The European Financial Crisis

George Papandreou
The European financial crisis began in 2008, when member countries of the European Union were hit by debt crisis. The country’s worst hit by the crises included Greece, Italy, Spain, Portugal and Cyprus. In 2001, Greece experienced a debt load of more than 100%, at the time it was joining the European Union (EU).

During that time, Greece lowered interest rates on mounting debts and this led to an economic boom. However, in October 2009, the conservative establishment was pushed out of power by the socialists. The new government revealed that the country’s deficits were actually more than twice the estimates.

This revelation led to a debt downgrade; a move that worsened in February 2010, when credit rating agencies and institutional bond owners began selling debts. It seemed like the trading systems were collapsing at the time.

On April 2010, Greece debt was downgraded to junk status by S&P. The government followed these developments with a string of austerity measures designed to stem the slide. In April 2010, Greece Prime Minister George Papandreou requested the EU and IMF to rescue the country.

The European Central Bank (ECB) and the E.U, through the European Financial Stability Facility (EFSF) promised the country a bailout package worth $145 billion. The bailout was tied to the country adopting austerity measures. Despite the intervention, the country’s financial crisis continued to worsen. To date, Greece is still under a bailout program.

Portugal’s management of the situation was relatively smooth during the onset of the European financial crisis. However, towards the end of 2009, the Greece debt crisis created panic in the country. This panic emanated from fears that the country wouldn’t be able to grow its economy over the long-term; even as fears concerning the growing deficit continued to plague the economy.

By November 2010, interest rates rose so high that the country became a candidate for bailout. The government requested a bailout from the E.U on April, 2011. The bailout package totaled $116 billion. Portugal opted out of the EU bailout on 18, May 2014, despite a staggering debt burden.

Spain’s financial crisis stemmed from a real estate bubble burst; the crisis hit the country’s growth prospects despite a sound banking sector. In May 2010, Spain adopted a series of austerity measures to curtail higher than expected deficit. Fitch later downgraded the country’s debt from AAA. On 9 June 2012, Spain was granted a bailout package by Eurogroup totaling €100 billion. On 23 January 2014, the country withdrew from the IMF/EU bailout after making a full recovery.

Italy became a victim of the European financial crisis as a result of slow growth and huge debt to GDP ratios. Even before the Euro-crisis, there were fears that Italy would fall victim to its own debt crisis. In May 2011, S&P downgraded the country’s debt outlook and in July 2011, Prime Minister, Silvio Berlusconi rushed through an austerity package aimed at starving off the crisis.

In Cyprus, the country’s economy was demoted to junk status in 2012 by International rating agencies. The small island nation’s government requested for bailout from EFSF in June 2012.

The government cited its inability to stabilize its banking sector due to exposure from the Greek debt crisis as the main reason behind the request. The terms of the bailout, agreed upon on November 2012 were tied to implementing cuts in social benefits, civil servant salaries and pensions as well as increasing VAT, property and fuel taxes.

Most economists believe that the Eurozone economies have to stay on their feet to stem another Eurozone crisis. Specific signs of trouble include German losing faith on the Euro-project and doubts about the ECB’s ability to intervene in future crisis.