SUMMARY OF THE EURO CRISIS – OVERVIEW OF EVENTS TILL DATE

The Euro Crisis had its making in the US financial crisis of 2008-09. Before 2008, Euro Zone nations had been borrowing indiscriminately owing to low interest bonds available due to being part of Euro Zone. Also, they were banking on their high growth rates to pay back those loans. However, as a result of US financial crisis, growth slowed down, resulting in slowing down of tax revenues. Meanwhile, the interest on loans was accruing. Combined, these factors led to huge fiscal deficits. Greece was the first country to feel the heat due to high budget deficits. When new government came into power in Greece in 2009, it announced that previous government had fudged about the fiscal deficit, and showed it to be lower than it actually was. It was found that Greece’ debts actually exceeded the size of its economy.
Seeing the higher risks associated with giving loans to Greece, lenders started asking for higher returns not only from Greece, but from other heavily indebted countries – Ireland, Spain and Portugal. The four countries are together referred as PIGS. Unlike Greece, in Ireland, government kept its spending in check but ended up in debt by guaranteeing the liabilities of banks which lost their money in property bubble burst.
The high lending costs for Greece coupled with the high debt made the fears of Greece defaulting on loans real. Since the banks of Germany and France had exposure to 15% of Greece’s debt, defaulting of Greece would have affected the financial strength of their own banks and could have resulted in flight of depositors. As a result, Euro Zone members led by Germany and France agreed to provide a safety net of 22bn Euros for Greece which eventually turned into 110bn Euros bailout package by European Union and IMF by mid 2010. By the end of 2010, EU had to arrange a bailout for Ireland