European sovereign debt crisis

From Wikipedia, the free encyclopedia

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]

vde

From late 2009, fears of a sovereign debt crisis developed among investorsconcerning some European states, intensifying in early 2010 and thereafter.[1][2]. On the side of the excessively borrowing states the governments have had problems to finance further budget deficits and service existing high debt levels. This included Eurozone members Greece, Ireland, Italy, Spain and Portugal, and also some non-Eurozone European Union (EU) countries. 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 default swapsbetween these countries and other EU members, most importantly Germany.[3][4] While the sovereign debt increases have been most pronounced in only a few eurozone countries, they have become a perceived problem for the area as a whole.[5] Concern about rising government debt levels across the globe together with a wave of downgrading of European government debt created alarm in financial markets. On 9 May 2010, Europe's Finance Ministers approved a rescue package worth 750 billion aimed at ensuring financial stability across Europe by creating the European Financial Stability Facility(EFSF).[6] 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 stable, [7] trading even slightly higher against the Euro bloc's major trading partners than at the beginning of the crisis. [8][9] The

three most affected countries, Greece, Ireland and Portugal, collectively account for six percent of eurozone'sgross domestic product (GDP).[10]
Contents
[hide]

1 Eurozone sovereign debt concerns

o o o

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

o o o

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

o o o o o

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

o o o o o o o o o

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 use of complex currency and credit derivatives structures.[11][12] 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 counterparties.[11] Financial reforms within the U.S. since the financial crisis have only served to reinforce special protections for derivativesincluding greater access to government guaranteeswhile minimizing disclosure to broader financial markets.[13] 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 and elsewhere".[14][15][16][17][18] Although some financial institutions clearly profited from the growing Greek government debt in the short run,[19] 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 financed primarily by German and French banks.[clarification needed][20]

[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 banks that were earning substantial sums underwriting the bonds.[21]

[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 highinterest loans) be activated.[22] The IMF had said it was "prepared to move expeditiously on this request". The initial size of the loan package was45 billion ($61 billion) and its first installment covered 8.5 billion of Greek bonds that became due for repayment.[23] On 27 April 2010, Standard & Poor's slashed Greece's sovereign debt rating to BB+ or "junk" status amid fears of default.[24][25] The yield of the Greek two-year bond reached 15.3% in the secondary market.[26] Standard & Poor's estimates that, in the event of default, investors would lose 3050% of their money.[24] Stock markets worldwide and the Euro currency declined in response to this announcement.[27]

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.[28] The proposal helped persuade Germany, the last remaining holdout, to sign on to a larger, 110 billion euro EU/IMF loan package over three years for Greece (retaining a relatively high interest of 5% for the main part of the loans, provided by the EU).[29] On 5 May, a national strike was held in opposition to the planned spending cuts and tax increases. Protest on that datewas widespread and turned violent in Athens, killing three people.[29] On 2 May 2010, the Eurozone countries and the International Monetary Fund agreed to a110 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 even harder, and indications signal a recession harsher than originally feared.[30] 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 to repay adequately due to their low growth rate, high deficit, less FDI, etc.[31] In May 2011, Greek public debt gained prominence as a matter of concern.[32] 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 mid-July.[33] 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 measures.[34] 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 MinisterGeorge Papandreou proposed a re-shuffled cabinet, and asked for a vote of confidence in the parliament.[35][36] The crisis sent ripples around the world, with major stock exchanges exhibiting losses.[37] 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 6.4%.[citation needed] 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 eurozone and reintroduce its national currency the drachma at a debased rate.[38][39] Economists who favor this approach to solve the Greek debt crisis typically argue that a delay in organising an orderly default would wind up hurting EU lenders and neighboring European countries even more.[40] In the early hours of 27 October 2011, Eurozone leaders and the IMF came to an agreement with banks to accept a 50% write-off of (some part of) Greek debt,[41][42][43] the equivalent of 100 billion.[41] The aim of the haircut is to reduce Greece's debt to 120% of GDP by 2020.[41][44][45]

[edit]Spread

beyond Greece

Public debt as a percent of GDP (2010).

The government surplus or deficit of Portugal, Italy, Ireland, Greece, United Kingdom, and Spain against the eurozone 20002010

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.

A wave of selling swept across global markets Tuesday, a day after Greece's prime minister said he would call a national vote on an unpopular European plan that would result in painful tax increases and drastic welfare cuts to rescue that nation's economy. If the European rescue plan falls through and Greece defaults on its debt, the ripple effect would be global. Europe could fall into recession, hurting a major market for American exports, and banks could severely restrict lending. The Dow fell 2.5 percent to close at 11,657.96 on Tuesday. It was the biggest drop since Sept. 22, 2011. The S&P 500 lost 2.8 percent to 1,218.28. The Nasdaq composite dropped 2.9 percent to 2,606.96.[citation needed] 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 32.4% of GDP, Spain with 9.2%, and Portugal at 9.1% are most at risk.[48] According to the UK Financial Policy Committee "Market concerns remain over fiscal positions in a number of euro area countries and the potential for contagion to banking systems."[49] Financing needs for the eurozone in 2010 come to a total of 1.6 trillion, while the US is expected to issue US$1.7 trillion more Treasury securities in this period,[50] and Japan has 213 trillion of government bonds to roll over.[51] According to Ferguson similarities between the U.S. and Greece should not be dismissed. [52] 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 economy. [53]

[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 MinisterBrian Lenihan, Jnr issued a one-year guarantee to the banks' depositors and bond-holders. 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 executive Sen 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 through Dil

ireann and passed through Seanad ireann without a vote on 20 January 2009.[54]President Mary McAleese then signed the bill at ras an Uachtarin the following day, confirming the bank's nationalisation.[55] 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 matched by a 23 billion cash balance, and it remarked: "We're very comfortably circumstanced".[56] On 18 May the NTMA tested the market and sold a 1.5 billion issue that was three times oversubscribed.[57] 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 "bailout" agreement of 29 November 2010[58][59], of which 34 billion were used to support its ailing financial sector.[60] In return the government agreed to reduce its budget deficit to below three percent by 2015.[60] In February the government lost the ensuing Irish general election, 2011. In April 2011, despite all the measures taken, Moody's downgraded the banks' debt to junk status.[61] 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 external support from the second half of 2012 onwards.[62] 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 4 per cent by 2015.[63]

[edit]Portugal
A report released in January 2011 by the Dirio de Notcias[64] and published in Portugal by Gradiva, demonstrated that in the period between theCarnation 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 state-managedpublic 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 debt creation, 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 bankruptcy by 2011.[65] 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 speculators. [66] In the first quarter of 2010, before markets pressure, Portugal had one of the best rates of economic recovery in

the EU. Industrial orders, exports, entrepreneurial innovation and high-school achievement the country matched or even surpassed its neighbors in Western Europe.[66] 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 Financial Stability Facility, and the International Monetary Fund.[67] According to the Portuguese finance minister, the average interest rate on the bailout loan is expected to be 5.1%[68] As part of the bailout, Portugal agreed to eliminate its golden share in Portugal Telecom to pave the way for privatization.[69][70] 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 bailout. [71]

[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 as a risky asset.[72] On the other hand, the public debt of Italy has a longer maturity and a big share of it is held in domestically. Overall this makes the country more resilient to financial shocks, ranking better than France and Belgium. [73] On 15 July and 14 September 2011, Italy's government passed austerity measures meant to save 124 billion euro.[74][75]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 markets.[76] 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 government to replace that of Prime Minister Silvio Berlusconi.[77] 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 ownership of local services. [72] The interim government expected to put the new laws into practice is led by former European Union Competition Commissioner Mario Monti.[72]

[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 budget deficit.[78] 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 European countries and the European Commission to cut its deficit more aggressively.[79][80] According to the Financial Times, Spain succeeded in trimming its deficit from 11.2% of GDP in 2009 to 9.2% in 2010.[81] 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 United Kingdom (80.0%).[82][83]

[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 Italy[84] and there were doubts about the financial stability of the banks.[85] After inconclusive elections in June 2010, by July 2011[86] 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 to form a majority government.[84] Financial analysts forecast that Belgium would be the next country to be hit by the financial crisis as Belgium's borrowing costs rose.[85] 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 (5.2%).[85] 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 markets. [87]

[edit]France
By 16 November 2011, France's bond yield spreads vs. Germany had widened 450% since July, 2011, making it a new "core country" under attack [88]. France's C.D.S. contract value rose 300% in the same period [89]

[edit]Other

European countries

[edit]United Kingdom
According to the Financial Policy Committee "Any associated disruption to bank funding markets could spill over to UK banks."[49]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 expected. [90] Before the crash

of the three largest commercial banks in Iceland, Glitnir,Landsbanki and 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 take over the domestic operations of the three largest banks.[91] 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 of GDP.[92] 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 government was unable to bail out.[93][94] 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 hands.[93][94]

[edit]Switzerland
In September 2011, the Swiss National Bank weakened the Swiss franc to a floor of 1.20 francs per euro.[95] 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 Stability Facility, a legal instrument[96] 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 the European Commission, can all provide some support for the treasury while it is still being built.[97] 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 nations in need. The new entity will sell debt only after an aid request is made by a country.[98] 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 the European Financial Stabilisation Mechanism (reliant on guarantees given by the European Commission using the EU budget as collateral) and 250 billion loan backed by the IMF.[99][100] The agreement is interpreted to allow the ECB to start buying government debt from the secondary market which is expected to reducebond yields.[101] (Greek bond yields fell from over 10% to just over 5%;[102] Asian bonds yields also fell with the EU bailout.[103]) 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 nations capital, exposing strains within the four-party ruling coalition".[104] 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 bankrupt? How can it be that the no-bail clause of the Lisbon treaty has been ripped up?"[105] 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 crisis. [106] Furthermore the EU agreed that Greece should receive EU loans at lower interest rates of 3.5%.[107] 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 Greek debt crisis would spread subsided,[108] some rose the most in a year or more.[109] The Euro made its biggest gain in 18 months,[110] before falling to a new four-year low a week later.[111] Shortly after the euro rose again as hedge funds and other short-term traders unwound short positions and carry trades in the currency.[112] Commodity prices also rose following the announcement.[113] The dollar Libor held at a nine-month high.[114] Default swaps also fell.[115] The VIX closed down a record almost 30%, after a record weekly rise the preceding week that prompted the bailout.[116] International credit rating agencies consider that, while the aid package has so far averted a financial panic, eurozone countries such as Portugal may continue to have economic difficulties.[117]

[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 and guaranteed by the European Commission using the budget of the European Union as collateral.[118] It runs under the supervision of the Commission[119] and aims at preserving financial stability in Europe by providing financial assistance to member states of the European Union in economic difficulty.[120] The Commission fund, backed by all 27 European Union members, has the authority to raise up to 60 billion[121] and is rated AAA by Fitch, Moody's andStandard & Poor's.[122][123] Under the EFSM, the EU successfully placed in the capital markets a 5 billion issue of bonds as part of the financial support package agreed for Ireland, at a borrowing cost for the EFSM of 2.59%.[124] 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

interventions

The European Central Bank (ECB) has taken a series of measures aimed at reducing volatility in the financial markets and at improving liquidity:[125]

First, it began open market operations buying government and private debt securities worth 183 billion euros (as of mid November 2011).[126]

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[127] with Federal Reserve support.[128]

Subsequently, the member banks of the European System of Central Banks started buying government debt.[129] 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 German successor to Stark as well, news reports said".[130]

[edit]Reform

and recovery

See also: Euro Plus Pact In May 2010 the European Commissioner for Economic and Financial Affairs, Olli Rehn, called for "absolutely necessary" deficit cuts by the heavily indebted countries of Spain and Portugal. [131]

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 deficit or the debt rules.[132][133] 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 package as a set of "exceptional measures for exceptional times".[134][135] The deal was welcomed by Greek Prime Minister George Papandreou, who said that "a new day" had come "not only for Greece but also for Europe".[134] French President Nicolas Sarkosy said it represented a "credible, ambitious and comprehensive response" to the debt crisis.[136] Christine Lagarde, head of the International Monetary Fund, said she was "encouraged by the substantial progress made on a number of fronts".[134] Financial markets worldwide responded positively to news of an agreement being reached. [137] 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 weak for them to be taken seriously.[138] 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 reforms of pensions, labour markets and privatisation.[139] Commentators suggested that the package agreed in Brussels might not be enough to ensure the long-term survival of the Euro without additional political integration within the Eurozone.[140][141] It was also noted that the means by which the overall package would be funded were unclear.[142] 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 bailout, upsetting financial markets. [143] 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 reformers and Portugal is ranked seventh among 17 countries included in the report.[144]

[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 hazard and ensure sustainable public finances.[145][146] 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 growing field of investors and economists say it would be the best way of solving the debt crisis. [147] 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%, combining it with a bold debt reduction scheme for countries not on life support from the EFSF.[147] The introduction of eurobonds matched by tight financial and budgetary coordination may well require changes in EU treaties, which is widely expected to be discussed at the 9 December EU summit.[147]

[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 capital flows remain unregulated in the Euro Area,[148] asset bubbles[149] and current account imbalances 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 goods.[150] The 2009 trade deficits for Italy, Spain, Greece, and Portugal were estimated to be $42.96 billion, $75.31B and $35.97B, and $25.6B respectively, while Germany's trade surplus was $188.6B.[151] 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 deficits, artificially lowering interest rates and creating asset bubbles.[152][153] 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 payments.[154] 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 country's citizens saved more instead of consuming imports, this would reduce its trade deficit.[154]

[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 survive with the European Union."[155] 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 the European Treasury.[156] Angel Ubide from the Peterson Institute for International Economics suggested that long term stability in the eurozone requires a common fiscal policy rather than controls on portfolio investment.[157] 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 eurozone member states.[158]

[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 mid-2013. On 16 December 2010 the European Council agreed a two line amendment to the EU Lisbon Treaty to allow for a permanent bail-out mechanism to be established[159] 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 ESM.[160][161] According to this

treaty, the ESM will be an intergovernmental organisation under public international law and will be located in Luxembourg.[162][163]

[edit]European

Monetary Fund

On 20 October 2011, the Austrian Institute of Economic Research published an article that suggests to transform the EFSF into aEuropean 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) governmental bonds with less favorable market rates.[164] 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 debt levels by 2015, compared to the baseline scenario with market based interest levels.[164]

[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 very serious risks to the global business cycle."[165] 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 lower wages and steps to bring in more foreign capital investment.[166]

[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 Monetary Theory condemned the introduction of the Euro currency from the beginning,[167] on the basis that the Eurozone does not fulfill the necessary criteria for anoptimum currency area, though it is moving in that direction.[144] The latter view is supported also by non-Keynesian economists, such as Luca A. Ricci, of the IMF.[168] Others have even declared an urgent need for more radical shift in perspective, "a new science of macroeconomics". [169] 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 fiscal sovereignty, and re-adopt national currencies.[170][171] Two-currencies speculation Bloomberg has suggested that, if the Greek and Irish bailouts should fail, an alternative is for Germany to leave the eurozone in order to save the currency through depreciation[172] instead of austerity. The likely substantial fall in the Euro against the newly reconstituted Deutsche Mark would give a "huge boost" to its members' competitiveness.[173] Also The Wall Street Journalconjectures that Germany could return to the Deutsche Mark,[174] or create another currency union[175] with the Netherlands, Austria, Finland, Luxembourg and other European countries such as Denmark, Norway, Sweden, Switzerland and the Baltics.[176] A monetary union of the mentioned current account surplus countries would create the world's largest creditor bloc that is bigger than China[177] 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 the "straitjacket of Germanic stability phobia".[178] The Wallstreet Journal added that without the German-led bloc a residual euro would have the flexibility to keep interest rates low[179] and engage in quantitative easing or fiscal stimulus in support of a jobtargeting economic policy[180] instead of inflation targeting in the current configuration. In early October 2011, policy expert Philippa Malmgren believed[181] 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, that would have worked."[182] Greenspan later added Switzerland to the list. In September 2011, Joaqun Almunia, an EU commissioner, "lashed out"[183] 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 defended the price stability of the euro.[184] 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 currencies, which it called ECU2. [185]

[edit]Controversies [edit]Breaking

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 in EFSF 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 EU and Eurozone countries encourage moral hazard also in the future.[186] While the no bail-out clause remains in place, the "no bail-out doctrine" seems to be a thing of the past.[187]

[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 annualgovernment 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 Italy might prolong and deepen their recessions.[188] 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 structural reform."[189] Apart from arguments over whether or not austerity, rather than increased or frozen spending, is a macroeconomic solution,[190] 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 20072010, 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 world.[191]

[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 characterized as odious debt.[192] The Greek documentaryDebtocracy 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 debt levels through the use of complex currency and credit derivatives structures.[11][12] 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 counterparties. [11] Financial reforms within the U.S. since the financial crisis have only served to reinforce special protections for derivativesincluding greater access to government guaranteeswhile minimizing disclosure to broader financial markets.[13] 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 several countries [193] [194] [195] [196] or have focused on Italy, [197] the United Kingdom,[198] [199] [200] [201] [202] [203] [204] [205] Spain, [206] the United States, [207] [208] [209] and even Germany. [210] [211]

[edit]Credit

rating agencies

The international U.S. based credit rating agencies Moody's, Standard & Poor's and Fitch have played a central[212] and controversial role[213] in the current European bond market crisis.[214] As with the housing bubble[215][216] and the Icelandic crisis,[217][218] the ratings agencies have been under fire. The agencies have been accused of giving overly generous ratings due to conflicts of interest.[219] Ratings agencies also have a tendency to act conservatively, and to take some time to adjust when a firm or country is in trouble. [220] In the case of Greece, the market responded to the crisis before the downgrades, with Greek bonds trading at junk levels several weeks before the ratings agencies began to describe them as such.[212] 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 government, regardless of the nation's credit rating.[221] 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 faced.[212][222] 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 European financial markets in the future.[223][224]According to German consultant company Roland Berger, setting up a new ratings agency would cost 300 million and could be operating by 2014.[225] Due to the failures of the ratings agencies, European regulators will be given new powers to supervise ratings agencies.[213] With the creation of the European Supervisory Authority in January 2011 the European Union set up a whole range of new financial regulatory institutions,[226] including the European Securities and Markets Authority (ESMA),[227] which became the EUs single credit-ratings firm regulator.[228] Credit-ratings companies have to comply with the new standards or be denied operation on EU territory, says ESMA Chief Steven Maijoor.[229] 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 arrangements between credit rating agencies and their clients"[230]

[edit]Media This section may contain inappropriate or misinterpreted citations that do not verifythe 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 the bond market crisis.[231][232] The Spanish Prime Minister Jos Luis Rodrguez Zapatero has suggested that the recent financial market crisis in Europe is an attempt to undermine the euro[233][234] in order that countries, such as the U.K. and the U.S., can continue to fund their large external deficits[original research?],[235] which are matched by large government deficits.[original research?][236] 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 China.[237][238] This is not the case in the eurozone which is self funding.[239][240] 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 crisis.[241][242][243][244][245][246][247] 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 eurozone by certain other interests, political or financial".[248]

[edit]Role

of speculators

Financial speculators and hedge funds engaged in selling euros have also been accused by both the Spanish and Greek Prime Ministers of worsening the crisis.[249][250] German chancellor Merkel has stated that "institutions bailed out with public funds are exploiting the budget crisis in Greece and elsewhere."[251] The role of Goldman Sachs[252] in Greek bond yield increases is also under scrutiny.[253] 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 that brought the currency below $1.36. [254] On 8

June, exactly four months after the dinner, the Euro hit a four year low at $1.19 before it started to rise again.[255] Traders estimate that bets for and against the euro account for a huge part of the daily three trillion dollar global currency market.[254] In response to accusations that speculators were worsening the problem, some markets banned naked short selling for a few months.[256]

[edit]Finland

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 potential new 109 billion support package for the Greek economy.[257] 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 their participation in the bailout.[258] 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 of a Greek default.[259][260] 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 raise the required capital with relative ease.[261] 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 vote.[262] However, as of 10 October, Slovakia's government was still deeply split over the issue.[104] 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, PMIvars 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.

This chart comes from a Michael Cembalests research note today. The key is in there too. Im not making this up:

1. The toreador in a floppy hat, and the F1 driver with his helmet, represent Spain, Italy and the rest of the Euro Periphery. 2. The three men with helmets, shields, and medieval weaponry represent the CDU, CSU and FDP parties in Germany. 3. The blue-and-white sailor boy is Finland. Obvs. 4. The woman with an oversized carrot and her friend in overalls with a shovel represent theSocial Democrats and Greens. 5. Wotan represents the Bundesbank. 6. The piggy bank is the IMF. 7. The grey-haired Banque chap is the ECB. 8. The chap in the red bib is Poland. 9. The artists are France. 10. The angry chef, the sweeper with a broom, the airline pilot, and the rest of the motley crew at bottom left, represent EU taxpayers in Core countries. 11. The storm troopers are the EU Commission and Euro Group Finance Ministers, chaired by Jose Manuel Barroso and Jean- Claude Juncker. 12. The monocled banker and his assistant are EU bondholders and shareholders.

Full credit here is given to Peter Cembalest, who specializes in conceptualization of such phenomena; I assume that Peter (age 9) helped out too with the Icelandic bonus extra, for people who make it to page three. But Iceland sadly didnt make the cut as one of the 12 players in the EMU Debt Crisis most likely to affect policy from here. Cembalest does at one point feel the need to explain what hes doing here: If todays diorama analysis borders on the absurd, so does maintaining the fiction that accumulation of massive public and private sector claims in Europe can somehow be engineered away. Still, I like the idea of sitting all the key European players in a room with a box of lego and telling them to work things out that way. The results couldnt really be more farcical than those of the EU bank stress tests.