The Global Financial Crisis: Eurozone Debt, European Central Bank, Global Economy (2011)

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• published: 25 Feb 2015
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The European debt crisis (often also referred to as the Eurozone crisis or the European sovereign debt crisis) is an ongoing multi-year long debt crisis taking place in a handful of eurozone member states since end of 2009. These states were unable to repay or refinance their government debt or to bail-out over-indebted banks under their national supervision without the assistance of third parties like the EFSF, the ECB, or the IMF. The European debt crisis erupted in the wake of the Great Recession around late 2009, and was characterized by an environment of overly high government structural deficits and accelerating debt levels. The states getting adversely hit by the crisis, faced a strong rise of interest rate spreads for government bonds, as a result of investor concerns about their future debt sustainability, to the extent that four eurozone states needed to be rescued by sovereign bailout programs, delivered jointly by the International Monetary Fund and European Commission - with additional support at the technical level by the European Central Bank. Together these three international organisations representing the bailout creditors, became nicknamed "the Troika". In 1992, members of the European Union signed the Maastricht Treaty, under which they pledged to limit their deficit spending and debt levels. However, in the early 2000s, some EU member states were failing to stay within the confines of the Maastricht criteria and turned to securitising future government revenues to reduce their debts and/or deficits, sidestepping best practice and ignoring international standards.[3] This allowed the sovereigns to mask their deficit and debt levels through a combination of techniques, including inconsistent accounting, off-balance-sheet transactions, and the use of complex currency and credit derivatives structures.[3] From late 2009 on, after Greece's new elected government stopped masking its true indebtness and budget deficit, fears of sovereign defaults in certain European states developed in the public. This led to a wave of downgrading the government debts of these states. The detailed causes for running unsustainable budget deficits and debt levels varied by crisis country. In several countries, private debts arising from a property bubble were transferred to sovereign debt as a result of banking system bailouts and government responses to slowing economies post-bubble. In Greece, high public sector wage and pension commitments were connected to the debt increase.[4] The structure of the eurozone as a currency union (i.e., one currency) without fiscal union (e.g., different tax and public pension rules) contributed to the crisis and harmed the ability of European leaders to respond.[5][6] European banks own a significant amount of sovereign debt, such that concerns regarding the solvency of banking systems or sovereigns are negatively reinforcing.[7] Concerns intensified in early 2010 and thereafter,[8][9] leading European nations to implement a series of financial support measures such as the European Financial Stability Facility (EFSF) and European Stability Mechanism (ESM). When the relatively fragile banking sector, as a negative repercussion of the Great Recession had suffered big capital losses, most states in Europe had to bailout several of their worst hit banks with some supporting recapitalization loans, because of the strong linkage between their survival and the financial stability of the economy. As of January 2009, a group of 10 central and eastern European banks had already asked for a bailout.[10] At the time, the European Commission released a forecast of a 1.8% decline in EU economic output for 2009, making the outlook for the banks even worse.[10][11] The many public funded bank recapitalizations, were one of the main reasons behind the sharply deteriorated debt-to-GDP ratios experienced by several European governments in the wake of the Great Recession, but can not solely be blamed for having caused eruption of the subsequently experienced sovereign debt-crisis - which only erupted in a limited number of European states. The main root causes for the four sovereign debt crisis erupting in Europe, were reportedly a mix of: Weak actual and potential growth; competitive weakness; liquidation of banks and sovereigns; large pre-existing debt-to-GDP ratios; and considerable liability stocks (government, private, and non-private sector). http://en.wikipedia.org/wiki/European_debt_crisis