Eurozone crisis/Addendum

Comparative data

Fiscal characteristics

	Portugal	Ireland	Italy	Greece	Spain
Public debt. 2010 (per cent GDP)	83.1	99.4	118.4	130.2	63.5
Percentage of public debt that is foreign-owned 2007	55	62	42		48
Average time to maturity of public debt, years	6.6	6.9	7.2	7.8	6.4
Primary budget deficit, 2010 (per cent GDP)	4.1	29.3	0.8	2.2	7.3
Spreads (against 10 year German bunds) December 2010, per cent	3.5	6.0	1.7	9.5	2.3
S&P credit rating, February 2011	A-	AA	A+	BB+	AA
Current account deficit, 2010 (per cent of GDP)	10.0	2.7	2.9	10.8	4.8

CDS spreads (a measure of perceived risk[1])

(basis points)

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

GDP growth

(per cent change on previous quarter)

	2009	2010				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

(Source: Eurostat[2])

Crisis development by country

Greece

	2007	2008	2009	2010	2011	2012
Public Debt (% GDP)	105.4	111.7	127.1	142.8	157.7	166.1
Budget deficit (% GDP)		9.8	15.4	10.5	9.5	9.3

The crisis in Greece was the result of the impact of the recession upon the already inflated public debt of a heavily indebted economy that had already suffered a loss in international competitiveness.

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 also financed by borrowing, and the country's public debt rose to several times the European average, at around 100 per cent of GDP. By 2010 it had increased further as a result of the increases in borrowing brought about by the Great Recession. Concern about the sustainability of the government's fiscal policy led the a succession of credit rating downgrades in the first quarter of 2010.

By May 2010, the yields on 10-year government bonds had reached 10 per cent, the CDS spread on 5-year bonds was over 9 per cent, and there was doubt about the government's ability to finance that year's budget deficit. A loan was sought from other eurozone governments and a €110 billion European Union/International Monetary Fund rescue was mounted. In addition, a "European Financial Stability Facility", was created to provide support, if required, to other applicants, including a loan facility of up to €500 billion from member governments and the European Commission. The loan failed to reassure investors, and the CDS spread on Greek bonds rose from 4.8 per cent in April to 10 pre cent in November.

In July 2011, Eurozone leaders and the International Monetary Fund agreed to lend Greece a further 109bn euros ($155bn, £96.3bn) Under the deal, private sector investors - that is, the banks and institutions that hold Greek bonds - are being asked to accept a 21% loss on the debt they hold. For many observers, this is tantamount to a selective default, the first time it has happened to a eurozone member.

Ireland

	2007	2008	2009	2010	2011	2012
Public Debt (% GDP)	25.0	44.4	65.6	95.2	112.0	117.7
Budget deficit (% GDP)		7.3	14.3	32.4	10.5	8.8

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 was expected to raise the national debt to over 80 per cent of GDP from its 2007 level of 28 per cent. 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. In September 2010, its CDS spread reached a record 5 per cent. 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 Fund ((a special-purpose fund created by eurozone countries in May, augmented by extra contributions from Britain, Sweden and Denmark). The interest rate on the loans was to average about 5.8%.

Italy

	2007	2008	2009	2010	2011	2012
Public Debt (% GDP)	103.6	106.9	116.1	119.0	120.3	119.6
Budget deficit (% GDP)		2.7	5.4	4.6	4.0	3.2

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. Alberto Alesìna has described it as a stagnant economy that has not grown for 15 years, whose public debt was already very high before the recession, and has risen during the recession.

.

Portugal

	2007	2008	2009	2010	2011	2012
Public Debt (% GDP)	68.3	71.6	83.0	93.0	101.7	107.4
Budget deficit (% GDP)		3.5	10.1	9.1	5.9	4.5

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

	2007	2008	2009	2010	2011	2012
Public Debt (% GDP)	36.1	39.8	53.3	60.1	68.1	71.0
Budget deficit (% GDP)		4.2	11.1	9.2	6.3	5.3

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.

The Washington Rescue

Details of the rescue plan that were emerging on 26th September include:
- a 50 per cent write-off of the Greek government's debt;
- the recapitalisation of 16 eurozone banks; and,
- an increase in the size of the European Financial Stability Facility to €2 trillion.