't take much to tip us into another recession," said Sung Won Sohn, an economics professor at California State University, Channel Islands. "If Europe gets into any deeper trouble, it will take us and the rest of the world down, too." The European Union said last week that the region could slip into a "deep and prolonged recession" next year. The Eurozone is expected to grow just 0.5 percent in 2012. That's far below the 1.8 percent growth predicted in the spring. Wells Fargo estimates that the U.S. economy will grow 2.1 percent next year, 0.4 percentage point lower because of Europe's slowdown. Goldman Sachs thinks the region's slowdown could shave a full percentage point off U.S. growth. Even if Europe doesn't fall into a downturn, its turmoil is affecting U.S companies and consumers in several ways: Stock-market gyrations unsettle consumers and make them more cautious about spending. U.S. companies with big European operations are suffering from lower sales, prices and profits.

 Banks worldwide are cutting lending and hoarding cash to create more cushion for potentially deep losses on their holdings of Greek, Italian and other government debt. U.S. and overseas banks are keeping about $1.57 trillion in reserves at the Federal Reserve a jump of nearly $580 billion in the past year. Uncertainty about how much damage Europe could cause is making corporations reluctant to spend their piles of cash to hire and invest. Not every U.S. company is hurting in Europe, of course. McDonald's Corp., Kraft Foods Inc., Sara Lee Corp. and Oracle Corp. recently reported strong results there. But General Motors Co.'s thirdquarter profit fell 15 percent, due mainly to slower sales and higher costs in Europe. "Things have clearly deteriorated," GM Chief Financial Officer Dan Ammann told investors last week. Jeff Fettig, CEO of Whirlpool, said late last month that with demand tumbling in parts of Europe, the company plans to lay off 5,000 workers in North America and Europe. First Solar, based in Phoenix, is postponing plans to finish building a solar panel factory in Vietnam because of a worldwide glut in panels. The glut has been caused by falling demand in Europe, the world's biggest solar market. Falling prices caused by the glut have sent share prices of established solar panel makers such as First Solar and SunPower tumbling. They've also forced some solar companies such as Solyndra into bankruptcy protection. Abercrombie & Fitch Co.'s struggles in Europe caused its share price to plummet. Nike Inc. said its last quarterly revenue rose in every region it operates in except Western Europe. Cisco expects growth in the area to slip about 5 percent during the next three months. "Europe, we think, is going to be a challenge for us for this next quarter," Cisco CEO John Chambers told analysts Wednesday. Smaller businesses are being affected, too. Wine exports are suffering because of poor consumer sentiment in Europe and because a weak euro is making U.S. wine costlier by comparison. The European Union accounts for about 38 percent of U.S. wine industry exports. For banks, the crisis is different, and scarier. They hold debt of European governments and companies that could lose value if the crisis worsens. The big fear is that big U.S. and European banks would become so worried about each other's ability to cover losses that they'd stop lending to each other. The result could be diminished confidence that would freeze lending and shock the global economy.

Last week, Federal Reserve Chairman Ben Bernanke told soldiers and their families in Texas that Europe posed a "significant risk" to the U.S. economy. Europe's troubles have been weighing on U.S. stock markets for months. David Hensley, a global economist at JPMorgan Chase, noted that falling stock prices make consumers feel less wealthy and cause some to cut back on spending. That, in turn, slows U.S. growth. The unease is growing right as the holiday shopping season which accounts for up to 40 percent of retailers' annual sales is about to start. "The retail industry is hyper-sensitive to any sort of national or international crisis that affects consumer confidence," said Brian Dodge of the Retail Leaders Industry Association. "Consumers read the news."

Prevailing corruption in a number of eurozone nations played a role in exacerbating the current regional debt crisis, and continues to hamper any relief efforts, said top international corruption watchdog Transparency International (TI) on Thursday.
The biggest culprits of corruption in the eurozone were Greek and Italian politicians, both of whom were ranked well below their neighbours. On a scale of 0-10, with 0 being highly corrupt and 10 meaning having no corruption at all, Italy received a score of 3.9 while Greece scored 3.4, ranking them 69th and 80th respectively in a 183-nation list of the least corrupt governments in the world. Related: Corruption Perceptions Index Rank and Score Data for All Countries Related: World Corruption Special Report Eurozone countries suffering debt crises, partly because of public authorities failure to tackle the bribery and tax evasion that are key drivers of debt crisis, are among the lowest scoring EU countries, said a statement by the Berlin-based watchdog, as cited by the Financial Times. Robin Hodess, TI's research director, toldAFP that the eurozone crisis "reflects poor financial management, lack of transparency and mismanagement of public funds."

"There is a strong link between poor performance in terms of perceptions of corruption and broader issues around economic governance," she added, noting that when graft is widespread, "people feel the pinch at all levels.
This year we have seen corruption on protesters banners be they rich or poor. Whether in a Europe hit by a debt crisis or an Arab world starting a new political era, leaders must heed the demands for better government, said TIs chairman Huguette Labelle.

According to Public Service Europe, corruption costs European Union member states around 120 billion euros ($161.5 billion) every year. While most associate European corruption with the former communist bloc in Eastern Europe, Western European nations are also suffering from the problem.

PIGS (economics)
From Wikipedia, the free encyclopedia

It has been suggested that this article or section be merged into European sovereign debt crisis. (Discuss) Proposed since November 2011.

PIGS: Portugal, Italy, Greece andSpain PIIGS: with Ireland PIIGGS: with Great Britain

A graph showing the economic data from Portugal, Italy, Ireland, Greece, Spain (PIIGS), Germany, the EU and the Eurozone for 2009. The data is taken from Eurostat.

PIGS (also PIIGS[1]) is an acronym used by international bond analysts, academics, and the economic press that refers to the economies of Portugal, Italy,Greece, and Spain - and sometimes Ireland often in regard to matters relating to sovereign debt markets. Some news and economic organizations have limited or banned use of the term because of criticism regarding perceived offensive connotations.
Contents
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1 History 2 Variations 3 See also 4 References

[edit]History
The term has been used by bank analysts, scholars, bond and currency traders dating back at least to the period of the ERM[2] as a grouping acronym[3]referring to Portugal, Italy, Greece and Spain noted for similar economic environments.[4][5] The term became popularized by the wider media during the European sovereign debt crisis[6][7][8][9][10][11][12] The term was denounced as a pejorative by the Portuguese Finance Minister in 2008.[13] Members of the international economic press continue to use the term.[14][15][16][17][18][19] However, some organisations, notably the Financial Times (FT) and Barclays Capital, have restricted or banned[20] the term.[21]

[edit]Variations
With the onset of the Financial crisis of 20072010 several variations appeared.[22] When rendered as PIIGS[23][24] some commentators added the additional I for comparative purposes to include Ireland from the 20082010 Irish financial crisis, with alternatively the I which originally referred to Italy occasionally becoming an interchangeable reference to Ireland[25] by some during this period. And GIIPS has also been for the same grouping.[26] A variant with three Is, PIIIGS also has been used, where the three i's represent Italy, Ireland, and Iceland.[27] Additional permutations gained prominence during the 2009 United Kingdom bank rescue package period and into the 2010 European sovereign debt crisis as some commentators used numerous variations such as PIIGGS[28][29] which includes Great Britain for assorted political, economic, or social reportage andeditorial commentary.[30][31][32]

The European sovereign debt crisis continues to rattle global markets as uncertainty over austerity measures and a proposed bailout have people questioning whether the Eurozone will be able to survive more financial trauma.

UPDATE: Interesting reading for you readers is this assembly of references on our site: http://www.asymptotix.eu/news/european-sovereign-and-banking-crisis-asymptotix-references

At the center of concerns are the "PIIGS" nations - Portugal, Italy, Ireland Greece and Spain - heavily indebted countries in danger of default that could trigger an economic domino effect around the globe. In an April 2010 report, the Swiss-based Bank for International Settlements (BIS), a clearinghouse for worlds central banks - reviews central bank data and reveals the countries that are the most exposed to European turmoil, specifically in their banking systems. The numbers presented here take into account foreign claims investments in the form of loans and bonds that have arisen from PIIGS nations that are held by international banks headquartered outside the individual countries. If a government defaults on debt, it could carry catastrophic consequences for the country's economy, with the potential to seriously devalue - or potentially wipe out - these assets. For the context of this report, CNBC.com has compared the exposure of countries to the size of their respective financial systems for a percentage of total direct exposure. The exposure numbers only include data from international banks, and does not account for insurance companies or other financial firms.

Notes: Countries are listed in order of exposure, but are not presented in rank order as the BIS does not provide a completely comprehensive list of countries. The numbers also do not include any insurance taken out against these market bets. The banking systems of Canada, Chile, Panama and Mexico are included in the report, but are omitted here as they have near-zero exposure. Assets in BIS data include only those held by international commercial banks headquartered in various countries. When banking sector information is taking from the EU, it includes domestic banking groups and stand-alone banks, all institutions, total assets [full sample], outstanding amounts at the end of the period (stocks), all currencies combined.

The PIGS external debt problem

Ricardo Cabral 8 May 2010
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Markets are increasingly concerned that the Greek debt crisis could spread to other Eurozone countries including Portugal, Ireland, and Spain. This column notes that much of these countries' debt is held by non-residents meaning that the governments do not receive tax revenue on the interest paid, nor does the interest payment itself remain in the country. The solution lies with debt restructuring and rescheduling. Financial markets are focused on the public finances of Portugal, Ireland, Greece, and Spain (the PIGS). The PIGS public profligacy is partly to blame for their current plight, but other factors are at play. Amid the hype, little attention is paid to the crucial difference between these nations public debt and their external debt.

Debt held by a nations own citizens has less pernicious consequences (Scott 2010) the interest paid is returned to the domestic economy. External debt, if used to finance non-productive expenditure, is a different matter. Nonresidents receive the interest on such debt, making the nation poorer with every interest payment.

Table 1. Government debt, external debt, and Internal Investment Position at year-end 2009

Notes to Table 1: (a) IIP and net external data for Ireland excludes Ireland's International Financial Service Center assets and liabilities; (b) General Government Gross debt and balance, as defined in the updates to Stability and Growth Programme. For remaining variables, IMF IIP and External debt manuals definitions are used; (c) Net external debt data is calculated by adding external debt-like securities liabilities by sector and subtracting asset claims on debt-like securities by sector. It excludes direct investment claims, financial derivatives claims, and reserves; (d) Proxy for non-government net external debt. Monetary Authority is included in this category to account for varying degrees of central bank lending to the domestic banking systems of the countries in the Table.

The facts: Internal versus external debt burdens

The PIGSs problem is that a significant share of their debt is external (see Table 1).

Greece, for example, has approximately 79% of government gross debt held by non-residents and has net international investment position of -82.2% of GDP. Interest payments on public debt represented nearly 40% of Greeces already large 2009 budget deficit and this is set to

increase. Italy, by contrast, does not face the same challenge. Italys public debt reached 115% of GDP at the end of 2009, but Italys net international investment position were just about -19% of GDP. So, much of Italys interest burden is paid to Italians, and some of it is paid back to the government as taxes. As a result, Italys public debt dynamics are better than those of the PIGS.

The flip side of the PIGS external interest payments is income and thus tax receipts in the lending nations. The governments of Germany, France, and of other creditor nations earn tax revenues on the PIGS interest payments, as taxes on interest-income are typically paid according to the country of residence of the lender. In fact, external indebtedness is key to understanding the current crisis. Portugal, Ireland, and Spain have similar external debt dynamics to that of Greece. Despite netting out debt-like assets held by residents abroad, the PIGS average net external debt-to-GDP ratio, is approximately 30 percentage points higher than the average gross external debt-to-GNP ratio observed in the emerging market external debt crises of Table 2. Table 2. Government debt, external debt for selected past external debt crises

Notes to Table 2: (a) Reinhart et al (2003) define a "credit event" as "a default or restructuring of the country's external debt". Here, it is considered that Southeast Asia countries experienced an adverse credit event in 1997, given corporate debt defaults and restructuring, even though sovereign defaults were averted through IMF bailouts; (b) Data is for Gross external debt to GDP in the case of Colombia, India, Indonesia, Korea, Malaysia, Philippines (1997), and Thailand. See Reinhart et al (2003) for further table notes. Table 3. The PIGS combined current account, trade, and income balances

The PIGS combined income balance has deteriorated in recent years (Table 3). In order to reduce the net external debt-to-GDP ratio, the PIGS would need to increase net exports substantially while maintaining reasonable nominal GDP growth rates. In sum, the PIGS face challenging external debt dynamics as a result of the leakage of interest income abroad and interest compounding (Cabral 2009).

Greeces bailout
The EU, jointly with the IMF, is about to finance Greeces public debt while Greek officials are required to bring its budget into order, under close European Commission and IMF supervision. The rescue package is conditional on Greeces government implementing a strict budget austerity programme (Corsetti and James 2010; Eichengreen 2010). A byproduct of the ensuing restrictive budgetary policy should be falling domestic wages and prices, which, it is argued, would help restore Greeces external competitiveness. Alcidi and Gros (2010) point that large fiscal adjustments have been achieved in the past by different European countries. However, there are doubts whether even under a serious austerity programme Greece will be able to stabilise the public debt (Wyplosz 2010). Though some argue debt restructuring would be necessary (Boone and Johnson 2010; Roubini and Das 2010), the president of the European Council has suggested that public debt restructuring will not be considered and the president of the European Central Bank has stated that a default on public debt is out of the question. However, the issue with not restructuring debt is that Greeces external indebtedness will continue to rise and to sap domestic economic activity through the interest income leakage effect identified above. Moreover, the austerity programme will likely depress nominal GDP growth, resulting in worsening external debt dynamics. Finally, the potential for contagion effects to Portugal, Ireland, and Spain remains large (Eichengreen 2007, De Grauwe 2009, Reinhart 2010, Wyplosz 2010).

A solution for the PIGS debt crisis

Past precedents (Table 2) and the size of the required current-account adjustment (Table 3) suggest that the PIGS too will be unable to significantly reduce their external debt, regardless of the austerity of their budgetary policy. The PIGS high external indebtedness is detrimental to these nations public debt dynamics, through the interest income and tax revenue leakage effects identified above. For these reasons, it is probably a good idea to allow bygones to be bygones some form of external debt restructuring is required. Further, the current PIGS crisis is not a one-time event. The intra-Eurozone current account deficits and external debt buildups will reoccur. They require an enduring solution. A significant part of the PIGS net external liabilities is private (Table 1). In market economies, excessive levels of private sector debt are often resolved through bankruptcy or bank resolution. Therefore, a solution should seek to support the restructuring of private sector debt, for example, through Chapter 11-type bankruptcy procedures and a new US-type European bank resolution

authority (Strauss-Kahn, 2010, Nguyen and Praet 2010). These instruments would force creditors and debtors that took excessive risks to bear losses. The restructuring of the PIGS private sector debt would reduce these nations external indebtedness (Cabral 2009). A solution ought also to address the high levels of (external) public debt. There are no good options available in this instance. Outright debt forgiveness by the governments of Eurozone creditor nations does not seem advisable, given the creditor nations high public debt levels and the moral hazard problems for debt holders and issuers. Public debt restructuring and debt rescheduling seems preferable since it should have an immediate effect on the PIGS interest income leakage abroad and on the external debt dynamics. While not ideal, it offers a better approach to reducing moral hazard. Creditors would suffer losses and debtor nations would face higher interest rates for any new debt issuance. Finally, debt restructuring would send the right signals to credit markets, and set an important precedent for any future debt crisis in the Eurozone.