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After months of uncertainty and fears that the Greek sovereign debt crisis would spread to larger, core economies in the eurozone, sending the global economy back into recession or even signalling the end of the single currency, European leaders reached an agreement in principle on October 27th 2011, on a deal to contain the eurozone debt crisis. Although the details need to be finalised, news of an agreement boosted financial markets. However, Italian government debt problems remain a concern.
The eurozone sovereign debt crisis began in Greece in 2009 when it emerged that the government had underreported its debt figures. This resulted in an initial bail-out agreement in 2010 and a second bail-out agreement in 2011 but concerns about insufficient government austerity resulted in fears of a Greek debt default from mid-2011. Greece has the highest public debt burden in the eurozone at an estimated 165.4% of GDP in 2011.
Ireland and Portugal have also been bailed out as a result of their escalating government debt problems following the global economic downturn of 2008-2009. These countries had the third and fourth highest public debt burdens in the eurozone in 2011 at an estimated 109.3% and 106.0% of GDP respectively. Furthermore, Ireland has the highest general government budget deficit in the eurozone at a projected 10.3% of GDP in 2011.
Many European countries had high government debt levels before the global economic downturn following years of public transfers, overspending and early retirement. However, economic recessions, high unemployment and unprecedented government stimulus measures following the global financial crisis in 2008 exacerbated government debt levels across the region. Prospects of weak economic growth, low productivity and structural problems have resulted in further investor uncertainty about the ability of governments to service their debt.
% of GDP
Source: Euromonitor International from National Statistical Offices/Eurostat/International Monetary Fund/OECD/ International Financial Statistics
Note: figures are forecasts
A three-pronged preliminary agreement was announced at the European summit on October 27th 2011 with the aim of restoring stability to the crisis-ridden region:
The eurozone is home to some of the world’s largest economies – any downturn in the region or continued sovereign debt crisis would have global repercussions. At the October summit, European leaders declared that the eurozone debt crisis was the biggest challenge facing European leaders since the Second World War:
% of global GDP
Source: Euromonitor International from IMF
Note: GDP is calculated in US$ terms
The announcement has been hailed by European leaders as a success and although ambitious, anything less would have resulted in further volatility in financial markets, renewed capital flight from the region and an acceleration of the global economic slump evident since mid-2011. Financial markets reacted positively to the announcement while the euro and oil prices also strengthened. However, some analysts were expecting a bigger boost to the EFSF of around €2 trillion and an even larger “haircut” of up to 60% of Greek debt.