page_title: European debt crisis
section_title: Evolution of the crisis
hierarchical_section_title: European debt crisis / Evolution of the crisis
caption_attribution_description: English: The Debt-to-GDP ratio and Budget deficit to GDP ratio have been plotted for 10 important/big EU member states in 2009. The same plot can also be found here with 2012 figures. The figures indicate the fiscal health of the countries in the plot. Generally, the farther up and to the right a country goes, the higher the risk for investors. The following 4 areas have been given a background color in the plot to reflect the level of fiscal health: Green (max.60% debt-to-GDP and max.3% deficit), maps the European limits outlined by the Stability and Growth Pact. Yellow (60-120% debt-to-GDP if the deficit is below 3%, OR 0-60% debt-to-GDP with a 3-6% deficit), maps the area considered to be unhealthy on the long term. All countries belonging to the area will comply with 1 out of 2 SGP limits and be close to comply with both SGP limits, which mean that the situation is not yet at a "critical" state. Orange (min.120% debt-to-GDP if the deficit is below 3%, OR 60-120% debt-to-GDP if the deficit is above 3%, OR 0-60% debt-to-GDP if the deficit is above 6%), covers the three areas commonly referred to as critical levels. Red (if the debt-to-GDP exceeds 120% in combination with having a deficit above 3%). In this area, the situation (according to IMF guidelines) is considered to be "unsustainable". As a general rule of thumb, it is only possible for a country to enter a path of continously declining debt-to-GDP ratios if it succeeds to achieve budget deficits below 3% of GDP; and IMF have argued this for an average-country will not be possible (without external help) if the debt suddenly exceeds the 120% limit. Trend over time is important to map. In example, a critical deficit (bigger than 6%) in a single year might occure only because of special temporary one-off circumstances, and if forecasts promise it will by-it-self return to more normal levels in subsequent years (while the debt level also still remain below 120%), then it will in such a situation not be evaluated as being truly critical (despite of having a critical size for a specific year).
context_page_description: The European debt crisis is a multi-year debt crisis that has been taking place in the European Union since the end of 2009. Several eurozone member states were unable to repay or refinance their government debt or to bail out over-indebted banks under their national supervision without the assistance of third parties like other eurozone countries, the European Central Bank, or the International Monetary Fund.
  The eurozone crisis was caused by a balance-of-payments crisis. The crisis was worsened by the inability of states to resort to devaluation. Debt accumulation in some eurozone members was in part due to macroeconomic differences among eurozone member states prior to the adoption of the euro. The European Central Bank adopted an interest rate that incentivized investors in Northern eurozone members to lend to the South, whereas the South was incentivized to borrow. Over time, this led to the accumulation of deficits in the South, primarily by private economic actors. A lack of fiscal policy coordination among eurozone member states contributed to imbalanced capital flows in the eurozone.
context_section_description: The European debt crisis erupted in the wake of the Great Recession around late 2009, and was characterized by an environment of overly high government structural deficits and accelerating debt levels. When, as a negative repercussion of the Great Recession, the relatively fragile banking sector had suffered large capital losses, most states in Europe had to bail out several of their most affected banks with some supporting recapitalization loans, because of the strong linkage between their survival and the financial stability of the economy. As of January 2009, a group of 10 central and eastern European banks had already asked for a bailout. At the time, the European Commission released a forecast of a 1.8% decline in EU economic output for 2009, making the outlook for the banks even worse. The many public funded bank recapitalizations were one reason behind the sharply deteriorated debt-to-GDP ratios experienced by several European governments in the wake of the Great Recession. The main root causes for the four sovereign debt crises erupting in Europe were reportedly a mix of: weak actual and potential growth; competitive weakness; liquidation of banks and sovereigns; large pre-existing debt-to-GDP ratios; and considerable liability stocks (government, private, and non-private sector).
  In the first few weeks of 2010, there was renewed anxiety about excessive national debt, with lenders demanding ever-higher interest rates from several countries with higher debt levels, deficits, and current account deficits. This in turn made it difficult for four out of eighteen eurozone governments to finance further budget deficits and repay or refinance existing government debt, particularly when economic growth rates were low, and when a high percentage of debt was in the hands of foreign creditors, as in the case of Greece and Portugal.
  The states that were adversely affected by the crisis faced a strong rise in interest rate spreads for government bonds as a result of investor concerns about their future debt sustainability. Four eurozone states had to be rescued by sovereign bailout programs, which were provided jointly by the International Monetary Fund and the European Commission, with additional support at the technical level from the European Central Bank. Together these three international organisations representing the bailout creditors became nicknamed "the Troika".
  To fight the crisis some governments have focused on raising taxes and lowering expenditures, which contributed to social unrest and significant debate among economists, many of whom advocate greater deficits when economies are struggling. Especially in countries where budget deficits and sovereign debts have increased sharply, a crisis of confidence has emerged with the widening of bond yield spreads and risk insurance on CDS between these countries and other EU member states, most importantly Germany. By the end of 2011, Germany was estimated to have made more than €9 billion out of the crisis as investors flocked to safer but near zero interest rate German federal government bonds (bunds). By July 2012 also the Netherlands, Austria, and Finland benefited from zero or negative interest rates. Looking at short-term government bonds with a maturity of less than one year the list of beneficiaries also includes Belgium and France. While Switzerland (and Denmark) equally benefited from lower interest rates, the crisis also harmed its export sector due to a substantial influx of foreign capital and the resulting rise of the Swiss franc. In September 2011 the Swiss National Bank surprised currency traders by pledging that "it will no longer tolerate a euro-franc exchange rate below the minimum rate of 1.20 francs", effectively weakening the Swiss franc. This is the biggest Swiss intervention since 1978.
  Despite sovereign debt having risen substantially in only a few eurozone countries, with the three most affected countries Greece, Ireland and Portugal collectively only accounting for 6% of the eurozone's gross domestic product (GDP), it has become a perceived pr
caption: The 2009 annual budget deficit and public debt both relative to GDP, for selected European countries. In the eurozone, the following number of countries were: SGP-limit compliant (3), Unhealthy (1), Critical (12), and Unsustainable (1).
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