The European Sovereign Debt Crisis was a period when several European countries experienced the failure of financial institutions, high levels of government debt, and rapidly rising bond yield spreads on government bonds.
Important points
The European sovereign debt crisis began in 2008 with the collapse of Iceland’s banking system. The causes include the financial crisis of 2007-2008 and the Great Recession of 2008-2012. The crisis peaked in 2010-2012.
Investopedia / Julie Bang
history of crisis
The debt crisis began in 2008 with the collapse of Iceland’s banking system and spread to mainly Portugal, Italy, Ireland, Greece and Spain in 2009, popularizing its somewhat offensive nickname (PIIGS). This led to a loss of confidence in European businesses and the economy.
The crisis was ultimately contained by financial guarantees from European countries and the International Monetary Fund (IMF), which feared a collapse of the euro and financial contagion. Rating agencies have downgraded the debt of several euro zone countries.
For a time, Greece’s debt reached junk status. Countries receiving bailout funds were required to follow austerity measures aimed at curbing the rise in public sector debt as part of the financing agreement.
Causes of the debt crisis
Causes include the financial crisis of 2007-2008, the Great Recession of 2008-2012, the real estate market crisis, and real estate bubbles in several countries. Fiscal policies regarding government spending and revenue in neighboring countries also contributed.
By the end of 2009, eurozone peripheral member states Greece, Spain, Ireland, Portugal and Cyprus will be unable to repay or refinance government debt or rescue distressed banks without the assistance of third-party financial institutions. I can no longer do that. These included the European Central Bank (ECB), the IMF, and eventually the European Financial Stability Facility (EFSF).
Also in 2009, Greece revealed that the previous government had grossly underreported its budget deficit, a violation of EU policy and fueling fears of a collapse of the euro with political and financial ramifications. I put it on.
The 17 euro area countries voted in 2010 to create the EFSF, specifically to respond to and support crises. The European debt crisis peaked between 2010 and 2012.
Amid growing concerns about excessive sovereign debt, financial institutions in 2010 ordered euro zone countries to take action as high levels of debt and budget deficits made it difficult to finance budget deficits in the face of low overall economic growth. demanded higher interest rates. Some affected countries raised taxes and cut spending to combat the crisis, contributing to social unrest within their borders and a crisis of confidence in leadership, particularly in Greece.
Several of these countries, including Greece, Portugal and Ireland, had their sovereign debt downgraded to junk status by international credit rating agencies during the crisis, exacerbating investor fears.
A 2012 report to the U.S. Congress states:
The eurozone debt crisis began in late 2009, when Greece’s new government revealed that the previous government had misreported government budget data. Higher-than-expected deficit levels undermined investor confidence and pushed bond spreads to unsustainable levels. Concerns quickly spread that the fiscal situation and debt levels of many euro area countries were unsustainable.
One of the EU’s responses to the debt crisis was to introduce “bail-in” rules that prohibit countries from bailing out financial institutions with taxpayer funds without investors suffering initial losses.
Example of European crisis: Greece
In early 2010, this situation was reflected in rising government bond yield spreads among the affected peripheral member states of Greece, Ireland, Portugal, Spain, and most notably Germany.
Greek yields diverged as Greece needs euro zone support by May 2010. Greece received multiple bailouts from the EU and the IMF in the following years, in exchange for the introduction of EU-mandated austerity measures, along with cuts in public spending and significant tax increases. The country’s economic depression continued. These measures, combined with the economic situation, caused social unrest. Greece faced sovereign default in June 2015, with divided political and fiscal leadership.
Greeks voted against the bailout package and further EU austerity measures the following month. This decision raises the possibility of Greece leaving the European Monetary Union (EMU) completely.
It would be unprecedented for a country to withdraw from EMU, and if Greece had returned to the use of the drachma, the economic impact would range from complete economic collapse to a surprising recovery.
In the end, Greece remained part of EMU and slowly began to show signs of recovery in the following years. Unemployment fell from a five-year high of more than 27% to 16%, while at the same time annual GDP rose from a negative figure to a forecast of more than 2%.
Brexit and the European crisis
In June 2016, the United Kingdom voted in a referendum to leave the European Union (EU). The vote heightened Euroscepticism across the continent and spiked speculation that other countries might also leave the EU. After a lengthy negotiation process, Brexit took place at 11pm GMT on January 31, 2020, but there was no sudden surge in sentiment calling for the country to leave EMU in other countries.
It is common knowledge that the movement grew during the debt crisis, with the campaign describing the EU as a “sinking ship”. The UK referendum sent shock waves throughout the economy. Investors fled to safety, some government yields went negative, and the British pound fell to its lowest value against the dollar since 1985. The S&P 500 and Dow Jones plunged, but recovered in the following weeks, hitting new highs as investors fled. Because of the negative yield, it is no longer an investment option.
Italy and the European debt crisis
The situation for Italian banks worsened in mid-2016 due to a combination of market volatility caused by Brexit, questionable performance by politicians, and a poorly managed financial system. A whopping 17% of Italy’s roughly $400 billion worth of loans were junk, leaving banks in need of a massive bailout.
Because Italy’s economy is much larger, the complete failure of Italian banks was probably a greater risk to the European economy than the failures of Greece, Spain, or Portugal. Although this risk has been averted, the problem is not yet resolved and there are concerns that falling interest rates could put Italian banks in crisis again.
Further effects
Ireland followed Greece in November 2010, followed by Portugal in May 2011. Italy and Spain were also vulnerable. Spain and Cyprus required government assistance in June 2012.
The situation in these countries has since improved due to various fiscal reforms, domestic austerity measures, and other specific economic factors. However, this does not mean that a new debt crisis will not occur.
In some countries, such as Italy, there are concerns that high interest rates and increased public spending could create uncertainty and spark a new crisis. However, it is also true that, having learned from previous experiences, the EU is now better equipped to prevent, manage and respond to such crises. Moreover, unlike during the last crisis, governments no longer need to rely on financial markets to buy government bonds. Currently, the ECB finances public debt.
What caused the European sovereign debt crisis?
The European debt crisis was caused by a variety of factors, including excessive deficit spending by several European governments, lax lending practices by banks, the resulting loss of confidence in European businesses and the economy, and the inflow of capital from abroad. This led to a decrease in They were backed by investors.
What was the solution to the euro debt crisis?
Various measures were introduced to combat the crisis. These included giving much-needed loans to struggling governments in exchange for cheap loans to commercial banks and more say in how the funds were spent.
Which country left the EU?
As of August 2024, the only country to have left the EU is the UK. The UK voted to leave the EU in a referendum in 2016, and officially left the EU in early 2020.
conclusion
The European Sovereign Debt Crisis was a financial crisis caused by large government debts and poor financial management that shook European countries from 2008 to 2012. Countries caught up in the crisis, led by Greece, received bailout funds in exchange for agreeing to cuts in public funding. Spend and introduce austerity measures. These measures sparked much controversy, led to prolonged economic turmoil, and at one point threatened the collapse of the European Union.
