Eurozone crisis

The financial assistance that was provided to the governments of Greece and Ireland in  2010 failed restore the confidence of the markets in their continued ability to service their debt,  and bond market investors became reluctant to buy the bonds being issued by some other eurozone governments. The eurozone crisis that started in 2010 arose from doubts about the willingness of major eurozone governments to provide the further assistance that may be needed, and fears that there may be a breakup of the eurozone if they do not.

Overview
During 2010, prospective investors became increasingly reluctant to buy the bonds issued by five eurozone governments (Portugal, Ireland, Italy, Greece and Spain) at the offered interest rates,  and the governments concerned had to make a succession of increases in those rates. Two of those governments - Greece and Ireland - eventually decided that, without help, they  would not be able to continue to  finance their budget deficits,  and they sought - and received - loans from other European governments. Those loans failed to reassure potential investors, and in November  they  demanded further increases in the interest rates on   the  government bonds of all five governments (including  those of Portugal, Spain and Italy,  because of fears of contagion from Greece and Ireland).

By December 2010, there was widespread uncertainty about future prospects for the eurozone and beyond. There were doubts about the willingness of European governments to provide further financial support to the five "PIIGS" governments, and speculation that financing difficulties might spread to affect other governments. Some commentators considered it inevitable that one or other of the PIIGS governments would default on its loans, and other commentators forecast departures from the eurozone by governments wishing  to escape its  restraints. There were even those who envisaged wholesale departures, leading to a collapse of the common currency - an outcome that would impose substantial losses upon countries with investments in euro-denominated securities, and could threaten the stability of the international financial system.

Membership
In 1991, the 15 members of the European Union, meeting in the Dutch town of Maastricht, agreed to set up a monetary union with a single currency. They agreed upon strict criteria for joining, including targets for inflation, interest rates and budget deficits, and they subsequently agreed upon rules of conduct that were intended to preserve its members' fiscal sustainability. No provision was made for the expulsion of countries that did not comply with its rules, nor for the voluntary departure of those who no longer wished to, but the intention was announced of imposing financial penalties for breaches.

Greece joined the eurozone in 2001, Slovenia in 2007, Cyprus and Malta in 2008, Slovakia in 2009. The current membership comprises Belgium, Germany¸ Ireland,  Greece,  Spain,  France,  Italy,  Cyprus,  Luxembourg,  Malta,  The Netherlands,  Austria,  Portugal,  Slovenia,  Slovakia,  and Finland. Bulgaria, Czech Republic, Denmark, Estonia, Latvia, Lithuania, Hungary, Poland, Romania, Sweden and the United Kingdom are EU Member States but are not members of the eurozone.

The Stability and Growth Pact
The Stability and Growth Pact that was introduced as part of the Maastricht Treaty in 1992, set arbitrary limits upon member countries'  budget deficits and levels of national debt at 3 per cent and 60 per cent of gdp respectively.

Following multiple breaches of those limits by France and Germany, the pact has since been renegotiated to introduce the flexibility necessary to take account of changing economic conditions. Revisions introduced in 2005 relaxed the pact's enforcement procedures by introducing "medium-term budgetary objectives" that are differentiated across countries and can be revised when a major structural reform is implemented;  and by providing for abrogation of the procedures during periods of low or negative economic growth. A clarification of the concepts and methods of calculation involved was issued by the European Union's The Economic and Financial Affairs Council in November 2009 which includes an explanation of its excessive deficit procedure. According to the Commission services 2011 Spring forecasts, the government deficit exceeded 3% of GDP in twenty-two Member States in 2010.

The bail-out clauses
Article 104 of the Maastricht treaty appears to forbid any financial bail-out of member governments, but article 103 of the treaty appears to envisage circumstances under which a bail-out is permitted,

The PIIGS
The economies of five of the eurozone countries (Portugal, Italy, Ireland, Greece and Spain) differed  in several respects from those of the others. Unlike most of the others, they had developed deficits on their balance of payments current accounts (largely attributable to the effect of the euro's exchange rate upon the competiveness of their exports). Deleveraging of corporate and household debt had amplified the effects of the recession to a greater extent - especially in those with  larger-than-average financial sectors, and those that had experienced debt-financed housing booms. In common with the others, they had developed  cyclical  deficits  under the action of their economies' automatic stabilisers and of their governments' discretionary  fiscal stimuli,  and  increases in existing structural deficits as a result of  losses of revenue-generating productive capacity. In some cases, their budget deficits had been further increased by subventions and guarantees to distressed banks.

The development of the crisis
In 2010, the Greek goverment faced the prospect of being unable to fund its maturing debts, and in 2010 the Irish government found itself in a similar position. Their problems arose from large increases in their sovereign spreads reflecting the bond market's fears that they might default - fears that were based upon both  their large budget deficits, and  their limited economic prospects. In May 2010, the Greek government was granted a  €110 billion rescue package, and in November 2010 the Irish government was granted an €85 billion rescue package, both financed jointly by the eurozone governments and the IMF. Further increases in spreads showed that those rescue packages had failed to reassure the markets. Further support packages also failed to solve the problem, and signs began to appear of the contagion of the bond market fears from Greece to other eurozone countries, particularly Portugal and Spain. What had started as a Greek crisis was developing into a eurozone  crisis because the  rescue packages that could be needed for the much bigger economies of Spain or Italy  were expected  be larger than the eurozone could afford. It was also acquiring the potential to trigger a second international financial crisis because the default of a European government might be expected to create a shock comparable to the failure of the Lehman Brothers bank that had triggered the crash of 2008. Portugal received an EU/IMF rescue package in May 2011, and Greece received a second package in July, neither of which restored the bond market's confidence in eurozone sovereign debt. The falls in world stock market prices that occurred in August and September of 2011 were widely attributed to fears of a eurozone-generated financial crisis.

Bond purchases
The failure of conditional loans to avert the growing crisis prompted the exploration of possible alternatives, some of which have since been adopted, and all of which are the subject of continuing debate. Among those that were adopted was the idea of eurozone bond purchases. A "covered bond purchase programme", under which national central banks  and the European Central Bank  bought  covered bonds  had been in operation between July 2009 and June 2010. Its purpose had been to support those financial market institutions that supply funds to  banks  that had been particularly affected by the financial crisis. In May  2010 the European Central Bank announced its intention to make secondary market purchases of other private and European government bonds under  its Securities Markets Programme.

Eurobonds
The Greek government's funding problems would be solved if it were permitted to issue bonds that were guaranteed by the other eurozone governments and a number of eurobond proposals have been put forward that combine such an arrangement with fiscal stability measures. In August 2011 the financier George Soros argued that such a "eurobond" would have to be an essential feature of any effective Greek rescue package, an assessment that was endorsed by the eminent economist, Joseph Siglitz , but was vigorously rejected by German Chancellor Angelor Merkel.