The Eurozone Crisis
The Eurozone Crisis is a debt crisis, which at first hit the peripheral EU countries (Greece and Ireland), and then affected almost the entire euro area. The crisis of the government bond market in Greece in autumn 2009 was the main source of it. Refinancing of the public debt without the help of intermediaries has become a difficult or impossible task for some countries in the Eurozone. The paper studies the causes of and measures aimed at resolving the crisis, as well as the effects of these measures.
Since the late 2009, investors have started to anticipate the debt crisis due to the value growth of the public and private sectors debt around the world and simultaneous lowering the credit ratings of some EU countries (Lapavitsas & Kouvelakis, 2012). A variety of regional reasons has led to the development of the debt crisis in different countries. In some countries, crisis was caused by the provision of emergency government assistance to the companies in the banking sector that were on the verge of bankruptcy due to the market bubble. In others, crisis was caused by the government failed efforts to stimulate the economy after the market bubble burst (Lapavitsas & Kouvelakis, 2012). In Greece, the rise of the national debt was caused by a wasteful high-wage for the civil servants and a significant amount of the pension payments.
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The structure of the Eurozone has also contributed to the crisis. It has had a negative impact on the ability of the European countries’ management to react to the development of the crisis: the euro area members have a single currency, but there is no single tax and pension legislation. It is noteworthy that doubts about the solvency of individual countries caused the doubts about the solvency of their banking sector and vice versa. It is due to the fact that a significant proportion of government bonds are in the property of the European banks. While the government bond issuance has increased significantly only in several Eurozone countries, the growth of public debt began a common problem of all countries of the European Union in general. Nevertheless, the European currency remained stable. The three countries that are most affected by the crisis (Greece, Ireland, and Portugal) accounted only for 6 percent of the gross domestic product (GDP) of the whole Eurozone.
In June 2012, the debt crisis in Spain came to the forefront of the economic problems in the Eurozone (Tuori, 2014). This fact led to a sharp increase in the rate of government bonds of Spain return and has hindered the country’s access to the capital markets. This problem, in turn, has caused the need to provide financial assistance to Spanish banks and implement a series of other measures. The use of traditional instruments of the anti-crisis policy, particularly fiscal and monetary (decline in interest rates, providing preferential credit conditions, and facilitating access to credit) did not always bring the expected results, allowing only to alleviate the manifestations of problems (Lapavitsas & Kouvelakis, 2012).
In order to resolve the crisis, it was decided to cancel 50% of the debt on Greek bonds owned by banks, in order to increase the funds of financial rescue by the European Financial Stability Facility almost fourfold and to increase the level of required capitalization of the EU banks to 9%. The decision was made after a meeting of leaders of 17 Eurozone countries in Brussels on October 26, 2011 (Daianu, 2014). Despite the entry into force of the requirements to increase the level of own funds, no bank could not receive the government capital investments while at least some of the European banks preserved the sizes of the paid dividends on the highest level. In addition, management of the European Central Bank (ECB) has implemented a series of measures aimed at stabilization of the financial markets and increase of their liquidity.
In May 2010, the leadership of the ECB has:
- Started the operations on buying the government bonds and private debts in the open market. By February 2012, the cost of the purchased securities has reached €219.5 billion while ECB has carried out the absorption of excess liquidity for the prevention of inflation. According to Elwin de Groot, the economist of the Rabobank, €300 billion is a “natural limit” of the volume of debt that ECB could sterilize (Thesing, 2011);
- Renewed an agreement on carrying out the transactions on the dollar swaps with the support of the Federal Reserve System;
- Changed the requirements to credit ratings in the provision of the borrowed funds: now, all existing and new debt securities issued or guaranteed by the Greek government, regardless of the country’s credit rating, are accepted as collateral (Rodrigues, 2014).
These measures have led to a slight improvement of the situation with the Greek bonds in the capital markets. Raising additional funds with the help of these bonds remained difficult due to the fact that the credit rating of the government bonds of Greece was downgraded to junk.
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Another measure was European Stability Mechanism (ESM). The European Stability Mechanism is a permanent program to provide emergency financing funds, which came into effect in September 2012, replacing the two temporary emergency financing programs: the European Financial Stability Facility and the European Financial Stabilization Mechanism. ESM functions as a permanent element of the insurance network of the euro area with a maximum borrowing capacity of €700 billion (Daianu, 2014). Since 1 March 2013, availability of the completely ratified European fiscal agreement has become an obligatory condition of receiving the ESM assistance.