SUMMARY OF THE EURO CRISIS – OVERVIEW OF EVENTS TILL DATE
The Euro Crisis had its making in the US financial crisis of 2008-09. Before 2008, Euro Zone nations had been borrowing indiscriminately owing to low interest bonds available due to being part of Euro Zone. Also, they were banking on their high growth rates to pay back those loans. However, as a result of US financial crisis, growth slowed down, resulting in slowing down of tax revenues. Meanwhile, the interest on loans was accruing. Combined, these factors led to huge fiscal deficits. Greece was the first country to feel the heat due to high budget deficits. When new government came into power in Greece in 2009, it announced that ...view middle of the document...
Portugal also got a bailout of 78 billion Euros.
The countries asking for bailouts had to enforce budget cuts and adopt austerity measures in order to bring fiscal deficits and sovereign debts under check. Protests and riots erupted in these countries against the austerity measures imposed and also led to falling of several governments. However the austerity measures, budget cuts and the new loans pushed Greece, Ireland and Portugal further into recession leading to the need of 2nd bailout for Greece.
Meanwhile in 2010, a permanent 500 billion Euros bailout fund called, European Stability Mechanism was also set up. The officials hoped that the size of the rescue package would assure the market of commitment towards the troubled countries and about their solvency abilities. IMF pledged $300 billion and the European Central Bank also begun buying government and corporate debt. Several of the world’s leading central banks announced an intervention to make more dollars available for intra-bank lending.
By June 2011, Greece was on the verge of default if it didn’t receive funds from EU. European leaders had refused to release the funds until more drastic austerity measures were adopted. Greece eventually relented and passed the unpopular austerity and privatization programmes through parliament. In July 2011 meeting, Euro Zone finance ministers promised cheaper loans, longer maturities and a more flexible rescue fund to help Greece and stop the ‘domino effect’ from Italy and Spain. However during the latter half of the year, interest rates started rising on Italy and Spain bonds also, leading to fear of bailout packages for two of the larger economies of Euro Zone. Also, ratings of several of these countries were also downgraded during this period. In October, Bank of England decided to inject 75bn Pounds more to provide a stimulus to UK economy. The ECB announced a plan to purchase government bonds if necessary in order to keep yields from spiralling to a level that countries such as Italy and Spain could not afford.
In December 2011, the ECB made 489...