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European Sovereign Debt Crisis – An Overview

European Sovereign Debt Crisis – An Overview. When did it start?. 5 th November 2009, when Greece revealed that it’s budget deficit was 12.5% of GDP, which was more than double what it previously disclosed, BUT On the 7 th February 1992, the Maastricht Treaty (MT) was signed.

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European Sovereign Debt Crisis – An Overview

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  1. European Sovereign Debt Crisis – An Overview

  2. When did it start? • 5th November 2009, when Greece revealed that it’s budget deficit was 12.5% of GDP, which was more than double what it previously disclosed, BUT • On the 7th February 1992, the Maastricht Treaty (MT) was signed. • The MT put in place a set of criteria for countries wanting to join the Eurozone.

  3. The Problem • The MT failed to provide “enforcement” mechanisms should a state fail to meet the joining criteria, Instead a REPORT is issued. • Joining the Eurozone promised great economic rewards and the ability to borrow • All members competed on a level playing field, but there was no central management of economies. They governed themselves.

  4. Thus, the combination of economic rewards for admittance to the eurozone with no enforcement mechanism for nations failing to meet the convergence criteria created an incentive-rich environment for nations to overburden themselves with debt without much fear of reprisal. It was later revealed that Greece lied it’s way into the Eurozone.

  5. Though it would be easy to blame Greece for the European sovereign debt crisis of 2009–2012, Greece’s debt problems are the straw that broke the camels back. The IMF estimates that, from 2006 to the end of 2012, total debt in the eurozone will have increased from €5,870 billion to €8,714 billion, an increase of €2,844 billion. By comparison, GDP has grown from €8,568 billion in 2006 to an estimated €9,687 billion in 2012, an increase of €1,119 billion. In other words, it is projected that absolute debt levels in the eurozone will have grown 2.5 times faster than GDP.

  6. Nearly all eurozone members — 13 of 17 countries — have debt levels exceeding the joining criteria maximum • Among this group are the large economies — Germany, France, Italy and Spain. The estimated 2012 debt of these four nations alone totals €6,732 billion, versus projected 2012 GDP of €7,410 • Thus the European sovereign debt crisis is truly a European crisis, and not just a crisis for the Greeks to resolve

  7. In Addition • The previous slides only cover national (or government) debt. • On top of this we need to take into account both Personal Debt and Corporate Debt

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