European Financial and Debt Crisis
i a research paper " European Finacial debt crisis" typed pages. I charts bibliography reference pages.charts, bibliography include typed pages
The European financial and debt crisis
The European financial and debt crisis refers to the struggle which the European Union region endured while trying to pay off the enormous debts that had built up in the recent decades. There were five countries in the region whose economic growth was stunted, and thus it played wrongly on their ability to pay back to their bondholders the guarantee that they had intended. These five countries are Greece, Italy, Portugal, Spain and Ireland. Their inability to pay was in varying degrees, and although these five countries were in greatest immediate danger to default on their debts, the consequences that would result from the crisis would extend beyond these five countries and would affect the whole world. In October of the year 2011, the head of the Bank of England termed the European financial and debt crisis as the "the most serious financial crisis at least since the 1930s, if not ever," Valiente, 2011()
The European debt crisis began as a result of the U.S. financial crisis of the years 2008-2009. During this time, the global economy was in recession, and there was slow growth that was experienced. The U.S. financial crisis came about as a result of the public taking mortgages of 100% or more of the value of the homes they were purchasing. These mortgages were sold by banks in packages and were part of mortgage-backed securities. The effect of this was expected to be isolated to the real estate business only. However, since the first mortgages that were given to the property owners were chopped up into pieces and resold, the actual derivatives from this process were impossible to put a price on. Therefore, the value of these derivatives on the secondary market was small, and investors began to panic and steer their investments clear of such low prices.
During this U.S. financial crisis, the unstable fiscal policies of the European countries were exposed, and this is what led to the European financial crisis. Greece as a country had spent a lot of money for years, but they had not instituted any financial reforms. It was the first country to feel the effects of this slow economic growth since tax revenues slumped and, therefore, they had high budget deficits that were unsustainable. The new prime minister of Greece, George Papandreou announced in late 2009 that the previous government had concealed the truth of the nation's deficits and the truth was that Greece was so engrossed in debt. These debts were larger than the country's entire economy. Investors responded to this announcement by demanding higher yields on bonds that were given to Greece and this increased the cost of the country's debt burden, and it made it necessary for the European Credit Bank (ECB) and the European Union to make a series of bailouts. Other heavily indebted countries also felt adverse effects as the bond yields were driven up by investors.
The reason why investors demanded a higher bond yield is that they needed to be compensated for the risk since these countries had higher risks of default. This was the beginning of a vicious cycle. Since the investors demanded a higher bond yield, these countries experienced higher borrowing costs and this led to further fiscal strain which prompted investors to demand even higher bond yields. This can be clearly seen in figure 1 and 2. This situation was a contagion since it affected many other countries that were in serious debt.
The European Union (EU) took some action to help resolve this European financial and debt crisis. However, the action that they could take moved at a snail's pace since the EU is required to obtain the consent of all 17 member nations. The EU issued a number of bailouts for the troubled...
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