Eurozone Debt Crisis - Problems and Solutions

8/2/2019 Eurozone Debt Crisis - Problems and Solutions

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Discipline: Understanding of global and European business

environment

Specialty: European business and finance

Report:Eurozone Debt Crisis problems and solutions

Prepared by: Revised by:Anjelika Aleksieva 1123274 Assoc. Prof. Dr. Iv. Stoychev

Assoc. Prof. Dr. Sv. Boneva

January 2012


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Beginning of the crisis 3

Origins of the present crisis 3 What happens when sovereign states accumulate large debts? 4 From Greece to Italy 4 But what is contagion? 5 Why is the euro depreciating? 5

The Crisis in Italy 6

Acknowledging Contagion Bill Auction Disaster Borrowing Costs

Tax reform in Italy 8

Aim of Tax Reform in Italy 8

Income Tax Reforms in Italy 8

IVA in Italy 8

Reforms of Corporate Tax Structure in Italy 9

The Crisis in Greece: 9

What If Greece Drops the Euro? 10 Tensions in the Euro Zone 10 Three-Year Package 11

The Crisis in Portugal 12

The Crisis in Ireland 13

Financial assistance package for Ireland 13 Facts and figures on the program for Ireland 14

The Crisis in Spain 15

Solutions 16

European Financial Stability Facility (EFSF) 16 European Financial Stabilisation Mechanism (EFSM) 16 ECB interventions 17

Conclusion 18

References 19


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Beginning of the crisis

The Greek crisis has led to fears that this is only the beginning of a deeper sovereign

debt crisis that could ultimately destabilise the Eurozone.

Origins of the present crisisIt is useful to start out with the origins of the present crisis. Figure 1 shows the average

yearly changes (in percent of GDP) of private and public debt in the Eurozone.

The period 1999-2009 has been organised in periods of booms and busts: the boom

years were 1999-2001 and 2005-07; the bust years were 2002-04 and 2008-09.

We can see a number of remarkable patterns.

1. First, private debt increases much more than public debt throughout the whole period(compare the left hand axis with the right hand axis).

2. Second, during boom years private debt increases spectacularly.The latest boom period of 2005-07 stands out with yearly additions to private debt

amounting on average to 35 percentage points of GDP.

3. During these boom periods, public debt growth drops from 1 to 2 percentage points ofGDP. The opposite occurs during bust years. Private debt growth slows down and

public debt growth accelerates.

Again the last period of bust (2008-09) stands out. Public debt increases by 10

percentage points of GDP per year, mirroring the spectacular increase of private debt during

the boom years (but note that the surge of public debt during the bust years of 2008-09 are

dwarfed by the private debt surge during the preceding boom years).

Figure 1


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Source: ECB, Quarterly Euro Area Accounts. Note: 2009 is until second quarter

During boom years the private sector adds a lot of debt. This was spectacularly so

during the boom of 2005-07. Then the bust comes and the governments pick up the pieces.

They do this in two ways.

First, as the economy is driven into a recession, government revenues decline andsocial spending increases.

Second as part of the private debt is implicitly guaranteed by the government (bankdebt in particular) the government is forced to issue its own debt to rescue private

institutions.

Thus the driving force of the cyclical behaviour of government debt is the boom and bust

character of private debt. This feature is particularly pronounced during the last boom-bust

cycle that led to unsustainable private debt growth forcing governments to add large amounts

to its own debt.1

What happens when sovereign states accumulate large debts?Initially, investors start worrying that this debt may not be sustainable, which means

that the state cannot be able to pay back capital and interests by generating revenue bigger

than expenditures .In this case, investors require higher interest rates to subscribe new public

debt as a compensation for the risk of insolvency. This increases the risk of insolvency as it

worsens public sector balance sheets. At some point, there may no longer be an interest rate

able to compensate investors for the risk of insolvency; then they just stop subscribing the

public debt. This is a situation of fiscal crisis and has only two possibilities:

1. government default followed by a renegotiation of the debt (as in Argentinas case),2. monetisation of the debt, which is effectively bought by the central bank. This

represents an injection of money in the economy and thus generates inflation and

exchange-rate depreciation.

From Greece to Italy

1 For a fascinating historic analysis of public and private debt see Reinhart and Rogoff(2009).


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Second, in the case of Greece, the second option monetisation - was ruled out by Greeces

membership in the European monetary union: the Greek government could not force the ECB

to buy its own bonds. For this reason, the only option was insolvency and renegotiation of the

debt, unless other countries were willing to lend to Greece at an interest rate lower than the

market rate. But did the EU help Greece? In 2010 it has been clear that, following a

substantial dose of indecision, they did it mainly for fear of contagion.

But what is contagion?Thirdly, as the Greek crisis unfolded, investors started to suspect that other countries

with high levels of public debt, namely Portugal, Spain and Italy, would find themselves in a

similar situation. But as governments of these countries rushed to point out, their fiscal

position is not as dramatic as the Greek one.

So why are investors so concerned?Because ,even if the government is not highly

indebted, investors might start questioning its willingness to raise taxes above a level

considered politically sustainable,which ,in future, might seek a renegotiation of the debt,

its monetisation, or both. Fear that this will happen can push interest rates to a level so high

that the investors fears will eventually come true. In the prevailing interest rates a country

that otherwise would be unable to service its debt ultimately require renegotiation or

monetization of the debt to avoid full repayment.

So the outcome depends on investors confidence. If there is confidence, the good

equilibrium with moderate interest rates and stable markets prevails; when confidence

disappears, the economy jumps to a bad equilibrium, where a fiscal crisis occurs.2 Greeks

contagion has been exactly of this type.The burden of Greek bail-out itself is affecting

negatively the fiscal position of Portugal, Spain, and Italy. This too may have contributed to

weaken confidence in their ability to service the debt.

Why is the euro depreciating?A possible answer is that as the crisis spreads to other large Eurozone countries, the

risk of monetisation of the public debt is concentrating. Even if Greece is bailed out by other

countries in the Eurozone, this would not be possible for the much larger public debts of

Italy, Spain, and Portugal. In the scenario of a widespread crisis, the possibility that the ECB

will monetise the debt of weak Eurozone countries exists, and fear of the implied inflation can

explain the depreciation of the euro.

2 Marco Pagano , Fiscal crisis, contagion, and the future of euro, May 15, 2010


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Countries that are in a critic situation:

Portugal Italy Ireland Greece Spain

The Crisis in Italy

The plunge in Italian markets overshadowed policy makers efforts to fix Greek

finances as the euro-regions debt crisis infectedEuropes largest borrower.

Italianbonds fell for a seventh day and the nations borrowing costs jumped by more

than half at an auction of 6.75 billion euros ($9.4 billion) of bills.Stocks decline comparedafter falling to a two-year low. Warnings made by Investors Service "Moody" and Standard

& Poor over the ability of Italy to cut debt, combined with infighting in the government of

Silvio Berlusconi over plan to cut budget, fueled sales.

Italy coming under severe market pressure, being the third-largest economy and a

founding member of the EU, signals that the sovereign and banking crisis has reached a

deeply systemic phase,3

The pogrom in Italy highlighted the inability of Europe to contain the crisis that began

in Greece in October 2009 and led to rescue Ireland and Portugal. Finance ministers failed to

agree how to share with lenders the cost of a second bailout for Greece to be financed mainly

from its European allies of the EU, including Italy.

Acknowledging ContagionEurope needs to recognize its no longer a crisis of small sovereigns in the euro area,

It is becoming a euro-area wide crisis and European policy makers have struggled to accept

that for some time. 4

The yield on 10-year Italian bonds rose 7 basis points to 5.76 percent, after reaching 5.96

percent earlier, the highest since 1997. The yield premium investors demand to hold the debt

3Vladimir Pillonca, an economist at Societe Generale SA in London, July 12, 20114 Jacques Cailloux, chief European economist at Royal Bank of Scotland Plc ,Bloomberg TelevisionsThe Pulse.
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over German bunds to a euro-era reached a euro-era record 348 basis points, before narrowing

to 311.

Bill Auction

Italys bonds have suffered more than debt of Spain, considered the euro-regions

next-weakest link after the three bailed-out countries. The premium to hold Spanish debt over

Italian bonds narrowing to as low as 30 basis points, the least since November 2010.

Trading in shares ofUniCredit SpA (UCG), Italys biggest bank, had to be suspended

limit down after the stock plunged more than 7 percent, pushing the benchmark FTSE MIB

index down as much as 4.8 percent. UniCredit, one of the biggest holders of Italian bonds,

pared losses and advanced 4.5 percent to 1.206 euros as of 11:40 a.m. in Milan. Even with the

rebound, UniCredit has fallen by 22 percent this month, shedding about 9 billion euros in

market value.

Disaster

Italy has more than 500 billion euros of bonds maturing in the next three years. Thats

about twice as much as the 256 billion euros extended to Greece, Ireland and Portugal in their

three-year aid programs.

At almost 120 percent of gross domestic product , Italys debt is the EUs second largest by

that measure after Greece. Its 1.8 trillion euros of borrowing in nominal terms is more than

the combined debt of Greece, Spain, Portugal and Ireland.

Borrowing Costs

Jump in bond yields of Italy, if sustained, would increase funding costs, which the

government estimates will total about 75 billion for 2011, or almost 5% of GDP. This figure

is expected to grow to 85 billion by 2014.

Jefferies International Ltd. calculated that if the average interest rate on debt rises to

6% during this period rather than 5 percent forecast costs will jump by another 35 billion.

Average cost of funding of 5.5 percent means that Italy will need a primary surplus of

at least 3% to stabilize the debt of 120% of GDP level will not reach Italy until 2015, Pillonca

assessments.
http://www.bloomberg.com/apps/quote?ticker=UCG:IMhttp://www.bloomberg.com/apps/quote?ticker=UCG:IMhttp://www.bloomberg.com/apps/quote?ticker=UCG:IM


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Tax reform in Italy

It has changed the operating system of the entire tax structure of the country. These

reforms in the tax structure of Italy have influenced the economy and caused several changesin the economic and social conditions.

Tax reform in Italy is done in three fields, income tax, corporate tax and

environmental tax. These reforms in the tax structure are meant to create favorable fiscal

conditions. Tax reform in Italy is also meant to develop the investment sector and provide

encouragement for entrepreneurship.

Aim of Tax Reform in ItalyOne major reason behind these reforms in the Italian tax structure is to introduce

fairness in the process and at the same time to make the process simpler than ever. The tax

reform activities in the country aim at proper distribution of the tax burden. At the same time,

making the tax payment process as simple as possible and reducing other charges related to

tax collection, are the other objectives of these tax reform activities. There is a number of a

tax prevailing in the country but at present, only five taxes are proposed and all these are

fused in a Tax Code.

Income Tax Reforms in Italy

The personal income tax generates huge revenues for the country. In the past, the

individual taxpayers faced huge financial burdens due to these taxes. Because of this the

proposals of tax reform in Italy suggested several changes in the income tax structure of Italy.

The income tax reforms in Italy have been designed in two stages. The first stage of these

reforms transformed the tax credits that are related to the income to tax allowance. At the

same time, it also provided basic allowance that has been designed as tax-free. The second

stage abolished unnecessary tax brackets and provided only four brackets for the purpose.

IVA in Italy

IVA or Imposta sul Valore Aggiunto is a kind of Value Added Tax. IVA is imposed

on trading of goods, import activities and different types of services provided to the clients


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and customers. The general rate of IVA in Italy is 20%. There are certain operations that are

tax exempted and IVA is not imposed on these activities. The foreign businesses are provided

with tax exemptions regarding the payment of IVA.

Reforms of Corporate Tax Structure in Italy

The public deficit of Italy is under control and because of this, a number of tax

reductions are provided through tax reform in Italy. Reform in the corporate tax structure is

one of those reductions. At the same time, the corporate taxes are reduced to stimulate the

investment sector. The IRPEG taxes are no more in existence in the country. Instead of these

taxes, IRES are introduced in the country. The corporate tax rate has also been altered and at

present it is 33%. On the other hand, the proposals for tax reforms in Italy has also proposed

to abolish the IRAP in the coming years and certain portions of this tax have been abolished.

The Crisis in Greece:

By the end of 2009, as a result of a combination of international and local factors the

Greek economy faced its most-severe crisis since the restoration of democracy in 1974 as the

Greek government revised its deficit from a prediction of 3.7% in early 2009 and 6% in

September 2009, to 12.7% of gross domestic product (GDP).

In 2010,it was revealed that successive Greek government have been found to have

consistently and deliberately false official economic statistics in the country to keep within the

monetary union guidelines. This has allowed the Greek government to spend beyond their

means, while hiding the actual deficit from the EU oversees.

In May 2010 the Greek government deficit was again reviewed and evaluated to

13.6% for the year is one of the highest in the world, compared to GDP. The total public debt

is forecast by some estimates, to hit 120% of GDP in 2010, one of the highest in the world.

As a result, there was a crisis of international confidence in Greece's ability to repay its

debt. In order to avoid a default in May 2010 other euro zone countries and the IMF agreed on

a rescue package, which includes Greece providing immediate 45 billion in loan guarantees,

with more resources to follow amounting to 110 billion. In order to provide funding, Greece

was obliged to adopt stringent austerity measures to bring its budget deficit under control.

On November 15, 2010 EU statistics body Eurostat revised the public finances and
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debt figure for Greece after an excessive deficit procedure methodological mission in Athens,

Greece 2009 and put the government deficit 15.4% of GDP and public debt to 126.8 percent

of GDP that it makes the largest deficit (as a percentage of GDP) between the EU member

states.

The financial crisis - especially austerity package, etc. EU and the IMF met with anger

by the Greek public, leading to seditions and social unrest. Although the long range of

austerity measures, the government deficit was not reduced according to many economists

because of the recession. Therefore, the government debt to GDP continues to increase

rapidly.

What If Greece Drops the Euro?

Over the last year, Greeks have withdrawn almost 40 billion euros, or nearly $53 billion, in

deposits from their banking system, equal to about 17 percent of the nations gross domestic

product. A total of 14 billion euros in deposits was withdrawn in September and October

alone.

The deposit flight peaked in October and early November 2011, at a time of intense

political uncertainty in Greece and financial turmoil in Europe. The outflows have stabilized

of late under the leadership of the new prime minister. Greeces future lies within the euro

zone, not outside it.5

Tensions in the Euro Zone

For Greece and for Spain, Italy, Ireland and Portugal the financial crisis has

highlighted the constraints of euro membership. Unable to devalue their currencies to regain

competitiveness, and forced by E.U. fiscal agreements to control spending, they are facing

austerity measures just when their economies need extra spending. Other economies like

Germany, the Netherlands and Austria have kept deficits down while retaining an edge in

global markets by restraining domestic wage increases. France lies somewhere between the

two camps.

The chief difficulty in working out a package to support Greece was the popular

sentiment in Germany deeply concerned about becoming the answer to the debt problems

of all of Europes endangered economies that Greece should pay a penalty for its former

profligacy.

5Georgios A. Provopoulos, the head of the Greek central bank


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there are questions widely raised about the role played by banks, including Goldman

Sachs, in constructing elaborate financial deals that helped the previous government hide the

extent of its deficit.

Three-Year Package

Faced with the prospect of economic contagion spreading to the wobbly economies of

Spain and Portugal and the potentially devastating effect of a Greek default on French and

German banks, which hold billions in Greek debt the I.M.F. and the euro zone countries

quickly worked out the larger aid package. In return for assistance in meeting debt deadlines

over the next three years, Greece agreed to austerity measures that are likely to cut its budget

deficit sharply and may well produce a new round of recession.

Greece had agreed to raise its value-added tax to 23 percent from 21 percent, to freeze

civil servants wages and to eliminate pu blic sector annual bonuses amounting to two

months pay. In addition, members of parliament would no longer receive bonuses. He said

special rules allowing for early retirement of civil servants would be tightened and the

government intended to increase taxes on fuel, tobacco and alcohol by about 10 percent.

The Crisis in Portugal:

Everyone knew that Portugal would have to roll over and accept a bailout at some

point. It was inevitable that this has happened. Portugal has too much short-term debt. The

cost of rolling it over (if possible at all) would be too high. Debt service at free market rates

would kill the country. So there is no sense in keeping up the charade any longer. It was

Portugals dependence on ST debt that did them in. This chart shows how the maturity

schedule of existing debt simply overwhelmed their capacity to refinance.
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Mismanagement comes to mind when you see the situation. The Portuguese Treasury put

the country at risk. Rather than point fingers it would be nicer to conclude that Portugal had

no option but to borrow short-term.It would be fair to blame the economic leaders of the EU.

They knew for years that Portugals ST debt was a time bomb.

In this case, ST debt = death. The greater the reliance on ST financing the greater systemic

risk. Comparison of the USs debt profile and to Portugals debt profile.

When looking at a countrys aggregate debt and maturity profile it is important to look at the

borrowers current status. But it is much more important to look at the relative change of ST

debt on a year over year basis. Clearly the US is going in the wrong direction.

EU leaders are grappling with a new eurozone threat after Portugal's parliament

rejected an austerity budget and PM Jose Socrates resigned.

The vote means an international bail-out, similar to those accepted by Greece and the

Irish Republic in 2010, is now far more likely.The EU summit in Brussels is aimed at tackling

the eurozone debt crisis.

Although the situation in Libya, Tunisia and Egypt are high on the agenda, the summit

has been pressured the 27 EU member states to adopt a "comprehensive package" on

stabilising the eurozone. As part of the deal, the lending capacity of the European Financial

Stability Facility (EFSF) would be raised from 250bn euros (218bn; $354bn) to 440bn euros.

The EFSF is due to be replaced by a permanent European Stability Mechanism in 2013.

Pressure on Portugal's economy intensified as the interest rate on the country's 10-year

bonds climbed to a new high of 7.6%.
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Portugal faces bond repayments of 4.3bn euros on 15 April 2011. Mr Socrates warned

that the political crisis would have "very serious consequences in terms of the confidence

Portugal needs to enjoy with institutions and financial markets"

The Crisis in Ireland

The 2008-2011 Irish financial crisis resulting from the financial crisis of 2008 was a

major political and economic crisis in Ireland that is partly responsible for the country falling

into recession for the first time since 1980. In September 2008, the Irish government made up

of a Fianna Fil (Green Party coalition), officially announced that the country entered a

recession, the fast increase in unemployment occurring in the coming months. Ireland was thefirst country in the euro zone to enter recession as declared by the Central Statistical Office.

The numbers of people claiming unemployment benefit in Ireland rose to 326,000 in

January 2009, the highest monthly level since records began in 1967. Amidst the crisis, which

has coincided with a series of banking scandals, the ruling Fianna Fil party fell to third place

in an opinion poll conducted byThe Irish Times. The party placed behind Fine Gael and the

Labour Party, the latter rising above Fianna Fil for the first time.

The weakening conditions force more than 100,000 protesters on the streets of Dublin

on February 21, 2009, among the additional threats of protests and industrial action. Irish

Stock Exchange (ISE) of the country's overall index peaked at 10,000 points briefly in April

2007, but on February 24, 2009 amounted to 1987 points, a 14-year low. The last time it stood

under the level of 2000, was the middle of 1995.

With banks guaranteed and the National Asset Management Agency, the evening of

November 21, 2010, then Taoiseach Brian Cowen confirmed the intervention of EU / IMF

financial matters in Ireland. Fianna Fil / Green Party coalition collapsed within a few months

and was replaced by a Fine Gael-Labour coalition in February 2011 general elections.

Financial assistance package for IrelandFollowing the official Irish request for financial assistance from the European Union,

the euro-area Member States and the International Monetary Fund (IMF) of 21 November

2010, the joint EC/IMF/ECB mission on 28 November reached agreement at staff level with

the Irish authorities on a comprehensive policy package for the period 2010-2013.
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This includes a joint financing package of EUR 85 billion with contributions from the

EU, euro area Member States, bilateral contributions from the United Kingdom, Sweden and

Denmark as well as funding from the IMF and an Irish contribution through the Treasury cash

buffer and investments of the National Pension Reserve Funds.

Facts and figures on the program for IrelandObjectives:

Immediate strengthening and comprehensive overhaul of the banking sector. >> EUR35 billion

Ambitious fiscal adjustment to restore fiscal sustainability, correction of excessivedeficit by 2015. >> EUR 50 billion

Growth enhancing reforms, in particular on the labor market, to allow a return to arobust and sustainable growth.

Financing:

The total EUR 85 billion of the program are financed as follows:

EUR 17.5 billion contribution from Ireland (Treasury and National Pension ReserveFund)

EUR 67.5 billion external support, EUR 22.5 billion for each of EFSM (until October 2011: EUR 13.9 billion disbursed) EFSF (until November 2011: EUR 6.3 billion disbursed) + bilateral loans from

the UK, Denmark and Sweden

IMF (until December 2011: EUR 13.1 billion disbursed)Program disbursements will be made over 3 years with an average maximum maturity of 7.5

years.

EFSM loan disbursements and funding plan 2011

Overview on EFSM loan disbursements (Status: 10 October 2011)

Amount Maturity Raised on Loan beneficiary Disbursed on

5.0 bn 5 yr 5 Jan 2011 Ireland 12 Jan 2011

3.4 bn 7 yr 17 March 2011 Ireland 24 March 2011

3.0 bn 10 yr 24 May 2011 Ireland 31 May 2011


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2.0 bn 15 yr 22 Sept 2011 Ireland 29 Sept 2011

0.5 bn 7 yr 29 Sept 2011 Ireland 06 Oct 2011

Source: European Commission Economic and Financial Affairs

Complementary disbursements have been made by the EFSF and the IMF.

Disbursements envisaged over the rest of the year will be subject to Ireland's

requirements and to quarterly reviews by the Commission in cooperation with the IMF and in

liaison with the European Central Bank (ECB).

The Crisis in Spain:

Spain has a comparatively low debt among advanced economies and it does not face a

risk of default. The country's 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. Like Italy, Spain has most of its debt controlled internally, and both countries are

in a better fiscal situation than Greece and Portugal, making a default unlikely unless the

situation gets far more severe.]As one of the largest euro zone economies the condition of

Spain's economy is of particular concern to international observers, and faced pressure from

the United States, the IMF, other European countries and the European Commission to cut its

deficit more aggressively. Spain's public debt was approximately U.S. $820 billion in 2010,

roughly the level of Greece, Portugal, and Ireland combined.

Rumors raised by speculators about a Spanish bail-out were dismissed by Spanish

Prime Minister Jos Luis Rodrguez Zapatero as "complete insanity" and "intolerable".

Nevertheless, shortly after the announcement of the EU's new "emergency fund" for euro

zone countries on May 2010, Spain had to announce new austerity measures designed to

further reduce the country's budget deficit, in order to signal financial markets that it was safeto invest in the country. The Spanish government had hoped to avoid such deep cuts, but

weak economic growth as well as domestic and international pressure forced the government

to expand on cuts already announced in January.

Spain succeeded in trimming its deficit from 11.2% of GDP in 2009 to 9.2% in 2010

and around 6% in 2011. To build up additional trust in the financial markets, the government

amended the Spanish Constitution in 2011 to require a balanced budget at both the national

and regional level by 2020. The amendment states that public debt cannot exceed 60% of

GDP, though exceptions would be made in case of a natural catastrophe, economic recession
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or other emergencies. The new conservative Spanish government led by Mariano Rajoy aims

to cut the deficit further to 4.4 percent in 2012 and 3 percent in 2013.

Solutions

European Financial Stability Facility (EFSF)

The European Financial Stability Facility (EFSF) was created by the euro area

Member States following the decisions taken on 9 May 2010 within the framework of the Eco

fin Council.

The aim of the EFSF is to preserve financial stability in Europe by providing financial

assistance to the euro area. EFSF is authorized to use the following tools related toappropriate conditions:

provision of loans to countries in financial difficulties enter into a debt of primary and secondary markets. Intervention in the secondary

market will be only based on an analysis of the ECB acknowledges the existence of

exceptional financial market conditions and risks to financial stability

Act on the basis of a precautionary program

Finance recapitalization of financial institutions through loans to governments

To fulfill its mission, EFSF issues bonds or other debt instruments on the capital

markets.

EFSF is backed by guarantee commitments from the euro area Member States for a total of

780 billion and has a lending capacity of 440 billion.

European Financial Stabilisation Mechanism (EFSM)

This mechanism provides financial assistance to EU Member States in financial

difficulties.

The EFSM essentially reproduces for the EU 27 the basic mechanics of the existing

Balance of Payments Regulation for non-euro area Member States. Under EFSM, the

Commission is allowed to borrow up to a total of 60 billion in financial markets on behalf of

the Union under an implicit EU budget guarantee. The Commission then on-lends the
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proceeds to the beneficiary Member State. This particular lending arrangement implies that

there is no debt-servicing cost for the Union. All interest and loan principal is repaid by the

beneficiary Member State via the Commission. The EU budget guarantees the repayment of

the bonds through a p.m. line in case of default by the borrower.

The EFSM has currently been activated for Ireland and Portugal, for a total amount up

to 48.5 billion (up to 22.5 billion for Ireland and up to 26 billion for Portugal), to be

disbursed over 3 years.

The EFSM is a part of the wider safety net. Alongside the EFSM, the European

Financial Stability Facility (EFSF), i.e. funds guaranteed by the euro area Member States, and

funding from the International Monetary Fund are available for euro area Member States.

Non-euro area Member States are also eligible for assistance under the Balance of Payments

Regulation. The EFSM and the EFSF can only be activated after a request for financial

assistance has been made by the concerned Member State and a macroeconomic adjustment

program, incorporating strict conditionality, has been agreed with the Commission, in liaison

with the European Central Bank (ECB).

ECB interventions

The Governing Council of the European Central Bank (ECB) has decided to take on

several measures to address the severe tensions in certain market segments which are

hampering the monetary policy transmission mechanism and thereby the effective conduct of

monetary policy oriented towards price stability in the medium term. The measures not affect

the stance of monetary policy.6

Governing Council has decided:

To conduct interventions in the euro area public and private debt securities markets(Securities Markets Programme) to ensure depth and liquidity in those market

segments which are dysfunctional. The objective of this programme is to address the

malfunctioning of securities markets and restore an appropriate monetary policy

transmission mechanism. The scope of the interventions will be determined by the

Governing Council. In order to sterilise the impact of the above interventions, specific

6 European central Bank, decides on measures to address severe tensions in financial markets,2010


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operations will be conducted to re-absorb the liquidity injected through the Securities

Markets Programme. This will ensure that the monetary policy stance will not be

affected.

To adopt a fixed-rate tender procedure with full allotment in the regular 3-monthlonger-term refinancing operations (LTROs) to be allotted on 26 May and on 30 June

2010.

To conduct a 6-month LTRO with full allotment on 12 May 2010, at a rate which willbe fixed at the average minimum bid rate of the main refinancing operations (MROs)

over the life of this operation.

To reactivate, in coordination with other central banks, the temporary liquidity swaplines with the Federal Reserve, and resume US dollar liquidity-providing operations at

terms of 7 and 84 days. These operations will take the form of repurchase operations

against ECB-eligible collateral and will be carried out as fixed rate tenders with full

allotment. The first operation will be carried out on 11 May 2010.

On 21 December 2011, the ECB started the biggest infusion of credit into the European

banking system in the euro's 13 year history. It loaned 489 billion to 523 banks for an

exceptionally long period of three years at a rate of just one percent.This way the ECB tries to make sure that banks have enough cash to pay off200

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.

Conclusion

Europes future path will not be straightforward. Even some years from now the

monetary union may not have become fully sustainable. But as structural policies bear fruit

and structural characteristics converge, the union will become less prone to the sorts of

problems that have been afflicting it, and better able to deal with new types of shock should

they occur. This crisis may not be the lastthing that Europe will overcome. But provided that

political will remains, Europe will probably continue to proceed stepwise to sustainability.


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References:

1. De Grauwe, On the eurozone crisis,20102. Financial times, Euro in crisis, 2011, http://www.ft.com3. The Guardian, Eurozone crisis,http://www.guardian.co.uk4. The telegraph, Eurozone debt crisis: leaders warn of dangers facing economyin 2012, 01 Jan 20125. Eurozone debt crisis worsens as financial world holds breath over impending

financial apocalypse, by Mike Adams,November 30, 20116. Global post, The collapse of the Euro, Michael Goldfarb, December 5, 20117. Wall St. Cheat Sheet , Euro Finance Ministers Discuss Radical Ideas to Avert

Global Crisis, November 29,20118. Greece: The start of a systemic crisis of the Eurozone, Paul de Grauwe , May

20109. The future of euro, Marco Pagano, May 201010.Portugal PM Socrates' resignation overshadows EU summit, BBC news, March 201111.The Crisis in Portugal, Bruce Kasting, March 201112.The New York Times, Greece and the euro, Jan 9, 201213.Plunge Brings Europe Debt Crisis to Italy, Andrew Davis, Jul 12, 201114.European Commission, Program for Ireland, Europa.eu15.www.ecb.int, European Central Bank, May 10, 2010
http://www.guardian.co.uk/http://www.guardian.co.uk/http://www.guardian.co.uk/http://www.globalpost.com/bio/michael-goldfarbhttp://www.ecb/http://www.ecb/http://www.ecb/http://www.ecb/http://www.globalpost.com/bio/michael-goldfarbhttp://www.guardian.co.uk/

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Eurozone Debt Crisis - Problems and Solutions