EUROZONE CRISIS

1.       EUROZONE CRISIS

The sovereign debt crisis in the 17 – nation euro zone, which began in the aftermath of the 2008 global financial meltdown, continued through 2011 with prospects of its spread to bigger Euro zone countries like Italy and Spain. These fears were based on the premise that many banks holding Greek bonds will come under pressure in the event of default by Greece and create panic among other banks which may stop lending to weaker banks and which may also offload bonds of Italy and Spain to make good their losses. In fact, Italian and Spanish leaders threatened to block all other agreements of Euro zone rescue until their colleagues in the euro zone did something to take the pressure off them.

The entire euro zone was therefore keen to save Greece as early as possible to prevent the crisis from spreading to other countries in the zone. A bailout package of 110 billion Euros was given to Greece in 2010 by IMF, ECB, banks and private investors. Another bailout package of 109 billion Euros was approved for 2011. Three were also plans to leverage the 440 billion Euros Rescue Fund, known as the European financial stability facility to help struggling nations avert debt defaults.

Accordingly, in the face of pressured from the embattled Euro zone countries Italy and Spain, European leaders in June, 2012 agreed to use the continent’s bay out funds to recapitalize struggling bakes directly.  The decision would allow help to banks without adding directly to the sovereign debt of countries. As a condition, though, the leaders agreed the Euro zone’s permanent bailout fund ()agreed to at the Euro zone’s meeting in October, 2011) called the European Stability Mechanism of 500 billion Euros to be set up in July, 2012 could act only after a banking supervisory body overseen by the European central Bank had been set up, which is likely o happen by the end of the year 2012.another key measure agreed was that bailout funds would be used in a flexible and efficient manner in order to stabilize markets. Leaders also greed a package of measures worth 120 billion Euros to bolster growth in the recession – hit block. In a longer term perspective, leaders agreed on a tentative road map for the future shape of the zone that could include a banking union and a budgetary union.

The summit deal, however, leaves out crucial details of just how any bank bailouts would work. Would bank creditors have to take a loss on their investments or would tax payers foot the whole bill?

Meanwhile, narrow election victory of Greece’s pro – bail out parties in June, 2012 signaled that Germany may be willing  to grant Greece more time to meet its fiscal targets of austerity imposed as a pre – condition to its bailout to avert a catastrophic euro (130 billion Euros) which pre – conditions strict austerity measures like (a ) deep private sector wage cuts (b) civil service layoff (c) significant reductions in health, social security and military spending, all of which together would imply nearly 430 million US dollars worth of extra saving by Greece.

Spain became the fourth country in the Euro zones to get a financial bailout in June 2012 of 100 billion Euros after Ireland, Greece and Portugal, this bailout is exclusively to shore up its teetering banks, particularly a bank named banksias whose a\shareholders were wiped out. Unlike other countries, austerity measures and economic reformed are not a precondition on Spain. The bailout is onyx for the banking sector, blot for the whole country. Spain is the 4^th largest economy in Euro zone and 13^th biggest economy in the world.

Some of the underlying weaknesses of Euro Zone are (a)  it lacks a single fiscal authority capable of strict enforcement (b) economies with deferent level of competitiveness and fiscal position have a single currency (c) these economies cannot adjust through a depreciation of the currency and (d) there is no lender of last resort i.e., fully fledged central bank.