The situation in many debt-ridden countries worsened with a major political upheaval and the resultant change in eight out of 17 countries hit by the crisis. The crisis led to power shifts in Greece, Ireland, Italy, Portugal, Spain, Slovenia, Slovakia, and the Netherlands.
A number of countries in Europe face serious financial crisis that has made it impossible for them to refinance their government debt. The debt crisis resulted from a number of complex factors such as the easy-credit conditions during the 2002-08 period which facilitated high-risk lending and borrowing practices, the ‘2007-2012 global financial crisis, the ‘2008-2012 global recession, international trade imbalances, the real estate bubbles, fiscal policy choices related to government revenues and expenses and globalization of finance. Another reason for the crisis is the approach used by nations to bail out troubled banking industries and private bond-holders. The result was the burdening of these economies with the private debts.
The debt crisis started in late 2009 as a result of the rising private and government debt. The interesting part of the crisis is the different causes which varied from country to country. Among them is the property bubble through which the banking system bailouts were transferred to sovereign debt. These bailout packages were the response of governments in these countries to boost the slowing of economies in the post-bubble era. The high public-sector wage and pension commitment were another cause which increased the government debt.
The situation in many debt-ridden countries worsened with a major political upheaval and the resultant change in eight out of 17 countries hit by the crisis. The crisis led to power shifts in Greece, Ireland, Italy, Portugal, Spain, Slovenia, Slovakia, and the Netherlands. 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), it has become a perceived problem for the area as a whole, leading to speculation of further contagion of other European countries and a possible breakup of the Eurozone and slowing down of the world economy.
The response of some governments was on austerity measures such as higher taxes and lower expenses which contributed to social unrest. The economists did not favour these steps rather many of them advocate greater deficits for economies struggling to sail through debt crisis. The advice was especially for countries facing sharp rise in the budget deficits and sovereign debts. The main argument was the crisis of investors’ confidence which fuelled the flight of capital from the debt-stricken countries to better performing economies.
In the mid-2012, due to implementation of structural reforms and successful fiscal measures in the countries at risk and various policy measures taken by European Union (EU) leaders, financial stability in the Eurozone has improved significantly and interest rates have steadily fallen. The contagion risk has also greatly diminished for other euro zone countries. As of October 2012 only three out of 17 Eurozone countries, namely Greece, Portugal and Cyprus still battled with long-term interest rates above 6 per cent. By the end of 2012, the debt crisis forced five out of 17 Eurozone countries to seek help from other nations.
In return, the Euro group agreed 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 of that debt. This should bring Greece’s debt-to-GDP ratio down to 124% by 2020 and well below 110% two years later. Without agreement the debt-to-GDP ratio would have risen to 188% in 2013.
The Irish 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. In 2008, Finance Minister issued a two-year guarantee to banks’ depositors and bond-holders. The guarantees were subsequently renewed for new deposits and bonds in a slightly different manner.
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. With yields on Irish Government debt rising rapidly, the government negotiated bailout package of 67.5 billion in November 2010. Together with additional 17.5 billion coming from Ireland’s own reserves and pensions, the government received 85 billion, of which up to 34 billion was to be used to support the country’s ailing financial sector. In return the government agreed to reduce its budget deficit to below three percent by 2015.
When global crisis disrupted the markets and the world economy, together with the US credit crunch and the European debt crisis, Portugal was one of the most affected economies to succumb.
In the summer of 2010, ‘Moodys Investors Service cut Portugal’s sovereign bond rating, which led to increased pressure on Portuguese government bonds. In the first half of 2011, Portugal requested a â‚¬78 billion bailout package to stabilize its public finances. 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 implement measures to improve the State’s financial situation and the country started to be seen as moving on the right track.
Spain had a comparatively low debt level among advanced economies prior to the crisis. It is a 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. 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. When the bubble burst, Spain spent large amounts of money on bank bailouts.
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 it amended the Spanish Constitution in 2011 to require a balanced budget at both the national and regional level by 2020.
As one of the largest euro zone economies (larger than Greece, Portugal and Ireland combined) 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 the Spanish governments eventually succeeded in trimming the deficit from 11.2% of GDP in 2009 to an expected 5.4% in 2012.
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 programme, will result in a debt-to-GDP ratio reaching its maximum at 110% in 2018 followed by a declining trend in subsequent years. With regard to the structural deficit, the same outlook promised it would gradually decline to comply with the maximum 0.5% level required by the Fiscal Compact in 2022/2027.