Mapping the European Debt Crisis

On 23 April 2010, the Greek government requested that the EU/IMF bailout package (made of relatively high-interest loans) be activated. The IMF had said it was prepared to move expeditiously on this request. The initial size of the loan package was €45 billion ($61 billion) and its first installment covered €8.5 billion of Greek bonds that became due for repayment.

On 27 April 2010, Standard & Poor's slashed Greece's sovereign debt rating to BB or junk status amid fears of default. The yield of the Greek two-year bond reached 15.3% in the secondary market. Standard & Poor's estimates that, in the event of default, investors would lose 30–50% of their money. Stock markets worldwide and the Euro currency declined in response to this announcement.

On 1 May 2010, a series of austerity measures was proposed. The proposal helped persuade Germany, the last remaining holdout, to sign on to a larger, €110 billion EU/IMF loan package over three years for Greece (retaining a relatively high interest of 5% for the main part of the loans, provided by the EU). On 5 May, a national strike was held in opposition to the planned spending cuts and tax increases. Protest on that date was widespread and turned violent in Athens, killing three people.

On 2 May 2010, the Eurozone countries and the International Monetary Fund agreed to a €110 billion loan for Greece, conditional on the implementation of harsh austerity measures. The Greek bail-out was followed by a €85 billion rescue package for Ireland in November, a €78 billion bail-out for Portugal in May 2011, then continuing efforts to meet the continuing crisis in Greece and other countries.

The Irish sovereign debt crisis was not based on government over-spending, but from the state guaranteeing the six main Irish-based banks who had financed a property bubble. On 29 September 2008 the Finance Minister Brian Lenihan, Jnr issued a one-year guarantee to the banks' depositors and bond-holders. He renewed it for another year in September 2009 soon after the launch of the National Asset Management Agency (NAMA), a body designed to remove bad loans from the six banks.

Irish banks had lost an estimated 100 billion euros, much of it related to defaulted loans to property developers and homeowners made in the midst of the property bubble, which burst around 2007. Ireland could have guaranteed bank deposits and let private bondholders who had invested in the banks face losses, but instead borrowed money from the ECB to pay these bondholders, shifting the losses and debt to its taxpayers. NAMA purchased over 80 billion euros in bad loans from the banks as the mechanism for this transfer. The economy collapsed during 2008. Unemployment rose from 4% in 2006 to 14% by 2010, while the federal budget went from a surplus in 2007 to a deficit of 32% GDP in 2010, the highest in the history of the euro zone, despite draconian austerity measures.

By September 2010 the banks could not raise finance and the bank guarantee was renewed for a third year. This had a negative impact on Irish government bonds, government help for the banks rose to 32% of GDP, and so the government started negotiations with the EU, the IMF and three nations: the United Kingdom, Denmark and Sweden, resulting in a €67.5 billion bailout agreement of 29 November 2010. Together with additional €17.5 billion coming from Ireland's own reserves and pensions, the government received €85 billion, of which €34 billion were used to support the country's ailing financial sector. In return the government agreed to reduce its budget deficit to below three percent by 2015. In February the government lost the ensuing Irish general election, 2011. In April 2011, despite all the measures taken, Moody's downgraded the banks' debt to junk status.

The Euro Plus Monitor report from November 2011 attests to Ireland's vast progress in dealing with its financial crisis, expecting the country to stand on its own feet again and finance itself without any external support from the second half of 2012 onwards. According to the Centre for Economics and Business Research Ireland's export-led recovery will gradually pull its economy out of its trough.

On 16 May 2011 the Eurozone leaders officially approved a €78 billion bailout package for Portugal. The bailout loan will be equally split between the European Financial Stabilisation Mechanism, the European Financial Stability Facility, and the International Monetary Fund. According to the Portuguese finance minister, the average interest rate on the bailout loan is expected to be 5.1% As part of the bailout, Portugal agreed to eliminate its golden share in Portugal Telecom to pave the way for privatization. Portugal became the third Eurozone country, after Ireland and Greece, to receive a bailout package.

On 6 July 2011 it was confirmed that the ratings agency Moody's had cut Portugal's credit rating to junk status, Moody's also launched speculation that Portugal may follow Greece in requesting a second bailout.

Italy's deficit of 4.6 percent of GDP in 2010 was similar to Germany’s at 4.3 percent and less than that of the U.K. and France. Italy even has a surplus in its primary budget, which excludes debt interest payments. However, its debt has increased to almost 120 percent of GDP (U.S. $2.4 trillion in 2010) and economic growth was lower than the EU average for over a decade. This has led investors to view Italian bonds more and more as a risky asset. On the other hand, the public debt of Italy has a longer maturity and a big share of it is held domestically. Overall this makes the country more resilient to financial shocks, ranking better than France and Belgium.

On 15 July and 14 September 2011, Italy's government passed austerity measures meant to save €124 billion. Nonetheless, by 8 November 2011 the Italian bond yield was 6.74 percent for 10-year bonds, climbing above the 7 percent level where the country is thought to lose access to financial markets. On 11 November 2011, Italian 10-year borrowing costs fell sharply from 7.5 to 6.7 percent after Italian legislature approved further austerity measures and the formation of an emergency government to replace that of Prime Minister Silvio Berlusconi.

Shortly after the announcement of the EU's new emergency fund for eurozone countries in early May 2010, Spain's government announced new austerity measures designed to further reduce the country's budget deficit. The Spanish government had hoped to avoid such deep cuts, but weak economic growth as well as domestic and international pressure forced the government to expand on cuts already announced in January. As one of the largest eurozone economies the condition of Spain's economy is of particular concern to international observers, and faced pressure from the United States, the IMF, other European countries and the European Commission to cut its deficit more aggressively.

Spain's public debt was approximately U.S. $820 billion in 2010, roughly the level of Greece, Portugal, and Ireland combined.

In 2010, Belgium's public debt was 100% of its GDP – the third highest in the eurozone after Greece and Italy and there were doubts about the financial stability of the banks. After inconclusive elections in June 2010, by November 2011 the country still had only a caretaker government as parties from the two main language groups in the country (Flemish and Walloon) were unable to reach agreement on how to form a majority government. Financial analysts forecast that Belgium would be the next country to be hit by the financial crisis as Belgium's borrowing costs rose.

However the government deficit of 5% was relatively modest and Belgian government 10-year bond yields in November 2010 of 3.7% were still below those of Ireland (9.2%), Portugal (7%) and Spain (5.2%). Furthermore, thanks to Belgium's high personal savings rate, the Belgian Government financed the deficit from mainly domestic savings, making it less prone to fluctuations of international credit markets. Nevertheless on 25 November 2011, Belgium's long-term sovereign credit rating was downgraded from AA to AA by Standard and Poor and 10-year bond yields reached 5.66%. Shortly after Belgian negotiating parties reached an agreement to form a new government. The deal includes spending cuts and tax rises worth about €11 billion, which should bring the budget deficit down to 2.8% of GDP by 2012, and to balance the books in 2015.

France's public debt in 2010 was approximately U.S. $2.1 trillion and 83% GDP, with a 2010 budget deficit of 7% GDP. By 16 November 2011, France's bond yield spreads vs. Germany had widened 450% since July, 2011. France's C.D.S. contract value rose 300% in the same period.

According to the Financial Policy Committee Any associated disruption to bank funding markets could spill over to UK banks. Bank of England governor Mervyn King declared that the UK is very much at risk from a domino-fall of defaults and called on banks to build up more capital when financial conditions allowed.

Iceland suffered the failure of its banking system and a subsequent economic crisis. After a sharp increase in public debts due to the banking failures, the government has been able to reduce the size of deficits each year. The effort has been made more difficult by a more sluggish recovery than earlier expected. Before the crash of the three largest commercial banks in Iceland, Glitnir, Landsbanki and Kaupthing, they jointly owed over 10 times Iceland's GDP. In October 2008, the Icelandic parliament passed emergency legislation to minimise the impact of the financial crisis. The Financial Supervisory Authority of Iceland used permission granted by the emergency legislation to take over the domestic operations of the three largest banks.

The foreign operations of the banks, however, went into receivership. As a result, the country has not been seriously affected by the European sovereign debt crisis from 2010. In large part this is due to the success of an IMF Stand-By Arrangement in the country since November 2008. The government has enacted a program of medium term fiscal consolidation, based on expenditure cuts and broad based and significant tax hikes. As a result, central government debts have been stabilised at around 80–90 percent of GDP. Capital controls were also enacted and the work began to resurrect a sharply downsized domestic banking system on the ruins of its gargantuan international banking system, which the government was unable to bail out

In September 2011, the Swiss National Bank weakened the Swiss franc to a floor of 1.20 francs per euro. The franc has been appreciating against the euro during the crisis, harming Swiss exporters. The SNB surprised currency traders by pledging that it will no longer tolerate a euro-franc exchange rate below the minimum rate of 1.20 francs. This is the biggest Swiss intervention since 1978.