Eurozone crisis/Addendum

Fiscal characteristics

 * {|class = "wikitable"

! Portugal ! Ireland !  Italy ! Greece !  Spain
 * Public debt. 2010 (per cent GDP)
 * align="center"| 83.1
 * align="center"| 99.4
 * align="center"| 118.4
 * align="center"| 130.2
 * align="center"| 63.5
 * Percentage of public debt that is foreign-owned 2007
 * align="center"| 55
 * align="center"| 62
 * align="center"| 42
 * align="center"|
 * align="center"| 48
 * Average time to maturity of public debt, years
 * align="center"| 6.6
 * align="center"| 6.9
 * align="center"| 7.2
 * align="center"| 7.8
 * align="center"| 6.4
 * Primary budget deficit, 2010 (per cent GDP)
 * align="center"| 4.1
 * align="center"| 29.3
 * align="center"| 0.8
 * align="center"| 2.2
 * align="center"| 7.3
 * align="center"| 29.3
 * align="center"| 0.8
 * align="center"| 2.2
 * align="center"| 7.3


 * Spreads (against 10 year German bunds) December 2010, per cent
 * align="center"| 3.5
 * align="center"| 6.0
 * align="center"| 1.7
 * align="center"| 9.5
 * align="center"| 2.3
 * S&P credit rating, February 2011
 * align="center"| A-
 * align="center"| AA
 * align="center"| A+
 * align="center"| BB+
 * align="center"| AA
 * Current account deficit, 2010 (per cent of GDP)
 * align="center"| 10.0
 * align="center"| 2.7
 * align="center"| 2.9
 * align="center"| 10.8
 * align="center"| 4.8
 * }
 * align="center"| 4.8
 * }

CDS spreads (a measure of perceived risk)
(basis points)


 * {|class = "wikitable"

! Portugal ! Ireland !  Italy ! Greece !  Spain
 * December 2009
 * align="center"| 79
 * align="center"| 156
 * align="center"| 98
 * align="center"| 241
 * align="center"| 98
 * May 2010
 * align="center"| 306
 * align="center"| 212
 * align="center"| 169
 * align="center"| 708
 * align="center"| 196
 * December 2010
 * align="center"| 468
 * align="center"| 570
 * align="center"| 218
 * align="center"| 993
 * align="center"| 330
 * April 2011
 * align="center"| 607
 * align="center"| 593
 * align="center"| 144
 * align="center"| 1206
 * align="center"| 229
 * September 2011
 * align="center"| 1308
 * align="center"| 978
 * align="center"| 503
 * align="center"| 7318
 * align="center"| 429
 * }
 * align="center"| 978
 * align="center"| 503
 * align="center"| 7318
 * align="center"| 429
 * }

GDP growth
(per cent change on previous quarter)
 * {|class= "wikitable"

! 2009 ! colspan = "4"| 2010 ! colspan = "4"| 2011 ! Q4 ! Q1 ! Q2 ! Q3 ! Q4 ! Q1 ! Q2 ! Q3 ! Q4
 * Portugal
 * -0,2
 * 1.1
 * 0.2
 * 0.3
 * -0.6
 * -0.6
 * 0.0
 * Italy
 * -0.1
 * 0.4
 * 0.5
 * 0.3
 * 0.3
 * 0.1
 * 0.3
 * Ireland
 * -2.5
 * 2.2
 * -1.2
 * 0.6
 * -1.6
 * 1.3
 * Greece
 * -1.1
 * -0.6
 * -1.7
 * -1.6
 * -2.8
 * -2.1
 * 0.2
 * Spain
 * -0.2
 * 0.1
 * 0.3
 * 0.0
 * 0.2
 * 0.3
 * 0.2
 * Eurozone
 * 0.2
 * 0.4
 * 1.0
 * 0.4
 * 0.3
 * 0.8
 * }
 * 0.3
 * 0.0
 * 0.2
 * 0.3
 * 0.2
 * Eurozone
 * 0.2
 * 0.4
 * 1.0
 * 0.4
 * 0.3
 * 0.8
 * }
 * 0.3
 * 0.8
 * }
 * }
 * }
 * }

(Source: Eurostat)

Greece
The crisis in Greece was the result of the impact of the Great Recession upon the already inflated public debt of an economy that had  suffered a loss in international competitiveness as a result of its membership of the eurozone. Greece joined the eurozone in 2001, and membership enabled it to use borrowing  from abroad  to finance an  economic boom. Labour costs rose more rapidly than productivity over the next seven years, as a result of which there was a fall in export competitiveness,  and the deficit on its balance of payments rose to over 14 per cent of GDP. Much of the government's public expenditure during those years  was  financed  by borrowing, and the country's  public debt rose to several times the European average, at around 100 per cent of GDP.

The crisis erupted in the winter of 2009/10 with a series of bond rating downgrades by the credit rating agencies and a major increase in bond spreads (see table) as it became apparent that the government might not be able to roll-over maturing debt. Help was sought from other members of the eurozone, and financial rescue negotiations lasted until till May. An austerity package was launched including a 15 per cent cut in public sector pay, severe cuts to pensions and an increase in value-added tax from 21 per cent to 23 per cent. In May 2010,a €110 billion European Union/International Monetary Fund rescue was mounted.

The austerity package was initially effective: the budget deficit was reduced to 10.5 per cent in 2010, but there was little further reduction beyond the first six months, and there were reports of resistance and obstruction by public sector workers. The bond market responded with another major increase in spreads and in May 2011, further funding problems became evident. Further austerity measures were introduced in June, including income tax and value-added tax increases and a charge of €300 on the self employed. In July, the eurozone leaders and the International Monetary Fund agreed to lend Greece a further 109bn euros ($155bn, £96.3bn). Also, as part of the deal, private sector investors were asked to accept a restructuring agreement involving a 21% loss on their holdings. The deal was subject to the approval of the parliaments of the eurozone countries. The deal failed to reassure investors, and Greece ceased to have access to the bond market. A further austerity package was launched under which 30,000 public sector workers were to be placed on stand-by at 60% of salary, there was to be a further income tax rise, and a property tax of about €700 for typical household. By September 2011, the yield on 10-year Greek government bonds had risen to over 20 per cent, and it was openly acknowledged that default had become unavoidable, and that reduction of the Greeek government's debt by about 50 per cent had become necessary.

On October 26 2011, at an EU summit, agreement was reached on a package that included a 50 percent writeoff of the Greek government's debt, at the price to Greece of further austerity measures, and Prime Minister Papandreou decided to hold a referendum to enable the country to decide whether to accept its terms. The associated austerity package is expected to involve 100,000 job losses over the next three years and big cuts in pensions. Opinion poll results suggest that the outcome of the referendum will be rejection. At an emergency summit on 2nd November, Greek Prime Minister Papandreou was persuaded by French President Sarkozy and German Chancellor Merkel that the subject of the referendum should be whether Greece should remain within the eurozone, rather than his proposed question concerning the rescue package. It was decided that the €8 billion tranche of the EU/IMF loan that is needed to avoid a default in December would be withheld until after the referendum. Jean-Claude Juncker, the Chairman of the Eurogroup of eurozone Finance Ministers indicated that preparations for the exit of Greece from the eurozone were in hand.

Ireland
Ireland's financial crisis resulted from a recession-induced bursting of an asset price bubble, not from an above-average level of its pre-recession public debt. It was greatly aggravated, however, by a government decision to guarantee its banks' deposits.

Having joined the eurozone, the Irish government offered tax incentives to  promote inward investment by  financial companies and there was a large inflow of capital. Between 2001 and 2008 the country's total debt (pubic and private) doubled to reach over 700 per cent of GDP - of which 421 per cent went to the financial sector and much of the rest was used to finance a housing boom. In 2008, however, a downturn in the output of the construction industry that had started in 2007,  developed into a full-blown  economic recession,  and  construction and property companies  began to default on loans from the banks. Bank losses amounted to as much as 20 per cent of GDP by 2009, and foreign banks and investors, that had been the banks' principal source of short-term finance, became reluctant to risk further commitments. A banking crisis developed, consumer confidence fell and there was a very sharp increase in unemployment. In September 2008, the Irish government undertook to guarantee all deposits in Irish banks: a liability of over twice Ireland's GDP, and in April 2009  it set up a National Asset Management Agency to operate as a bad bank which acquires toxic debt from banks in return for  government bonds. The government also introduced fiscal stimulus measures amounting to 4.4 per cent of GDP spread over the three years 2008-10 which, combined with the effects of its automatic stabilisers resulted a sharp increase in the country's public debt (see table). Foreign investors became wary of the possibility  a sovereign default, and the government's ability to finance the deficit was threatened by a general loss of confidence. In March 2009 the Standard and Poor credit rating agency downgraded its rating for Ireland from AAA to AA+, and April, the government decided that the only way to restore confidence was to take steps to reduce its deficit - and took the extraordinary step of increasing taxation in the midst of a recession. Additional steps taken included direct purchase of stock in some banks and the establishment of the "National Asset Management Agency" - essentially a government-owned bank that will buy toxic debt from six financial institutions - both steps aimed at improving their balance sheets and freeing up capital.

Between 2009 and 2010 Ireland's budget deficit increased from 14.2 per cent to 32.4 per cent of GDP, as a result mainly of one-off measures in support of the banking sector. On August 24, 2010 the Standard and Poor's credit rating agency downgraded Ireland's debt for the 3rd time to AA- (following 3 downgrades by the Fitch agency and 2 by Moody's). In the second quarter of 2010, Ireland's economy suffered a second downturn and the Government's financial position continued to deteriorate. Early in November, the government announced its intention to make €15bn of budget cuts, including a €6bn cut in 2011.

On the 22nd of November 2010 the government applied for financial assistance from the EU and the IMF. The package that was agreed included €35 billion  to restructure the banking sector, €50 billion to assist the state budget. Of that sum, Ireland agreed to provide €17.5 billion  from its own reserves and  €67.5 billion, was to be divided equally among the International Monetary Fund, the European Commission and the European Financial Stability Facility. The interest rate on the loans was to average  about 5.8%.

Italy
Investor concern about contagion of default risk by Italy did not surface until mid-2011. It was reinforced then by fears that, although its budget deficit is among the lowest in the eurozone, Italy's public debt (then at 120% of GDP) might be unsustainable in the long run. The IMF had estimated that Italy would  need to raise an amount equivalent to 20% of GDP in order to roll-over maturing   debt  in 2012, and there were doubts about its ability to raise that amount, in view of its low growth rate.

In September 2011 Italian government bonds were downgraded from A+ to A by Standard & Poors , because of the high level of its public debt, its weakening growth prospects, and the fragility of its governing coalition, and because policy differences within parliament were expected  to limit the government's ability to respond decisively to economic challenges. The emergency budget approved by parliament on September 14th and substantial purchases by the European Central Bank of Italian government bonds on the secondary market since early August have failed to calm investors nerves, increasing the pressure on Prime Minister  Berlusconi to stand aside. In October Mr Berlusconi responded to demands from other European leaders by providing them with a letter of intent detailing reforms which, it says, would enable the Italian government to eliminate its budget deficit by 2013. The promised reforms are reported to include a reduction in the size of the civil service, a €15 billion privatistion of state assets and the promotion of private sector investment in the infrastructure.

Portugal
Since joining the eurozone, Portuguese labour costs have risen faster than its productivity, leading to a fall in international competitiveness, and  to a growing balance of payments deficit - financed by borrowing from abroad. Its principal sources of income were agricultural exports, tourism, and income from its nationals working abroad. All three were hit by the recession, and its economy suffered a downturn earlier than other eurozone economies. In response to the downturn (and to fiscal stimulus of about 1¼ per cent of GDP) the 2009 budget deficit rose to 9.3 per cent of GDP. There was a return to GDP growth early in 2010, but output fell again in the 4th quarter of the year, and despite reductions in public expenditure the deficit for the year remained above  9 per cent of GDP,  and expectations of a further  fallin output in 2011 cast doubt upon the prospect of further deficit  reductions and the level of  public debt is expected to rise from its 2010 level of 83 per cent of GDP to 93 per cent by 2012.

On 5th May 2011 the EU and the IMF ageed to provide Portugal with a conditional €26 Billion Extended Fund Facility Arrangement. Under the agreement, Portugal is required to reduce its budget deficit to 3 percent of GDP by 2013.

On 5th July 2011, Moody’s downgraded Portugal’s long-term government bond ratings to Ba2 from Baa1  and  downgraded its short-term debt rating to  Not-Prime from Prime-2. Moody's cited the risk that Portugal might need further EU support before it can return to the private market, and that such support might be conditional on  private sector  participation, and the risk  that it might fail to meet its agreed deficit reduction and debt stabilisation targets.

Spain
The recession in Spain was shallower but more protracted than the European average, and the recovery, which started in the first quarter of 2010, has been described as "weak and fragile". Spain's unemployment rate was among the highest in Europe, reaching 20 per cent by mid 2010. A major contributory factor was the bursting of a vigorous housing bubble, as a result of which  the construction sector crashed, and the banking sector suffered a downturn despite the fact that it  had avoided the acquisition of toxic debt. Another major factor was deleveraging of a deeply indebted household sector. The Government responded with a major fiscal stimulus that, together with the effects of the country's automatic stabilisers resulted in the largest budget deficit in the European Union - although its public debt as a percentage of GDP was among the smallest. In 2010, the bond market developed a debt aversion against Spain following the Greek crisis, the Standard and Poor credit rating agency downgraded its credit rating from AA+ to AA on 28 April 2010, and the sovereign spread over Germany's 10-year bonds rose to  164 basis points in early May 2010.

Summary
In reviewing the situations in the PIIGS countries, the eurozone leaders expressed satisfaction concerning the policies of the governments of Ireland and Portugal. They also commended the fiscal measures taken by the Spanish government, but called upon it to reduce unemployment by increasing labour market flexibility. The decisions that were set out in their  "Euro Summit Statement" of  26 October 2011 were, however,  concerned with their policies toward Greece and Italy and  with the need to increase the funds that could be used to erect a "firewall" against the spread of the crisis by contagion. They were stated in terms that would require clarification before they could be implemented .

The Greek package
A package, intended to reduce the Greek government's debt to GDP ratio from its current 160 per cent to 120 per cent by 2020, was announced by the European Council on 27th October Its principal features were stated in broad terms to be: - a "nominal discount" of 50% on "notional Greek debt" held by private sector investors; - a private sector contribution of up to €30 billion, and a new European Union-IMF contribution of up to €100 billion;

The Italian programme
Paragraph 6 of the summit declaration, welcomed the Italian government's commitment to:
 * - achieve a balanced budget by 2013, and structural budget surplus in 2014 ;
 * - reduce gross government debt to 113% of GDP in 2014;
 * - institute a constitutional balanced budget rule by mid-2012;
 * - reform labour legislation, and review the unemployment benefit system;
 * - increase the retirement age to 67 years by 2026, and to
 * - focus spending programmes on education, employment, digital agenda and the rail network

- and " as a matter of urgency" to provide an "ambitious timetable" for the reforms. The European Commission was asked to provide a detailed assessment of the measures and to monitor their implementation, and the Italian authorities were asked to provide "in a timely way all the information necessary for such an assessment".

The eurozone firewall
The measures taken to limit the contagion by European governments and their banks included: - provision for the European Financial Stability Facility to leverage its financial capacity by 4 or 5 times to around €1 trillion; and, - the recapitalisation of most eurozone banks and an increase in their the required core capital requirement from 4 to 9 percent.