The Eurozone crisis (often referred to as the Euro crisis) is an ongoing crisis that has been affecting the countries of the Eurozone since late 2009. It is a combined sovereign debt crisis, a banking crisis and a growth and competitiveness crisis.[8]

The crisis made it difficult or impossible for some countries in the euro area to repay or re-finance their government debt without the assistance of third parties. Moreover, banks in the Eurozone are undercapitalized and have faced liquidity problems. Additionally, economic growth is slow in the whole of the Eurozone and is unequally distributed across the member states.[8]

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, a number of 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. Sovereigns sold rights to receive future cash flows, allowing governments to raise funds without violating debt and deficit targets, but sidestepping best practice and ignoring internationally agreed standards.[9] This allowed the sovereigns to mask (or "Enronize") their deficit and debt levels through a combination of techniques, including inconsistent accounting, off-balance-sheet transactions as well as the use of complex currency and credit derivatives structures.[9]

From late 2009, fears of a sovereign debt crisis developed among investors as a result of the rising private and government debt levels around the world together with a wave of downgrading of government debt in some European states. Causes of the crisis varied by 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.[10] The structure of the Eurozone as a monetary 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.[11][12] European banks own a significant amount of sovereign debt, such that concerns regarding the solvency of banking systems or sovereigns are negatively reinforcing.[13]

Concerns intensified in early 2010 and thereafter,[14][15] leading European nations to implement a series of financial support measures such as the European Financial Stability Facility (EFSF) and European Stability Mechanism (ESM).

Aside from all the political measures and bailout programmes being implemented to combat the Eurozone crisis, the European Central Bank (ECB) has also done its part by lowering interest rates and providing cheap loans of more than one trillion Euro to maintain money flows between European banks. On 6 September 2012, the ECB also calmed financial markets by announcing free unlimited support for all eurozone countries involved in a sovereign state bailout/precautionary programme from EFSF/ESM, through some yield lowering Outright Monetary Transactions (OMT).[16]

The crisis did not only introduce adverse economic effects for the worst hit countries, but also had a major political impact on the ruling governments in 8 out of 17 eurozone countries, leading to power shifts in Greece, Ireland, Italy, Portugal, Spain, Slovenia, Slovakia, and the Netherlands.

The Eurozone crisis has also become increasingly a social crisis for the most affected countries, with Greece and Spain having the highest unemployment rates in the currency area. Spain's unemployment was 26.9 percent in May 2013, while Greece's rate in March was 26.8 percent.[17]

Contents [hide]
1 Causes
2 Evolution of the crisis
2.1 Greece
2.2 Ireland
2.3 Portugal
2.4 Spain
2.5 Cyprus
3 Policy reactions
3.1 EU emergency measures
3.1.1 European Financial Stability Facility (EFSF)
3.1.2 European Financial Stabilisation Mechanism (EFSM)
3.1.3 Brussels agreement and aftermath
3.2 European Central Bank
3.3 European Stability Mechanism (ESM)
3.4 European Fiscal Compact
4 Economic reforms and recovery proposals
4.1 Direct loans to banks and banking regulation
4.2 Less austerity, more investment
4.3 Increase competitiveness
4.4 Address current account imbalances
4.5 Mobilization of credit
4.6 Commentary
5 Proposed long-term solutions
5.1 European fiscal union
5.2 European bank recovery and resolution authority
5.3 Eurobonds
5.4 European Monetary Fund
5.5 Drastic debt write-off financed by wealth tax
6 Controversies
6.1 EU treaty violations
6.2 Actors fuelling the crisis
6.2.1 Credit rating agencies
6.2.2 Media
6.2.3 Speculators
6.3 Speculation about the break-up of the eurozone
6.4 Odious debt
6.5 National statistics
6.6 Collateral for Finland
7 Political impact
8 Projections
9 See also
10 References
11 External links
Causes[edit source | editbeta]Main article: Causes of the Eurozone crisis
The Eurozone crisis resulted from a combination of complex factors, including the globalisation of finance; easy credit conditions during the 2002–2008 period that encouraged high-risk lending and borrowing practices; the 2007–2012 global financial crisis; international trade imbalances; real-estate bubbles that have since burst; the 2008–2012 global recession; fiscal policy choices related to government revenues and expenses; and approaches used by nations to bail out troubled banking industries and private bondholders, assuming private debt burdens or socialising losses.

A research report, completed in 2012 for the United States Congress explains, “The current Eurozone crisis has been unfolding since 2009, when a new Greek government revealed that previous Greek governments had been underreporting the budget deficit. The crisis subsequently spread to Ireland and Portugal, while raising concerns about Italy, Spain the European banking system, and more fundamental imbalances within the Eurozone”[18]

The underreporting was exposed sometime in the first quarter of 2010. The alarm of ‘something smells’ spread throughout some of Europe when Greece revealed that its 2009 deficit was revised from 5% of GDP (no greater than 3% of GDP was a rule of the Maastricht Treaty) to more than double that amount: 12.7%. The fact that the Greek debt exceeded $400 billion and France owned 10% of that debt, struck terror into investors at the word “default”. Contagion was possible. Greece was bailed out in 2010 with a 110 billion euro direct loan by the European Union and the International Monetary Fund. After 2 years of fiscal austerity and Greek riots, another 130 billion euro loan was made. Greek austerity programs reduced public pensions and public wages, among the most generous in the world.[19]

Evolution of the crisis[edit source | editbeta]See also: 2000s European sovereign debt crisis timeline and European debt crisis contagion The 2009 annual budget deficit and public debt both relative to GDP, for selected European countries. In the eurozone, the following number of countries were: SGP-limit compliant (3), Unhealthy (1), Critical (12), and Unsustainable (1).
The 2012 annual budget deficit and public debt both relative to GDP, for all eurozone countries and UK. In the eurozone, the following number of countries were: SGP-limit compliant (3), Unhealthy (5), Critical (8), and Unsustainable (1).
Debt profile of Eurozone countriesIn the first few weeks of 2010, there was renewed anxiety about excessive national debt, with lenders demanding ever higher interest rates from several countries with higher debt levels, deficits and current account deficits. This in turn made it difficult for some governments to finance further budget deficits and service existing debt, particularly when economic growth rates were low, and when a high percentage of debt was in the hands of foreign creditors, as in the case of Greece and Portugal.[20]

To fight the crisis some governments have focused on austerity measures (e.g., higher taxes and lower expenses) which has contributed to social unrest and significant debate among economists, many of whom advocate greater deficits when economies are struggling. Especially in countries where 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 CDS between these countries and other EU member states, most importantly Germany.[21] By the end of 2011, Germany was estimated to have made more than €9 billion out of the crisis as investors flocked to safer but near zero interest rate German federal government bonds (bunds).[22] By July 2012 also the Netherlands, Austria and Finland benefited from zero or negative interest rates. Looking at short-term government bonds with a maturity of less than one year the list of beneficiaries also includes Belgium and France.[23] While Switzerland (and Denmark)[23] equally benefited from lower interest rates, the crisis also harmed its export sector due to a substantial influx of foreign capital and the resulting rise of the Swiss franc. In September 2011 the Swiss National Bank surprised currency traders by pledging that "it will no longer tolerate a euro-franc exchange rate below the minimum rate of 1.20 francs", effectively weakening the Swiss franc. This is the biggest Swiss intervention since 1978.[24]

Despite sovereign debt having risen substantially in only a few Eurozone countries, with the three most affected countries Greece, Ireland and Portugal collectively only accounting for 6% of the Eurozone's gross domestic product (GDP),[25] it has become a perceived problem for the area as a whole,[26] leading to speculation of further contagion of other European countries and a possible break-up of the Eurozone. In total, the debt crisis forced five out of 17 Eurozone countries to seek help from other nations by the end of 2012.

However, in Mid-2012, due to successful fiscal consolidation and implementation of structural reforms in the countries being most at risk and various policy measures taken by EU leaders and the ECB (see below), financial stability in the Eurozone has improved significantly and interest rates have steadily fallen. This has also greatly diminished contagion risk for other eurozone countries. As of October 2012 only 3 out of 17 eurozone countries, namely Greece, Portugal and Cyprus still battled with long term interest rates above 6%.[27] By early January 2013, successful sovereign debt auctions across the Eurozone but most importantly in Ireland, Spain, and Portugal, shows investors believe the ECB-backstop has worked.[28]

Greece[edit source | editbeta]Main article: Greek government-debt crisis Greece's debt percentage since 1999 compared to the average of the eurozone.
Public debt, gross domestic product (GDP), and public debt-to-GDP ratio
Graph based on "ameco" data from the European Commission
100,000 people protest against the austerity measures in front of parliament building in Athens, 29 May 2011In the early mid-2000s, Greece's economy was one of the fastest growing in the eurozone and was associated with a large structural deficit.[29] As the world economy was hit by the global financial crisis in the late 2000s, Greece was hit especially hard because its main industries — shipping and tourism — were especially sensitive to changes in the business cycle. The government spent heavily to keep the economy functioning and the country's debt increased accordingly.

On 23 April 2010, the Greek government requested an initial loan of €45 billion from the EU and International Monetary Fund (IMF), to cover its financial needs for the remaining part of 2010.[30][31] A few days later Standard & Poor's slashed Greece's sovereign debt rating to BB+ or "junk" status amid fears of default,[32] in which case investors were liable to lose 30–50% of their money.[32] Stock markets worldwide and the euro currency declined in response to the downgrade.[33]

On 1 May 2010, the Greek government announced a series of austerity measures[34] to secure a three-year €110 billion loan.[35] This was met with great anger by the Greek public, leading to massive protests, riots and social unrest throughout Greece.[36] The Troika, a tripartite committee formed by the European Commission, the European Central Bank and the International Monetary Fund (EC, ECB and IMF), offered Greece a second bailout loan worth €130 billion in October 2011, but with the activation being conditional on implementation of further austerity measures and a debt restructure agreement. A bit surprisingly, the Greek prime minister George Papandreou first answered that call, by announcing a December 2011 referendum on the new bailout plan,[37][38] but had to back down amidst strong pressure from EU partners, who threatened to withhold an overdue €6 billion loan payment that Greece needed by mid-December.[37][39] On 10 November 2011 Papandreou resigned following an agreement with the New Democracy party and the Popular Orthodox Rally to appoint non-MP technocrat Lucas Papademos as new prime minister of an interim national union government, with responsibility for implementing the needed austerity measures to pave the way for the second bailout loan.[40][41]

All the implemented austerity measures, have helped Greece bring down its primary deficit – i.e. fiscal deficit before interest payments – from €24.7bn (10.6% of GDP) in 2009 to just €5.2bn (2.4% of GDP) in 2011,[42][43] but as a side-effect they also contributed to a worsening of the Greek recession, which began in October 2008 and only became worse in 2010 and 2011.[44] The Greek GDP had its worst decline in 2011 with −6.9%,[45] a year where the seasonal adjusted industrial output ended 28.4% lower than in 2005,[46][47] and with 111,000 Greek companies going bankrupt (27% higher than in 2010).[48][49] As a result, the seasonal adjusted unemployment rate grew from 7.5% in September 2008 to a record high of 27.2% in January 2013, while the Youth unemployment rate rose from 22.0% to as high as 59.3%.[50][51][52] Youth unemployment ratio hit 13 percent in 2011.[53][54]

Overall the share of the population living at "risk of poverty or social exclusion" did not increase noteworthily during the first 2 years of the crisis. The figure was measured to 27.6% in 2009 and 27.7% in 2010 (only being slightly worse than the EU27-average at 23.4%),[55] but for 2011 the figure was now estimated to have risen sharply above 33%.[56] In February 2012, an IMF official negotiating Greek austerity measures admitted that excessive spending cuts were harming Greece.[42]

Some economic experts argue that the best option for Greece and the rest of the EU, would be to engineer an “orderly default”, allowing Athens to withdraw simultaneously from the eurozone and reintroduce its national currency the drachma at a debased rate.[57][58] However, if Greece were to leave the euro, the economic and political consequences would be devastating. According to Japanese financial company Nomura an exit would lead to a 60% devaluation of the new drachma. Analysts at French bank BNP Paribas added that the fallout from a Greek exit would wipe 20% off Greece's GDP, increase Greece's debt-to-GDP ratio to over 200%, and send inflation soaring to 40%–50%.[59] Also UBS warned of hyperinflation, a bank run and even "military coups and possible civil war that could afflict a departing country".[60][61] Eurozone National Central Banks (NCBs) may lose up to €100bn in debt claims against the Greek national bank through the ECB's TARGET2 system. The Deutsche Bundesbank alone may have to write off €27bn.[62]

To prevent this from happening, the Troika (EC, IMF and ECB) eventually agreed in February 2012 to provide a second bailout package worth €130 billion,[63] conditional on the implementation of another harsh austerity package, reducing the Greek spendings with €3.3bn in 2012 and another €10bn in 2013 and 2014.[43] For the first time, the bailout deal also included a debt restructure agreement with the private holders of Greek government bonds (banks, insurers and investment funds), to "voluntarily" accept a bond swap with a 53.5% nominal write-off, partly in short-term EFSF notes, partly in new Greek bonds with lower interest rates and the maturity prolonged to 11–30 years (independently of the previous maturity).[64] It is the world's biggest debt restructuring deal ever done, affecting some €206 billion of Greek government bonds.[65] The debt write-off had a size of €107 billion, and caused the Greek debt level to fall from roughly €350bn to €240bn in March 2012, with the predicted debt burden now showing a more sustainable size equal to 117% of GDP by 2020,[66] somewhat lower than the target of 120.5% initially outlined in the signed Memorandum with the Troika.[43][67][68]

Critics such as the director of LSE's Hellenic Observatory argue that the billions of taxpayer euros are not saving Greece but financial institutions,[69] as "more than 80 percent of the rescue package is going to creditors—that is to say, to banks outside of Greece and to the ECB."[70] The shift in liabilities from European banks to European taxpayers has been staggering. One study found that the public debt of Greece to foreign governments, including debt to the EU/IMF loan facility and debt through the eurosystem, increased from €47.8bn to €180.5bn (+132,7bn) between January 2010 and September 2011,[71] while the combined exposure of foreign banks to (public and private) Greek entities was reduced from well over €200bn in 2009 to around €80bn (−120bn) by mid-February 2012.[72]

Mid May 2012 the crisis and impossibility to form a new government after elections and the possible victory by the anti-austerity axis led to new speculations Greece would have to leave the Eurozone shortly due.[73][74][75][76][77] This phenomenon became known as "Grexit" and started to govern international market behaviour.[78][79][80] However, the center-right's narrow victory in the 17 June election gave hope that Greece would honour its obligations and stay in the Euro-zone.[81]

Due to a delayed reform schedule and a worsened economic recession, the new government immediately asked the Troika to be granted an extended deadline from 2015 to 2017 before being required to restore the budget into a self-financed situation; which in effect was equal to a request of a third bailout package for 2015–16 worth €32.6bn of extra loans.[82][83] On 11 November 2012, facing a default by the end of November, the Greek parliament passed a new austerity package worth €18.8bn,[84] including a "labor market reform" and "midterm fiscal plan 2013–16".[85][86] In return, the Eurogroup agreed on the following day to lower interest rates and prolong debt maturities and to provide Greece with additional funds of around €10bn for a debt-buy-back programme. The latter allowed Greece to retire about half of the €62 billion in debt that Athens owes private creditors, thereby shaving roughly €20 billion off that debt. This should bring Greece's debt-to-GDP ratio down to 124% by 2020 and well below 110% two years later.[87] Without agreement the debt-to-GDP ratio would have risen to 188% in 2013.[88]

The Financial Times special report on the future of the European Union argues that the liberalization of labor markets has allowed Greece to narrow the cost-competitiveness gap with other southern eurozone countries by approximately 50 percent over the past two years.[89] This has been achieved primary through wage reductions, though businesses have reacted positively.[89] The opening of product and service markets, however, is proving tough because interest groups are slowing reforms.[89] The biggest challenge for Greece is to "overhaul the tax administration with less than 10 percent of annually assessed taxes paid."[89] However, Poul Thomsen, the IMF official who heads the bailout mission in Greece, stated that "in structural terms, Greece is more than halfway there."[89]

In June 2013 Equity index provider MSCI Inc. reclassified Greece as an emerging market, citing failure to qualify on several criteria for market accessibility.[90]

Ireland[edit source | editbeta]Main article: 2008–13 Irish financial crisis Ireland's debt percentage compared to Eurozone average since 1995
Public debt, gross domestic product (GDP), and public debt-to-GDP ratio
Graph based on "ameco" data from the European Commission
Irish government deficit compared to other European countries and the United States (2000–2014)[91]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, Finance Minister Brian Lenihan, Jnr issued a two-year guarantee to the banks' depositors and bond-holders.[92] The guarantees were subsequently renewed for new deposits and bonds in a slightly different manner. In 2009, an National Asset Management Agency (NAMA), was created to acquire large property-related loans from the six banks at a market-related "long-term economic value".[93]

Irish banks had lost an estimated 100 billion euros, much of it related to defaulted loans to property developers and homeowners made in the midst of the property bubble, which burst around 2007. The economy collapsed during 2008. Unemployment rose from 4% in 2006 to 14% by 2010, while the national budget went from a surplus in 2007 to a deficit of 32% GDP in 2010, the highest in the history of the eurozone, despite austerity measures.[10][94]

With Ireland's credit rating falling rapidly in the face of mounting estimates of the banking losses, guaranteed depositors and bondholders cashed in during 2009–10, and especially after August 2010. (The necessary funds were borrowed from the central bank.) With yields on Irish Government debt rising rapidly it was clear that the Government would have to seek assistance from the EU and IMF, resulting in a €67.5 billion "bailout" agreement of 29 November 2010[95][96] Together with additional €17.5 billion coming from Ireland's own reserves and pensions, the government received €85 billion,[97] of which up to €34 billion was to be used to support the country's ailing financial sector (only about half of this was used in that way following stress tests conducted in 2011).[98] In return the government agreed to reduce its budget deficit to below three percent by 2015.[98] In April 2011, despite all the measures taken, Moody's downgraded the banks' debt to junk status.[99]

In July 2011 European leaders agreed to cut the interest rate that Ireland was paying on its EU/IMF bailout loan from around 6% to between 3.5% and 4% and to double the loan time to 15 years. The move was expected to save the country between 600–700 million euros per year.[100] On 14 September 2011, in a move to further ease Ireland's difficult financial situation, the European Commission announced it would cut the interest rate on its €22.5 billion loan coming from the European Financial Stability Mechanism, down to 2.59 per cent – which is the interest rate the EU itself pays to borrow from financial markets.[101]

The 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.[102] 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, has already fallen substantially since its record high at 12% in mid July 2011 (see the graph "Long-term Interest Rates"). At 24 July 2012 it was down at a sustainable 6.3%,[103] and it is expected to fall even further to a level of only 4% by 2015.[104]

On 26 July 2012, for the first time since September 2010, Ireland was able to return to the financial markets selling over €5 billion in long-term government debt, with an interest rate of 5.9% for the 5-year bonds and 6.1% for the 8-year bonds at sale.[105]

By 2013 Ireland shouldered €41 billion (42%) of the total cost of the European banking crisis, or nearly €9,000 for each Irish citizen.[106]

Portugal[edit source | editbeta]Main article: 2010–13 Portuguese financial crisis Portugal's debt percentage compared to Eurozone average since 1999
Public debt, gross domestic product (GDP), and public debt-to-GDP ratio
Graph based on "ameco" data from the European CommissionAccording to a report by the Diário de Notícias[107] Portugal had allowed considerable slippage in state-managed public works and inflated top management and head officer bonuses and wages in the period between the Carnation Revolution in 1974 and 2010. 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.[108] When the global crisis disrupted the markets and the world economy, together with the US credit crunch and the Eurozone crisis, Portugal was one of the first and most affected economies to succumb.

In the summer of 2010, Moody's Investors Service cut Portugal's sovereign bond rating,[109] which led to an increased pressure on Portuguese government bonds.[110]

In the first half of 2011, Portugal requested a €78 billion IMF-EU bailout package in a bid to stabilise its public finances.[111] These measures were put in place as a direct result of decades-long governmental overspending and an over bureaucratised civil service. After the bailout was announced, the Portuguese government headed by Pedro Passos Coelho managed to implement measures to improve the State's financial situation and the country started to be seen as moving on the right track. However, this also lead to a strong increase of the unemployment rate to over 15 percent in the second quarter 2012 and it is expected to rise even further in the near future.[112]

Portugal's debt was in September 2012 forecast by the Troika to peak at around 124% of GDP in 2014, followed by a firm downward trajectory after 2014. Previously the Troika had predicted it would peak at 118.5% of GDP in 2013, so the developments proved to be a bit worse than first anticipated, but the situation was described as fully sustainable and progressing well. As a result from the slightly worse economic circumstances, the country has been given one more year to reduce the budget deficit to a level below 3% of GDP, moving the target year from 2013 to 2014. The budget deficit for 2012 has been forecast to end at 5%. The recession in the economy is now also projected to last until 2013, with GDP declining 3% in 2012 and 1% in 2013; followed by a return to positive real growth in 2014.[113]

As part of the bailout programme, Portugal is required to regain complete access to financial markets starting from September 2013. The first step has been successfully completed on 3 October 2012, when the country managed to regain partial market access. Once Portugal regains complete access it is expected to benefit from interventions by the ECB, which announced support in the form of some yield-lowering bond purchases (OMTs),[113] to bring governmental interest rates down to sustainable levels. A peak for the Portuguese 10-year governmental interest rates happened on 30 January 2012, where it reached 17.3% after the rating agencies had cut the governments credit rating to "non-investment grade" (also referred to as "junk").[114] As of December 2012, it has been more than halved to only 7%.[115]

According to the Financial Times special report on the future of the European Union, the Portuguese government has "made progress in reforming labor legislation, cutting previously generous redundancy payments by more than half and freeing smaller employers from collective bargaining obligations, all components of Portugal's €78 billion bailout program."[89] Additionally, unit labor costs have fallen since 2009, working practices are liberalizing, and industrial licensing is being streamlined.[89] "But many reforms remain in the pipeline," the FT admits.[89]

Spain[edit source | editbeta]See also: 2008–13 Spanish financial crisis Spain's debt percentage compared to Eurozone average since 1999Spain had a comparatively low debt level among advanced economies prior to the crisis.[116] Its public debt relative to GDP in 2010 was only 60%, more than 20 points less than Germany, France or the US, and more than 60 points less than Italy, Ireland or Greece.[117][118] Debt was largely avoided by the ballooning tax revenue from the housing bubble, which helped accommodate a decade of increased government spending without debt accumulation.[119] When the bubble burst, Spain spent large amounts of money on bank bailouts. In May 2012, Bankia received a 19 billion euro bailout,[120] on top of the previous 4.5 billion euros to prop up Bankia.[121] Questionable accounting methods disguised bank losses.[122] During September 2012, regulators indicated that Spanish banks required €59 billion (USD $77 billion) in additional capital to offset losses from real estate investments.[123]

The bank bailouts and the economic downturn increased the country's deficit and debt levels and led to a substantial downgrading of its credit rating. To build up trust in the financial markets, the government began to introduce austerity measures and in 2011 it passed a law in congress to approve an amendment to the Spanish Constitution to require a balanced budget at both the national and regional level by 2020[124]. The amendment states that public debt can not exceed 60% of GDP, though exceptions would be made in case of a natural catastrophe, economic recession or other emergencies.[125][126] As one of the largest eurozone economies (larger than Greece, Portugal and Ireland combined[127]) the condition of Spain's economy is of particular concern to international observers. Under pressure from the United States, the IMF, other European countries and the European Commission[128][129] the Spanish governments eventually succeeded in trimming the deficit from 11.2% of GDP in 2009 to an expected 5.4% in 2012.[127]

Nevertheless, in June 2012, Spain became a prime concern for the Euro-zone[130] when interest on Spain's 10-year bonds reached the 7% level and it faced difficulty in accessing bond markets. This led the Eurogroup on 9 June 2012 to grant Spain a financial support package of up to €100 billion.[131] The funds will not go directly to Spanish banks, but be transferred to a government-owned Spanish fund responsible to conduct the needed bank recapitalisations (FROB), and thus it will be counted for as additional sovereign debt in Spain's national account.[132][133][134] An economic forecast in June 2012 highlighted the need for the arranged bank recapitalisation support package, as the outlook promised a negative growth rate of 1.7%, unemployment rising to 25%, and a continued declining trend for housing prices.[127] In September 2012 the ECB removed some of the pressure from Spain on financial markets, when it announced its "unlimited bond-buying plan", to be initiated if Spain would sign a new sovereign bailout package with EFSF/ESM.[135][136]

As of October 2012, the Troika (EC, ECB and IMF) is indeed in negotiations with Spain to establish an economic recovery program, which is required if the country should request a bailout package for the sovereign state from ESM. Reportedly Spain, in addition to the €100bn "bank recapitalisation" package arranged for in June 2012,[137] now also seeks sovereign financial support from a "Precautionary Conditioned Credit Line" (PCCL) package.[138] If Spain receives a PCCL package, irrespective to what extent it subsequently decides to draw on this established credit line, Spain would immediately qualify to receive "free" additional financial support from ECB, in the form of some unlimited yield-lowering bond purchases (OMT).[139][140] According to recent statements by the Prime Minister, the country as of December 2012 still consider perhaps to request a PCCL sovereign bailout package in 2013, but only if developments at financial markets will promise Spain a significant financial advantage of doing so. As of 7 December 2012, the yield of 10-year government bonds had declined to 5.4%.[141]

According to the latest debt sustainability analysis published by the European Commission in October 2012, the fiscal outlook for Spain, if assuming the country will stick to the fiscal consolidation path and targets outlined by the country's current EDP programme, will result in a debt-to-GDP ratio reaching its maximum at 110% in 2018 – followed by a declining trend in subsequent years. In regards of the structural deficit the same outlook has promised, that it will gradually decline to comply with the maximum 0.5% level required by the Fiscal Compact in 2022/2027.[142]

Though Spain is suffering with 27 percent unemployment and an economy set to shrink by 1.4 percent in 2013, Mariano Rajoy's conservative government has pledged to speed up reforms, according to the Financial Times special report on the future of the European Union.[89] "Madrid is reviewing its labor market and pension reforms and has promised by the end of this year to liberalize its heavily regulated professions."[89] But Spain is benefiting from improved labor cost competitiveness.[89] "They have not lost export market share," says Eric Chaney, chief economist at Axa.[89] "If credit starts flowing again, Spain could surprise us."[89]

Cyprus[edit source | editbeta]Main article: 2012–13 Cypriot financial crisis
The economy of the Republic of Cyprus was hit by several huge blows in and around 2012 including, amongst other things, the exposure of Cypriot banks to the Greek debt haircut, the downgrading of the Cypriot economy into junk status by international rating agencies and the inability of the government to refund its state expenses.[143]

Cyprus's debt percentage compared to Eurozone average since 1999In September 2011, the small island of Cyprus with 840,000 people was downgraded by all major credit rating agencies following the Evangelos Florakis Naval Base explosion in July and slow progress with fiscal and structural reforms. At the same time yields on its long-term bonds rose above 12%. Despite its low population and small economy Cyprus has a large off-shore banking industry that was shaken to its foundations during the financial turmoil. With a total nominal GDP of €19.5bn ($24bn[144]) the country was unable to stabilise its banks, which had amassed €22 billion of Greek private sector debt and were disproportionately hit by the haircut taken by creditors.[145][146][147]

The Cypriot Government was reported to have been requesting a bailout from the European Financial Stability Facility or the European Stability Mechanism on 25 June 2012, citing difficulties in supporting its banking sector from the exposure to the Greek debt haircut.[148] Representatives of the Troika (the European Commission, the International Monetary Fund, and the European Central Bank) arrived to the island in July for investigation over the financial problems of the country and submitted the terms of the bailout to the Cypriot government on 25 July.[149] The Cypriot government expressed disagreement over the bailout terms, and continued negotiation with Troika representatives concerning possible alterations to the terms throughout the following months.[150][151] On 20 November the government handed its counter-proposals to the Troika on the terms of the bailout,[152] with negotiations continuing. On 30 November it was reported that Troika and the Cypriot Government had agreed on the bailout terms with only the amount of money required for the bailout remaining to be agreed upon.[153] The bailout terms were made public on 30 November.[154] They include strong austerity measures, including cuts in civil service salaries, social benefits, allowances and pensions and increases in VAT, tobacco, alcohol and fuel taxes, taxes on lottery winnings, property, and higher public health care charges.[155]

In December 2012 a preliminary estimate indicated, that the needed overall bailout package should have a size of €17.5bn, comprising €10bn for bank recapitalisation and €6.0bn for refinancing maturing debt plus €1.5bn to cover budget deficits in 2013+2014+2015, which in total would have increased the Cypriot debt-to-GDP ratio to around 140%.[156] The final package negotiated and presented on 16 March 2013 however only entailed a €10bn support package,[157] financed partly by IMF (€1bn) and ESM (€9bn),[158] because it was possible to reach a fund saving agreement with the Cypriot authorities.[159] At first, the fund saving agreement comprised due to a specific request for this by the Cypriot finance minister, an unprecedented one-off levy of 6.7% for deposits up to €100.000 and 9.9% for higher deposits on all domestic bank accounts.[160] Following public outcry about neglect of the by EU law established Deposit Guarantee Scheme, the Eurozone finance ministers the next day however convinced Cypriot authorities instead to change the levy, into a higher 15.6% levy on deposits of above €100,000 ($129,600), while sparing depositors up to that level — in line with the EU law about existence of such a minimum deposit guarantee.[161] This revised deal was however rejected by the Cypriot parliament on 19 March 2013 with 36 votes against, 19 abstentions and one not present for the vote.[162]

When the final agreement was settled on 25 March, the idea of imposing any sort of deposit levy was dropped, as it was instead now possible to reach a mutual agreement with the Cypriot authorities accepting a direct closure of the most troubled Laiki Bank (with remaining good assets and deposits below €100,000 being saved and transferred to Bank of Cyprus (BoC), while shareholder capital would be written off, and the uninsured deposits above €100,000 — along with other creditor claims — would be lost to the degree being decided by how much the receivership subsequently can recover from liquidation of the remaining bad assets), while as an extra safety measure, uninsured deposits above €100,000 in BoC will also remain frozen until a recapitalisation has been implemented (with a possible imposed haircut if this is later deemed needed to reach the requirement for a 9% tier 1 capital ratio). The targeted closure of Laiki and recapitalisation plan for BoC helped significantly to reduce the needed loan amount for the overall bailout package, so that €10bn was still sufficient without need for imposing a general levy on bank deposits.[163]

The final conditions for activation of the bailout package was outlined by the Troika's MoU agreement, which was endorsed in full by the Cypriot House of Representatives on 30 April 2013, and include:[4][163]

“ 1.Recapitalisation of the entire financial sector while accepting a closure of the Laiki bank,
2.Implementation of the anti-money laundering framework in Cypriot financial institutions,
3.Fiscal consolidation to help bring down the Cypriot governmental budget deficit,
4.Structural reforms to restore competitiveness and macroeconomic imbalances,
5.Privatization programme. ”

The Cypriot debt-to-GDP ratio is on this background now forecasted only to peak at 126% in 2015 and subsequently decline to 105% in 2020, and thus considered to remain within sustainable territory. The €10bn bailout comprise €4.1bn spend on debt liabilities (refinancing and amortization), 3.4bn to cover fiscal deficits, and €2.5bn for the bank recapitalization. These amounts will be paid to Cyprus through regular tranches from 13 May 2013 until 31 March 2016. According to the programme this will be sufficient, as Cyprus during the programme period in addition will:[4]

1.Receive €1.0bn extraordinary revenue from privatization of government assets.
2.Ensure an automatic roll-over of €1.0bn maturing Treasury Bills and €1.0bn of maturing bonds held by domestic creditors.
3.Bring down the funding need for bank recapitalization with €8.7bn, of which 0.4bn is a reinjection of future profits earned by the Cyprus Central Bank (injected in advance at the short term by selling its gold reserve), and €8.3bn origin from the bail-in of creditors in Laiki Bank and Bank of Cyprus.
Policy reactions[edit source | editbeta]Main article: Policy reactions to the Eurozone crisis
EU emergency measures[edit source | editbeta]The table below provides an overview of the financial composition of all bailout programs being initiated for EU member states, since the Global Financial Crisis erupted in September 2008. EU member states outside the eurozone (marked with yellow in the table) have no access to the funds provided by EFSF/ESM, but can be covered with rescue loans from EU's Balance of Payments programme (BoP), IMF and bilateral loans (with an extra possible assistance from the Worldbank/EIB/EBRD if classified as a development country). Since October 2012, the ESM as a permanent new financial stability fund to cover any future potential bailout packages within the eurozone, has effectively replaced the now defunct GLF + EFSM + EFSF funds. Whenever pledged funds in a scheduled bailout program was not transferred in full, the table has noted this by writing "Y out of X".

v ·t ·eEU member Time span IMF[137][164]
(billion €) World Bank[164]
(billion €) EIB / EBRD
(billion €) Bilateral[137]
(billion €) BoP[164]
(billion €) GLF[165]
(billion €) EFSM[137]
(billion €) EFSF[137]
(billion €) ESM[137]
(billion €) Bailout in total
(billion €)
Cyprus I1 2011-12-15Dec.2011-Dec.2012 - - - 2.5 - - - - - 002.51
Cyprus II2 2013-05-13 until 2016-03-31May 2013-Mar.2016 001.0 - - - - - - - 009.0 010.02
Greece3 2010-05-01May 2010-Mar.2016 048.1 (20.1+19.8+8.2) - - - - 52.9 - 144.6 - 245.63
Hungary4 2008-11-01Nov.2008-Oct.2010 009.1 out of 12.5 1.0 - - 5.5 out of 6.5 - - - - 015.6 out of 20.04
Ireland5 2010-11-01Nov.2010-Dec.2013 022.5 - - 4.8 - - 022.5 017.7 - 067.55
Latvia6 2008-12-01Dec.2008-Dec.2011 001.1 out of 1.7 0.4 0.1 0.0 out of 2.2 2.9 out of 3.1 - - - - 004.5 out of 7.56
Portugal 2011-05-01May 2011-May 2014 026 - - - - - 026 026 - 078
Romania I7 2009-05-01May 2009-June 2011 012.6 out of 13.6 1.0 1.0 - 5.0 - - - - 019.6 out of 20.67
Romania II8 2011-03-01Mar 2011-Jun 2013 000.0 out of 3.6 - - - 0.0 out of 1.4 - - - - 000.0 out of 5.08
Spain I9 2012-07-23July 2012-Dec.2013 - - - - - - - - 41.4 out of 100 041.4 out of 1009
Spain II10 2013-07-01Perhaps in 2013 (considered) - - - - - - - (considered) (considered)10
Total payment Nov.2008-Mar.2016 120.3 2.4 1.1 7.3 13.4 52.9 48.5 188.3 50.4 484.6
1 Cyprus received in late December 2011 a €2.5bn bilateral emergency bailout loan from Russia, to cover its governmental budget deficits and a refinancing of maturing governmental debts until 31 December 2012.[166][167][168]
2 When it became evident Cyprus needed an additional bailout loan to cover the government's fiscal operations throughout 2013-2015, on top of additional funding needs for recapitalization of the Cypriot financial sector, negotiations for such an extra bailout package started with the Troika in June 2012.[169][170][171] In December 2012 a preliminary estimate indicated, that the needed overall bailout package should have a size of €17.5bn, comprising €10bn for bank recapitalisation and €6.0bn for refinancing maturing debt plus €1.5bn to cover budget deficits in 2013+2014+2015, which in total would have increased the Cypriot debt-to-GDP ratio to around 140%.[172] The final agreed package however only entailed a €10bn support package, financed partly by IMF (€1bn) and ESM (€9bn),[158] because it was possible to reach a fund saving agreement with the Cypriot authorities, featuring a direct closure of the most troubled Laiki Bank and a forced bail-in recapitalisation plan for Bank of Cyprus.[173][174]
The final conditions for activation of the bailout package was outlined by the Troika's MoU agreement in April 2013, and include: 1) Recapitalisation of the entire financial sector while accepting a closure of the Laiki bank, 2) Implementation of the anti-money laundering framework in Cypriot financial institutions, 3) Fiscal consolidation to help bring down the Cypriot governmental budget deficit, 4) Structural reforms to restore competitiveness and macroeconomic imbalances, 5) Privatization programme. The Cypriot debt-to-GDP ratio is on this background now forecasted only to peak at 126% in 2015 and subsequently decline to 105% in 2020, and thus considered to remain within sustainable territory. The €10bn bailout comprise €4.1bn spend on debt liabilities (refinancing and amortization), 3.4bn to cover fiscal deficits, and €2.5bn for the bank recapitalization. These amounts will be paid to Cyprus through regular tranches from 13 May 2013 until 31 March 2016. According to the programme this will be sufficient, as Cyprus during the programme period in addition will: Receive €1.0bn extra-ordinary revenue from privatization of government assets, ensure an automatic roll-over of €1.0bn maturing Treasury Bills and €1.0bn of maturing bonds held by domestic creditors, bring down the funding need for bank recapitalization with €8.7bn - of which 0.4bn is reinjection of future profit earned by the Cyprus Central Bank (injected in advance at the short term by selling its gold reserve) and €8.3bn origin from the bail-in of creditors in Laiki bank and Bank of Cyprus.[175]
3 Many sources list the first bailout was €110bn followed by the second on €130bn. When you deduct €2.7bn due to Ireland+Portugal+Slovakia opting out as creditors for the first bailout, and add the extra €8.2bn IMF has promised to pay Greece for the years in 2015-16, the total amount of bailout funds sums up to €245.6bn.[165][176]
4 Hungary recovered faster than expected, and thus did not receive the remaining €4.4bn bailout support scheduled for October 2009-October 2010.[164][177] IMF paid in total 7.6 out of 10.5 billion SDR,[178] equal to €9.1bn out of €12.5bn at current exchange rates.[179]
5 In Ireland the National Treasury Management Agency also paid €17.5bn for the program on behalf of the Irish government, of which €10bn were injected by the National Pensions Reserve Fund and the remaining €7.5bn paid by "domestic cash resources",[180] which helped increase the program total to €85bn.[137] As this extra amount by technical terms is an internal bail-in, it has not been added to the bailout total. As of 31 March 2013, €58.0bn out of the promised €67.5bn had been transferred, with the remaining amount expected to be transferred during the next three quarters.[181]
6 Latvia recovered faster than expected, and thus did not receive the remaining €3.0bn bailout support originally scheduled for 2011.[182][183]
7 Romania recovered faster than expected, and thus did not receive the remaining €1.0bn bailout support originally scheduled for 2011.[184][185]
8 Romania had a precautionary credit line with €5.0bn available to draw money from if needed, during the period March 2011-June 2013; but entirely avoided to draw on it.[186][187][164][188]
9 Spain's €100bn support package has been earmarked only for recapitalisation of the financial sector.[189] Initially an EFSF emergency account with €30bn was available, but nothing was drawed, and it was cancelled again in November 2012 after being superseded by the regular ESM recapitalisation programme.[190] The first ESM recapitalisation tranch of €39.5bn was approved 28 November,[191][192] and transferred to the bank recapitalisation fund of the Spanish government (FROB) on 11 December 2012.[190] A second tranch for "category 2" banks on €1.9bn was approved by the Commission on 20 December,[193] and finally transferred by ESM on 5 February 2013.[194] "Category 3" banks were also subject for a possible third tranch in June 2013, in case they failed before then to acquire sufficient additional capital funding from private markets.[142] During January 2013, all "category 3" banks however managed to fully recapitalise through private markets and thus will not be in need for any State aid. The remaining €58.6bn of the initial support package is thus not expected to be activated, but will stay available as a fund with precautionary capital reserves to possibly draw upon if unexpected things happen - until 31 December 2013.[189][195]
10 Spain has since September 2012 considered to sign an MoU and apply for a Precautionary Conditioned Credit Line (PCCL) or Enhanced Conditioned Credit Line (ECCL). If the line is created, Spain plans not to draw any money from it, and will only be interested to get it for precautionary reasons (to calm down markets; and to enable ECB to perform a yield lowering OMT). As of February 2013, the Spanish finance minister emphasized that no such sovereign PCCL/ECCL would be sought, for as long as the current interest rates for Spanish goverment bonds remained at an acceptable level.[196] In that sense, it is noteworthy the average interest rate for 10yr Spanish governmental bonds declined from 6.6% in August 2012 to 5.2% in February 2013, and further down to 4.6% in April 2013, without any external market intervention.[197] Spain's strategy is only to apply for a sovereign bailout, if it throughout several months in a row experience some significantly elevated interest rate levels on the financial markets.[196]

European Financial Stability Facility (EFSF)[edit source | editbeta]Main article: European Financial Stability Facility
On 9 May 2010, the 27 EU member states agreed to create the European Financial Stability Facility, a legal instrument[198] aiming at preserving financial stability in Europe by providing financial assistance to eurozone states in difficulty. The EFSF can issue bonds or other debt instruments on the market with the support of the German Debt Management Office to raise the funds needed to provide loans to eurozone countries in financial troubles, recapitalise banks or buy sovereign debt.[199]

Emissions of bonds are backed by guarantees given by the euro area member states in proportion to their share in the paid-up capital of the European Central Bank. The €440 billion lending capacity of the facility is jointly and severally guaranteed by the eurozone countries' governments and may be combined with loans up to €60 billion from the European Financial Stabilisation Mechanism (reliant on funds raised by the European Commission using the EU budget as collateral) and up to €250 billion from the International Monetary Fund (IMF) to obtain a financial safety net up to €750 billion.[200]

The EFSF issued €5 billion of five-year bonds in its inaugural benchmark issue 25 January 2011, attracting an order book of €44.5 billion. This amount is a record for any sovereign bond in Europe, and €24.5 billion more than the European Financial Stabilisation Mechanism (EFSM), a separate European Union funding vehicle, with a €5 billion issue in the first week of January 2011.[201]

On 29 November 2011, the member state finance ministers agreed to expand the EFSF by creating certificates that could guarantee up to 30% of new issues from troubled euro-area governments, and to create investment vehicles that would boost the EFSF's firepower to intervene in primary and secondary bond markets.[202]

Reception by financial markets
Stocks surged worldwide after the EU announced the EFSF's creation. The facility eased fears that the Greek debt crisis would spread,[203] and this led to some stocks rising to the highest level in a year or more.[204] The euro made its biggest gain in 18 months,[205] before falling to a new four-year low a week later.[206] Shortly after the euro rose again as hedge funds and other short-term traders unwound short positions and carry trades in the currency.[207] Commodity prices also rose following the announcement.[208]

The dollar Libor held at a nine-month high.[209] Default swaps also fell.[210] The VIX closed down a record almost 30%, after a record weekly rise the preceding week that prompted the bailout.[211] The agreement is interpreted as allowing the ECB to start buying government debt from the secondary market which is expected to reduce bond yields.[212] As a result Greek bond yields fell sharply from over 10% to just over 5%.[213] Asian bonds yields also fell with the EU bailout.[214])

Usage of EFSF funds
The EFSF only raises funds after an aid request is made by a country.[215] As of the end of July 2012, it has been activated various times. In November 2010, it financed €17.7 billion of the total €67.5 billion rescue package for Ireland (the rest was loaned from individual European countries, the European Commission and the IMF). In May 2011 it contributed one-third of the €78 billion package for Portugal. As part of the second bailout for Greece, the loan was shifted to the EFSF, amounting to €164 billion (130bn new package plus 34.4bn remaining from Greek Loan Facility) throughout 2014.[216] On 20 July 2012, European finance ministers sanctioned the first tranche of a partial bail-out worth up to €100 billion for Spanish banks.[217] This leaves the EFSF with €148 billion[217] or an equivalent of €444 billion in leveraged firepower.[218]

The EFSF is set to expire in 2013, running some months parallel to the permanent €500 billion rescue funding program called the European Stability Mechanism (ESM), which will start operating as soon as member states representing 90% of the capital commitments have ratified it. (see section: ESM)

On 13 January 2012, Standard & Poor's downgraded France and Austria from AAA rating, lowered Spain, Italy (and five other[219]) euro members further, and maintained the top credit rating for Finland, Germany, Luxembourg, and the Netherlands; shortly after, S&P also downgraded the EFSF from AAA to AA+.[219][220]

European Financial Stabilisation Mechanism (EFSM)[edit source | editbeta]Main article: European Financial Stabilisation Mechanism
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.[221] It runs under the supervision of the Commission[222] and aims at preserving financial stability in Europe by providing financial assistance to EU member states in economic difficulty.[223] The Commission fund, backed by all 27 European Union members, has the authority to raise up to €60 billion[224] and is rated AAA by Fitch, Moody's and Standard & Poor's.[225][dead link][226]

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%.[227]

Like the EFSF, the EFSM was replaced by the permanent rescue funding programme ESM, which was launched in September 2012.[228]

Brussels agreement and aftermath[edit source | editbeta]On 26 October 2011, leaders of the 17 eurozone countries met in Brussels and agreed on 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. José Manuel Barroso characterised the package as a set of "exceptional measures for exceptional times".[229][230]

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.[231] On 3 November 2011 the promised Greek referendum on the bailout package was withdrawn by Prime Minister Papandreou.

In late 2011, Landon Thomas in the New York Times noted that some, at least, European banks were maintaining high dividend payout rates and none were getting capital injections from their governments even while being required to improve capital ratios. Thomas quoted Richard Koo, an economist based in Japan, an expert on that country's banking crisis, and specialist in balance sheet recessions, as saying:

I do not think Europeans understand the implications of a systemic banking crisis.... When all banks are forced to raise capital at the same time, the result is going to be even weaker banks and an even longer recession – if not depression.... Government intervention should be the first resort, not the last resort.

Beyond equity issuance and debt-to-equity conversion, then, one analyst "said that as banks find it more difficult to raise funds, they will move faster to cut down on loans and unload lagging assets" as they work to improve capital ratios. This latter contraction of balance sheets "could lead to a depression”, the analyst said.[232] Reduced lending was a circumstance already at the time being seen in a "deepen[ing] crisis" in commodities trade finance in western Europe.[233]

Final agreement on the second bailout package
In a marathon meeting on 20/21 February 2012 the Eurogroup agreed with the IMF and the Institute of International Finance on the final conditions of the second bailout package worth €130 billion. The lenders agreed to increase the nominal haircut from 50% to 53.5%. EU Member States agreed to an additional retroactive lowering of the interest rates of the Greek Loan Facility to a level of just 150 basis points above the Euribor. Furthermore, governments of Member States where central banks currently hold Greek government bonds in their investment portfolio commit to pass on to Greece an amount equal to any future income until 2020. Altogether this should bring down Greece's debt to between 117%[66] and 120.5% of GDP by 2020.[67]

European Central Bank[edit source | editbeta]
ECB Securities Markets Program (SMP) covering bond purchases since May 2010The European Central Bank (ECB) has taken a series of measures aimed at reducing volatility in the financial markets and at improving liquidity.[234]

In May 2010 it took the following actions:

It began open market operations buying government and private debt securities,[235] reaching €219.5 billion in February 2012,[236] though it simultaneously absorbed the same amount of liquidity to prevent a rise in inflation.[237] According to Rabobank economist Elwin de Groot, there is a "natural limit" of €300 billion the ECB can sterilise.[238]
It reactivated the dollar swap lines[239] with Federal Reserve support.[240]
It changed its policy regarding the necessary credit rating for loan deposits, accepting as collateral all outstanding and new debt instruments issued or guaranteed by the Greek government, regardless of the nation's credit rating.
The move took some pressure off Greek government bonds, which had just been downgraded to junk status, making it difficult for the government to raise money on capital markets.[241]

On 30 November 2011, the ECB, the US Federal Reserve, the central banks of Canada, Japan, Britain and the Swiss National Bank provided global financial markets with additional liquidity to ward off the debt crisis and to support the real economy. The central banks agreed to lower the cost of dollar currency swaps by 50 basis points to come into effect on 5 December 2011. They also agreed to provide each other with abundant liquidity to make sure that commercial banks stay liquid in other currencies.[242]

Long Term Refinancing Operation (LTRO)
Though the ECB's main refinancing operations (MRO) are from repo auctions with a (bi)weekly maturity and monthly maturation, the ECB now conducts Long Term Refinancing Operations (LTROs), maturing after three months, six months, 12 months and 36 months. In 2003, refinancing via LTROs amounted to 45 bln euro which is about 20% of overall liquidity provided by the ECB.[243]

The ECB's first supplementary longer-term refinancing operation (LTRO) with a six-month maturity was announced March 2008.[244] Previously the longest tender offered was three months.[245] It announced two 3-month and one 6-month full allotment of Long Term Refinancing Operations (LTROs). The first tender was settled 3 April, and was more than four times oversubscribed. The €25 billion auction drew bids amounting to €103.1 billion, from 177 banks. Another six-month tender was allotted on 9 July, again to the amount of €25 billion. The first 12-month LTRO in June 2009 had close to 1100 bidders.[246]

On 22 December 2011, the ECB[247] started the biggest infusion of credit into the European banking system in the euro's 13-year history. Under its Long Term Refinancing Operations (LTROs) it loaned €489 billion to 523 banks for an exceptionally long period of three years at a rate of just one percent.[248] Previous refinancing operations matured after three, six and twelve months.[246] The by far biggest amount of €325 billion was tapped by banks in Greece, Ireland, Italy and Spain.[249]

This way the ECB tried to make sure that banks have enough cash to pay off €200 billion of their own maturing debts in the first three months of 2012, and at the same time keep operating and loaning to businesses so that a credit crunch does not choke off economic growth. It also hoped that banks would use some of the money to buy government bonds, effectively easing the debt crisis.[250] On 29 February 2012, the ECB held a second auction, LTRO2, providing 800 Eurozone banks with further €529.5 billion in cheap loans.[251] Net new borrowing under the €529.5 billion February auction was around €313 billion; out of a total of €256 billion existing ECB lending (MRO + 3m&6m LTROs), €215 billion was rolled into LTRO2.[252]

ECB lending has largely replaced inter-bank lending. Spain has €365 billion and Italy has €281 billion of borrowings from the ECB (June 2012 data). Germany has €275 billion on deposit.[253]

Resignations
In September 2011, Jürgen 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 ECB's bond purchases, which critics say erode the bank's independence". Stark was "probably the most hawkish" member of the council when he resigned. Weber was replaced by his Bundesbank successor Jens Weidmann, while Belgium's Peter Praet took Stark's original position, heading the ECB's economics department.[254]

Money supply growth
In April 2012, statistics showed a growth trend in the M1 "core" money supply. Having fallen from an over 9% growth rate in mid-2008 to negative 1% +/- for several months in 2011, M1 core has built to a 2–3% range in early 2012. "'It is still early days but a further recovery in peripheral real M1 would suggest an end to recessions by late 2012,' said Simon Ward from Henderson Global Investors who collects the data." While attributing the money supply growth to ECB's LTRO policies, an analysis in The Telegraph said lending "continued to fall across the eurozone in March [and] ... [t]he jury is out on the ... three-year lending adventure (LTRO)".[255]

Reorganization of the European banking system
On 16 June 2012 the European Central Bank together with other European leaders hammered out plans for the ECB to become a bank regulator and to form a deposit insurance program to augment national programs. Other economic reforms promoting European growth and employment were also proposed.[256]

Outright Monetary Transactions (OMTs)
On 6 September 2012, the ECB announced to offer additional financial support in the form of some yield-lowering bond purchases (OMT), for all eurozone countries involved in a sovereign state bailout program from EFSF/ESM.[16] A eurozone country can benefit from the program if -and for as long as- it is found to suffer from stressed bond yields at excessive levels; but only at the point of time where the country posses/regains a complete market access -and only if the country still comply with all terms in the signed Memorandum of Understanding (MoU) agreement.[16][135] Countries receiving a precautionary programme rather than a sovereign bailout, will per definition have complete market access and thus qualify for OMT support if also suffering from stressed interest rates on its government bonds. In regards of countries receiving a sovereign bailout (Ireland, Portugal and Greece), they will on the other hand not qualify for OMT support before they have regained complete market access, which will normally only happen after having received the last scheduled bailout disbursement.[16][257] Despite none OMT programmes were ready to start in September/October, the financial markets straight away took notice of the additionally planned OMT packages from ECB, and started slowly to price-in a decline of both short term and long term interest rates in all European countries previously suffering from stressed and elevated interest levels (as OMTs were regarded as an extra potential back-stop to counter the frozen liquidity and highly stressed rates; and just the knowledge about their potential existence in the very near future helped to calm the markets).

If Spain signs a negotiated Memorandum of Understanding with the Troika (EC, ECB and IMF) outlining ESM shall offer a precautionary programme with credit lines for the Spanish government to potentially draw on if needed (beside of the bank recapitalisation package they already applied for), this would qualify Spain also to receive the OMT support from ECB, as the sovereign state would still continue to operate with a complete market access with the precautionary conditioned credit line. In regards of Ireland, Portugal and Greece, they on the other hand have not yet regained complete market access, and thus do not yet qualify for OMT support.[16][257]

European Stability Mechanism (ESM)[edit source | editbeta]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 July 2012[228] but it had to be postponed until after the Federal Constitutional Court of Germany had confirmed the legality of the measures on 12 September 2012.[258][259] The permanent bailout fund entered into force for 16 signatories on 27 September 2012. It became effective in Estonia on 4 October 2012 after the completion of their ratification process.[260]

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[261] 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.[262][263] The ESM is an intergovernmental organisation under public international law. It is located in Luxembourg.[264][265]

Such a mechanism serves as a "financial firewall." Instead of a default by one country rippling through the entire interconnected financial system, the firewall mechanism can ensure that downstream nations and banking systems are protected by guaranteeing some or all of their obligations. Then the single default can be managed while limiting financial contagion.

European Fiscal Compact[edit source | editbeta]Main article: European Fiscal Compact Public debt to GDP ratio for selected Eurozone countries and the UK – 2008 to 2011. Source Data: Eurostat.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 3% deficit or the 60% debt rules.[266][267] By the end of the year, Germany, France and some other smaller EU countries went a step further and vowed to create a fiscal union across the eurozone with strict and enforceable fiscal rules and automatic penalties embedded in the EU treaties.[268][269] On 9 December 2011 at the European Council meeting, all 17 members of the eurozone and six countries that aspire to join agreed on a new intergovernmental treaty to put strict caps on government spending and borrowing, with penalties for those countries who violate the limits.[270] All other non-eurozone countries apart from the UK are also prepared to join in, subject to parliamentary vote.[228] The treaty will enter into force on 1 January 2013, if by that time 12 members of the euro area have ratified it.[271]

Originally EU leaders planned to change existing EU treaties but this was blocked by British prime minister David Cameron, who demanded that the City of London be excluded from future financial regulations, including the proposed EU financial transaction tax.[272][273] By the end of the day, 26 countries had agreed to the plan, leaving the United Kingdom as the only country not willing to join.[274] Cameron subsequently conceded that his action had failed to secure any safeguards for the UK.[275] Britain's refusal to be part of the fiscal compact to safeguard the eurozone constituted a de facto refusal (PM David Cameron vetoed the project) to engage in any radical revision of the Lisbon Treaty. John Rentoul of The Independent concluded that "Any Prime Minister would have done as Cameron did".[276]

Economic reforms and recovery proposals[edit source | editbeta]Main article: Economic reforms and recovery proposals regarding the Eurozone crisis
Direct loans to banks and banking regulation[edit source | editbeta]On 28 June 2012 Eurozone leaders agreed to permit loans by the European Stability Mechanism to be made directly to stressed banks rather than through Eurozone states, to avoid adding to sovereign debt. The reform was linked to plans for banking regulation by the European Central Bank. The reform was immediately reflected by a reduction in yield of long-term bonds issued by member states such as Italy and Spain and a rise in value of the Euro.[277][278][279]

Less austerity, more investment[edit source | editbeta]There has been substantial criticism over the austerity measures implemented by most European nations to counter this debt crisis. US economist and Nobel laureate Paul Krugman argues that an abrupt return to "'non-Keynesian' financial policies" is not a viable solution[280] Pointing at historical evidence, he predicts that deflationary policies now being imposed on countries such as Greece and Spain will prolong and deepen their recessions.[281] Together with over 9,000 signatories of "A Manifesto for Economic Sense"[282] Krugman also dismissed the belief of austerity focusing policy makers such as EU economic commissioner Olli Rehn and most European finance ministers[283] that "budget consolidation" revives confidence in financial markets over the longer haul.[284][285] In a 2003 study that analysed 133 IMF austerity programmes, the IMF's independent evaluation office found that policy makers consistently underestimated the disastrous effects of rigid spending cuts on economic growth.[286][287] In early 2012 an IMF official, who negotiated Greek austerity measures, admitted that spending cuts were harming Greece.[42][42] In October 2012, the IMF said that its forecasts for countries which implemented austerity programs have been consistently overoptimistic, suggesting that tax hikes and spending cuts have been doing more damage than expected, and countries which implemented fiscal stimulus, such as Germany and Austria, did better than expected.[288]

Despite years of draconian austerity measures Greece has failed to reach a balanced budget as public revenues remain low.According to Keynesian economists "growth-friendly austerity" relies on the false argument that public cuts would be compensated for by more spending from consumers and businesses, a theoretical claim that has not materialised.[289] The case of Greece shows that excessive levels of private indebtedness and a collapse of public confidence (over 90% of Greeks fear unemployment, poverty and the closure of businesses)[290] led the private sector to decrease spending in an attempt to save up for rainy days ahead. This led to even lower demand for both products and labour, which further deepened the recession and made it ever more difficult to generate tax revenues and fight public indebtedness.[291] According to Financial Times chief economics commentator Martin Wolf, "structural tightening does deliver actual tightening. But its impact is much less than one to one. A one percentage point reduction in the structural deficit delivers a 0.67 percentage point improvement in the actual fiscal deficit." This means that Ireland e.g. would require structural fiscal tightening of more than 12% to eliminate its 2012 actual fiscal deficit. A task that is difficult to achieve without an exogenous eurozone-wide economic boom.[292] According to the Europlus Monitor Report 2012, no country should tighten its fiscal reins by more than 2% of GDP in one year, to avoid recession.[293]

Austerity is bound to fail if it relies largely on tax increases[294] instead of cuts in government expenditures coupled with encouraging "private investment and risk-taking, labor mobility and flexibility, an end to price controls, tax rates that encouraged capital formation ..." as Germany has done in the decade before the crisis.[295] Italy, for example, has essentially no cuts in spending (i.e. government austerity) when taken into account the shifting of spending from national to local levels. Instead, Italy has relied on tax increases which is an imposed austerity on the private sector, thereby reducing economic activity.[296]

Instead of public austerity, a "growth compact" centring on tax increases[291] and deficit spending is proposed. Since struggling European countries lack the funds to engage in deficit spending, German economist and member of the German Council of Economic Experts Peter Bofinger and Sony Kapoor of the global think tank Re-Define suggest providing €40 billion in additional funds to the European Investment Bank (EIB), which could then lend ten times that amount to the employment-intensive smaller business sector.[291] The EU is currently planning a possible €10 billion increase in the EIB's capital base. Furthermore the two suggest financing additional public investments by growth-friendly taxes on "property, land, wealth, carbon emissions and the under-taxed financial sector". They also called on EU countries to renegotiate the EU savings tax directive and to sign an agreement to help each other crack down on tax evasion and avoidance. Currently authorities capture less than 1% in annual tax revenue on untaxed wealth transferred between EU members.[291] According to the Tax Justice Network, worldwide, a global super-rich elite had between $21 and $32 trillion (up to 26,000bn Euros) hidden in secret tax havens by the end of 2010, resulting in a tax deficit of up to $280bn.[297][298]

Apart from arguments over whether or not austerity, rather than increased or frozen spending, is a macroeconomic solution,[299] 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 2007–2010, and this has led many to call for additional regulation of the banking sector across not only Europe, but the entire world.[300]

In the turmoil of the Global Financial Crisis, the focus across all EU member states has been gradually to implement austerity measures, with the purpose of lowering the budget deficits to levels below 3% of GDP, so that the debt level would either stay below -or start decline towards- the 60% limit defined by the Stability and Growth Pact. To further restore the confidence in Europe, 23 out of 27 EU countries also agreed on adopting the Euro Plus Pact, consisting of political reforms to improve fiscal strength and competitiveness; and 25 out of 27 EU countries also decided to implement the Fiscal Compact which include the commitment of each participating country to introduce a balanced budget amendment as part of their national law/constitution. The Fiscal Compact is a direct successor of the previous Stability and Growth Pact, but it is more strict, not only because criteria compliance will be secured through its integration into national law/constitution, but also because it starting from 2014 will require all ratifying countries not involved in ongoing bailout programmes, to comply with the new strict criteria of only having a structural deficit of either maximum 0.5% or 1% (depending on the debt level).[268][269] Each of the eurozone countries being involved in a bailout program (Greece, Portugal and Ireland) was asked both to follow a program with fiscal consolidation/austerity, and to restore competitiveness through implementation of structural reforms and internal devaluation, i.e. lowering their relative production costs.[301] The measures implemented to restore competitiveness in the weakest countries are needed, not only to build the foundation for GDP growth, but also in order to decrease the current account imbalances among eurozone member states.[302][303]