An Anatomy of the Eurozone Financial Crisis

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Euro as a common currency was introduced in 1999.Unified interest rates post euro’s introduction allowed members to borrow heavily .Bonds which were issued by southern countries were considered to be equally safe as the ones issued by nation like Germany. Nations like Greece, Italy & Spain lie in southern Europe.

We can relate crisis of US sub –prime mortgage market which further got transmitted to European nations. Easy availability of money encouraged a debt –fuelled boom in PIGS nation which witnessed real estate growth on unprecedented scale.


US housing prices peaked in late 2006, whereas   European housing prices did peak a year later.

We all are aware of the manner in which financial crisis  did  strike  US  from  later part of 2007 & start of 2008 when Bear Sterns ,Fannie Mae were taken over by US government.

Later in month of September, we saw Lehmann Brothers filing for bankruptcy, which triggered financial crisis globally. Sub-prime debt obligations made in US held around the world caused global financial shock & worldwide housing bubble bursted in UK, Spain, Ireland as well as US.

American International Group required 180 billion $ bailout to cover CDS[Credit Default Swaps],insurance against bond defaults underwritten without reserves. Stress on banks around the world led to shrinkage in availability of credit.US government however released bailout packages of 700 billion $,then 800 billion $ & then 847 billion $,There was a significant  decline in exports of nations worldwide as US imports dropped.




It was conceived that Euro as a currency  would compete effectively with American $ and Chinese Yuan [RMB].However this aura of invincibility did not sustain.

Before formation of Euro , European leaders agreed to limit borrowings to just 3 % of their economies total output. This was expected that at least nations in Eurozone will not be accumulating too much debt..However in later years [Euro was formed in 1999], nations did not stick to the rule.

Germany, Italy & France , these nations started breaking rule of 3 %.IF we compare nations struck with crisis ,we will find that Spain’s government had smallest debts relative to size of its economy.

Greece had its own  wayward  ways on which it moved. Role of rating agencies such as Goldman Sachs did come under heavy scrutiny after the revelation that it artificially manipulated financial status of Greek  government  &  presented a nice image of Greek economy. Goldman Sachs had been deeply involved in covering up the Greek government’s mismanagement of its state budget & finances .IN 2001, after induction of Greece to European union  , Goldman Sachs helped the government quietly borrow billions.

Fact remain that birth of Euro came with an original  sin . Nation like Greece entered monetary union with bigger deficits than the ones permitted under the treaty that permitted common currency. Greek government is  blamed  as rather reducing spending ,it artificially reduced its deficits with derivatives.

Germany must have been under immense trouble as of its reckless borrowings , however that did not turn out to be the case. Germany had transformed its economy into an export power–house. It was exporting more to the rest of world than imports. And it had an excess of cash on its exports .Germany has been considered safe market ,with investors willing to lend even at historically low level[Germany 10 years bonds yield is merely 1.5%,,whereas as of now yield on Spainish bonds has been often crossing 7 %,,,which is considered unbearable level for a government to repay].This is not same with rest of European nations.

In late 2009, new Greek government found that its predecessor lied about its borrowing,& were running under huge debts. This revelation provoked  a drastic loss in investor’s confidence, spreading nervousness,, who started pulling their money out of the country 7 demanded punitive interest rates on its debt.

There were serious threats of sovereigns debt-default,& to avoid  it EU-IMF approved a 3 year emergency 146 billion $ credit line to Athens in May 2010.Investors had started turning to economies of Portugal, & Spain, but even losses as of bursting up of housing bubble saw nations like Ireland, Portugal & Spain seeking bailout packages.

EFSF [European Financial Stability Facility] was constituted in May,2010,intending to provide loans to countries in financial difficulties,& financial recapitalisation of financial institutions through loans to government. EFSF had a capacity to lend 440 billion euro.

This was supposed to be increased but then major nations of Europe saw a bifurcation of opinion among masses , like in Germany as majority of it would be provided by Germany & German masses were reluctant to allow German government to pay for it.


European financial institutions were under stress!!!!.,

1-BNP-Paribas was forced to close funds in August 2007.

2-German banks IKB ,West LB,& Saschen LB were bailed out by the government.

3-Irish banks were given government deposit guarantees.

European central Bank injected liquidity into European banks,& did not lower interest rates  until October 2008, as of it’s focus to curb on inflation.

EU approved additional 157 billion $ package in July,& parliament adopted strict austerity measures. Now Greece’s debt/GDP ratio had reached 115% in 2009.Greece’s government found itself in dilemma after it received bailout package .Greek government had to increase sales taxes ,reduce public sector salaries ,pensions ,elimination of bonuses ,reduction in minimum wages, liberalisation of labour laws which allows employers to increase working hours.

These strict measures have led to a deep contraction in growth, which has only further undermined confidence. Country received a second bailout of 130 billion euro from EU & IMF last year. There were possibilities of Greece even exiting from Euro. Greece received 130 billion euro from IMF & other euro-zone members , but it had to abide a condition that it will reach a deal with it’s existing private  sectors lenders to reduce its debts. This would be done through a swap of old bonds with newly issued bonds that would be worth a lot less & pay less interest. Private owners will take 53.5% nominal loss on Greek debt which will work out to be 74%.This way Greece will be able to wipe half of it’s debt of 485 billion euro.  Total aims are to reduce Greek government total indebtedness from 160% of GDP now to 120.5% by 2020.

 WE can however learn few things from it about Euro.

European governments did try to act together, but did not successfully implement it. There was a limited impact of falling exports due to extensive internal trade relationships. And Greece as of now is facing difficult adjustment problems, as Europeans  are avoiding losses on Greek bonds.

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  • Tnnophoto N

    Guest - drake olives

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    from New York, NY, USA

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