Causes Of The European Sovereign Debt Crisis – With the ECB far from introducing interest rate hikes and government debt higher than before the last sovereign debt crisis, this is an issue that worries many investors and certainly central banks. up.

Debt becomes unsustainable when investors no longer believe the government can repay it. It is not only the current level of debt that is important, but also the repayment plan drawn up by the government. The feasibility of such a plan depends on the path of growth, inflation, interest rates and fiscal policy. If these variables become inconsistent with long-term stable debt levels, investors will doubt the government’s ability to service its debts and the risk of sovereign default may escalate.

Causes Of The European Sovereign Debt Crisis

Causes Of The European Sovereign Debt Crisis

At the start of the European debt crisis of 2009-2015, the countries of the Eurozone were clearly in a difficult situation. Nominal growth rates are mostly negative – with the exception of Austria and Belgium, debt interest rates are relatively high and most economies run structural budget deficits.

Crises And Their Social Costs In Europe

Currently, the risk of sovereign default appears low as inflation maintains high nominal growth rates. Even if the ECB raises interest rates, debt servicing costs remain low and it will take time for higher central bank interest rates to translate into higher borrowing costs. The average nominal yield on eurozone debt was just 1.6% in the third quarter of 2022, compared with 3.6% in the fourth quarter of 2009.

However, if these effects are reversed, the risk situation may change. Ten of the twelve euro area economies have primary budget deficits and budget balances are causing weakness.

We expect euro area nominal growth to return to 3.3% (trend level) in 2024 from 13.1% in 2022, largely driven by the decline in the headline inflation rate. It is also reasonable to assume that further interest rate hikes by the ECB will lead to higher interest rates on government debt – much of which is already baked into government bond yields.

We simulate this effect below (Figure 2) to show that sovereign debt default risk may increase under this scenario, but remains well below levels prior to the recent sovereign debt crisis. Many countries are currently in the “danger zone” (upper left quadrant).

The Eu Economy In Crisis: Can We Learn From Past Mistakes?

We built a model to estimate the extent to which the government needs to adjust its fiscal policies to maintain sustainable debt. Figure 3 shows the necessary adjustment to a country’s core budget balance to keep the probability of cross-country tension below 1%. It is clear that several countries, including Greece, Italy and France, will need to make significant adjustments over the next few years to reduce the risk of default.

But for other countries, they already have a lot of financial leeway because they currently have a very low default risk. The model shows that Ireland, the Netherlands, Germany and Cyprus could actually increase spending and still keep the risk of government strain below 1%.

During the pandemic, EU leaders came together to agree a massive economic stimulus package worth more than €800 billion. For debt-burdened peripheral countries, the NGEU offers much-needed support. The ability to borrow at lower interest rates than usual and the expected positive impact on nominal GDP growth can improve their debt sustainability

Causes Of The European Sovereign Debt Crisis

In addition, holding EU bonds also helps to reduce the risk of loss of confidence in sovereign debt, as they act as generally safe assets whose value is more resistant to an idiosyncratic shock.

Understanding The Downfall Of Greece’s Economy

On the other hand, however, lower borrowing costs could encourage some countries to take on more debt by investing in more, perhaps less efficient, projects.

Currently, most countries are on an aggressive path to achieving debt sustainability despite large budget deficits due to high inflation and low interest rates. However, the situation is likely to worsen as falling inflation, worsening real growth and higher ECB interest rates weigh on government funding costs.

However, the expected development of government debt and the factors that determine this development look significantly more positive today than 14 years ago.

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Diving Into The European Debt Crisis

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The Eurozone debt crisis from 2008 to 2012 continues to affect the European Union today and has an impact on the global economy. A closer look at the crisis will shed light on how the coming crisis can be prevented.

The euro area consists of 19 member states of the European Union (EU) that have adopted the euro (€) as their currency. Croatia will become the 20th member in 2023 and other EU countries are legally bound to join once they meet the criteria.

Causes Of The European Sovereign Debt Crisis

Joining the Eurozone offers member countries significant advantages. One of these benefits is a significant reduction in borrowing costs for both governments and private entities. This, combined with a generally relaxed global credit environment with low approval standards and reasonable interest rates, made borrowing extremely attractive during the period 2002-2008.

Extraordinary European Council Meeting On Greece, 12 July 2015

The resulting debt explosion outlined a major problem for the eurozone. Although the region has a common currency and monetary policy, it includes countries with very different political needs.

The EU’s dominant economies, such as Germany, France and (at the time) the UK, had a large influence on politics, and policies suitable for them were not necessarily suitable in other countries. The “smaller” peripheral countries of the EU.

The strength of the euro, driven by the strong performance of core countries, has made peripheral countries rapidly uncompetitive in export markets. Because of the common financial policy, they cannot revalue their currencies to improve competitiveness. They quickly ran large trade deficits.

Easy borrowing has led to an increase in public and private debt in many countries. Some countries, notably Ireland and Spain, experienced an excessive real estate boom as local and foreign buyers took advantage of cheap loans to amass wealth.

The Euro Crisis. Causes And Consequences Of The Greek Debt Crisis On The Euro Zone

Some loans are definitely irresponsible. Borrowed money is often not invested wisely. Some are used to finance consumption, some government loans are used to finance social assistance measures that are considered unsustainable. Some countries resorted to manipulating the numbers: the Greek government was forced to admit in 2009 that it had seriously distorted its debt and budget deficit.

The debt explosion and subsequent eurozone debt crisis are often attributed solely to irresponsible borrowing. It is important to remember that very loose lending criteria encourage aggressive borrowing and the inability to set country-specific monetary policies limits the economic development that would otherwise occur. This can help the parties to cope.

In September 2008, Lehman Brothers, a major New York investment bank, filed for bankruptcy. Obviously, their failure to do so is only the tip of a very large iceberg. The economic bubble, propped up by massive debt, quickly burst and the contagion spread across Europe.

Causes Of The European Sovereign Debt Crisis

Iceland – which is not a member of the eurozone but has an economy closely linked to it – triggered the eurozone debt crisis. The country’s three largest commercial banks failed back-to-back in 2008, prompting nationalization and leaving the country with debts seven times its GDP.

Sovereign Debt Crisis

In January 2009, a group of ten Central and Eastern European banks filed for bailout, and attention turned to heavily indebted economies such as Portugal, Italy, Ireland and Greece, as well as Spain, a group that immediately received the unattractive acronym “PIGS.” In April 2009, the EU asked France, Spain, Ireland and Greece to reduce their budget deficits.

Greece’s new government has revealed the true extent of the country’s debt, raising fears that sovereign debt is imminent. The sovereign debt of Greece, Portugal and Ireland was downgraded to junk status.

Some analysts predict its end

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