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The European sovereign debt crisis, EMU and Turkey

Explore the phases of the European sovereign debt crisis, its impact on banking sectors, and policy responses to restore stability. Learn about financial mechanisms, governance reforms, and strategies for a stable Economic and Monetary Union (EMU).

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The European sovereign debt crisis, EMU and Turkey

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  1. The European sovereign debt crisis, EMU and Turkey Dirk Verbeken European Commission Istanbul, 24 February 2012 European Commission, Economic and Financial Affairs

  2. The global financial crisis has evolved through phases Phase 1: US mortgage market crisis Phase 2: Global credit crisis Phase 3: Global economic and financial crisis Phase 4: Sovereign debt crisis European Commission, Economic and Financial Affairs

  3. Interaction of sovereign and bank-balance sheets Credit risk transferred from banks to government 2008/9 Government finances weakened further by recession Investors focus on public debt sustainability Pressure in sovereign debt markets Banking sector vulnerable via sovereign exposures European Commission, Economic and Financial Affairs

  4. The vicious circle Slowing economy Banking sector fragility Sovereign crisis European Commission, Economic and Financial Affairs

  5. Responses to the crisis • Remove market uncertainty relating to Greece • Budgetary consolidation and growth in vulnerable Member States • Firewall against contagion in sovereign debt markets • Reinforcement of the EU banking sector • Strengthening of euro-area governance framework European Commission, Economic and Financial Affairs

  6. Greece • Early 2010: confidence lost • May 2010: € 110 bn package • Mid-2011: new package, easier conditions for existing loan • End-2011: upward revisions deficit, slower growth • Feb 2012: € 130 bn package European Commission, Economic and Financial Affairs

  7. Action on vulnerable Member States • Ireland: good programme implementation  market confidence is returning • Portugal: structural reforms aim at switch from consumption to exports • Italy: new government adopted package to address twin challenges • Spain: new government adopted package for fiscal reform at all levels of government European Commission, Economic and Financial Affairs

  8. Firewall 1 Up to €750 bn financial stability package (support in the form of loans under strict conditionality) EFSM - €60 bn European Financial Stabilisation Mechanism EFSF - €440 bn European Financial Stability Facility IMF – up to €250 bn International Monetary Fund European Commission, Economic and Financial Affairs European Commission, Economic and Financial Affairs Delegation of the European Union to China 8

  9. Firewall 2: ESM • Capital size and structure: • Size: € 500 bn • Paid-in capital; callable capital; guarantees; • AAA rating • Instruments: • Loans (ESM stability support) • Bond purchases (Primary market support facility) • Pricing: in line with IMF pricing European Commission, Economic and Financial Affairs

  10. Reinforcing the banking sector • Restore confidence  9% capital ratio  submit plans to deal with shortfall • ECB measures  easing of collateral requirements  reduce reserve requirements  LTRO with 3-y maturities European Commission, Economic and Financial Affairs

  11. Governance Reform • Strengthening the SGP • Preventing and correcting macroeconomic imbalances • Reinforcing economic surveillance European Commission, Economic and Financial Affairs

  12. Reform of the SGP • More focus on public debt • Strengthening Enforcement • Wider range of sanctions • Triggered at an earlier stage • More automaticity European Commission, Economic and Financial Affairs

  13. Macroeconomic Surveillance • Preventive arm: • Alert mechanism – scoreboard • In-depth country analysis • Recommendation on how to tackle imbalances • Corrective arm: • Excessive imbalances position  stricter surveillance European Commission, Economic and Financial Affairs

  14. Europe 2020 • Structural reforms to raise potential growth • Smart consolidation • Reforms with low costs for the budget • Priority to growth-stimulating reforms European Commission, Economic and Financial Affairs

  15. Fiscal Compact • Legally binding balanced budget rule • Automatic correction mechanism • Ex-ante coordination of debt issuance • Ex-ante coordination of major economic policy reforms • Euro Summit meetings European Commission, Economic and Financial Affairs

  16. Route to a stable EMU Restore confidence via • Sound public finances • Spur growth and competitiveness • Stable achitecture (‘reinvent EMU’) • Deepening integration and financial market reform European Commission, Economic and Financial Affairs

  17. What about Turkey? • Declining demand and confidence in the EU markets affect Turkish exports, FDI and growth prospects. • In a G20 and IMF context, Turkey has a say and a role to play. • The Derviş-plan and the way it was implemented by the government show that there is a way out… European Commission, Economic and Financial Affairs

  18. European Commission, Economic and Financial Affairs

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