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What is the European Sovereign Debt Crisis?

2016-12-02T09:55:59+00:00

The term 'European Sovereign Debt Crisis' is included in the Banking edition of the Financial Dictionary. Get yours now on amazon in ebook or paperback format. Read more here...

The European sovereign debt crisis threatened to overthrow financial institutions, sovereign countries’ bonds, and even the Euro currency at several points. This crisis erupted in 2008 when Iceland saw its entire banking system collapse.

From here it spread to other peripheral European nations including Greece, Portugal, and Ireland throughout the subsequent year 2009. A number of peripheral EU countries like Spain and their financial institutions faced default as government debt and sovereign bond yields rose dangerously. The ensuing crisis in debt created a cascading confidence crisis for European economies, businesses, and consumers.

In the end it took financial backstop guarantees from European Union countries and the IMF International Monetary Fund to bring the crisis under control. EU member states became concerned that financial contagion would spread enough that even the Euro itself might collapse.

While the crisis raged, a few of the Eurozone countries suffered from repeated agency downgrading of their sovereign debt. Greece in particular experienced a debt rating of junk status at the low point of its crisis. Bailouts were issued to a number of the countries on the EU periphery, including Greece, Spain, Portugal, Cyprus, and Ireland. These loan deals involved austerity measures that were intended to reduce the growing public debts of the countries.

The sovereign debt crisis in Europe reached its climax in 2009-2010. At this point, nations ranging from Greece, Ireland, and Spain to Portugal and Cyprus could no longer pay their debt payments, refinance government debts, or save their struggling banks without recourse to third party help.

At this point, these countries turned to international financial institutions such as the International Monetary Fund, the European Central Bank, and the EFSF European Financial Stability Facility to provide financial assistance. The Eurozone 17 member countries created the EFSF itself in 2010 to combat the problems created by the sovereign debt crisis.

Other situations combined to contribute to this long lasting sovereign debt crisis. The financial crisis of 2007 and 2008, ensuing Great Recession of 2008 to 2012, and several nations’ real estate crises all worked together to exacerbate the situation. A few EU members had also violated their government budget deficit limits and created a more serious crisis of confidence.

In 2009 Greece revealed that its prior government had intentionally under-stated its budget deficits. This violated policies of the European Union and led to fears that the Euro itself might collapse because of the ensuing financial contagion. Suspicions mounted that both the amounts of debt and financial positions of a variety of Eurozone countries were drastically and unsustainably overextended.

By 2010 this agitated level of fear of too much sovereign debt caused the lenders to insist on greater interest rates from the countries in the EZ that possessed both high deficit and debt amounts. This meant that such nations were struggling to finance their deficits because they suffered from a small level of economic growth.

Portugal and Ireland joined Greece in having their sovereign debt cut to humiliating junk levels by the major credit ratings agencies. Ireland had to obtain a bailout by November of 2010 while Portugal required one by May of 2011. Even Spain and also Cyprus needed help to save their ailing banking sectors by June of 2012.

In or by 2014 Ireland, Spain, and Portugal had made enough progress in financial reforms and undergone sufficient austerity to successfully complete their bailout programs. Most of their banks have been recapitalized and saved. Cyprus is also recovering well. As of 2016, Greece continues to struggle and limp along with additional aid payments from its Troika of lenders the EU, ECB, and IMF.

The term 'European Sovereign Debt Crisis' is included in the Banking edition of the Financial Dictionary. You can get your copy on amazon in Kindle or Paperback version. See more details here.