Sunday 18 February 2018

Key moments in the unfolding euro crisis that blighted 2011

The new year opens with the euro crisis still unresolved despite numerous efforts last year by EU leaders to draw a line under the ongoing damage to economies and the currency. Donal O'Donovan picks out the key moments of 2011 and examines where it all went wrong.


PORTUGAL becomes the third eurozone country forced to accept a bailout, following Greece and Ireland in asking the EU and IMF for a €78bn package of rescue loans.

Bailout three gives the lie to the notion that rescuing Greece and Ireland prevented the further spread of financial contagion.

Investors wonder which country will be next and settle on Spain, Italy and Belgium as the next most vulnerable borrowers.

Financing costs begin to rise for all three.



Eurozone ministers bring Greece to the edge of a messy default, insisting the country agrees to impose greater austerity before it gets a €12bn tranche of rescue loans.

The cash is handed over in July after Greece signs up to a second bailout deal.

For the first time there is a real prospect of a eurozone member suddenly and unexpectedly defaulting on its debts.

Germany insists that bondholders will bear some of the cost if there is a second Greek bailout.

German Finance Minister Wolfgang Schauble sends a widely leaked letter to European finance ministers saying any additional support for Greece must involve a "fair burden of sharing between taxpayers and private investors".

It fatally undermines a commitment from the Greek finance ministers to repay lenders in full, and reverses European policy that lenders would only face losses from 2103 on.

Within days, the head of the eurozone finance ministers, Jean-Claude Juncker, plus German Chancellor Angela Merkel and French President Nicolas Sarkozy, back the Schauble proposal.

Bond investors take flight, dumping not only Greek bonds but the debt of all countries, including Ireland, seen to be at risk of a future or second bailout. Reaction in the markets is so bad that by December Angela Merkel agrees to drop any future "burden sharing" when the permanent EU rescue fund comes into force.



Eurozone leaders agree a "comprehensive package" to restore confidence in the eurozone at a meeting in Brussels on July 21.

Greece will get a €109bn second rescue; the eurozone rescue fund will be beefed up to €440bn and made more flexible to cope with the impact of losses for lenders to Greece. The interest rate charged for the Irish and other bailout deals is slashed.

Markets initially welcome the deal, particularly for Ireland, which will enjoy the only sustained recovery in the markets of any eurozone country for the rest of the year.

By October, however, the beefed-up rescue fund still hadn't been finalised and the level of haircut first suggested for lenders to Greece is deemed to be too low.

Confidence in Europe's ability to come up with solutions or to deliver on its promises ebbs away.



The cost of borrowing for governments in Spain and Italy rises sharply to hit the dangerous 7pc level.

At that price, deficit financing becomes unsustainable. Italy's €1.9 trillion of debt means a bailout is beyond the capacity of existing eurozone rescue funds.

European Commission President Jose Manuel Barroso issues a stark warning that the sovereign debt crisis has spread beyond the so-called periphery.

The ECB says it will buy Italian and Spanish government bonds to try to bring down borrowing costs.



At a delayed summit on October 26, European leaders agree to a "three-pronged" attack to solve the debt crisis.

Private sector banks holding Greek debt will suffer a bigger than expected 50pc loss on their investment in order to return the country to solvency.

European banks are ordered to raise €109bn to cope with the losses.

With an eye to Italy, leaders promise a €1tn "big bazooka" fund to fight the crisis.

This time there is no honeymoon in the markets. The 50pc loss for lenders to Greece has shocked investors.

Banks dump their holdings of other governments' debt and cut lending in an effort to meet the new capital targets.

Worst of all, the €1tn proves to be an illusion. It quickly becomes clear that Germany wants to increase rescue funds without increasing the amount it puts into the rescue pot.

China and others refuse to make up the shortfall.



The sovereign debt crisis becomes a full-blown currency crisis after France and Germany threaten to force Greece out of the euro. Confidence plunges to a new, potentially fatal low.

The crisis deepens after Ms Merkel and Mr Sarkozy reject Greek Prime Minister George Papandreou's plan to hold a referendum on a planned second Greek bailout.

Ms Merkel and Mr Sarkozy insist any vote in Greece has to be a straight choice between accepting a second bailout and leaving the euro.

Despite being legally impossible, the threat is seen as credible by both Mr Papandreou and by the markets. "Merkozy", as the Franco-German pair were dubbed, get their way.

Mr Papandreou's plans for a "bailout" referendum are shelved. The prime minister himself is then quickly manoeuvred out of office, replaced with a less independent minded former central banker and ECB vice president.

Italy's Silvio Berlusconi is swept from office in the fallout, replaced by an unelected central banker after the ECB alllows Italy's borrowing costs to spiral out of control.

The political crisis had entered a dangerous new phase, especially for anyone seen to stand in the way of the increasingly dominant clique centred on France, Germany and the European Central Bank (ECB). The genie of a euro break-up proves impossible to put back in the lamp.

Mario Draghi replaces Jean Claude Trichet as President of the ECB.

"Super Mario" gives Europe a surprise lift by slashing interest rates but quickly reverts to conservative ECB form.

On December 1, Mr Draghi signals that the ECB will increase European bond purchases in return for governments signing up to a "fiscal compact".

A week later, Mr Draghi announces a U-turn. Mr Draghi says he will not order the hoped-for dramatic intervention in the markets, even as the fiscal compact is being agreed in Brussels.

Europe is left trying to implement a long-term solution to a near-term financing crisis.



UK Prime Minister David Cameron uses his "veto" to block French and German-inspired plans for a new European Union (EU) treaty that would enshrine deeper economic co-operation into law. It provokes a bitter spat with a furious Mr Sarkozy.

Unanimous agreement is needed to change EU rules, but rather than accept the UK veto and scrap treaty plans, EU leaders opt for a "deal within a deal".

Twenty-six of the 27 EU members states agree to consider signing a new treaty outside of the EU structures.

Once the principle of unanimity is scrapped, it emerges that Ireland has also lost its traditional ability to bargain for concessions by holding up EU deals.

The new treaty will be launched once just nine countries sign up, with all others joining later.

The aim of fast tracking the new treaty is to have a credible long-term solution to the crisis in place quickly; the effect is to raise the danger of the EU fracturing just when the strain on the eurozone is at its worst.

A week before Christmas, EU finance ministers hold a conference call to finalise plans to channel €200bn of European rescue funds through the IMF to help ease borrowing fears for Italy and Spain in 2012.

They come away with commitments of just €150bn after the UK refuses to contribute.


Irish Independent

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