European debt crisis

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The European sovereign debt crisis is a financial crisis in which countries in the Eurozone with too much sovereign debt have found it difficult or impossible to raise the money they need to repay that debt. Deposits at banks in these countries have had heavy losses as depositors moved their money to countries with stronger economies.[1]

The crisis began in the summer of 2010, largely focused on Greece[2] but then widening to include Portugal, Ireland, Italy and Spain. The financial crisis in the U.S. that began in 2008 helped to expose the instability of these European countries. Greece had been spending heavily for many years without taking steps toward fiscal reform. Its economic growth slowed, and its debts grew to be larger than the country's entire economy.[3]

In response, investors demanded higher yields on Greek bonds to make up for the higher risk associated with an ailing economy. This raised the cost of the country's debt, necessitating several bailouts by the European Union and European Central Bank. The markets also began driving up bond yields in the other heavily indebted countries in the region, anticipating problems similar to what occurred in Greece.

Bailouts

The European Union bailed out Greece with an infusion of 110 billion euros in spring, 2010. They gave it a second bailout in mid-2011 worth about $157 billion. On March 9, 2012, Greece and its creditors agreed to a debt restructuring that would lead to another round of bailout funds.

The EU gave bailouts to Ireland and Portugal in November 2010 and May 2011, respectively.

The Eurozone member states also created the European Financial Stability Facility (EFSF) to provide emergency lending to countries in financial difficulty.

References

  1. Understanding the European Crisis Now. The New York Times.
  2. TIMELINE-Euro zone debt crisis. Reuters.
  3. What is the European Debt Crisis?. About.com.