Showing posts with label debit crisis of euro. Show all posts
Showing posts with label debit crisis of euro. Show all posts

Monday, August 26, 2013

The European Sovereign Debt Crisis!

The financial crisis of 2007 caused a wide deleveraging among private agents developed and pushed the savings rate to rise, tipping the global economy into recession. Governments and central banks then intervened to prevent the collapse of the banking system and relaxed their cyclical policies to restore aggregate demand. The economic slowdown and the reaction of the public authorities have widened sharply public deficits, even though levels of public debt in the developed countries were already considered excessively high. This further deterioration of public finances has raised serious concerns about the ability of states to maintain their debt on a sustainable path. This is especially the countries of the euro zone that have crystallized concerns. Greece between the budget crisis in autumn 2009, and the sovereign bond yields rise sharply in Spain, Italy and Portugal in late 2010. Thus, interest rates, which had been a convergence in the past ten years with the European integration, begin to diverge, market making clear the distinction between state-member groups: on the one hand, those the "periphery" undergoing unsustainable increase in sovereign risk and on the other, those "core" that benefit from historically low interest rates. Countries experiencing the strongest market turmoil in sovereign debt have increased the fiscal austerity measures to restore confidence and reduce sovereign spreads.

 Other Member States have also adopted fiscal consolidation efforts to contain the contagion and prevent their own solvency are in doubt. In some countries, the change in sovereign risk premiums can however hardly be explained by changes in economic. If the debt and the deficit actually reached unsustainable levels in Greece, the fiscal situation in other countries threatened by the debt crisis was not more disastrous than that of the United States or the United Kingdom. In 2009, Spain respected the main Maastricht criteria for fiscal policy, since its public debt represented less than 60% of GDP. Italy certainly requires a budget adjustment to service its debt, but it should make the effort appeared modest as interest rates remained at a low level. Several authors have developed the idea that the sovereign debt crises, particularly the European countries could result from self-fulfilling expectations. In other words, the sustainability of public debt does not only depend on fundamentals (including the amount of the debt, the primary balance, etc. When investors fear for one reason or another the state has difficulties to cope with the burden of debt, they divest their sovereign bonds. These sales push interest rates higher and then the government could more be able to refinance its debt other than prohibitive rates. The liquidity crisis can then quickly degenerate into a solvency crisis. Indeed, the states will try to consolidate their public finances to restore market confidence. If the economy were initially in recession, austerity measures further depress activity, so they are likely to lead to a further increase in the debt to GDP ratio. With rising interest rates and contraction, states are finally forced to default on their debt. Thus, a State may become insolvent simply because investors fear default. They act indeed in such a way that the probability of default rises, even if their concerns were initially unfounded. If it happens, the default validates initial fears: expectations are proven "self-fulfilling." Ultimately, public debt is sustainable as creditors consider it as such. The economic literature formalizes this idea by emphasizing the existence of multiple equilibrium. These are particularly unstable in the presence of self-fulfilling expectations: a simple reversal of expectations is likely to tip the economy a good balance bad. However, a State may in principle difficult to use the central bank to reduce the risk of a liquidity crisis.

 Therefore, the member countries of the euro area, in essence, a greater chance to experience a crisis of sovereign debt that countries into debt in their own currency, even if they have more degraded public finances. The member states of the monetary union can indeed rely on a central bank to provide liquidity if it is missing. As such, they share the same vulnerability to crises of sovereign debt that developing countries that emit denominated in a foreign currency usually the U.S. dollar debt. When a liquidity crisis occurs in a monetary union, countries that lose market confidence the peripheral euro area countries meet in a bad equilibrium characterized by high interest rates and capital flight, as investors seek safer investments in the world. These countries are then capable of falling into recession as the high interest rates encourage their government to implement austerity plans. Conversely, countries that retain the confidence of the bond the core countries are maintained in a good balance: they receive cash flows from the periphery. These inflows exert a downward pressure on their interest rates and thus stimulate the economy. They find that increases in risk premiums that were observed in 2010 and 2011 occurred independently of changes in the ratio of public debt to GDP. Greece, however, is an exception, since the increase in the spread on its debt actually due to the deterioration of public finances. By cons, countries that do not belong to a currency area and that borrow in their own currency appear immunized against liquidity crises. They have indeed crossed the Great Recession without knowing a significant increase in their spread, even though some of them had ratios of public debt to GDP higher than in the euro area. .

So finally endorsing its role as lender of last resort to the States, the ECB seems to have managed to "break" the expectations and bring savings to a good balance. The announcement also seems to have been credible enough that the central bank did not have far to intervene in bond markets to stabilize interest rates. Since the crisis of sovereign debt in the euro zone is mainly due to the self-fulfilling expectations, the reaction of fiscal authorities appear absurd, dictated only by the emergency. The turmoil in the bond markets led all governments of the euro area to focus on fiscal consolidation at the expense of supporting the activity. While the public sector should continue spending to allow private agents to reduce debt, otherwise he immediately sought to consolidate its own balance sheet, which was subjected to powerful euro zone recessionary pressures.

Countries that have experienced the largest increases in spreads have implemented the most severe austerity measures. They then switched to a vicious spiral where the contraction and deterioration of the fiscal balance are mutually maintained. However, if there is a disconnection between risk premiums and the fundamentals, a policy aimed exclusively at improving fundamentals that is to reduce the burden of public debt may not be sufficient to contain the spread. The intervention of the ECB is against proved crucial in stabilizing the bond markets. Thus, not only the macroeconomic shock therapy that have inflicted the peripheral countries is very vain, but it has mostly contributed to the deterioration in public finances deteriorate the growth potential of their economies. However, economic growth is a key factor in the sustainability of public finances. The ECB intervention has certainly reduced the risk of self-fulfilling expectations, but the fundamentals are perhaps now sufficiently weakened that fears about the solvency of public finances are now justified.

Saturday, February 16, 2013

The European debt crisis going to end soon!!!

Europe emerging from a period to improve its financial situation that began in August last year, when the President of the European Central Bank (ECB), Mario Draghi announced that it would needed to support countries that are deficient in the Euro zone. This intention is then translated by a specific program for Italy and Spain, to limit the level of interest rates on their debt.

 However the optimism is reversed because of the accumulation of issues such as political scandal in Spain, financial conditions of Ireland. Hence the international markets react accordingly. Indebtedness of most European countries in relation to Gross Domestic Product is rising despite the efforts of Member States. With an average debt of the Euro zone (8000 billion Euros) over 90%, the smallest increase in interest rates impact the refinancing. The Euro zone should refinance more than 1,000 billion Euros in 2013.

 Reforms of the costs and revenues of government continue to impose. Economic lethargy does not seem to decrease. The European GDP growth is almost nil. Hence it is still in recession phase. Without growth, tax revenues are also lethargic and financial costs of states continue to be excessive. In this context, most European economies saw their unemployment rates are increasing. The question that remains is whether this or will improve? Basically, this is the strength of the U.S. economic recovery we can expect an early growth at the end of 2013. And the creation of 157,000 jobs in January 2013 is really good news. But the weakness of Europe is the situation of its banks. Without going into a pessimism that has no purpose, it should not diminish the vigilance that the Euro zone needs to restructure.

Wednesday, August 24, 2011

Was The United States Victim of The Collapse Of Euro?

The Euro, the fall guy accused of all evil.... Including the US markets tumbled? Not avoiding any scheme - as heavy as it is - Alan Greenspan, former chairman of the U.S. central bank (Fed) said in Washington that the euro was "decaying”.... Even better than the misadventures of the European currency was explaining the current difficulties in the U.S. economy.

Not life grand? Still, many Americans could join forces with his words ... history to find a culprit. According to Greenspan, European banks are in trouble because they hold debt securities in countries such as Greece. "The reason we are so slow is the level of uncertainty" caused by this situation, he said bluntly in an analysis still a bit fast....

A few days ago, Jacques Delors, former president of the European Commission - who initiated the single market - and former Minister of the French economy has in turn criticized the policy of the leaders of the euro against the current crisis. Believing nothing less than the single currency and the European Union would be "the brink".

History to put the record straight ... Still remembers that Alan Greenspan was one of the main instigators of financial deregulation in the United States. Which is widely considered to have “contributed” to the outbreak of the crisis?

The former head of the Fed, however, still dismissed the "allegations" of economists saying that the policy of low rates led the Fed from 2003 to 2005 is largely responsible for the housing bubble, which burst caused an unprecedented crisis.

Monday, May 30, 2011

Euro fears the fear of contagion from the debt crisis

After stabilizing euro, the euro does not escape the fears in financial markets. Last week the European currency dropped below $ 1.40 in session, a level it had not reached the past two months, which could provide some contagion of debt.

It may be that the Euro has slipped because of the spectrum of contagion those folds once again on Europe. Until the debt crisis seemed confined to the three countries most vulnerable to the euro area, Greece, Ireland and Portugal, the euro seemed to regain its natural color.

For about two months, the euro had not reached such a level.
The slump in the currency of 1.59% to 1.3969 dollar is a sign that can be described as disturbing. The crisis of European sovereign debt threatens to turn into a crisis for the euro, says an economist at RBS.

However, political leaders want to dampen the atmosphere by ensuring that this phenomenon is a crisis affecting some countries of the monetary union but say, otherwise there are several reasons for thinking a resurgence effects contagion more brutal.

In terms of the following reasons, the market no longer believes that the tools established by the government to stop the debt crisis are sufficient, the restructuring of the Greek debt undermines the stability of other countries and political risk remains very high.

Despite this climate very offensive, the European commission recently  raised 4.75 billion Euros of bonds to 10 years and this, through the mechanism of financial stability (MESF) to fund aid to Ireland and Portugal.