European Debt Crisis

Topics: European Union, Public finance, Government debt Pages: 24 (7610 words) Published: April 3, 2011

Europe's debt crisis is a continuation of the global financial crisis and also the result of how Europe attempted to solve the global financial crisis that brought an end to a decade of prosperity and unrestricted debt. European attempts at defending itself against a deep recession, has now created a new crisis of unsustainable and un-serviceable sovereign debt. In early 2010 fears of a sovereign debt crisis, the 2010 Euro Crisis developed concerning some European states including European Union members Portugal, Ireland, Italy, Greece,  Spain,(affectionately known as the PIIGS) and Belgium. This led to a crisis of confidence as well as the widening of bond yield spreads and risk insurance on credit default swaps between these countries and other EU members, most importantly Germany. Concern about rising government deficits and debt levels across the globe together with a wave of downgrading of European government debt has created alarm in financial markets. The debt crisis has been mostly centred on recent events in Greece, where there is concern about the rising cost of financing government debt. On 2 May 2010, the Euro zone countries and the International Monetary Fund agreed to a €110 billion loan for Greece, conditional on the implementation of harsh Greek austerity measures. On 9 May 2010, Europe's Finance Ministers approved a comprehensive rescue package worth almost a trillion dollars aimed at ensuring financial stability across Europe by creating the European Financial Stability Facility.

Much of this can be attributed to stimulus packages passed by European governments in order to halt the effects of the economic crisis, especially in preventing massive layoffs. Europe's heavyweights spent massively on stimulation packages. However such attempts at defending themselves against a deep recession, has now created a sovereign debt crisis. Sovereign debt is the money governments borrow and promise to pay back over a number of years. This gives a government access to large funds instantly, which it repays in instalments over a number of years. As a government guarantee's the debt, this type of debt is considered the most secure. This is why US treasury bonds are thought to be the most secure investment globally as the US government itself underwrites them.

Over the past decade, Greece borrowed heavily in international capital markets to fund government budget and current account deficits. The profligacy of the government, weak revenue collection, and structural rigidities in Greece’s economy are typically cited as major factors behind Greece’s accumulation of debt. Access to capital at low interest rates after adopting the euro and weak enforcement of EU rules concerning debt and deficit ceilings may also have played a role.

Greece is currently facing a classic sovereign debt crisis. Greece accumulated high levels of debt during the decade before the crisis, when capital markets were highly liquid. As the crisis has unfolded, and capital markets have become more illiquid, Greece may no longer be able to roll over its maturing debt obligations. Some analysts have discussed the possibility of a Greek default. To avoid such a default, however, the Greek government has introduced a variety of austerity measures and, on April 23, 2010, formally requested financial assistance from the other 15 European Union (EU) member states that use the euro as their national currency (the Euro zone) and the International Monetary Fund (IMF).

Greece’s debt crisis has raised a host of questions about the merits of the euro and the prospects for future European integration, with some calling for more integration and others less. Some have also pointed to possible problems associated with a common monetary policy but diverse national fiscal policies. Finally, Greece’s debt crisis has implications for the United States. The United States and the EU have exceptionally strong economic ties, and a crisis in Greece that...
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