19-02-2013, 12:13 PM
Third Bailout Package
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Ireland
Ireland's debt percentage compared to Eurozone average since 1995
Irish government deficit compared to other European countries and the United States (2000–2013)[77]
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, Finance Minister Brian Lenihan, Jnr issued a two-year guarantee to the banks' depositors and bond-holders.[78] The guarantees were subsequently renewed for new deposits and bonds in a slightly different manner. In 2009, an National Asset Management Agency (NAMA), was created to acquire large property-related loans from the six banks at a market-related "long-term economic value".[79]
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. The economy collapsed during 2008. Unemployment rose from 4% in 2006 to 14% by 2010, while the national budget went from a surplus in 2007 to a deficit of 32% GDP in 2010, the highest in the history of the eurozone, despite austerity measures
Portugal
Portugal's debt percentage compared to Eurozone average since 1999
According to a report by the Diário de Notícias[92] Portugal had allowed considerable slippage in state-managed public works and inflated top management and head officer bonuses and wages in the period between the Carnation Revolution in 1974 and 2010. Persistent and lasting recruitment policies boosted the number of redundant public servants. Risky credit, public debt creation, and European structural and cohesion funds were mismanaged across almost four decades.[93] When the global crisis disrupted the markets and the world economy, together with the US credit crunch and the European sovereign debt crisis, Portugal was one of the first and most affected economies to succumb.
In the summer of 2010, Moody's Investors Service cut Portugal's sovereign bond rating,[3][94] which led to increased pressure on Portuguese government bonds.[95]
In the first half of 2011, Portugal requested a €78 billion IMF-EU bailout package in a bid to stabilise its public finances.[96] These measures were put in place as a direct result of decades-long governmental overspending and an over bureaucratised civil service. After the bailout was announced, the Portuguese government headed by Pedro Passos Coelho managed to implement measures to improve the State's financial situation and the country started to be seen as moving on the right track. However, this also lead to a strong increase of the unemployment rate to over 15 percent in the second quarter 2012 and it is expected to rise even further in the near future.[97]
Spain
Spain's debt percentage compared to Eurozone average since 1999
Spain had a comparatively low debt level among advanced economies prior to the crisis.[101] It's public debt relative to GDP in 2010 was only 60%, more than 20 points less than Germany, France or the US, and more than 60 points less than Italy, Ireland or Greece.[102][103]Debt was largely avoided by the ballooning tax revenue from the housing bubble, which helped accommodate a decade of increased government spending without debt accumulation.[104] When the bubble burst, Spain spent large amounts of money on bank bailouts. In May 2012, Bankia received a 19 billion euro bailout,[105] on top of the previous 4.5 billion euros to prop up Bankia.[106] Questionable accounting methods disguised bank losses.[107] During September 2012, regulators indicated that Spanish banks required €59 billion (USD $77 billion) in additional capital to offset losses from real estate investments.[108]
The bank bailouts and the economic downturn increased the country's deficit and debt levels and led to a substantial downgrading of its credit rating. To build up trust in the financial markets, the government began to introduce austerity measures and it amended the Spanish Constitution in 2011 to require a balanced budget at both the national and regional level by 2020. The amendment states that public debt can not exceed 60% of GDP, though exceptions would be made in case of a natural catastrophe, economic recession or other emergencies.[109][110] As one of the largest eurozone economies (larger than Greece, Portugal and Ireland combined[111]) the condition of Spain's economy is of particular concern to international observers. Under pressure from the United States, the IMF, other European countries and the European Commission[112][113] the Spanish governments eventually succeeded in trimming the deficit from 11.2% of GDP in 2009 to an expected 5.4% in 2012.[111]
European Financial Stability Facility (EFSF)
On 9 May 2010, the 27 EU member states agreed to create the European Financial Stability Facility, a legal instrument[147] aiming at preserving financial stability in Europe by providing financial assistance to eurozone states in difficulty. The EFSF can issue bonds or other debt instruments on the market with the support of the German Debt Management Office to raise the funds needed to provide loans to eurozone countries in financial troubles, recapitalize banks or buy sovereign debt.[148]
Emissions of bonds are backed by guarantees given by the euro area member states in proportion to their share in the paid-up capital of the European Central Bank. The €440 billion lending capacity of the facility is jointly and severally guaranteed by the eurozone countries' governments and may be combined with loans up to €60 billion from the European Financial Stabilisation Mechanism (reliant on funds raised by the European Commission using the EU budget as collateral) and up to €250 billion from the International Monetary Fund (IMF) to obtain a financial safety net up to €750 billion.[149]
The EFSF issued €5 billion of five-year bonds in its inaugural benchmark issue 25 January 2011, attracting an order book of €44.5 billion. This amount is a record for any sovereign bond in Europe, and €24.5 billion more than the European Financial Stabilisation Mechanism (EFSM), a separate European Union funding vehicle, with a €5 billion issue in the first week of January 2011.[150]
On 29 November 2011, the member state finance ministers agreed to expand the EFSF by creating certificates that could guarantee up to 30% of new issues from troubled euro-area governments, and to create investment vehicles that would boost the EFSF’s firepower to intervene in primary and secondary bond markets.[151]
Reception by financial markets
Stocks surged worldwide after the EU announced the EFSF's creation. The facility eased fears that the Greek debt crisis would spread,[152] and this led to some stocks rising to the highest level in a year or more.[153] The euro made its biggest gain in 18 months,[154] before falling to a new four-year low a week later.[155] Shortly after the euro rose again as hedge funds and other short-term traders unwound short positions and carry trades in the currency.[156] Commodity prices also rose following the announcement.[157]
The dollar Libor held at a nine-month high.[158] Default swaps also fell.[159] The VIX closed down a record almost 30%, after a record weekly rise the preceding week that prompted the bailout.[160]The agreement is interpreted as allowing the ECB to start buying government debt from the secondary market which is expected to reduce bond yields.[161] As a result Greek bond yields fell sharply from over 10% to just over 5%.[162] Asian bonds yields also fell with the EU bailout.[163])
Usage of EFSF funds
The EFSF only raises funds after an aid request is made by a country.[164] As of the end of July 2012, it has been activated various times. In November 2010, it financed €17.7 billion of the total€67.5 billion rescue package for Ireland (the rest was loaned from individual European countries, the European Commission and the IMF). In May 2011 it contributed one third of the €78 billion package for Portugal. As part of the second bailout for Greece, the loan was shifted to the EFSF, amounting to €164 billion (130bn new package plus 34.4bn remaining from Greek Loan Facility) throughout 2014.[165] On 20 July 2012, European finance ministers sanctioned the first tranche of a partial bail-out worth up to €100 billion for Spanish banks.[166] This leaves the EFSF with€148 billion[166] or an equivalent of €444 billion in leveraged firepower.[167]