DEBT CRISIS IN CERTAIN EURO AREA COUNTRIES

The euro area debt crisis started in late 2009 with the new Greek government announcing that its deficit and public debt were significantly higher than previously stated. This announcement resulted in an immediate loss of investor confidence in Greek debt securities. In May 2010, the IMF and the European Union granted Greece a financial support package of EUR 110 billion in exchange for the introduction of an austerity budget. Other European countries subsequently experienced difficulties in obtaining refinancing on the capital markets at satisfactory rates: Ireland (in 2010), Portugal (2011) and Cyprus (2013) also received IMF and European loans; in 2012, Spain received a European loan to help it to recapitalise its banking system. 

Alongside these support plans, European countries adopted fiscal adjustment measures with the aim of consolidating their public finances. Following the subprime crisis, they had introduced recovery plans (increased public spending and/or reduced taxes) to stimulate economic activity, which had accentuated the deterioration in public finances usually seen in crisis periods. In Europe, the Treaty on Stability, Coordination and Governance was signed in 2012 by 25 of the then 27 EU member states (with the exception of the United Kingdom and the Czech Republic). 

The debt crisis also prompted the introduction of new euro area solidarity mechanisms. A EUR 750 billion European Financial Stability Facility (EFSF) was set up in 2010. It was replaced in 2013 by the European Stability Mechanism (ESM). The ESM has capital of EUR 700 billion to guarantee its financial market borrowings. It can lend directly to Member States, purchase on the primary or secondary markets securities issued by troubled countries, or even recapitalise financial sectors in difficulty. Countries requesting ESM support must implement substantial budgetary adjustment measures, often accompanied by structural reform of their economies. 

The situation of countries benefiting from such financial support differs: Ireland, Spain and Portugal officially completed their programmes in 2013 and 2014; programmes continued, in early 2015, for Cyprus and Greece, where the situation remained particularly fragile. 

For its part, the Eurosystem took a series of measures to address the subprime debt crisis, the sovereign debt crisis and more recently the risk of deflation. The ECB cut its key refinancing rate several times, from 4.25% in July 2008 to 0.05% in September 2014. It also introduced a number of non-conventional measures, including long-term loans and unlimited short-term refinancing loans to banks; one-off secondary market purchases of sovereign debt issued by certain countries in difficulty (the Securities Market Programme, instituted in 2010), the implementation of an as yet unused mechanism for unlimited secondary market purchases of sovereign debt (the Outright Monetary Transactions Programme, launched in 2012), the implementation of a vast asset-backed securities purchase programme in the non-financial private sector in 2014, a covered bond purchase programme in the financial sector in 2014 and, in 2015, in the public sector, a programme to purchase securities issued by governments and European institutions in the secondary market.

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Franco-German agreement on the bailout plan for Greece at the European Summit in Brussels on 25/03/2010. From left to right: President Nicolas Sarkozy, Greek Prime Minister George Papandreou and German Chancellor Angela Merkel
Credit: Yves Herman / Reuters