The European financial crisis arose out of fiscal measures adopted in several European countries. The international community got concerned in late 2009 and at the beginning of 2010. The European countries had accumulated high amounts of sovereign debt. In Ireland, the debt had increased due to bank bailouts. There was also an increase in the bonds yields spread. The crisis mainly affected the countries known as PIIGS which are Portugal, Ireland, Italy, Greece, and Spain. The Greek situation became a matter of great concern. There were certain harsh measures that were introduced by the European Union that caused demonstrations in the country against the measures. The European Union approved a bailout budget of Euro 750 Billion which would enable the countries to achieve financial stability. The Union also required the European Banks to achieve a capitalization rate of 9% (Blundell- Wignall and Slovik, 2011)
The Greek Financial Crisis
The 2011 European Crisis has its origin in four major countries which are Greece, Spain, Ireland, and Portugal. In Greece, the economy had been performing extremely well in the period 2000 to 2007. Secondly, the bond interest rates had been falling allowing the government to have high structural deficits. In the year 1974, the country started experiencing democracy after the military junta was removed. The successive governments, therefore, worked hard to provide public sector jobs and other welfare services on government deficits. The 2000 crisis severely affected the shipping and tourism sectors, two of the major industries in Greece. The harsh measures introduced by the government were several.
The public sector wages and salaries were reduced. There was also a reduction in their allowances. In the area of pensioners, there was the introduction of a special tax on the people who were receiving high pensions (Featherstone, 2005). There was the limitation on the amount of pension that a person could receive from the government. On the 13th and 14th payments, a person had a pension limit of 800 Euros. There were extra taxes on company incomes. There was the privatization of over four thousand public companies. The VAT was also increased. There was a general national strike against the harsh measures (Featherstone, 2011)
The Ireland Financial Crisis
The Ireland financial crisis occurred because the country had offered guarantee facilities to six banks. In September, 2008, the Finance Minister had issued a one-year guarantee for the banks. The guarantee was extended for a further one year after the National Asset Management Agency was launched to assist the banks to deal with their bad loans. In December 2009, it was discovered that the Anglo Irish Bank had several hidden loans. This led to the resignation of three executive officers. Furthermore, there were several businessmen who were investigated for using bank loans to purchase stocks.
In 2009, the government nationalised the bank bypassing the Anglo Irish Bank Nationalization Act of 2009. In April 2010, the National Asset Management Agency announced that in the year 2010, it had no major refinancing obligations. This is because it had a Euro 23 Billion cash balance that would be sufficient for the Euro 20 Billion that it had. In September 2010, the banks were not able to pay off the loans therefore the government chose to renew the guarantee for another year. This had an adverse effect on the economy. The Irish bonds started to perform poorly. The
bank’s loan was a significant portion of the GBP. It stood at 32% of the country’s GDP.
The government started to communicate with the IMF and the ECB on how the country could be assisted. In November 2010, the international bodies gave the Irish government 85 Billion dollars bail out. However, the bank’s loans were downgraded by the rating agency Moody. There has been speculation whether there will need to be a second financial bailout of the country.
The Portugal Financial Crisis
In the country of Portugal there was also financial trouble. The government had encouraged high over expenditure. There were many agreements between the private and public sector on consultancy and advisory services that were unregulated. The nature of the contracts was unclear. The agreements were also excessive, unnecessary and ineffective. The country had a high number of redundant workers due to inappropriate pension and retirement policies. In the government officers, the top management had inflated bonuses and wages. There was gross mismanagement of the European Union funds in the period 1974 to 2011. The country was experiencing near bankruptcy in the beginning of 2011. The country issued a lot of bonds due to pressure from the bond traders and speculators (Becker, 2011). The rating agencies also played an active role in pushing the government to spend more in the market.
Portugal was a country with a great economy before the sovereign debt crisis. In May, 2011, the country received a bail out of Euro 78 Billion from the International Monetary fund, the European Financial Stabilization Mechanism and the European Financial Stabilization Facility. The bailout loan had an interest of 5.1%. This was the
third country to receive financial assistance after Greece and Ireland. The government however had to pave the way for the privatization of the Portugal Telecom by selling its shares in the company. In July, 2011, the Moody rating company downgraded the country’s credit rating. There was an expectation that like Greece, the country would soon request for a second round of financial assistance.
The Spanish Financial Crisis
In Spain, the financial situation was a bit better than Greece, Ireland and Ireland. The Spanish government decided to reduce its deficit by introducing fiscal measures. The country is one of the largest economies in the Euro region therefore there was a lot of pressure from the international community such as the United States and the other European countries to control its deficit and public debt. The government was able to reduce the deficit from 11% in 2009 to 9% in 2010. The public debt of the country at 60% of the country’s GDP can also not be compared to the adverse status of countries such as Greece at 142%, Portugal at 90% and Ireland at 96%.
The Belgium Financial Crisis
In the country of Belgium, the country’s public debt stood at 100% of the Gross Domestic Product. It was ranking number three after Greek and Portuguese. The country held elections in 2010 and the results were inconclusive. There was therefore a transition or caretaker government in place to oversee the affairs of the country.
The two majority parties in the country were unable to sit down and agree on the particular details of the majority government. In the international community it was feared that the country would suffer from a financial crisis like Greece and Ireland.
However, the country was able to weather the storm due to several factors. The government budget deficit was not high. It was at a manageable level of 5%. The country was also able to finance its deficit by the use of its savings. The country had high savings. The advantage of this was that the country is not vulnerable to the fluctuating interest rates of the international credit markets. The bond yields were also considerably lower than those of its neighbouring countries. As at the end of 2010, the yield rates of the bonds stood at 4%. The bond yield rate at the same time for Ireland was 9% and Portugal stood at 6.9%.
The European Union Financial Solutions
In May, 2010, the European Union decided to create the ESFS, a body that would oversee the financial bailout of the Euro zone countries. The management of the organization is by members of the different Euro zone countries. The body participates in the bonds market and uses the money to aid the European countries. However, a country has to make a formal request for a bail out in order to be assisted. These loans would be given in addition to the loans that the IMF gives. At times the European Financial Stabilization Mechanism also offers loans to the European countries. The European Union would buy the countries’ bonds from the secondary market in their countries. The action would result in a decrease in the bond yields (Akram, Ali, Noreen and Monazza, 2011)
The crisis was caused by financial decisions by the European Countries governments. Just like the 2009 financial crisis, the international community has learned a lot. There are measures which were introduced such as limits of public debt and government deficit. In the future, the governments have to be careful to make wiser decisions and commit to the regulatory conditions of the European Union.
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Becker, Sebastian. “EMU Sovereign Spread Widening, Reasonable Market Reaction or Exaggeration” Deutsche Bank Research. 2009. Web.
Blundell-Wignall, Adrian and Patrick Slovik. “The EU Stress Test and Sovereign Debt Exposures” OECD Working Papers on Finance, Insurance and Private Pensions. 2010. Web.
Featherstone, K. “The Greek Sovereign Debt Crisis and EMU:A Failing State in Skewed Regime”. Journal of common market studies, 49.2 (2011), 127-193. Print.
Featherstone, K. ““Soft” Co-ordination Meets “Hard” Politics: The European Union and Pension Reform in Greece”. Journal of European Public Policy, 12.4(2005): 50-733. Print