What is the Eurozone Debt Crisis?
This is also known as Eurozone sovereign debt crisis
The term indicates the financial woes caused due to
overspending by come European countries
When a nation lives beyond its means by borrowing heavily
and spending freely, there comes a point when it cannot
manage its financial situation.
When that country faces insolvency. (Insolvency: when it is
unable to repay its debts and lenders start demanding higher
interest rates, the cornered nation begins to get swallowed up
by what is known as the Sovereign Debt Crisis
What are the causes of a debt crisis?
What causes a debt crisis to occur are a stopped or
slowed economic growth, declined tax revenues,
increased government spending, or a combination
of the factors.
The Eurozone debt crisis seems to surround Greece the
The actual beginning is how the European Union (EU)
began in 1993 where 27 European nations "agreed to
form an alliance that could compete economically with
larger nations such as the US". This is what created the
currency of the euro.
The euro's value has decreased over the past few years
due to the European Debt Crisis.
The EDC began in 2008 with the crash of Iceland’s
banking system, which spread to Greece.
Greece had experienced corruption and spending as its
government continued borrowing money despite not
being able to produce sufficient income through work
It was admitted that Greece's debts had reached 300bn
euros, the highest in modern history
Spain, Portugal, and the other nations later followed
affected in the
Crisis are as
Unemployment. Oct 2011: 9.8%
S&P Rating: AAA
Unemployment. Oct 2011: 5.5%
S&P Rating: AAA
Unemployment. July 2011: 18.3%
S&P Rating: CC
Unemployment. Oct 2011: 8.5%
S&P Rating: A
Unemployment. Oct 2011: 12.9%
S&P Rating: BBB-
Unemployment. Oct 2011: 22.8%
S&P Rating: AA
In the first quarter of 2010 Portugal had one of the best
rates of economic recovery in the EU. The country
matched or even surpassed its neighbors in Western
A report was released that the Portuguese government
public debt has increased due to mismanaged structural
and cohesion funds which then resulted to the verge of
bankruptcy of the country.
Bonuses and wages of head officers also resulted to their
May 16 2011- Eurozone leaders officially approved a €78
billion bailout package for Portugal, which became the
third Eurozone country, after Ireland and Greece, to
receive emergency funds.
According to the Portuguese finance minister, the average
interest rate on the bailout loan is expected to be 5.1
As part of the deal, the country agreed to cut its budget
deficit from 9.8 percent of GDP in 2010 to 5.9 percent in
2011, 4.5 percent in 2012 and 3 percent in 2013.
The Portuguese government also agreed to eliminate its
golden share in Portugal Telecom to pave the way for
July 6 2011- Rating’s agency Moody had cut Portugal’s
credit rating to junk status
December 2011- it was reported that Portugal's
estimated budget deficit of 4.5 percent in 2011 will be
substantially lower than expected, due to a one-off
transfer of pension funds. This way the country will
meet its 2012 target already a year earlier.
The country's public debt relative to GDP in 2010 was
Spain's public debt was approximately U.S. $820 billion
As one of the largest euro zone economies the condition
of Spain's economy is of particular concern to
international observers, and faced pressure from the
United States, the IMF, other European countries and
the European Commission to cut its deficit more
May 2010- Spain announces the new austerity measures
designed to further reduce the country's budget deficit, in
order to signal financial markets that it was safe to invest in the
Spain succeeded in minimizing its deficit from 11.2% of GDP
in 2009 to 9.2% in 2010 and around 6% in 2011
To build up additional trust in the financial markets, the
government amended the Spanish Constitution in 2011 to
require a balanced budget at both the national and regional
level by 2020.
The amendment states that public debt cannot exceed 60% of
GDP, though exceptions would be made in case of a natural
catastrophe, economic recession or other emergencies.
• October 4 2009-With the new president, Papandreou
• November 5 2009-Greece reveals that their budget deficit is
1207 percent of GDP
December 8 2009- Greece's long-term debt to BBB+, from
March 3 2010- Greece tries to persuade the financial market
that they can repay their debts
April 23 2010- Papandreou asks help from International
Monetary Fund after Greece is priced out of the
international bond markets.
May 2 2010- European finance ministers lend €110bn which
covers until 2013. Greece pledges to bring its budget deficit
into line, through unprecedented budget cuts.
April 17 2011- Greek borrowing costs start rising sharply
again, on fears that its austerity measures are failing to
work. Greece is now deep in recession.
June 19 2011- Admits that they need to borrow money
June 29, 2011- EU leaders agree on €109bn bailout –
which will see private sector lenders take haircuts of 20% –
and extension to the European Financial Stability Facility
October 27 2011- Europe leaders agree new deals that slash
Greek debt and increase the firepower of the main bailout
fund to around €1 trillion.
November 6 2011- Prime Minister resigns
Impact on the local economy
The Eurozone debt crisis impacted market sentiment.
The country’s economic condition will remain sound—able
to withstand the effects of the lingering debt crisis in
Europe and uncertainties in the United States
―2012 will be a tough one, with reduced global growth
outlook due to global uncertainties.‖
Trouble abroad curbed the country’s economic growth last
year and dampened the market. The debt crisis in the euro
zone rattled investors and heightened demand for safe
haven and assets such as US dollars and bonds.
Emergency loans have been extended as bailouts
mainly by stronger economies like France and
Germany, as also by the IMF.
The EU member states have also created the European
Financial Stability Facility (EFSF) to provide
Restructuring of the debt
Austerity measures have been enforced.
The recession began in the United States in December 2007 and became
international in September 2008 and is still ongoing.
US mortgage-backed securities, which had risks that were hard to assess,
were marketed around the world.
A more broad based credit boom fed a global speculative ripple in real
estate and equities, which served to reinforce the risky lending practices.
The bad financial situation was made more difficult by a sharp increase
in oil and food prices.
The emergence of sub-prime loan losses in 2007 began the crisis and
exposed other risky loans and over-inflated asset prices.
With loan losses mounting and the fall of Lehman Brothers on September
15, 2008, a major panic broke out on the inter-bank loan market.
As share and housing prices declined, many large and well
established investment and commercial banks in the United
States and Europe suffered huge losses and even faced
bankruptcy, resulting in massive public financial assistance.
A global recession has resulted in a sharp drop
in international trade, rising unemployment and slumping
HOUSE PRICE CHANGE
Housing prices were relatively stable during the 1990s, but they began to
rise toward the end of the decade.
Between January 2002 and mid-year 2006, housing prices increased by a
whopping 87 percent.
The boom had turned to a bust, and the housing price declines continued
throughout 2007 and 2008.
By the third quarter of 2008, housing prices were approximately 25
percent below their 2006 peak.
THE DEFAULT RATE
The default rate fluctuated, within a narrow range, around 2 percent
prior to 2006.
It increased only slightly during the recessions of 1982, 1990, and
The rate began increasing sharply during the second half of 2006
It reached 5.2 percent during the third quarter of 2008.
STOCK MARKET RETURNS
As of mid-December of 2008, stock returns were down by 37
percent since the beginning of the year.
This is nearly twice the magnitude of any year since 1950.
This collapse eroded the wealth and endangered the retirement
savings of many
Imprudent Mortgage Lending
Against a backdrop of abundant credit, low interest rates,
and rising house prices, lending standards were relaxed to the
point that many people were able to buy houses they couldn’t
afford. When prices began to fall and loans started going bad,
there was a severe shock to the financial system.
With its easy money policies, the Federal Reserve allowed
housing prices to rise to unsustainable levels. The crisis was
triggered by the bubble bursting, as it was bound to do.
Global financial flows have been characterized in recent years by
Mortgage loans that were not securitized.
Lack of Transparency and Accountability in Mortgage
Shadow Banking System
Risky financial activities confined to regulated banks (use
of leverage, borrowing short-term to lend long, etc.) migrated
outside the explicit government safety net provided by deposit
insurance and safety and soundness regulation. Mortgage lending,
Effect on the U.S
In the U.S., persistent high unemployment remains as of December 2012,
along with low consumer confidence, the continuing decline in home values
and increase in foreclosures and personal bankruptcies, an increasing federal
debt, inflation, and rising petroleum and food prices.
Real gross domestic product (GDP) began contracting in the third quarter
of 2008 and did not return to growth until Q1 2010. It is projected that
GDP would not return to its potential level until 2017.
The unemployment rate rose from 5% in 2008 pre-crisis to 10% by late
2009, then steadily declined to 7.6% by March 2013.
Residential private investment (mainly housing) fell from its 2006 precrisis peak of $800 billion, to $400 billion by mid-2009 and has remained
depressed at that level.
Housing prices fell approximately 30% on average from their
mid-2006 peak to mid-2009 and remained at approximately
that level as of March 2013.
Stock market prices fell 57% from their October 2007.Stock
prices returned to record levels by April 2013.
U.S. total national debt rose from 66% GDP in 2008 precrisis to over 103% by the end of 2012.
PROJECTION FOR FUTURE
Absent legislative action, large spending cuts and large tax
increases will hit the economy at the same time, causing a total
fiscal contraction of $500 billion, or about 3.2 percent of GDP.
This will result in the ―double whammy‖ effect.
Washington’s failure to address the pending fiscal cliff is already
having an impact, cutting 0.6 percentage points from GDP growth
The worst could be ahead. If the fiscal contraction happens, the
economy will almost certainly experience a recession in 2013 and
significantly slower growth through 2014.
From 2012 to 2015, the economy will lose 12.8 percent of the
average annual real GDP it could have attained with moderate
growth, sapping critical resources from all economic sectors.
Job losses will be dramatic. By 2014, the fiscal contraction
will result in almost 6 million jobs lost, and the
unemployment rate could reach more than 11 percent.
Households will take a big hit. Real personal disposable
income will drop almost 10 percent by 2015.
Manufacturers of consumer goods and defense contractors
likely will see large and durable contractions in their
It will take most of the decade for economic activity and
employment levels to recover from the fiscal shock. Another
recession could deal a substantial blow to long-term
economic potential, permanently reducing living standards in
the United States.