Eurozone Debt Crisis Flashcards
The ECB announced the LTRO when?
What was it?
How much money was made available?
Announced in response to what?
December of 2011
LTRO (Long-term refinancing operation). Secured funding facility for stressed Eurozone banks.
Offered 1 trillion euros in secured funding in two consecutive tranches.
Announced in response to investor worries about the creditworthyness of Italy and Spain.
At the height of the Eurozone debt crisis, what proprtion of total Eurozone GDP does Spain and Italy make up?
Spain: 10.8 percent
Italy: 16.5 percent
What happened in June 2012 with respect to Spain?
Asked for 100 billion euros to assist with the recapitalization of its ailing banks, which it received as a loan.
What is the OMT?
Date of announcement?
Outright Monetary Transactions
Outright Monetary Transactions (“OMT”) is a program of the European Central Bank under which the bank makes purchases (“outright transactions”) in secondary, sovereign bond markets, under certain conditions, of bonds issued by Eurozone member-states.
Date of Mario Draghi’s famous speech? What was the promise?
July 26 2012
“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro.”
What was the contradiction inherent in Draghi’s OMT program?
‘Unlimited’ and ‘conditional’
Conditional support by definition is not unlimited.
What did the announcement of the OTM do for the Eurozone?
Although it has yet to be employed, the announcement was seen by market participants as largely eliminating the tail risk of euro break-up.
Following the announcement, spreads of the riskier countries over German bunds began to decline.
Current account to gdp in 2007 for:
Germany Netherlands Finland Austria Belgium France Italy Ireland Spain Portugal Greece
Germany: 7.5 percent Netherlands: 6.7 percent Finland: 4.3 percent Austria: 3.5 percent Belgium: 1.6 percent France: -1.0 percent Italy: -1.2 percent Ireland: -5.3 percent Spain: -10.0 percent Portugal: -10.1 percent Greece: -14.4 percent
When creditors try to get their money out quickly, one or more of three things must happen instead of repayment:
Repricing of assets
Default
Refinancing by official sources
Hughe current account surpluses and deficits can be viewed in three mutually exclusive ways:
- Reflected private-capital flows towards what were mistakenly believed to be higher-return opportunities in more dynamic economies.
- Deficit: Excess of spending over income or excess of investment over savings.
- Surplus: Excess of income over spending or excess of savings over investment
- Surpluses reflected increasing competitivness of these countries while deficits reflected declining competitiveness.
What are the reasons for the loss in competitiveness in deficit countries as opposed to those in surplus countries?
Real unit labor costs in the surplus groups stagnated while those of deficit countries soared.
Soaring real labor costs reflected:
- the strong economies of some of these deficit countries which pushed up nominal wages
- Inflexible labour markets
- productivity growth weak
Describe the three events of sudden stops of private capital that occurred accross Eurozone.
Dates and triggers.
2008: during the global financial crisis, when the stops particularly affected Greece and Ireland;
spring 2010: contagion from the Greek program to Ireland and Portugal;
second half of 2011: the stops reached Spain and Italy.
What were the three lending facilities created by the ECB in response to the crisis.
What were the lending capacities for each facility?
Where did the funding come from for each of these facilities?
- European Financial Stability Facility (EFSF):
440 billion euros
raised in markets but guaranteed by governments - European Financial Stabilization Mechanism (EFSM)
60 billion euros borrowed from the European Commission
those two lending facilities were replaced by…
- European Stability Mechanism (ESM)
500 billion euro lending capacity
In short, what was the cause of the Eurozone debt crisis?
Large current account imbalances of Eurozone countries and the rounds of sudden stops in financing that occured following the re-rating of risk during the 2008 financial crisis.
Describe how European countries got to where they were before the crisis (current account imbalances), and how things changed.
What sort of capital flowed into these countries? From where? Equity or debt?
Who were the creditors? What was the main characteristic of their economies?
What justified this kind of lending?
Before the crisis, huge private-capital flows went into a number of countries in southern Europe and Ireland.
Most of these fund flowed from elsewhere in Europe and mostly in the form of debt, particularly bank debt.
These flows came from countries with excess savings and weak demand for credit at home and then flowed to countries with buoyant demand for credit, which appeared to offer superior returns and at least reasonable safety.
The pre-crisis spreads on sovereign bonds fell to very close to zero: thus, Germany and Greece were, astonishingly, considered equally riskless.
A series of sudden stops occurred once providers - endowments, insurance companies, hedge funds, pension funds, private individuals and even government agencies - realized the risks were much greater than they had anticipated.
