Literature Review - shortly

1. 1 Literature Review
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European Sovereign Debt Crisis and Its Connection to Global Financial Crisis;
Difference between US Financial Crisis and EU Sovereign Debt Crisis
What is the connections between sovereign debt crisis and banking crisis?
First, financial stability and second monetary stability. Moreover, it is one of
the basic functions of modern central banks. On the background of the recent
financial turmoil, financial stability becoming a priority for many central banks.
The interconnections established between government and banking sectors
largely put their mark on overall financial stability on the other hand these two
sectors are in close interdependence. First, financial soundness of sovereigns is one of
the conditions necessary for ensuring the normal and efficient functioning of the
financial/banking system. Second, a sound financial system is vital for the fiscal
health of sovereigns pointed out Roman and Bilan (2012, p. 765).
Research paper from S. Apak and E. Atay (2012, p. 567) examines internet
banking in the context of the banking sector which has a great importance due to its
big effect on the economy of the EU and Balkan countries. In their study investigated
the potential risk of the Sub-Prime banking crisis into a sovereign debt one in Euro
area countries. Results show that we should expect that the impact of internet banks
may not be strong enough to affect the banking system as a whole. Nevertheless,
internet banks certainly contribute to increase transparency on specific products, like
current accounts, allowing for comparisons among banks that were previously more
difficult.
Roman and Bilan (2012, p. 766) describe that before 2010 the transfer of risk
occurred from the financial to government sector, on the one hand as the public debt
of many European countries rose both as the result of the automatic stabilizers on the
other hand the discretionary reactions of public authorities to the economic
downturn materialized in lower taxes and higher public expenditures. Financial
support granted to banks in distress is presented in Figure 1.

2. 2 Literature Review
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Figure 1 The vicious cycle of sovereign debt crises and banking crises.
Source: According to the Roman and Bilan (2012, p. 766)
First, the downward spiral continued, second a significant risk of disruptions
in the activity of credit institutions incurred. As a result of these factors although at
early stages a public finances crisis, the sovereign debt crisis was likely to turn into a
banking crisis, implicitly a funding crisis of the economy due to credit rationing . It
means not only the financial sector would suffer, but rather the real sector, as a result
of the reduced access to bank loans and on the other hand increasing costs of
financing. That may resulted even trigger a vicious cycle, amplifying the economic
recession and leading to higher budget deficits and further debt increases presented
by Roman and Bilan (2012, p. 766).

3. 3 Literature Review
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The Eurozone Financial Crisis
The European Union (EU) undertook large scale measures setting up a
financial stability plan totalling 750 billion euros in the form of loans and equities.
More to the point, the eurozone is able to support any member state in serious
financing difficulties pointed out T. M. Ali (2012, p. 425).
The important role play the International Monetary Fund (IMF) and European
Central Bank (ECB) to support economies by purchasing public and private debts
accumulated by the eurozone. Viewed on this light, the countries in crisis must
continuously prove their solvency by credibly reorganizing their finances and by
initiating reforms conducive to economic growth. In other words, the current
eurozone crisis is a public debt crisis. As you can see in Table 1, results show that all
PIIGS countries, France and Germany have exceeded the budgetary limit of 3%
deficit in 2009-2012. Deficit of Portugal decresead from 2009 to 2012 by -3,8%. Italy
had improved their deficit about -2,5% in 2012. The most improvement we see in
country of Ireland and Greece. More to the point, Ireland decreased their deficit from
2010 to 2012 by -22,4% and Greece declined by -6,7% from 2009 to 2012.
Table 1: General Government Deficit/Surplus1 (% of GDP)
Country 2009 2010 2011 2012
Portugal -10.2 -9.8 -4.3 -6.4
Italy -5.5 -4.5 -3.8 -3.0
Ireland -13.7 -30.6 -13.1 -8.2
Greece -15.7 -10.7 -9.5 -9.0
Spain -11.1 -9.6 -9.6 -10.6
France -7.5 -7.1 -5.3 -4.8
Germany -3.1 -4.2 -0.8 0.1
Eurozone (17) -6.4 -6.2 -4.2 -3.7
EU (28) -6.9 -6.5 -4.4 -3.9
Source: Author´s according to data from Eurostat, 06.11.2013
1 Public deficit/surplus is defined in the Maastricht Treaty as general government net
borrowing/lending according to the European System of Accounts (ESA95). The general government
sector comprises central government, state government, local government, and social security funds.