Eurozone Debt Crisis
Eurozone Debt Crises is a multi-year debt crisis that has been happening in the European Union since the end of 2009. It is also known as the Eurozone crisis or European Sovereign Debt Crisis. The crisis erupted in the wake of the Great Recession after 2009 due to government structural deficits and increasing debt levels. In simple terms, it defines the struggle of Eurozone Countries to pay off the debts that accumulated over the decades.
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The Causes of the Crisis:
- Rising Household and Government Debt Levels: High structural debts occurred before the crisis exacerbated the aging population in European Countries.
- Trade Imbalances: The recession caused a sharp rise in the budget deficit, thus leading to imbalances.
- The Great Recession:
Asset Bubbles in the time of various periphery countries led to the Great Recession with capital flowing from stronger economies to weaker economies.
- Loss of confidence:
The credit crunch caused huge losses to commercial banks thus investors became fearful of default.
- Sovereign Default:
There were concerns about sovereign default as interest rates were rising resulting in investors losing faith in their country’s ability to service and pay the debt.
- Increasing Interest Rates:
Higher Debts lead to higher interest rate costs due to which it was difficult to repay.
How it affected Financial Markets?
During 2011, the Eurozone crisis had a major market impact. The Corporate & Bank credits suffered downgrades because of Sovereign downgrades, thus making it harder to price and sell new deals. The Eurozone crisis not only affected Britain but also India, China, United States, Japan, Russia, and other major world economies as it had business with Eurozone. China considered lending money to Europe; they are more concerned that the Euro may collapse. The IMF, which was set up to help the countries having economic difficulty had set aside hundreds of billions of dollars for a bailout of some of Eurozone countries.
European Government’s Response to the Crisis:
EU took action, but it moved slowly since it required the consent of all the nations in the EU. In 2010 the IMF and EU disbursed 163 billion to Greece, followed by the second bailout in 2011 of 157 billion. Bailouts were also given to Ireland & Portugal. EFSF was created to provide emergency lending to countries in financial difficulty. ECB announced plans to purchase bonds if necessary, to keep yields from spiraling that Spain and Italy could not afford. In 2012 the ECB decided to hold onto its reserves rather than extending loans. The ECB could only stabilize small countries like Greece and would not be able to rescue large countries like Italy and Spain.
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The Eurozone Crisis collapsed when the over-indebted countries were unable to self-finance themselves and honor their financial obligations. Overly rigid measures of austerity lead to greater economic shrinkage. Despite the difficulties, Eurozone showed the power of its union, coming out stronger when doubts about their continuity came to light.
Author: Urvi Surti
About the Author:
Urvi is a commerce graduate and has a keen interest in Finance. She has completed her Chartered Wealth Management (CWM) from the American Academy of Financial Management and is currently pursuing a career in Financial Risk Management (FRM).