Euro as a common currency was introduced in 1999.Unified
interest rates post euro’s introduction allowed members to borrow heavily
.Bonds which were issued by southern countries were considered to be equally
safe as the ones issued by nation like Germany. Nations like Greece, Italy
& Spain lie in southern Europe.
We can relate crisis of US sub –prime mortgage market which
further got transmitted to European nations. Easy availability of money
encouraged a debt –fuelled boom in PIGS nation which witnessed real estate
growth on unprecedented scale.
US housing prices peaked in late 2006, whereas European housing prices did peak a year
later.
We all are aware of the manner in which financial
crisis did strike
US from later part of 2007 & start of 2008 when
Bear Sterns ,Fannie Mae were taken over by US government.
Later in month of September, we saw Lehmann Brothers filing
for bankruptcy, which triggered financial crisis globally. Sub-prime debt
obligations made in US held around the world caused global financial shock
& worldwide housing bubble bursted in UK, Spain, Ireland as well as US.
American International Group required 180 billion $ bailout
to cover CDS[Credit Default Swaps],insurance against bond defaults underwritten
without reserves. Stress on banks around the world led to shrinkage in
availability of credit.US government however released bailout packages of 700
billion $,then 800 billion $ & then 847 billion $,There was a significant decline in exports of nations worldwide as US
imports dropped.
It was conceived that Euro as a currency would compete effectively with American $ and
Chinese Yuan [RMB].However this aura of invincibility did not sustain.
Before formation of Euro , European leaders agreed to limit
borrowings to just 3 % of their economies total output. This was expected that
at least nations in Eurozone will not be accumulating too much debt..However in
later years [Euro was formed in 1999], nations did not stick to the rule.
Germany, Italy & France , these nations started breaking
rule of 3 %.IF we compare nations struck with crisis ,we will find that Spain’s
government had smallest debts relative to size of its economy.
Greece had its own
wayward ways on which it moved.
Role of rating agencies such as Goldman Sachs did come under heavy scrutiny
after the revelation that it artificially manipulated financial status of
Greek government &
presented a nice image of Greek economy. Goldman Sachs had been deeply
involved in covering up the Greek government’s mismanagement of its state
budget & finances .IN 2001, after induction of Greece to European
union , Goldman Sachs helped the
government quietly borrow billions.
Fact remain that birth of Euro came with an original sin . Nation like Greece entered monetary
union with bigger deficits than the ones permitted under the treaty that
permitted common currency. Greek government is
blamed as rather reducing
spending ,it artificially reduced its deficits with derivatives.
Germany must have been under immense trouble as of its
reckless borrowings , however that did not turn out to be the case. Germany had
transformed its economy into an export power–house. It was exporting more to
the rest of world than imports. And it had an excess of cash on its exports
.Germany has been considered safe market ,with investors willing to lend even
at historically low level[Germany 10 years bonds yield is merely 1.5%,,whereas
as of now yield on Spainish bonds has been often crossing 7 %,,,which is
considered unbearable level for a government to repay].This is not same with
rest of European nations.
In late 2009, new Greek government found that its
predecessor lied about its borrowing,& were running under huge debts. This
revelation provoked a drastic loss in
investor’s confidence, spreading nervousness,, who started pulling their money
out of the country 7 demanded punitive interest rates on its debt.
There were serious threats of sovereigns debt-default,&
to avoid it EU-IMF approved a 3 year
emergency 146 billion $ credit line to Athens in May 2010.Investors had started
turning to economies of Portugal, & Spain, but even losses as of bursting
up of housing bubble saw nations like Ireland, Portugal & Spain seeking
bailout packages.
EFSF [European Financial Stability Facility] was constituted
in May,2010,intending to provide loans to countries in financial
difficulties,& financial recapitalisation of financial institutions through
loans to government. EFSF had a capacity to lend 440 billion euro.
This was supposed to be increased but then major nations of
Europe saw a bifurcation of opinion among masses , like in Germany as majority
of it would be provided by Germany & German masses were reluctant to allow
German government to pay for it.
European financial institutions were under stress.,
1-BNP-Paribas was forced to close funds in August 2007.
2-German banks IKB ,West LB,& Saschen LB were bailed out
by the government.
3-Irish banks were given government deposit guarantees.
European central Bank injected liquidity into European banks,&
did not lower interest rates until
October 2008, as of it’s focus to curb on inflation.
EU approved additional 157 billion $ package in July,&
parliament adopted strict austerity measures. Now Greece’s debt/GDP ratio had
reached 115% in 2009.Greece’s government found itself in dilemma after it
received bailout package .Greek government had to increase sales taxes ,reduce
public sector salaries ,pensions ,elimination of bonuses ,reduction in minimum
wages, liberalisation of labour laws which allows employers to increase working
hours.
These strict measures have led to a deep contraction in
growth , which has only further undermined confidence. Country received a
second bailout of 130 billion euro from EU & IMF last year. There were possibilities of Greece even
exiting from Euro. Greece received 130 billion euro from IMF & other
eurozone members , but it had to abide a condition that it will reach a deal
with it’s existing private sectors
lenders to reduce it’s debts. This would be done through a swap of old bonds
with newly issued bonds that would be worth a lot less & pay less interest.
Private owners will take 53.5% nominal loss on Greek debt which will work out
to be 74%.This way Greece will be able to wipe half of it’s debt of 485 billion
euro. Total aims are to reduce Greek
government total indebtedness from 160% of GDP now to 120.5% by 2020.
WE can however learn few things from it about Euro.
European governments did try to act together , but did not
successfully implement it. There was a limited impact of falling exports due to
extensive internal trade relationships. And Greece as of now is facing
difficult adjustment problems ,as European are avoiding losses on Greek bonds.
[SOURCE,,THIS WAS WRITTEN BY ME IN 2012 LAST PARTS,,LAST
MONTHS,,,THIS HAS BEEN USED IN MY TEACHERS WEBSITE MR.SIBA SANKAR MOHANTY
WEBSITE ''LOK KATHA''WITH NAME OF ‘’AN ANATOMY OF GREEK CRISIS’’..I AM USING ONLY THAT
ARTICLE WHICH ACTUALLY HAD BEEN ASKED TO SUBMIT AS AN SUBJECT ASSIGNMENT WHEN
WE WERE STUDYING PUBLIC ECONOMICS..DURING 3RD SEMESTER WHEN WE WERE STUDYING PUBLIC FINANCE]
I HAD USED NEWS FROM ONLINE AS MAJOR SOURCE,,,AND THEN
ARTICLES FROM MAGAZINES,,,TRYING TO ENSURE THAT I CAN WRITE INCIDENCES
PROPERLY,,,]
THANKS,]
harsh vardhan pathak
doon university
