European Sovereign Debt Crisis Has Quickly Become Term Paper
- Length: 4 pages
- Sources: 4
- Subject: Economics
- Type: Term Paper
- Paper: #68643528
Excerpt from Term Paper :
European sovereign debt crisis has quickly become one of the main topics in today's news and more specifically in business and finance news. The European governments are struggling to not only bring back stability but also maintain it with relation to their finances. John Nugee from State Street Global Advisors has described this European sovereign debt crisis in a very clear and concise manner stating that "economically, it is clear that several EU countries -- most notably Greece, Portugal, Spain, Ireland and Italy within the Eurozone -- have been running very large deficits for some time, and are reaching or have already reached levels of debt-to-GDP that are above 100% GDP." It is important to note, however, that the reasons behind the deficits and large debt levels and in turn the sovereign debt crisis differ between countries. So, we need to begin by taking a closer look at each individual country in order to pinpoint exactly what caused such a crisis.
Taking a closer look at Greece allows us to verify that poor tax collection was one of the major causes of the countries deficit and large debt level (Nugee). In addition, there seemed to be a discrepancy between the government expenditures and their tax receipts. Tax evasion also added to the problem and Greece has been taking more and more steps to identify tax evasion situations and slowly eliminate them. Reports have shown that Greece has a 13% fiscal deficit and 113% of public debt as a percentage of its GDP (sovereigndebtcrisis.net). To date, Europe along with the International Monetary Fund have provided financial support to both Greece and Ireland totaling 200 billion Euros, or $262 billion, in order to keep the two countries from completely going under (cnbc.com). As part of the rescue package given to Greece, they are expected to fulfill a three- year adjustment plan; however, even if they manage to do so, their debt is estimated to further rise to 158% of its GDP by 2013 (cnbc.com). Their debt crisis was further afflicted by a rating downgrade in March 2011 by Moody's. Greece's credit rating was decreased by three points lowering it from Ba1 to B1, and this may not be the end of such downgrades. This downgrade now classifies Greece's debt as "highly speculative" (cnbc.com). Greece and Ireland have also found themselves in yet another dilemma as 80% of their export revenue is being spent to repay external debt (cnbc.com). Unlike Greece, Ireland found itself in this crisis mainly due to their high bank debts.
In Ireland, the holders of senior bank debts are the ones experiencing the most pressure to take losses (cnbc.com). Similarly to Greece, Moody's has cut Ireland's sovereign rating by two notches lowering it to Baa3 from Baa1. Additionally, this downgrade brings Ireland's sovereign two notches lower than both Fitch and Standard & Poor's ratings (huffingtonpost.com). According to a recent article in the Huffington Post "the ratings cut pushed the euro to a session low against the dollar, falling as low as $1.4451, down 0.2% on the day, and moving further away from its 15-month high around $1.4521 hit earlier this week." Since receiving 85 billion Euros from the International Monetary Fund and the European Union in a bailout just last year, Ireland has still been struggling to convince markets that its economy can in fact grow fast enough to sustain its debts (huffingtonpost.com). With its current state, Ireland needs to be focused solely on growth. Dermot O'Leary, the chief economist at Goodbody Stockbrokers, has said "it's absolutely all about growth now. I think we've parked the banking issue which is a positive and you can get that from the readings of the ratings agencies views" (huffingtonpost.com).
Portugal has been another country to be hit by the debt crisis. Unlike Greece and Ireland, Portugal has suffered from weakened access to the loan markets (macauhub.com). In March 2011, Standard & Poor's followed by Fitch, downgraded the sovereign debt rating of Portugal by one level, both for short- and long-term debt, making Portugal's ration just one notch short of junk status (macauhub.com). This downgrade resulted in their credit going from A- to BBB and to remain on a negative credit watch (Bloomberg.com). Eileen Zhang, Standard & Poor's lead analyst, has claimed that "the resulting increased political uncertainty could…