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The Spectre of the Eurozone Debt Crisis
- Does the chaos in the Eurozone signal the beginning of the end of the Euro?
- Four years and a couple of trillion dol
- In the aftermath of the 2007 meltdown, economies with three traits were at risk: (a) those whose banking systems had huge exposure to toxic assets; (b) those who had an unsustainable debtdeficit situation; and (c) those who had a large chunk of sovereign debt held externally.
- The Eurozone with a single common currency but different country-specific configuration of debts and deficits turned out to be the most vulnerable.
- If Iceland (not a member of the European Union) was the first to show signs of a major problem, Ireland followed soon after and then it was Greece with the most severe financial and economic challenges.
- Since contagion was a real issue, what started with Greece slowly spread to Portugal, Spain and even Italy.
- The International Monetary Fund’s (IMF) “Global Financial Stability Report” (GFSR) of September 2011 has noted, “After four years of financial crisis, public balance sheets have been saddled with onerous debt burdens... Lower tax revenue, weaker growth prospects, and large-scale support for ailing financial institutions have driven public finances into precarious territory.
- While noting that “Sovereign strains have spilled over to the EU banking system, increasing systemic risks”, the GFSR holds political uncertainty and the perception of a weak policy response responsible for the erosion of market confidence.
- Various options are being talked of. A huge IMF-EU rescue package, a fresh round of debt restructuring and belttightening on the part of the affected countries are all blowing in the wind.
- While Germany is extremely mindful about the sanctity of the Eurozone and the need for fiscal prudence, the exposure of French banks to Greek sovereign assets makes them vulnerable to a default.
- Private sector investors are worried that voluntary private sector participation in any Greece-style debt restructuring could set a precedent for other Eurozone IMF programme countries.
- There is an influential branch of opinion which feels that Greece, with an unsustainable debt position, should default, leave the Euro, and reintroduce the drachma while the market players too bear some of the burden of their irresponsible lending.
- Another view is that the EU itself needs to do much more. The 21 July summit of the Eurozone leaders decided to lengthen the maturity of future European Financial Stability Facility (EFSF) loans to Greece to the maximum extent possible, from the current 7.5 years to a minimum of 15 years and called for private sector involvement.
- The scenario as of now looks quite chaotic.
- In all the pan-European political wrangling over an expanded and modified EFSF, private sector involvement in restructuring, recapitalisation of European banks, exposure of the financial institutions to downgraded sovereign debt, and the clamour for fiscal prudence (read, increased taxation and reduced social expenditure), the travails of the affected people have become a casualty.
