EUROPEAN SOVEREIGN DEBT CRISIS

ByVarsha Pandey Swapnil Prerna Gupta Meenakshi

WHAT IS THE EUROZONE DEBT CRISIS?

This is also known as Eurozone sovereign debt crisis The term indicates the financial woes caused due to overspending by some European countries When a nation lives beyond its means by borrowing heavily and spending freely, there comes a point when it cannot manage its financial situation. When that country faces insolvency. (Insolvency: when it is unable to repay its debts and lenders start demanding higher interest rates, the cornered nation begins to get swallowed up by what is known as the Sovereign Debt Crisis

BRIEF HISTORY
The Eurozone debt crisis seems to surround Greece the most. The actual beginning is how the European Union (EU) began in 1993 where 27 European nations "agreed to form an alliance that could compete economically with larger nations such as the US". This is what created the currency of the euro. The euro's value has decreased over the past few years due to the European Debt Crisis. The EDC began in 2008 with the crash of Icelands banking system, which spread to Greece. Greece had experienced corruption and spending as its government continued borrowing money despite not being able to produce sufficient income through work and goods. It was admitted that Greece's debts had reached 300bn euros, the highest in modern history Spain, Portugal, and the other nations later followed Greece.

Data Collection
The main European countries affected in the European Debt Crisis are as follows:

CRISIS TIMELINE
Jan 2001: Greece joins the Eurozone, becoming the 12th member to adopt the Euro

Nov 2004: Admits to fudging figures to gain entry to the Euro. Says deficit was not below 3% of GDP, as required by EU rules. Has been consistently above 3% since 1999.

Mar 2005: Adopts austerity measures to reduce deficit and improve finances post the hosting of Olympics. Posts short recovery upto 2006, when GDP grows by 4.1% in 3 months.

Oct 2009: Recovery short-lived after Global Financial Crisis. Debt fears mount. Economy contracts by 0.3%, national debt up by 56% in 5 years (242bn), deficit expected to be 6% of GDP. (Later revised to 12.7% of GDP).

Dec 2009: Fitch downgrades rating from A- to BBB+, a first in 10 years. Govt. proposes radical reforms, including crackdown on corruption and reining in public spending. Workers begin strikes.

Feb 2010: Deficit at 12.7%, debt at 300bn. 1st Austerity measure announced, includes freeze on public sector pay & higher taxes. Strikes intensify. Goldman Sachs under Fed enquiry for helping Greece borrow billions through Exchange Rate Swaps.

Apr 2010: 16 Eurozone members announce bailout package. 30bn 3 year loan at 5% interest, to be provided over next 1 year through the ECB. IMF to provide 15bn. S&P downgrades rating to BB+ (Junk status), as loan amount not seen as enough. 2nd Austerity measures announced, include salary cuts, increase in taxes.

May 2010: Size of bailout package increased to avert sovereign default. 110bn 3 year loan at 5% interest to be provided, with Eurozone members share at 80bn and IMF share at 30bn. Deficit at 13.6%. Govt. submits a 3year plan aimed at cutting budget deficit from 13.6% of GDP in 2009 to below 3% of GDP in 2014.

May 2010: With default fears from Portugal and Ireland, EFSF worth 750bn launched. 440bn loan backed guarantee and bilateral loans by Eurozone members, 60bn balance of payment support by EU members and upto 250bn by IMF support to be made available to weak economies.

Jul 11: 2nd Eurozone Bailout package announced. 109bn to be provided through EFSF, at lower interest rates (~3.5%) & with longer timeframe (15-30 yrs). Private sector contribution at 37bn.

Present: Country barely being sustained on drip-feed from the Troika European Union, European Central Bank & International Monetary Fund. Fate of the nation still uncertain.