From late 2009, Iears oI a sovereign debt crisis developed among investors concerning some

European states, intensiIying in early 2010. This included eurozone members Greece, Ireland,
Italy, Spain and Portugal, and also some non-eurozone European Union (EU) countries.
Iceland, the country which experienced the largest Iinancial crisis in 2008 when its entire
international banking system collapsed, has emerged less aIIected by the sovereign debt
crisis. In the EU, especially in countries where sovereign debts have increased sharply owing
to bank bailouts, a crisis oI conIidence has emerged with the widening oI bond yield spreads
and risk insurance on credit deIault swaps between these countries and other EU members,
most importantly Germany.
While the sovereign debt increases have been most pronounced in only a Iew eurozone
countries, they have become a perceived problem Ior the area as a whole.
Concern about rising government debt levels across the globe together with a wave oI
downgrading oI European government debt created alarm in Iinancial markets. On 9 May
2010, Europe's Finance Ministers approved a rescue package worth t750 billion aimed at
ensuring Iinancial stability across Europe by creating the European Financial Stability
Facility (EFSF).
In October 2011, eurozone leaders meeting in Brussels agreed on a package oI measures
designed to prevent the collapse oI member economies due to their spiralling debt. This
included a proposal to write oII 50 oI Greek debt owed to private creditors, increasing the
EFSF to about t1 trillion and requiring European banks to achieve 9 capitalisation. As oI
November 2011, the same eurozone leaders that extended the package to save the eurozone
have extended an ultimatum toward Greece. Both President Nicolas Sarkozy oI France and
Prime Minister Angela Merkel oI Germany have made it public that both oI their
governments have reached the end oI their patience with the beleaguered Greek economy.
Eurozone sovereign debt concerns
Members oI the European Union signed the Maastricht Treaty, under which they pledged to
limit their deIicit spending and debt levels. However, a number oI European Union member
states, including Greece and Italy, were able to circumvent these rules and mask their deIicit
and debt levels through the use oI complex currency and credit derivatives structures. The
structures were designed by prominent U.S. investment banks, who received substantial Iees
in return Ior their services and who took on little credit risk themselves thanks to special legal
protections Ior derivatives counterparties. Financial reIorms within the U.S. since the
Iinancial crisis have only served to reinIorce special protections Ior derivativesincluding
greater access to government guaranteeswhile minimizing disclosure to broader Iinancial
markets.
In the Iirst weeks oI 2010, there was renewed anxiety about excessive national debt. Some
politicians, notably Angela Merkel, have sought to attribute some oI the blame Ior the crisis
to hedge Iunds and other speculators stating that "institutions bailed out with public Iunds are
exploiting the budget crisis in Greece and elsewhere"
Although some Iinancial institutions clearly proIited Irom the growing Greek government
debt in the short run, there was a long lead up to the crisis. EU politicians in Brussels turned a
blind eye and gave Greece a Iairly clean bill oI health, even as the reality oI economics
suggested the Euro was in danger. Investors assumed they were implicitly lending to a strong
Berlin when they bought eurobonds Irom weaker Athens. Historic enmity to Turkey led to
high deIense spending, and Iuelled public deIicits Iinanced primarily by German and
French banks.
ond market
Prior to development oI the crisis it was assumed by both regulators and banks that sovereign
debt Irom the Euro zone was saIe. Banks had substantial holdings oI bonds Irom weaker
economies such as Greece which oIIered a small premium and seemingly were equally
sound. As the crisis developed it became obvious that Greek, and possibly other country's,
bonds oIIered substantially more risk. Contributing to lack oI inIormation about the risk oI
European sovereign debt was conIlict oI interest by banks that were earning substantial sums
underwriting the bonds.
Greece
In the early-mid 2000s, Greece's economy was strong and the government took advantage by
running a large deIicit. As the world economy cooled in the late 2000s, Greece was hit
especially hard because its main industriesshipping and tourismwere especially sensitive
to changes in the business cycle. As a result, the country's debt began to pile up rapidly. In
early 2010, as concerns about Greece's national debt grew, policy makers suggested that
emergency bailouts might be necessary.
On 23 April 2010, the Greek government requested that the EU/IMF bailout package (made
oI relatively high-interest loans) be activated. The IMF had said it was "prepared to move
expeditiously on this request". The initial size oI the loan package was t45 billion ($61
billion) and its Iirst installment covered t8.5 billion oI Greek bonds that became due Ior
repayment.
On 27 April 2010, Standard & Poor's slashed Greece's sovereign debt rating to BB or "junk"
status amid Iears oI deIault. The yield oI the Greek two-year bond reached 15.3 in the
secondary market. Standard & Poor's estimates that, in the event oI deIault, investors would
lose 3050 oI their money. Stock markets worldwide and the Euro currency declined in
response to this announcement.
Prime Minister George Papandreou and European Commission President Jose Manuel
Barroso aIter their meeting in Brussels on 20 June 2011.
On 1 May 2010, a series oI austerity measures was proposed. The proposal helped persuade
Germany, the last remaining holdout, to sign on to a larger, 110 billion euro EU/IMF loan
package over three years Ior Greece (retaining a relatively high interest oI 5 Ior the main
part oI the loans, provided by the EU). On 5 May, a national strike was held in opposition to
the planned spending cuts and tax increases. Protest on that date was widespread and turned
violent in Athens, killing three people.


On 2 May 2010, the Eurozone countries and the International Monetary Fund agreed to a
t110 billion loan Ior Greece, conditional on the implementation oI harsh austerity measures.
The Greek bail-out was Iollowed by a t85 billion rescue package Ior Ireland in November, a
t78 billion bail-out Ior Portugal in May 2011, then continuing eIIorts to meet the continuing
crisis in Greece and other countries.
The November 2010 revisions oI 2009 deIicit and debt levels made accomplishment oI the
2010 targets even harder, and indications signal a recession harsher than originally Ieared.
Japan, Italy and Belgium's creditors are mainly domestic institutions, but Greece and Portugal
have a higher percent oI their debt in the hands oI Ioreign creditors, which is seen by certain
analysts as more diIIicult to sustain. Greece, Portugal, and Spain have a 'credibility problem',
because they lack the ability to repay adequately due to their low growth rate, high deIicit,
less FDI, etc.
In May 2011, Greek public debt gained prominence as a matter oI concern. The Greek people
generally reject the austerity measures, and have expressed their dissatisIaction through angry
street protests. In late June 2011, Greece's government proposed additional spending cuts
worth 28bn euros (25bn) over Iive years. The next 12 billion euros Irom the Eurozone bail-
out package will be released when the proposal is passed, without which Greece would have
had to deIault on loan repayments due in mid-July.
On 13 June 2011, Standard and Poor's downgraded Greece's sovereign debt rating to CCC,
the lowest in the world, Iollowing the Iindings oI a bilateral EU-IMF audit which called Ior
Iurther austerity measures. AIter the major political parties Iailed to reach consensus on the
necessary measures to qualiIy Ior a Iurther bailout package, and amidst riots and a general
strike, Prime Minister George Papandreou proposed a re-shuIIled cabinet, and asked Ior a
vote oI conIidence in the parliament. The crisis sent ripples around the world, with major
stock exchanges exhibiting losses.
Some experts argue the best option Ior Greece and the rest oI the EU should be to engineer an
'orderly deIault on Greece`s public debt which would allow Athens to withdraw
simultaneously Irom the eurozone and reintroduce its national currency the drachma at a
debased rate. Economists who Iavor this approach to solve the Greek debt crisis typically
argue that a delay in organising an orderly deIault would wind up hurting EU lenders and
neighboring European countries even more.
In the early hours oI 27 October 2011, Eurozone leaders and the IMF came to an agreement
with banks to accept a 50 write-oII oI (some part oI) Greek debt,

the equivalent oI t100
billion. The aim oI the haircut is to reduce Greece's debt to 120 oI GDP by 2020.
$5read beyond Greece
Long-term interest rates oI selected European countries (secondary market yields oI
government bonds with maturities oI close to ten years). Note that weak non-eurozone
countries (Hungary, Romania) lack the sharp rise in interest rates characteristic oI weak
eurozone countries. A yield oI 6 or more indicates that Iinancial markets have serious
doubts about credit-worthiness.
A wave oI selling swept across global markets Tuesday, a day aIter Greece's prime minister
said he would call a national vote on an unpopular European plan that would result in painIul
tax increases and drastic welIare cuts to rescue that nation's economy.
II the European rescue plan Ialls through and Greece deIaults on its debt, the ripple eIIect
would be global. Europe could Iall into recession, hurting a major market Ior American
exports, and banks could severely restrict lending.
The Dow Iell 2.5 percent to close at 11,657.96 on Tuesday. It was the biggest drop since
Sept. 22, 2011. The S&P 500 lost 2.8 percent to 1,218.28. The Nasdaq composite dropped 2.9
percent to 2,606.96. One oI the central concerns prior to the bailout was that the crisis could
spread beyond Greece. The crisis has reduced conIidence in other European economies.
Ireland, with a government deIicit in 2010 oI 32.4 oI GDP, Spain with 9.2, and Portugal
at 9.1 are most at risk. According to the UK Financial Policy Committee "Market concerns
remain over Iiscal positions in a number oI euro area countries and the potential Ior contagion
to banking systems."
Financing needs Ior the eurozone in 2010 come to a total oI t1.6 trillion, while the US is
expected to issue US$1.7 trillion more Treasury securities in this period, and Japan has 213
trillion oI government bonds to roll over. According to Ferguson similarities between the
U.S. and Greece should not be dismissed.
For 2010, the OECD Iorecasts $16,000bn will be raised in government bonds among its 30
member countries. Greece has been the notable example oI an industrialised country that has
Iaced diIIiculties in the markets because oI rising debt levels. Even countries such as the US,
Germany and the UK, have had Iraught moments as investors shunned bond auctions due to
concerns about public Iinances and the economy.
reland
The Irish sovereign debt crisis was not based on government over-spending, but Irom the
state guaranteeing the six main Irish-based banks who had Iinanced a property bubble. On 29
September 2008 the Finance Minister Brian Lenihan, Jnr issued a one-year guarantee to the
banks' depositors and bond-holders. He renewed it Ior another year in September 2009 soon
aIter the launch oI the National Asset Management Agency, a body designed to remove bad
loans Irom the six banks.
The December 2009 hidden loans controversy within Anglo Irish Bank had led to the
resignations oI three executives, including chieI executive Sean FitzPatrick. A mysterious
"Golden Circle" oI ten businessmen are being investigated over shares they purchased in
Anglo Irish Bank, using loans Irom the bank, in 2008. The Anglo Irish Bank Corporation Act
2009 was passed to nationalise Anglo Irish Bank was voted through Dail Eireann and passed
through Seanad Eireann without a vote on 20 January 2009. President Mary McAleese then
signed the bill at Aras an Uachtarain the Iollowing day, conIirming the bank's nationalisation.
In April 2010, Iollowing a marked increase in Irish 2-year bond yields, Ireland's NTMA state
debt agency said that it had "no major reIinancing obligations" in 2010. Its requirement Ior
t20 billion in 2010 was matched by a t23 billion cash balance, and it remarked: "We're very
comIortably circumstanced". On 18 May the NTMA tested the market and sold a t1.5 billion
issue that was three times oversubscribed.
By September 2010 the banks could not raise Iinance and the bank guarantee was renewed
Ior a third year. This had a negative impact on Irish government bonds, government help Ior
the banks rose to 32 oI GDP, and so the government started negotiations with the ECB and
the IMF, resulting in the t85 billion "bailout" agreement oI 29 November 2010. In February
the government lost the ensuing Irish general election, 2011. In April 2011, despite all the
measures taken, Moody's downgraded the banks' debt to junk status. Debate continues on
whether Ireland will need a "second bailout".
!ortugal
A report published in January 2011 by the Diario de Noticias

demonstrated that in the period
between the Carnation Revolution in 1974 and 2010, the democratic Portuguese Republic
governments have encouraged over-expenditure and investment bubbles through unclear
public-private partnerships and Iunding oI numerous ineIIective and unnecessary external
consultancy and advisory oI committees and Iirms. This allowed considerable slippage in
state-managed public works and inIlated top management and head oIIicer bonuses and
wages. Persistent and lasting recruitment policies boosted the number oI redundant public
servants. Risky credit, public debt creation, and European structural and cohesion Iunds were
mismanaged across almost Iour decades. The Prime Minister Socrates's cabinet was not able
to Iorecast or prevent this in 2005, and later it was incapable oI doing anything to improve the
situation when the country was on the verge oI bankruptcy by 2011.
Robert Fishman, in the New York Times article "Portugal's Unnecessary Bailout", points out
that Portugal Iell victim to successive waves oI speculation by pressure Irom bond traders,
rating agencies and speculators. In the Iirst quarter oI 2010, beIore markets pressure, Portugal
had one oI the best rates oI economic recovery in the EU. Industrial orders, exports,
entrepreneurial innovation and high-school achievement the country matched or even
surpassed its neighbors in Western Europe.
On 16 May 2011 the Eurozone leaders oIIicially approved a t78 billion bailout package Ior
Portugal. The bailout loan will be equally split between the European Financial Stabilisation
Mechanism, the European Financial Stability Facility, and the International Monetary
Fund.
|61|
According to the Portuguese Iinance minister, the average interest rate on the bailout
loan is expected to be 5.1 As part oI the bailout, Portugal agreed to eliminate its golden
share in Portugal Telecom to pave the way Ior privatization. Portugal became the third
Eurozone country, aIter Ireland and Greece, to receive a bailout package.
On 6 July 2011 it was conIirmed that the ratings agency Moody's had cut Portugal's credit
rating to junk status, Moody's also launched speculation that Portugal may Iollow Greece in
requesting a second bailout.
taly
Italy's deIicit oI 4.6 percent oI GDP in 2010 was similar to Germany`s at 4.3 percent and less
than that oI the U.K. and France. Italy even has a surplus in its primary budget, which
excludes debt interest payments. However, over the years it has piled up debt at almost 120
percent oI GDP and economic growth was lower than the EU average Ior over a decade. This
has led investors to view Italian bonds more and more as a risky asset.
On 15 July and 14 September Italy's government passed austerity measures meant to save
124 billion euro. Nonetheless, by 8 November 2011 the Italian bond yield was 6.74 percent
Ior 10-year bonds, climbing above the 7 percent level where the country is thought to lose
access to Iinancial markets. On 11 November 2011, Italian 10-year borrowing costs Iell
sharply Irom 7.5 to 6.7 percent aIter Italian legislature approved Iurther austerity measures
and the Iormation oI an emergency government to replace that oI Prime Minister Silvio
Berlusconi. The measures include a pledge to raise 15 billion euros Irom real-estate sales
over the next three years, a two-year increase in the retirement age to 67 by 2026, opening up
closed proIessions within 12 months and a gradual reduction in government ownership oI
local services. The interim government, which is expected to put the laws into practice will
be led by Iormer European Union Competition Commissioner Mario Monti.
$5ain
Shortly aIter the announcement oI the EU's new "emergency Iund" Ior eurozone countries in
early May 2010, Spain's government announced new austerity measures designed to Iurther
reduce the country's budget deIicit. The socialist government had hoped to avoid such deep
cuts, but weak economic growth as well as domestic and international pressure Iorced the
government to expand on cuts already announced in January. As one oI the largest eurozone
economies the condition oI Spain's economy is oI particular concern to international
observers, and Iaced pressure Irom the United States, the IMF, other European countries and
the European Commission to cut its deIicit more aggressively.
According to the Financial Times, Spain succeeded in trimming its deIicit Irom 11.2 oI
GDP in 2009 to 9.2 in 2010. It should be noted that Spain's public debt (60.1 oI GDP in
2010) is signiIicantly lower than that oI Greece (142.8), Italy (119), Portugal (93),
Ireland (96.2), and Germany (83.2), France (81.7) and the United Kingdom (80.0)
elgium
In 2010, Belgium's public debt was 100 oI its GDP the third highest in the eurozone aIter
Greece and Italy and there were doubts about the Iinancial stability oI the banks. AIter
inconclusive elections in June 2010, by July 2011 the country still had only a caretaker
government as parties Irom the two main language groups in the country (Flemish and
Walloon) were unable to reach agreement on how to Iorm a majority government. Financial
analysts Iorecast that Belgium would be the next country to be hit by the Iinancial crisis as
Belgium's borrowing costs rose.
However the government deIicit oI 5 was relatively modest and Belgian government 10-
year bond yields in November 2010 oI 3.7 were still below those oI Ireland (9.2),
Portugal (7) and Spain (5.2). Furthermore, thanks to Belgium's high personal savings
rate, the Belgian Government Iinanced the deIicit Irom mainly domestic savings, making it
less prone to Iluctuations oI international credit markets.
ther Euro5ean countries
United Kingdom
According to the Financial Policy Committee "Any associated disruption to bank Iunding
markets could spill over to UK banks." Bank oI England governor Mervyn King declared that
the UK is very much at risk Irom a domino-Iall oI deIaults and called on banks to build up
more capital when Iinancial conditions allowed. The incoming coalition government declared
its austerity measures to be essential lest the markets lose conIidence in the UK too.
celand
Iceland suIIered the Iailure oI its banking system and a subsequent economic crisis. AIter a
sharp increase in public debts due to the banking Iailures, the government has been able to
reduce the size oI deIicits each year. The eIIort has been made more diIIicult by a more
sluggish recovery than earlier expected. BeIore the crash oI the three largest commercial
banks in Iceland, Glitnir, Landsbanki and Kaupthing, they jointly owed over 10 times
Iceland's GDP. In October 2008, the Icelandic parliament passed emergency legislation to
minimise the impact oI the Iinancial crisis. The Financial Supervisory Authority oI Iceland
used permission granted by the emergency legislation to take over the domestic operations oI
the three largest banks.
The Ioreign operations oI the banks, however, went into receivership. As a result, the country
has not been seriously aIIected by the European sovereign debt crisis Irom 2010. In large part
this is due to the success oI an IMF Stand-By Arrangement in the country since November
2008. The government has enacted a program oI medium term Iiscal consolidation, based on
expenditure cuts and broad based and signiIicant tax hikes. As a result, central government
debts have been stabilised at around 8090 percent oI GDP. Capital controls were also
enacted and the work began to resurrect a sharply downsized domestic banking system on the
ruins oI its gargantuan international banking system, which the government was unable to
bail out.
Despite a contentious debate with Britain and the Netherlands over the question oI a state
guarantee on the Icesave deposits oI Landsbanki in these countries, credit deIault swaps on
Icelandic sovereign debt have steadily declined Irom over 1000 points prior to the crash in
2008 to around 200 points in June 2011. Further, on 9 June 2011, the Icelandic government
successIully raised 1$ billion with a bond issue indicating that international investors are
viewing positively the eIIorts oI the government to consolidate the public Iinances and
restructure the banking system, with two oI the three biggest banks now in Ioreign hands.
$itzerland
In September 2011, the Swiss National Bank weakened the Swiss Iranc to a Iloor oI 1.20
Irancs per euro. The Iranc has been appreciating against the euro during to the crisis, harming
Swiss exporters. The SNB surprised currency traders by pledging that "it will no longer
tolerate a euro-Iranc exchange rate below the minimum rate oI 1.20 Irancs." This is the
biggest Swiss intervention since 1978.

$olution
EU emergency measures
Euro5ean Financial $tability Facility (EF$F)
On 9 May 2010, the 27 member states oI the European Union agreed to create the European
Financial Stability Facility, a legal instrument aiming at preserving Iinancial stability in
Europe by providing Iinancial assistance to eurozone states in diIIiculty. The Iacility is jointly
and severally guaranteed by the Eurozone countries' governments, the EU and the IMF. The
European Parliament, the European Council, and especially the European Commission, can
all provide some support Ior the treasury while it is still being built.
In order to reach these goals the Facility is devised in the Iorm oI a special purpose vehicle
(SPV) that will sell bonds and use the money it raises to make loans up to a maximum oI t
440 billion to eurozone nations in need. The new entity will sell debt only aIter an aid request
is made by a country. The EFSF loans would complement loans backed by the lender oI last
resort International Monetary Fund, and in selected cases loans by the EFSF. The total saIety
net available would be thereIore t750 billion, consisting oI up to t 440 billion Irom EFSF, up
to t 60 billion loan Irom the European Financial Stabilisation Mechanism (reliant on
guarantees given by the European Commission using the EU budget as collateral) and t
250 billion loan backed by the IMF. The agreement is interpreted to allow the ECB to start
buying government debt Irom the secondary market which is expected to reduce bond yields.
(Greek bond yields Iell Irom over 10 to just over 5; Asian bonds yields also Iell with the
EU bailout.
The German Bundestag voted 523 to 85 to approve the increase in the EFSF's available Iunds
to t440bn (Germany's share t211bn), a victory Ior Merkel, though other possible ways to
expand the EFSF and EMU powers were not addressed in the legislation. WolIgang
Schuble, the German Iinance minister, and Philipp Rsler, the economics minister, were
concurrently on record against leveraging the EFSF. In early October, Slovakia remained
uncertain as to the approval, with "political turmoil in Bratislava, the nation`s capital,
exposing strains within the Iour-party ruling coalition". Mid-October Slovakia became the
last country to give approval, though not beIore parliament speaker Richard Sulik registered
strong questions as to how "a poor but rule-abiding euro-zone state must bail out a serial
violator with twice the per capita income, and triple the level oI the pensions a country
which is in any case irretrievably bankrupt? How can it be that the no-bail clause oI the
Lisbon treaty has been ripped up?"
In July 2011, it was agreed during the EU summit that the EFSF will be given more powers
to intervene in the secondary markets, thus dramatically socializing risk in the eurozone,
which ends the crisis. Furthermore the EU agreed that Greece should receive EU loans at
lower interest rates oI 3.5.
In Mid 2013 the EFSF will be replace by a permanent rescue Iunding program called
European Stability Mechanism (ESM). It will be established once the ratiIication process oI
its treaty is completed.

EIIects oI EU emergency measures
AIter the EU announced to create the EFSF on 9 May 2010 stocks worldwide surged as Iears
that the Greek debt crisis would spread subsided, some rose the most in a year or more. The
Euro made its biggest gain in 18 months, beIore Ialling to a new Iour-year low a week
later.
|102|
Shortly aIter the euro rose again as hedge Iunds and other short-term traders
unwound short positions and carry trades in the currency.
Commodity prices also rose Iollowing the announcement. The dollar Libor held at a nine-
month high. DeIault swaps also Iell. The VIX closed down a record almost 30, aIter a
record weekly rise the preceding week that prompted the bailout.
While the aid package has so Iar averted a Iinancial panic, international credit rating agencies
consider that eurozone countries such as Portugal continue to have economic diIIiculties.
EC interventions
The European Central Bank (ECB) has taken a series oI measures aimed at reducing volatility
in the Iinancial markets and at improving liquidity.
O First, it began open market operations buying government and private debt securities.
O Second, it announced two 3-month and one 6-month Iull allotment oI Long Term
ReIinancing Operations (LTRO's).
O Thirdly, it reactivated the dollar swap lines with Federal Reserve support.
Subsequently, the member banks oI the European System oI Central Banks started buying
government debt.
In September, 2011, Jrgen Stark became the second German aIter Axel A. Weber to resign
Irom the ECB Governing Council in 2011. Weber, the Iormer 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 oI the council when he resigned. Weber was replaced by his Bundesbank
successor Jens Weidmann and "|l|eaders in Berlin plan to push Ior a German successor to
Stark as well, news reports said"
#eform and recovery
Despite the moves by the EU, the European Commissioner Ior Economic and Financial
AIIairs, Olli Rehn, called Ior "absolutely necessary" deIicit cuts by the heavily indebted
countries oI Spain and Portugal. Private sector bankers and economists also warned that the
threat Irom a double dip recession has not Iaded. Stephen Roach, chairman oI Morgan
Stanley Asia, warned about this threat saying "When you have a vulnerable post-crisis
economic recovery and crises reverberating in the aItermath oI that, you have some very
serious risks to the global business cycle." Nouriel Roubini said the new credit available to
the heavily indebted countries did not equate to an immediate revival oI economic Iortunes:
"While money is available now on the table, all this money is conditional on all these
countries doing Iiscal adjustment and structural reIorm."
In March 2011 a new reIorm oI the Stability and Growth Pact was initiated, aiming at
straightening the rules by adopting an automatic procedure Ior imposing oI penalties in case
oI breaches oI either the deIicit or the debt rules.
russels agreement
On 26 October 2011, leaders oI the 17 Eurozone countries met in Brussels to discuss a
package aimed at addressing the crisis. AIter ten hours oI discussions, a package was
announced by the President oI the European Commission, Jose Manuel Barroso, which
proposed a 50 write-oII oI Greek sovereign debt held by banks, a IourIold increase (to
about t1 trillion) in bail-out Iunds held under the European Financial Stability Facility, an
increased mandatory level oI 9 Ior bank capitalisation within the EU and a set oI
commitments Irom Italy to take measures to reduce its national debt. Also pledged was t35
billion in "credit enhancement" to mitigate losses likely to be suIIered by European banks. He
characterised the package as a set oI "exceptional measures Ior exceptional times"
The deal was welcomed by Greek Prime Minister George Papandreou, who said that "a new
day" had come "not only Ior Greece but also Ior Europe".

French President Nicolas Sarkosy said it represented a "credible, ambitious and
comprehensive response" to the debt crisis.

Christine Lagarde, head oI the International
Monetary Fund, said she was "encouraged by the substantial progress made on a number oI
Ironts". Financial markets worldwide responded positively to news oI an agreement being
reached.
Italy's commitments to its Eurozone partners, presented by Silvio Berlusconi in the Iorm oI a
letter, included reIorms to pensions, t15bn in asset sales and liberalisation oI employment
law. However, Italian opposition leaders objected to these proposals and suggested that
Berlusconi's political position was too weak Ior them to be taken seriously. AIter Iierce
pressure Irom Iinancial markets and European peers, Italy agreed to have experts Irom the
IMF and the European Commission monitor its progress with reIorms oI pensions, labour
markets and privatisation.
Commentators suggested that the package agreed in Brussels might not be enough to ensure
the long-term survival oI the Euro without additional political integration within the
Eurozone.

It was also noted that the means by which the overall package would be Iunded
were unclear. The package's acceptance was put into doubt on 31 October when Greek Prime
Minister George Papandreou announced that a reIerendum would be held so that the Greek
people would have the Iinal say on the bailout, upsetting Iinancial markets. On 3 November
2011 the promised Greek reIerendum on the bailout package was withdrawn by Prime
Minister Papandreou.
Doubts about effectiveness of non-Keynesian 5olicies
There has been some criticism over the austerity measures implemented by most European
nations to counter this debt crisis. Some argue that an abrupt return to "non-Keynesian"
Iinancial policies is not a viable solution and predict the deIlationary policies now being
imposed on countries such as Greece and Italy might prolong and deepen their recessions.
Apart Irom arguments over whether or not austerity, rather than increased or Irozen spending,
is a macroeconomic solution, union leaders have also argued that the working population is
being unjustly held responsible Ior the economic mismanagement errors oI economists,
investors, and bankers. Over 23 million EU workers have become unemployed as a
consequence oI the global economic crisis oI 20072010, while thousands oI bankers across
the EU have become millionaires despite collapse or nationalization (ultimately paid Ior by
taxpayers) oI institutions they worked Ior during the crisis, a Iact that has led many to call Ior
additional regulation oI the banking sector across not only Europe, but the entire world.
!ro5osed long-term solutions
Regardless oI the corrective measures chosen to solve the current predicament, as long as
cross border capital Ilows remain unregulated in the Euro Area, asset bubbles and current
account imbalances are likely to continue. For example, a country that runs a large current
account or trade deIicit (i.e., it imports more than it exports) must ultimately be a net importer
oI capital; this is a mathematical identity called the balance oI payments. In other words, a
country that imports more than it exports must either decrease its savings reserves or borrow
to pay Ior those imports. Conversely, Germany's large trade surplus (net export position)
means that it must either increase its savings reserves or be a net exporter oI capital, lending
money to other countries to allow them to buy German goods.
The 2009 trade deIicits Ior Italy, Spain, Greece, and Portugal were estimated to be
$42.96 billion, $75.31B and $35.97B, and $25.6B respectively, while Germany's trade
surplus was $188.6B.
|136|
A similar imbalance exists in the U.S., which runs a large trade
deIicit (net import position) and thereIore is a net borrower oI capital Irom abroad. Ben
Bernanke warned oI the risks oI such imbalances in 2005, arguing that a "savings glut" in one
country with a trade surplus can drive capital into other countries with trade deIicits,
artiIicially lowering interest rates and creating asset bubbles.
|137||138|

A country with a large trade surplus would generally see the value oI its currency appreciate
relative to other currencies, which would reduce the imbalance as the relative price oI its
exports increases. This currency appreciation occurs as the importing country sells its
currency to buy the exporting country's currency used to purchase the goods. However, many
oI the countries involved in the crisis are on the Euro, so this is not an available solution at
present. Alternatively, trade imbalances might be addressed by changing consumption and
savings habits. For example, iI a country's citizens saved more instead oI consuming imports,
this would reduce its trade deIicit.
|139|

Likewise, reducing budget deIicits is another method oI raising a country's level oI saving.
Capital controls that restrict or penalize the Ilow oI capital across borders is another method
that can reduce trade imbalances. Interest rates can also be raised to encourage domestic
saving, although this beneIit is oIIset by slowing down an economy and increasing
government interest payments.
|139|

edit] Address slo economic groth
Slow GDP growth rates correspond to slower growth in tax revenues and higher saIety net
spending, increasing deIicits and debt levels. Fareed Zakaria described the Iactors slowing
growth in the Euro zone, writing in November 2011: "Europe's core problem |is| a lack oI
growth...Italy's economy has not grown Ior an entire decade. No debt restructuring will work
iI it stays stagnant Ior another decade...The Iact is that Western economies - with high wages,
generous middle-class subsidies and complex regulations and taxes - have become sclerotic.
Now they Iace pressures Irom three Ironts: demography (an aging population), technology
(which has allowed companies to do much more with Iewer people) and globalization (which
has allowed manuIacturing and services to locate across the world)." He advocated lower
wages and steps to bring in more Ioreign capital investment.
|140|

edit] Common fiscal 5olicy (Euro5ean Treasury)
In November 2010, as concerns started to resurIace about the Iiscal health oI Ireland, Greece
and Portugal, EU President Herman Van Rompuy said "II we don`t survive with the eurozone
we will not survive with the European Union."
|141|
To save the currency EU leaders suggested
closer cooperation.
In the event European Union leaders made a proposal to establish a single authority
responsible Ior tax policy oversight and government spending coordination oI EU member
countries, temporarily called the European Treasury.
|142|

Angel Ubide Irom the Peterson Institute Ior International Economics suggested that long term
stability in the eurozone requires a common Iiscal policy rather than controls on portIolio
investment.
|143|
In exchange Ior cheaper Iunding Irom the EU, Greece and other countries, in
addition to having already lost control over monetary policy and Ioreign exchange policy
since the euro came into being, would thereIore also lose control over domestic Iiscal policy.
Strong European Commission oversight in the Iields oI taxation and budgetary policy and the
enIorcement mechanisms that go with it inIringe the sovereignty oI eurozone member
states.
|144|

edit] Euro5ean Monetary Fund
On 20 October 2011, the Austrian Institute oI Economic Research published an article that
suggests to transIorm the EFSF into a European Monetary Fund (EMF), which could provide
governments with Iixed interest rate Eurobonds at a rate slightly below medium-term
economic growth (in nominal terms). These bonds would not be tradable but could be held by
investors with the EMF and liquidated at any time. Given the backing oI the entire eurozone
countries and the ECB "the EMU would achieve a similarly strong position vis-a-vis Iinancial
investors as the US where the Fed backs government bonds to an unlimited extent." To
ensure Iiscal discipline despite the lack oI market pressure, the EMF would operate according
to strict rules, providing Iunds only to countries that meet agreed on Iiscal and
macroeconomic criteria. Governments that lack sound Iinancial policies would be Iorced to
rely on traditional (national) governmental bonds with less Iavorable market rates.
|145|

Since investors would Iinance governments directly, banks were also no longer able to
unduly beneIit Irom intermediary rents by borrowing Irom the ECB at low rates and investing
in government bonds at high rates. Econometric analysis suggests that a stable long-term
interest rate oI three percent in all eurozone countries would lead to higher nominal GDP
growth rates and substantially lower sovereign debt levels by 2015, compared to the baseline
scenario with market based interest levels.
|145|

edit] Euro breaku5
Individual countries leaving the Euro
The school oI economists who are, broadly, adherents oI the post-Keynesian school oI the
Modern Monetary Theory condemned the introduction oI the Euro currency Irom the
beginning,
|146|
on the basis that the Eurozone does not IulIill the necessary criteria Ior an
optimum currency area. The latter view is supported also by non-Keynesian economists, such
as Luca A. Ricci, oI the IMF.
|147|
Others have even declared an urgent need Ior more radical
shiIt in perspective, "a new science oI macroeconomics".
|148|

As the debt crisis expanded beyond Greece, these economists continued to advocate, albeit
more IorceIully, the disbandment oI the Eurozone. II this is not immediately Ieasible, they
recommended that Greece and the other debtor nations unilaterally leave the Eurozone,
deIault on their debts, regain their Iiscal sovereignty, and re-adopt national currencies.
|149||150|

Two-currencies speculation
Others have suggested that it is Germany that should Iirst leave the Eurozone in order to save
it,
|151|
with an anticipated "huge boost" to its members' competitiveness via the "(likely)
substantial Iall in the Euro against the newly reconstituted Deutsche Mark". Bloomberg has
suggested that, iI the Greek and Irish bailouts should Iail, an alternative is Ior Germany to
leave the eurozone in order to save the currency through depreciation
|152|
instead oI austerity.
The Wall Street Journal conjectures that Germany could return to the Deutsche Mark,
|153|
or
create another currency union
|154|
with the Netherlands, Austria, Finland, Luxembourg and
other European countries such as Denmark, Norway, Sweden, Switzerland and the
Baltics.
|155|
A monetary union oI the mentioned current account surplus countries would
create the world's largest creditor bloc that is bigger than China
|156|
or Japan. The Iormer
president oI the German Industries, Hans-OlaI Henkel suggested that "southern countries"
could retain their competitiveness through a greater tolerance Ior inIlation and corresponding
regular devaluations, once they are Ireed oI the "straitjacket oI Germanic stability
phobia".
|157|
The Wallstreet Journal added that without the German-led bloc a residual euro
would have the Ilexibility to keep interest rates low
|158|
and engage in quantitative easing or
Iiscal stimulus in support oI a job-targeting economic policy
|159|
instead oI inIlation targeting
in the current conIiguration.
In early October 2011, policy expert Philippa Malmgren believed
|160|
that "the Germans will
announce they are re-introducing the Deutschmark" in the coming weeks. As oI Mid
November 2011, this is has not happened. Former Federal Reserve chairman Alan Greenspan
was more cautious when he answered the question whether the eurozone will split apart, "II
you ask me starting Irom scratch, would they have been better oII having a eurozone which
included Germany, Austria, Luxembourg, Finland, the Netherlands, that would have
worked."
|161|
Greenspan later added Switzerland in the list.
In September 2011, Joaquin Almunia, an EU commissioner, "lashed out"
|162|
against the bloc
oI Germany, Netherlands, Finland, Austria, saying that expelling weaker countries Irom the
euro was not an option: "Those who think that this hypothesis is possible just do not
understand our process oI integration". Also ECB president Jean-Claude Trichet denounced
the possibility oI a return oI the deutsche mark and deIended the price stability oI the
euro.
|163|

edit] Controversies
edit] reaking of the EU treaties
The Maastricht Treaty oI EU contains juridical language which appears to rule out intra-EU
bailouts. First, the 'no bail-out clause (Article 125 TFEU) ensures that the responsibility Ior
repaying public debt remains national and prevents risk premiums caused by unsound Iiscal
policies Irom spilling over to partner countries. The clause thus encourages prudent Iiscal
policies at the national level.
The European Central Bank purchase oI distressed country bonds can be viewed to break the
prohibition oI monetary Iinancing oI budget deIicits (Article 123 TFEU). The creation oI
Iurther leverage in EFSF with access to ECB lending would also appear to break this Article.
The Articles 125 and 123 were meant to create disincentive Ior EU member states to run
excessive deIicits and state debt, and prevent the moral hazard oI over-spend and lending in
good times. They were also meant to protect the taxpayers oI the other more prudent member
states. By issuing bail out aid guaranteed by the prudent Eurozone taxpayers to rule-breaking
Eurozone countries such as Greece, the EU and Eurozone countries encourage moral hazard
also in the Iuture.
|164|
While the no bail-out clause remains in place, the "no bail-out doctrine"
seems to be a thing oI the past.
|165|

edit] dious debt
Some protesters, commentators such as Liberation correspondent Jean Quatremer and the
Liege based NGO Committee Ior the Abolition oI the Third World Debt (CADTM) allege
that the debt should be characterized as odious debt.
|166|
The Greek documentary ebtocracy
examines whether the recent Siemens scandal and uncommercial ECB loans which were
conditional on the purchase oI military aircraIt and submarines are evidence that the loans
amount to odious debt and that an audit would result in invalidation oI a large amount oI the
debt.
edit] Controversy about national statistics
In 1992, members oI the European Union signed an agreement known as the Maastricht
Treaty, under which they pledged to limit their deIicit spending and debt levels. However, a
number oI European Union member states, including Greece and Italy, were able to
circumvent these rules and mask their deIicit and debt levels through the use oI complex
currency and credit derivatives structures.
|8||9|
The structures were designed by prominent
U.S. investment banks, who received substantial Iees in return Ior their services and who took
on little credit risk themselves thanks to special legal protections Ior derivatives
counterparties.
|8|
Financial reIorms within the U.S. since the Iinancial crisis have only served
to reinIorce special protections Ior derivativesincluding greater access to government
guaranteeswhile minimizing disclosure to broader Iinancial markets.
|10|

The revision oI Greece`s 2009 budget deIicit Irom a Iorecast oI "68 oI GDP" to 12.7 by
the new Pasok Government in late 2009 (a number which, aIter reclassiIication oI expenses
under IMF/EU supervision was Iurther raised to 15.4 in 2010) has been cited as one oI the
issues that ignited the Greek debt crisis.
This added a new dimension in the world Iinancial turmoil, as the issues oI "creative
accounting" and manipulation oI statistics by several nations came into Iocus, potentially
undermining investor conIidence.
The Iocus has naturally remained on Greece due to its debt crisis, however there has been a
growing number oI reports about manipulated statistics by EU and other nations aiming, as
was the case Ior Greece, to mask the sizes oI public debts and deIicits. These have included
analyses oI examples in several countries
|167|

|168|

|169|

|170|
or have Iocused on Italy,
|171|
the
United Kingdom,
|172|

|173|

|174|

|175|

|176|

|177|

|178|

|179|
Spain,
|180|
the United States,
|181|

|182|

|183|

and even Germany.
|184|

|185|

edit] Credit rating agencies
The international U.S. based credit rating agencies Moody's, Standard & Poor's and Fitch
have played a central
|186|
and controversial role
|187|
in the current European bond market
crisis.
|188|
As with the housing bubble
|189||190|
and the Icelandic crisis,
|191||192|
the ratings
agencies have been under Iire. The agencies have been accused oI giving overly generous
ratings due to conIlicts oI interest.
|193|
Ratings agencies also have a tendency to act
conservatively, and to take some time to adjust when a Iirm or country is in trouble.
|194|

In the case oI Greece, the market responded to the crisis beIore the downgrades, with Greek
bonds trading at junk levels several weeks beIore the ratings agencies began to describe them
as such.
|186|
In a response to the downgrading oI Greek governmental bonds the ECB
announced on 3 May that it will accept as collateral all outstanding and new debt instruments
issued or guaranteed by the Greek government, regardless oI the nation's credit rating.
|195|

Government oIIicials have criticized the ratings agencies. Following downgrades oI Greece,
Spain and Portugal that roiled Iinancial markets, Germany's Ioreign minister Guido
Westerwelle said that traders should not take global rating agencies "too seriously" and called
Ior an "independent" European rating agency, which could avoid the conIlicts oI interest that
he claimed US-based agencies Iaced.
|186||196|
European leaders are reportedly studying the
possibility oI setting up a European ratings agency in order that the private U.S.-based ratings
agencies have less inIluence on developments in European Iinancial markets in the
Iuture.
|197||198|
According to German consultant company Roland Berger, setting up a new
ratings agency would cost t300 million and could be operating by 2014.
|199|

Due to the Iailures oI the ratings agencies, European regulators will be given new powers to
supervise ratings agencies.
|187|
With the creation oI the European Supervisory Authority in
January 2011 the European Union set up a whole range oI new Iinancial regulatory
institutions,
|200|
including the European Securities and Markets Authority (ESMA),
|201|
which
became the EU`s single credit-ratings Iirm regulator.
|202|
Credit-ratings companies have to
comply with the new standards or be denied operation on EU territory, says ESMA ChieI
Steven Maijoor.
|203|

But attempts to regulate more strictly credit rating agencies in the wake oI the European
sovereign debt crisis have been rather unsuccessIul. Some European Iinancial law and
regulation experts have argued that the hastily draIted, unevenly transposed in national law,
and poorly enIorced EU rule on rating agencies (Reglement CE n 1060/2009) has had little
eIIect on the way Iinancial analysts and economists interpret data or on the potential Ior
conIlicts oI interests created by the complex contractual arrangements between credit rating
agencies and their clients"
|204|

edit] Media

This section may contain ina55ro5riate or misinter5reted citations that do not
verify the text. Please help improve this article by checking Ior inaccuracies. (help,
talk, get involved!) ovember 2011)
There has been considerable controversy about the role oI the English-language press in the
regard to the bond market crisis.
|205||206|
The Spanish Prime Minister Jose Luis Rodriguez
Zapatero has suggested that the recent Iinancial market crisis in Europe is an attempt to
undermine the euro
|207||208|
in order that countries, such as the U.K. and the U.S., can continue
to Iund their large external deIicits
|original research?|
,
|209|
which are matched by large government
deIicits.
|original research?||210|
The U.S. and U.K. do not have large domestic savings pools to
draw on and thereIore are dependent on external savings e.g. Irom China.
|211||212|
This is not
the case in the eurozone which is selI Iunding.
|213||214|

Zapatero ordered the Centro Nacional de Inteligencia intelligence service (National
Intelligence Center, CNI in Spanish) to investigate the role oI the "Anglo-Saxon media" in
Iomenting the crisis.
|215||216||217||218||219||220||221|
No results have so Iar been reported Irom this
investigation.
Greek Prime Minister Papandreou is quoted as saying that there was no question oI Greece
leaving the euro and suggested that the crisis was politically as well as Iinancially motivated.
"This is an attack on the eurozone by certain other interests, political or Iinancial".
|222|

edit] #ole of s5eculators
Financial speculators and hedge Iunds engaged in selling euros have also been accused by
both the Spanish and Greek Prime Ministers oI worsening the crisis.
|223||224|
German
chancellor Merkel has stated that "institutions bailed out with public Iunds are exploiting the
budget crisis in Greece and elsewhere."
|225|

The role oI Goldman Sachs
|226|
in Greek bond yield increases is also under scrutiny.
|227|
It is
not yet clear to what extent this bank has been involved in the unIolding oI the crisis or iI
they have made a proIit as a result oI the sell-oII on the Greek government debt market.
According to The Wall Street Journal hedge-Iunds managers already launched a concerted
attack on the euro in early 2010. On February 8 the boutique research and brokerage Iirm
onness, Crespi, Hardt & Co. hosted an exclusive "idea dinner" at a private townhouse in
Manhattan, where a small group oI hedge-Iund managers Irom SAC Capital Advisors LP,
Soros Fund Management LLC, Green Light Capital Inc., Brigade Capital Management LLC
and others eventually agreed that Greek government bonds represented the weakest link oI
the euro and that Greek contagion could soon spread to inIect all sovereign debt in the world.
Three days later the euro was hit with a wave oI selling, triggering a decline that brought the
currency below $1.36.
|228|
On 8 June, exactly Iour months aIter the dinner, the Euro hit a Iour
year low at $1.19 beIore it started to rise again.
|229|
Traders estimate that bets Ior and against
the euro account Ior a huge part oI the daily three trillion dollar global currency market.
|228|

In response to accusations that speculators were worsening the problem, some markets
banned naked short selling Ior a Iew months.
|230|

edit] Finland collateral
On 18 August 2011, as requested by the Finnish parliament as a condition Ior any Iurther
bailouts, it became apparent that Finland would receive collateral Irom Greece, enabling it to
participate in the potential new t109 billion support package Ior the Greek economy.
|231|

Austria, the Netherlands, Slovenia, and Slovakia responded with irritation over this special
guarantee Ior Finland and demanded equal treatment across the Eurozone, or a similar deal
with Greece, so as not to increase the risk level over their participation in the bailout.
|232|
The
main point oI contention was that the collateral is aimed to be a cash deposit, a collateral the
Greeks can only give by recycling part oI the Iunds loaned by Finland Ior the bailout, which
means Finland and the other Eurozone countries guarantee the Finnish loans in the event oI a
Greek deIault.
|233||234|

AIter extensive negotiations to implement a collateral structure open to all Eurozone
countries, on 4 October 2011, a modiIied escrow collateral agreement was reached. The
expectation is that only Finland will utilise it, due to i.a. requirement to contribute initial
capital to European Stability Mechanism in one installment instead oI Iive installments over
time. Finland, as one oI the strongest AAA countries, can raise the required capital with
relative ease.
|235|

At the beginning oI October, Slovakia and Netherlands were the last countries to vote on the
ESFS expansion, which was the immediate issue behind the collateral discussion, with a mid-
October vote.
|236||237|
However, as oI 10 October, Slovakia's government was still deeply split
over the issue.
|95|
On 13 October 2011 Slovakia approved Euro bailout expansion, but the
government has been Iorced to call new elections in exchange.
edit] !olitical im5act
Handling oI the ongoing crisis led to the premature end oI a number oI European national
Governments and impacted the outcome oI many elections
O Finland - April 2011 - The approach to the Portuguese bailout and the EFSF
dominated the April 2011 election debate and Iormation oI the subsequent
government.
O Greece - November 2011 - Following widespread criticism oI a reIerendum proposal
on austerity and bailout measures, Irom within his party, the opposition and other EU
governments, PM George Papandreou announced plans Ior his resignation in Iavour
oI a national unity govermement
O Ireland - November 2010 - In return Ior its support Ior the IMF bailout and
consequent austerity budget, the junior party in the coalition government, the Green
Party set a time-limit on its support Ior the Cowen Government which set the path to
early elections in Feb 2011
O Italy - November 2011 - Following market pressure on Government bond prices in
response to concerns about levels oI debt, the Government oI Silvio Berlusconi lost its
majority and his impending resignation was announced by the President.
O Latvia - February 2009 - Following a severe economic downturn, riots and citicism oI
the Governments handling oI the crisis, PM Ivars Godmanis and his government
resigned and there were subsequent changes to the constitutional election process.
O Portugal - March 2011 - Following the Iailure oI parliament to adopt the government
austerity measures, PM Jose Socrates and his government resigned and this led to
early elections in June 2011
O Slovakia - October 2011 - In return Ior the approval oI the EFSF by her coalition
partners, PM Iveta Radicova had to concede early elections in March 2012
O Slovenia - September 2011 - Following the Iailure oI June reIerendums on measures
to combat the economic crisis and the departure oI coalition partners, the Borut Pahor
government lost a motion oI conIidence and December 2011 early elections were set.