Sovereign debt crisis - Free Essay Example

Sample details Pages: 5 Words: 1415 Downloads: 1 Date added: 2017/06/26 Category Economics Essay Type Narrative essay Did you like this example? In the early 2010, fears of a sovereign debt crisis (2010 Euro Crisis) developed in some European countries due to the rising of government deficits and debt levels. Discuss in detail on the main cause of the Euro Crisis. What are the measures taken by the affected countries to overcome/ mitigate the impact of the Euro Crisis? In the early year of 2010, some of the European countries had fall into the sovereign debt crisis and caused the economic and euro currency slump down. (Schuman, M 2010) These countries are called â€Å"PIIGS. It starts up in Greece, followed by Ireland, Italy, Portugal and Spain. Rising in government deficits and debt level, together with downgrading of European government debt created fear and loss of confidence to investors in financial markets. To solve this issue, European nation and International Monetary Funds (IMF) loan out about trillion of euro to those affected countries in order to rescue the economic from continuously deteri orate. A score has given to each ‘PIIGS by Barclays (global financial services company) to measure its vulnerability insolvency. The result is Greeces score was the worst, 4.5. Surprisingly, the others ‘PIIGS countries score are remarkably similar. Portugal score was the second worst, 4.3, followed by Ireland, 4.1, Spain 3.4 and the lowest score is Italy 2.1. Based on Barclayss analysis (Schuman, M 2010), â€Å"Italy does not really belong to the group. It has been included based on its high initial debt to-GDP ratio. However, when accounting for the fiscal dynamics (i.e. the very low primary deficit), the potential financing needs (i.e. the larger domestic creditor base) and the comparatively modest risks in the banking sector (in particular, the low real estate related risks), it becomes clear that Italy is not in the same risk category.† The Euro Crisis is start off with Greece. Based on (BusinessWeek 2010), the main cause of the heavy debt is due to too much on spending and borrowing and there are many due in next few months. Hence, Greece is in default because cannot pay off about â‚ ¬54 billion debts on time and European Bank owns those bonds would take massive write-offs. This would affect lending and affect the economy indirect ways. The economist (Kraemer, J 2010)said thatGreece outstanding securities at euro 290 billion which twice higher than Lehman Brothers before went down in September 2008. Greek government has try to sell more bonds in order to raise funds and pay off the debts, but investors afraid of default payment on the debt (interest) due to Standard and Poor (SP) rated Greeks government below the investment grade, BB+. Moreover, it likely estimation that investor can only get back of 30% 50% of principal. Markets discovered the government has misreported the official statistic to keep within monetary union guidelines. (Blodget., H 2010), Greece had paid Goldman Sachs and other banks hundreds of million dollar fee for arranging transaction that hid the borrowing amount. To overcome this problem, Eurozone countries (Germany†¦) and the International Monetary Funds (IMF) has agreed to a loan of immediate â‚ ¬45 and will be more funds available later. The total funds of â‚ ¬110 have been agreed and the interest rate is 5% (considered rather high level). Government of Greece also has impose the austerity measure, such as extraordinary tax has imposed on company profits; total 10% rise tax in the luxury, alcohol, cigarettes and fuel; abolish the pensioners receiving over â‚ ¬2500 per month and the list goes on. Due to cut in government spending and increasing in tax, the general strike was held in Athens to protest against the government implementation. In Ireland, the failure of banking sector has dragged into negotiated the bailout package of â‚ ¬85 billion (â‚ ¬85 billion come from its own pension funds). On June 2010, Ireland beings further bail out of Anglo Irish Bank about â‚ ¬34 billion. The budget deficit is taking around 32pc of GDP. (Wall Street journal) reported that Standard and Poor (SP) lower the rate the government bond from AAA to AA-. This indicated the fiscal cost to the Irish government of supporting the financial sector has increase significantly above the estimation. Again in 6 October 2010, the Fitch Ratings cuts the government rating down to A- from AA- originally and stated it will cut the government credit rating again if the economic fails to recover. On 30 October 2010, Irish government announced it will be budget cut down of â‚ ¬15 billion over next four years and this is expected to cut the Irelands deficit to 3% of GDP by 2014 as agreed with EU previously. (Wall Street journal), November 2010, Ireland government has applied the â‚ ¬10 billion from EU and IMF in order to restructure debt and cut down its budget deficit. Moreover, government announced it will be budget cut down of â‚ ¬15 billion and incr ease the taxes rate. This action plan is expected to reduce the budget deficit to 9.1% of GDP in 2011, but it causes thousand s of demonstrators marched in Dublin. On March 2011, a round of bank ‘stress test exposes the 24 billion of capital shortfall. With the gap set largely by taxpayers, Irish Central Bank says it expected the likely result will be that government takes majority ownership of the countrys six largest lenders. Ireland government credit rating had downgrade to BAA 3 (one notch above junk). In April 2011, (Chapple, I 2011) Portugal has to pay total of â‚ ¬5 billion debt back to the investors in the coming June 2011. At first, Jose Socrates (Prime Minister of Portugal) resigned after parliament rejecting government austerity measure plan and avoiding assistance from EU countries. But due to run out choice, finally Portugal has asked the loam from IMF (about â‚ ¬80 billion). Portugal is the third country gets the financial assistance after unable to fund s the debts themselves. On the other hand, Fitch Rating estimated Portugal would need about â‚ ¬60 billion more in funding through end of 2013. Based on (CNN.com), although Portugal is able raised up the â‚ ¬1 billion of T-Bills, or short term debt, but it paid a massive premium. (BBC.com) stated that Portugal problem is different from the others, Portugal has low economic growth and high wages show the country has struggled to raise taxes to support government spending. Therefore, when financial crisis happen, Portugal found it is dealing with the same rising cost of debt that other countries currently dealing with, but finally Portugal had concede it fail to raise money through financial market. (Chapple, I 2011) Spain is the country that everyone concern about because it has long seen as the economy that is too big to fail given its huge size relative to whose have been bailout. (Pop, V 2010) On 12 May 2010, Barack Obama (US President) had a phone call to Madrid and asks for resolute action to stem widening deficit. In year 2010, Spain public deficit is 9.8% of the GDP. (Pop, V 2010) The austerity plan is Spain has cut down â‚ ¬5 billion of spending in 2010 and â‚ ¬10 billion in 2011. Luckily, in year 2011, it has been the positive look for the Spain has managed the distance itself from the debt crisis trouble. In addition, Goldman Sachs stated that â€Å"Spain will no need a bailout† and European Commission has state â€Å"Spain is well on track†. By the way, EU has also established the permanent stability funds who able to lend out of total â‚ ¬550 billion to replace current bailout fund when it expires in 2013. The purpose is to reassure markets that the EU is seriously supporting its members. In conclusion, the fiscal problem is the main reason cause debt crisis. (Thoma, M 2010) Country like Greece is lack of effective monitoring government deficits and lack of enforcement of the rules on how much debt a country can ha ve allowed excessive debt level to accumulate. In other cases such as Spain, the crisis is not causes by irresponsible government budget behavior but is due to recession that caused the government budget to collapse. Hence, once these countries went into trouble will cause other countries within EU run into deficit. This is often knows ‘contagion effects. In fact, (Thoma, M 2010) those EU countries are unable to use independent monetary policy. If those countries have their own currency, (Thoma, M 2010) they could stimulate export and this will offset the negative effect of cutting down budget to cope with deficit. Overall, ‘Greedy is also an issue cause happen of the debt crisis. Due to financial intermediaries are greedy enough, therefore, banks do not hold enough liquidity on hand and make the bank in run out situation. In this case, well structures of banking system and government budget seem to be very crucial to a country. Finally, EU should learn from this lesson and (Schuman, M 2010)is the time for strengthening the banking policy. Don’t waste time! Our writers will create an original "Sovereign debt crisis" essay for you Create order