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

Sovereign spread contagion

(excess of 10-year government bond yield over 10-year German Bund, percentage points]

	Austria	Belgium	France	Italy	Spain	(Greece)
17/11/2010	0.43	0.89	0.42	1.57	2.04	(9.12)
17/10/2011	0.89	2.38	0.95	3.72	3.20	(22.59)
17/11/2011	1.69	3.05	1.72	6.24	4.67	(31.78)
16/01/2012	1.46	2.39	1.32	4.93	3.47	(32.51)

(source: Thomas/Reuters quoted in Financial Times databank[2])

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	-0.4
Italy	-0.1	0.4	0.5	0.2	0.1	0.1	0.3	0.0	-0.2e
Ireland	-2.5	2.2	-1.2	0.6	-1.4	1.9	1.6
Greece	-1.1	-0.6	-1.7	-1.6	-2.1	0.2	-2.7	-0.7	-0.7e
Spain	-0.2	0.1	0.3	0.0	0.2	0.4	0.2	0.0
Eurozone	0.2	0.4	1.0	0.4	0.3	0.8	0.2	0.2

(Source: Eurostat[3])

Attitudes to the crisis

(September 2011)

In times of crisis, it is desirable to give financial help to another EU Member State facing severe economic and financial difficulties.

	Germany	France	Italy	EU 27
agree (%)	54	52	53	50
disagree (%)	44	45	38	44
don't know (%)	2	3	9	6

Setting aside a share of the public debt of all Member States to be held jointly would reinforce the financial stability of the Member States

	Germany	France	Italy	EU 27
agree (%)	45	50	64	57
disagree (%)	46	35	20	28
don't know (%)	9	16	16	15

Are you in favour of or opposed to the creation of Eurobonds, on the basis of what you know about them?
(replies from respondents who had heard of eurobonds)

	Germany	France	Italy	Eurozone
in favour (%)	18	41	57	38
opposed (%)	58	22	15	33
don't know	24	37	28	29

(Source Eurobarometer survey)

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 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.

	12/09	01/10	05/10	12/10	04/11	09/11	12/11
CDS spread (basis points)	241	400	708	993	1206	7318	10115

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 European Commision set up a Task Force for Greece to help it to increase the efficiency of its economic, fiscal and administrative systems .

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, however, 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 Greek 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, George 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. The next day Prime Minister Papandreou announced his willingness to cancel the referendum, and that he had obtained agreement of opposition leaders to do so. On the 6th of November party leaders agreed to form a coalition government under a new Prime Minister. A coalition government was formed with Lucas Papademos as Prime Minister, and the terms of the EU rescue were agreed by the him and by the leader of the main opposition party.

In early 2012 there were growing doubts about the ability of the Greek government to repay the holders of the €14.4bn of debt that was due to mature in late March. It had been expected that it would be getting a further €130bn tranche of EU/IMF funds before that date, but negotiations concerning the terms of the loan had run into difficulties.
The conditions attached to the loan by the EU/IMF team included: (a) a further austerity drive, and (b) the conclusion of the private sector debt swap deal ( involving a 50% nominal reduction of Greece’s sovereign bonds in private investors’ hands and up to €100 billion of debt forgiveness) that had been part of the decisions of 12th October. Concerning (a), the leaders of France and Germany had told Greece that if it fails to implement the agreed economic changes, it will not get the next tranche of the loan - and there are signs that Greece would not be able to make the required changes. Concerning (b), a statement issued on 13th January by the Chairmen of the negotiating committee reported that it "has not produced a constructive consolidated response by all parties, consistent with a voluntary exchange of Greek sovereign debt and the October 26/27 Agreement".

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

The impact of the Great Recession, combined with the bursting of an asset price bubble resulted in a major downturn in the Irish economy. The corresponding increase in its public debt was greatly aggravated 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.

	12/09	05/10	12/10	04/11	09/11	11/11
CDS spread (basis points)	156	212	570	593	978	555

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%.

In October 2011, a EU/IMF staff team reported that "strong policy efforts" by the Irish government had contributed to a reduction in its sovereign spreads, and that they expect the agreed budget deficit limit of 10.6 percent of GDP for 2011 to be met. In November, a document identifying austerity measures of €3.8 billion in Ireland's next budget and €3.5 billion in budget 2013 – was made public after being shown to the finance committee of the German Bundestag.

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

The impact of the Great Recession on the Italian economy was relatively severe, but it had a relatively minor effect upon Italy's public debt, which had fo some years previously been above 100 percent of its GDP. 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 become unsustainable. There were doubts about its ability to roll-over the debts of €300 billin that are due to mature in 2012. 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, failed to calm investors nerves.

	12/09	05/10	12/10	04/11	08/11	11/11
5y CDS spread (bp)	98	169	218	144	355	570

In late October 2011, Prime Minister 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. On 10 November 2011, the Italian parliament approved the reform programme and on thev 13th, Silvio Berlusconi was replaced as Prime Minister by Mario Monti. The yield on 10-year bonds during the following days again rose to over 7 percent, but the government sold all of its offer of €3 billion euros of five-year notes. On January 11 2012 Italy sold €8.5bn of one-year bills, at an average yield of 2.74 per cent, less than half the cost incurred when Italy last sold similar bills in mid-December . On the following day the Standard and Poor's credit rating agency downgraded the Italian government's bonds to 'BBB+' from 'A', citing "increasing vulnerabilities to external financing risks... exacerbated by deepening political, financial, and monetary problems within the eurozone"

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. Expectations of a further fall in 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 agreed 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.

	12/09	05/10	12/10	04/11	09/11
CDS spread (basis points)	79	306	468	607	1308

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.

In January 2012 the Standard and Poor's credit rating agency downgraded the Portuguese government's long-term ratings to 'BB/B' from 'BBB-/A-3', citing negative impact of deepening political, financial, and monetary problems within the eurozone on Portugal's already challenging readjustment path and its elevated vulnerabilities to external financing risks .

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.

	12/09	05/10	12/10	04/11	11/11
CDS spread (basis points)	98	196	330	229	467

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.

On January 11 2012 the Spanish government sold almost €10bn of new bonds at much lower rates than at its previous auction, removing almost a third of that year's borrowing requirements. On the following day the Standard and Poor's credit rating agency downgraded the Spanish government's long-term bonds by two notches to 'A' from 'AA-' , citing impact of deepening political, financial, and monetary problems within the eurozone and the external financing risks in the private sector, which could constrain growth and hamper the government's efforts to narrow the fiscal deficit.

France

	2008	2009	2010	2011	2012
Public Debt (% GDP)	68.2	79.0	82.3	85.4	89.2
Budget deficit (% GDP)	3.3	7.5	7.1	5.8	5.3

The sovereign spread between the yields on French and German 10-year government bonds began to rise above its normal 0.5 percent ceiling in July 2011 and had reached over 1.5 percent by the middle of November signalling the bond market's doubts about the French government's fiscal policy. In the influential Lisbon Council's Overall Health Check Indicator, France ranks 13 out of the 17 eurozone countries, (just ahead of Italy but slightly behind Spain) with below-average scores for fiscal sustainability, growth and competitiveness. Also, it ranks 15 out of 17 in the Council's Adjustment Progress Indicator. In January 2012 the Standard and Poor's credit rating agency downgraded the French government's bonds from AAA to AA+, citing "the impact of deepening political, financial, and monetary problems within the eurozone, with which France is closely integrated", and estimating that there was a 1-in-3 chance of a further downgrade.

	2008	2009	2010	2011	2012
Public Debt (% GDP)	89.3	95.9	96.2	97.2	99.2
Budget deficit (% GDP)	1.3	5.8	4.1	3.6	4.6

Belgium

On 5th December 2011, a government was sworn in, ending a political deadlock that began with the resignation of the previous government in April 2010. On December 16, the Moody's credit rating agency downgraded Belgium's credit rating by two notches , citing the difficulty of reducing its public debt in view of risks to economic growth due to deleveraging and fiscal adjustment elsewhere in the euro area.

Other eurozone members

In January 2012 the Standard and Poor's credit rating agency downgraded its long-term ratings on Cyprus, by two notches, and those on on Austria, Malta, Slovakia, and Slovenia, by one notch (in addition to the actions noted above) on the grounds that "the policy initiatives taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the eurozone".

The summit decisions of 26 October 2011

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

The summit decisions of 9 December 2011

Summary

The agreement that was reached on 9th December was mainly concerned with the imposition and enforcement of prudential restrictions upon member governments' discretion over their fiscal policy. A "fiscal compact" (below) for that purpose was agreed in principal by the representatives of all the governments of the European Union except the United Kingdom, for implementation in March 2012. Implementation would require a treaty change and would thus be subject to the agreement of a majority of eurozone members but for some member states it would also require popular assent by national referendum.

Under the heading of "strengthening the stabilisation tools", the announced decisions include the rapid implementation of the "leveraging" of the European Financial Stability Facility (that was agreed by the Eurogroup on 29 November), and the bringing forward of the introduction of the European Stability Mechanism. All except the British prime minister agreed to "consider and confirm within 10 days" to supplement IMF funds by €200 billion "to ensure that the IMF has adequate resources to deal with the crisis" - an agreement that was shortly to unravel

The new fiscal compact

The main provisions announced by the heads of state. were:

• a rule to be adopted that annual structural deficits must not exceed 0.5% of nominal GDP;
• that rule to be embofied in member governments', legal systems at constitutional or equivalent level, together with a correction mechanism that is to be triggered in the event of deviation;
• the Court of Justice to verify member governments' compliance;
• national debt proposals to be reported in advance;
• the Excessive Deficit Procedure (governing the treatment of a goverment with a budget deficit greater than 3 per cent of gdp, or a public debt greater than 60 per cent of gdp) to be reinforced by the imposition of penalties (unless opposed by a qualified majority).