European Sovereign Debt Crisis: Overview, Analysis, and Timeline of Major Events
Editor’s note: This post was last updated 14 December 2012.
Most commentators trace the beginning of the European sovereign debt crisis to 5 November 2009, when Greece revealed that its budget deficit was 12.7% of gross domestic product (GDP), more than twice what the country had previously disclosed. However, the real origins of the crisis can be traced to the very structures that govern Europe’s institutions and to the players that govern European institutions.
The creation of the European Union as we know it today began with ratification of the Maastricht Treaty on 7 February 1992. The Maastricht Treaty provisions imposed stringent economic requirements, known as “convergence criteria,” that member states are required to meet before they could gain admittance to the common currency zone that has come to be known as the eurozone.
Among these convergence criteria are:
- Price developments: These requirements are designed to ensure that member nations have low and stable inflation. Inflation in the year preceeding potential admittance to the eurozone can only be 1.5% more than the average of the three best-performing member states. In practice, the rate of inflation used to determine if this criterion is met is the preceeding 12-month average of the Harmonized Index of Consumer Prices — the EU-wide inflation index.
- Fiscal developments: These requirements are designed to ensure a prospective member state has a strong fiscal condition. Among the requirements are budget deficits that cannot exceed 3% of GDP unless a nation finds itself in exceptional and temporary circumstances. Total sovereign debt amounts cannot exceed 60% of GDP. Both of these criteria are waived if there is evidence of substantial and continuous declines.
- Exchange-rate developments: These requirements are designed to ensure stability of a member state’s currency exchange rate before gaining admittance. Specifically, a prospective member cannot have devalued its currency relative to any other member state’s currency for the preceding two years. Additionally, the currency must trade in a narrow band of ±2.25% around other member states’ currencies.
The Maastricht Treaty failed, however, to provide enforcement mechanisms should a member state fail to meet the convergence criteria. Instead of enforcement mechanisms, the only provision is for the European Commission to prepare a report for the opinion of the Economic and Financial Committee, a body set up under the terms of the Treaty.
Admittance to the eurozone promised great economic rewards as nations whose sovereign credit ratings were lower than those of the strongest member states would be able to borrow money as if they too had the superior rating. In addition, the common currency held the promise of preventing trading partners from devaluing their currency, forcing all eurozone members to compete on a level playing field. And with a European economy that featured a common currency, but that excluded centralized fiscal policy, it required individual nations to proactively manage their trade balance, lest such imbalances result in excess debt.
Thus, the coupling of tremendous economic rewards for admittance to the eurozone with no enforcement mechanism for nations failing to meet the convergence criteria created an incentive-rich environment for nations to overburden themselves with debt without much fear of reprisal.
In fact, as was later revealed, Greece was able to lie its way into the eurozone. This was disclosed by Eurostat in its 22 November 2004 report titled, “Report by Eurostat on the Revision of the Greek Government Deficit and Debt Figures.” Eurostat reported that Greece’s 2003 budget deficit had actually been 4.6% of GDP, rather than the previously reported 1.7% of GDP. Additionally, the three Greek budget deficits of 2000–2002 were all revised upward by more than 2%. Meanwhile, total government debt figures were revised upward by more than 7%. As the authors of the report stated bluntly: “Data revisions of such a scale have given rise to questions about the reliability of the Greek statistics on public finances.”
Though it would be easy to exclusively blame Greece for the European sovereign debt crisis of 2009–2012, Greece’s debt problems are best viewed as a spark on a stack of kindling. The International Monetary Fund estimates that, from 2006 to projected year-end 2012, total debt in the eurozone will have increased from €5,870 billion to €8,714 billion, an increase of €2,844 billion. By comparison, GDP has grown from €8,568 billion in 2006 to an estimated €9,687 billion in 2012, an increase of €1,119 billion.
In other words, it is projected that absolute debt levels in the eurozone will have grown 2.5 times faster than GDP.
Using the IMF’s projected figures for 2012 debt and GDP, here are the compound annual growth rates for debt and GDP for each member of the eurozone:
Projected Debt to GDP Growth Rates 2006-2012
|Debt CAGR 2006-2012||GDP CAGR 2006-2012||Debt/GDP CAGR 2006-2012|
As you can see each member of the eurozone’s debt is growing faster than its GDP — an unsustainable position in the long term.
Below are the IMF’s projections of debt-to-GDP ratios for 2012:
Debt-to-GDP Ratios for 2012
|Debt to GDP||Rank|
Nearly all eurozone members — 13 of 17 countries — have debt levels exceeding the convergence criteria maximum of 60%. Among this group are the large economies — Germany (81.9%), France (89.4%), Italy (121.4%), and Spain (70.2%). The projected 2012 debt of these four nations alone totals €6,732 billion, versus projected 2012 GDP of €7,410 — a debt-to-GDP ratio of 90.9%, a full 51.4% higher than the 60% maximum required by the convergence criteria. [CFA Institute has additional statistics that help explain the European sovereign debt crisis.]
Thus the European sovereign debt crisis is truly a European crisis, and not just a crisis for the Greeks to resolve. Furthermore, a littany of unresolved issues is remaining for European leadership to address before the crisis ends. One example being the large number of mortgages issued pre-The Great Recession denominated in Euro, US dollars and Swiss francs to EU members’ citizens where the euro is not their home currency.
Another factor driving the European sovereign debt crisis is the health of the balance sheets of Europe’s banks, which hold hundreds of billions of euros of eurozone sovereign debt. According to a 23 July 2010 stress test, conducted by the Organization for Economic Co-operation and Development (OECD), Europe’s largest financial institutions have €286.2 billion in trading book exposures and €1,400.5 billion of banking book exposures. Combined, this amounts to €1,686.7 billion of exposure. Put another way, total eurozone sovereign debt in 2010 was reported to be €7,862, meaning that eurozone banks hold 21.5% of the debt of eurozone member states.
On 27 October 2011, eurozone members approved a new bailout mechanism. One pillar of the plan was to increase tier 1 capital ratios (CT1) from 5% to 9% at an estimated cost of €106 billion to the largest banks in Europe. From these figures, one can deduce that CT1 levels are currently €132.5 billion. If increased from 5% to 9% then CT1 levels will be €238.5 billion. By comparison, the largest European banking institutions held €1,686.7 billion of eurozone sovereign debt in 2010. This means that CT1 is large enough only to absorb a decline in European sovereign debt of 14.1% (or €238.5 ÷ €1,686.7), an amount well below the declines experienced in other major financial crises.
Finally, according the European Banking Authority (EBA), Europe’s 16 largest financial institutions hold €386 billion of potentially suspect credit market and real estate assets. This compares to an estimated €339 billion of total debt holdings from Portugal, Ireland, Italy, Greece, and Spain by these same institutions. Again, this €386 billion of holdings by these 16 banks compares to the current CT1 of Europe’s largest 90 banks of just €132.5 billion.
Thus in summary Europe’s sovereign debt crisis contains, at its heart, two crises — both of which originate in questionable choices on debt financing and investing: first, European sovereign deficits and debt growing to unsustainable levels; and second, European financial institutions holding large amounts of European sovereign debt, as well as hundreds of billions of euros worth of depressed-value real-estate assets. The crisis results from both the high correlation between the fortunes of eurozone sovereigns and their financial institutions, as well as the restrictive political decision-making structure imposed by the Maastricht Treaty.
European Sovereign Debt Crisis Timeline (*Critical Events Noted in Red)
- December 27: Establishment of the International Monetary Fund (IMF).
- February 7: The Maastrict Treaty is signed creating the European Union (EU). As a part of the treaty, members are required to adjust their economies to meet vigorous criteria to serve as the f0undation for a common currency area, the eurozone. Among the requirements: price developments (i.e., low and stable inflation); fiscal developments (i.e., low deficits/debt and pro-growth policies); and exchange rate developments (i.e., stable exchange rates). The most important factor with regard to the European sovereign debt crisis will prove to be the fiscal requirements, more specifically, the requirement that 1) deficits should not exceed 3% of GDP; and 2) total debt should not exceed 60% of GDP. Additionally, no provisions are put in place for ejecting a member state in the event that the government manipulates domestic financial data in order to gain admittance to the EU.
- January 1: The eurozone, the common currency area, comes into existence after 11 EU member states met the convergence criteria in 1998. Each member of the eurozone must unanimously approve of any policy direction.
- June 19: Greece is admitted to the eurozone after it is determined that it has met the convergence criteria.
- November 22: Greece admits that it lied about its government’s fiscal convergence criteria in order to gain admittance to the eurozone.
- November 5: New Greek Prime Minister, George Papandreou, announces that Greece’s annual budget deficit will be 12.7% of GDP — more that twice the previously announced figure.
- December 8: Fitch Ratings cuts Greece’s sovereign credit rating to BBB+ from A-. The outlook is “negative.”
- December 9: Ireland announces a fiscal plan that will provide savings of €4 billion, in part by raising the public pension retirement age from 65 to 66 years.
- December 14: Papandreou outlines the details of his government’s first austerity package.
- December 16: Standard & Poor’s cuts Greece’s sovereign credit rating to BBB+ from A-.
- December 22: Moody’s cuts Greece’s sovereign credit rating to A2 from A1.
- January 14: Greece announces its Stability and Growth Program, which is designed to cut the country’s budget deficit from 12.7% in 2009 to 2.8% by 2012. This would bring the deficit into alignment with the convergence criteria outlined in the Maastricht Treaty.
- January 29: Spain announces austerity measures designed to save the nation €50 billion by cutting government spending by 4% of GDP and cutting government employees’ pay by 4%.
- February 2: Greece’s federal government freezes the wages of public employees earning less than €2,000 per month.
- Februay 3: The European Commission endorses Greece’s Stability and Growth Program and urges the nation to reduce its overall wage costs.
- February 9: Greece puts in place its first austerity package.
- March 5: Greece puts in place its second austerity package, which is designed to save €4.8 billion.
- March 15: Finance ministers of the Economic and Monetary Union (EMU) countries agree to help Greece but provide no details.
- March 18: Papandreou warns that borrowing costs are too high, putting pressure on the deficit and increasing the likelihood of a bailout from the IMF.
- March 25: President of the European Central Bank (ECB), Jean-Claude Trichet, extends less-restrictive collateral rules in order to prevent the possibility that one ratings agency determines whether a EMU country’s bonds are eligible for use as ECB collateral.
- April 9: Greece announces a reduction in debt of 39.2%.
- April 11: EMU leaders agree to a bailout plan for Greece.
- April 13: ECB voices its support for the Greek rescue plan announced by the EMU on 11 April.
- April 22: Eurostat, the EU’s statistical agency, announces that Greece’s 2009 budget deficit was 13.6% of GDP, not the previously reported 12.7%.
- April 23: Greece realizes that its austerity packages are not enough to save itself fiscally and asks for a bailout from the eurozone and the IMF.
- April 27: Standard & Poor’s downgrades Greece’s sovereign credit rating below investment-grade status. Standard & Poor’s also downgrades the sovereign debt of Portugal by two notches.
- April 28: Standard & Poor’s downgrades Spain’s sovereign credit rating from AAA to AA-.
- May 1: Greece proposes its third austerity package.
- May 2: Greece, the eurozone nations, and the IMF agree to a €110 billion bailout plan. Eurozone nations will provide €80 billion and the IMF €30 billion.
- May 3: ECB announces that it will accept Greek sovereign debt as collateral no matter the country’s rating.
- May 4: Greece’s third austerity package is put to parliament for a vote.
- May 6: Spreading anxiety about the eurozone’s inability to stem the Greek sovereign debt crisis sends financial markets across the world sharply down.
- May 9: The eurozone nations create the European Financial Stability Facility (EFSF) and fund it initially with €440 billion in capital. Additional firewall protection is put in place by the European Financial Stabilization Mechanism, which pledges to make loans of up to €60 billion, and the IMF, which pledges €250 billion to the effort. The total amount of the package is €750 billion.
- May 13: Portugal’s government announces plans to step up its budget deficit reduction.
- May 18: Germany announces a ban on “naked” short selling of shares in its top-10 largest financial institutions, as well as eurozone government bonds and related credit default swaps.
- May 24: Greece announces that it has reduced its federal budget deficit by 41.5% in the first four months of 2010.
- May 25: Italy agrees to a fiscal austerity package worth €25 billion designed to reduce its budget deficit to 2.7% by 2012 from 5.3% in 2009.
- May 27: Spain’s parliament approves a €15 billion austerity package. The measure passes by one vote.
- May 29: Fitch Ratings downgrades Spain’s sovereign credit rating from AAA to AA+.
- June 4: Hungary’s Prime Minister, Viktor Orbán, states that it is a very real possibility that his nation may default on its sovereign debt obligations.
- June 7: Germany agrees to an austerity package worth €80 billion over three years. The measure is designed to serve as a model of fiscal austerity for all of Europe.
- June 14: Moody’s cuts the sovereign debt rating of Greece to Ba1, junk status.
- June 15: ECB announces that it will apply a 5% surcharge to Greek debt offered to it as collateral to account for Greece’s credit downgrade.
- June 16: France announces austerity measures by raising its public pension program’s retirement age from 60 to 62 years by 2018.
- June 24: The cost of credit default swaps (CDS) to ensure Greek debt hits a record; it now costs €958,000 to insure €10 million worth of Greek sovereign debt.
- June 25: Protests in Italy lead to the Italian government reducing the size of its €25 billion austerity package, which was announced 25 May 2010.
- June 29–30: Greece’s parliament approves, in separate votes, its third austerity package.
- July 5: Greece’s central bank, Bank of Greece, announces a reduction in the nation’s deficit of 41.8% for the first six months of 2010.
- July 7: Germany agrees to a €80 billion austerity package to be implemented over four years. The maneuver is designed to shore up sagging support for German Chancellor Angela Merkel.
- July 13: Moody’s cuts the sovereign debt rating of Portugal to A1.
- July 23: European banks undergo “stress tests” to evaluate their ability to absorb losses in the case of greater financial turmoil. Of the 91 institutions tested, 17 barely pass and 7 fail. Many observers feel, however, that the tests are flawed and do not actually constitute a legitimate test of European financial institutions.
- July 29: Italy’s austerity package of €25 billion, announced on 25 May 2010, passes Italy’s lower house of parliament.
- August 5: The so-called troika of eurozone finance ministers — the IMF, ECB, and EU — applaud the austerity measures undertaken by Greece, endorsing an additional €9 billion payment to Greece.
- August 11: The eurozone’s poorest member, Slovakia, refuses to commit €816 million to the €110 billion Greek bailout fund.
- August 24: Standard & Poor’s cuts the sovereign debt rating of Ireland to AA-.
- September 5: Credit spreads on Greek debt widen to around 800 basis points (i.e., 8.0%).
- September 7: Members of the eurozone approve a second tranche of bailout monies for Greece amounting to €6.5 billion.
- September 11: The IMF approves a second tranche of bailout monies for Greece amounting to €2.6 billion.
- October 31: Merkel backs Bundestag proposals that will make bondholders pay for any future eurozone debt crises.
- November 13: Irish debts sell off as anxiety about an Irish sovereign debt interest payment holiday grips bondholders, sending the credit spread of Ireland’s 10-year bond to 652 basis points (i.e., 6.52%) over a German bond of comparable maturity.
- November 16: Ireland begins talks with eurozone nations about a bailout.
- November 28: Ireland agrees with the other eurozone members and the IMF to a €85 billion bailout package.
- January 14: Fitch Ratings downgrades Greek sovereign debt to BB+, or junk status.
- May 2: Greek finance minister, George Papaconstantinou, rules out restructuring Greece’s debt and expresses hope that the eurozone nations and the IMF will extend loan payments under the bailout package.
- May 17: Portugal agrees with the other Eurozone members and the IMF to a €78 billion bailout package.
- May 21: Papandreou and senior officials from the ECB agree that Greece must avoid restructuring its debt to resolve the crisis. Both parties emphasize that fiscal austerity for Greece is the way to resolve the crisis.
- May 23: Greece unveils its intent to privatize certain industries in an attempt to raise €50 billion to pay down its sovereign debt.
- June 9: German finance minister, Wolfgang Schäuble, in an open letter to the European and international communities states, “Any additional financial support for Greece has to involve a fair burden of sharing between taxpayers and private investors.”
- June 11: Head of the eurozone finance ministers, Jean-Claude Juncker, backs Germany’s proposal for a “soft restructuring” of Greek debt. Additionally, he says that any contribution from private creditors be “voluntary.”
- June 17: Merkel and French President Nicolas Sarkozy agree that private creditors of Greek debt will have a voluntary role in resolving the Greek debt crisis. This is a reversal from earlier, stronger statements, in which both leaders were strongly in favor of private creditors taking substantial losses on the value of their Greek sovereign debt.
- June 18: Merkel agrees to work with the ECB to help resolve the Greek sovereign debt crisis. This is a reversal from her previous reticence.
- June 29: Greece’s parliament agrees to the terms of the fourth austerity package.
- July 15: Italy’s parliament agrees to its first austerity package.
- July 21: The eurozone members agree to enlarge the size of the EFSF’s capital guarantees to €780 billion. Additionally, the lending capacity is raised to €440 billion.
- August 24: France announces a €12 billion deficit-reduction package that raises taxes on the wealthy and closes tax loopholes.
- September 14: Italy’s parliament agrees to its second austerity package to try to save €124 billion.
- September 18: Standard & Poor’s downgrades its credit ratings of 24 Italian banks, 7 of which are major institutions.
- September 19: Standard & Poor’s downgrades Italy’s sovereign debt rating from A+ to A-, outlook negative.
- September 29: Hopes for a resolution to the European sovereign debt crisis improve when Germany’s legislature, the Bundestag, approves an expanded bailout plan.
- October 4: Anxiety grows that the Franco-Belgian bank Dexia may need to be bailed out due to its exposure to European sovereign debt.
- October 7: Fitch Ratings cuts the sovereign debt rating of Italy from AA- to A+; it also cuts the sovereign debt rating of Spain to AA- from AA+.
- October 10: Dexia is nationalized.
- October 13: Standard & Poor’s cuts the sovereign debt rating of Spain to AA- from AA, outlook negative.
- October 13: Enlargement of the EFSF is approved by all of the eurozone nations.
- October 27: Members of the eurozone agree on a new plan to resolve the European sovereign debt crisis. Important provisions include: asking holders of Greek debt to cut the value of their holdings by 50%; increasing the tier 1 capital of European banks to 9% (approximately €106 billion); and leveraging the capacity of the EFSF up to €1 trillion.
- October 28: EFSF’s CEO, Klaus Regling, travels to China to try to get Chinese support for the expanded EFSF. He leaves without reaching an agreement.
- October 31: Papandreou shocks the world by calling for a Greek referendum vote on the new eurozone bailout proposal.
- November 3: Papandreou backs down from his referendum request after members of his own political party desert him in parliament.
- November 5: Papandreou’s ruling parliamentary party narrowly wins a vote of confidence.
- November 6: Papandreou works with other Greek politicians to negotiate his resignation.
- November 11: The new Greek prime minister, Lucas Papademos, is sworn in along with a new coalition government.
- November 12: Italian Prime Minister Silvio Berlusconi resigns his post clearing the way for a new government headed by the new prime minister, Mario Monti, a former EU commissioner. The hope is that Monti’s new government will help to restore investor confidence in Italy’s ability to resolve its sovereign debt crisis.
- November 20: With yields on Spanish sovereign debt hitting highs, the center-right opposition People’s party (PP) of Mariano Rajoy wins Spain’s general election. The country’s Socialist prime minister is the third leader within a two-week period to be felled by economic malaise and the eurozone crisis.
- November 21: Debt yields across the eurozone rise dramatically as investors become increasingly skittish about Europe’s prospects for resolving its crisis.
- November 23: Germany, the eurozone’s most economically secure country, offers €6 billion of 10-year bonds to the market, and the offering is significantly undersubscribed with only €3.644 billion being placed.
- November 23: Belgium asks France to increase its contribution to the bailout of Dexia, adding stress to France’s vulnerable AAA credit rating.
- November 30: U.S. Federal Reserve adjusts its dollar liquidity swap arrangements in coordination with the central banks of Canada, Europe, and Japan. Effectively this makes it easier for Europe’s banking institutions to raise capital. Global stock markets rally, some were more than 4% up.
- December 1: Bank of England governor, Mervyn King, states that moves by global central banks the day before do not address the real problems facing the eurozone and EU nations, and he states that sovereign debt problems are a “systemic crisis.”
- December 1: European Central Bank president Mario Draghi states that the ECB might be willing to expand its European bond purchase program if European governments implement greater fiscal controls.
- December 5: Standard & Poor’s places the debt of 15 of the 17 Eurozone nations on credit watch: negative. This means that there is a 50:50 chance of a downgrade in the next 30 days.
- December 8: ECB President Mario Draghi states, “We shouldn’t try to circumvent the spirit of the [Maastricht] treaty, no matter what the legal trick is,” in response to calls for the ECB to do more to help mitigate the European Sovereign Debt Crisis.
- December 9: Moody’s credit ratings agency downgrades of three major French banks — BNP Paribas, Crédit Agricole (down to Aa3), and Société Générale (to A1) — due to a lack of investor appetite for their debt.
- December 9: Leaders of the 17 eurozone governments, along with additional agreement from some European Union members, all agree to greater centralization of their budgets and automatic punishment for those who break the budget accord. Many investors had wanted and expected greater bolstering of the bailout mechanism by an additional €200 billion.
- December 12: Italian and Spanish bond yields rise, which many see as a vote of low-confidence on the long-term efficacy of eurozone measures agreed to on 9 December.
- December 13: The European Financial Stability Facility raises €1.972 billion at an auction of three-month treasury bills at an average yield of 0.2222% and a bid-to-cover ratio of 3.2x. The success of the offering eases pressure on financial markets.
- December 14: Italian debt yields hit 6.47% from 6.29% in the latest auction of 5-year bonds.
- December 16: Primer Minister of Italy, Mario Monti, wins wide Chamber of Deputies support (402 vs. 75) for his emergency austerity budget of €30 billion.
- December 19: Bad debt ratio (i.e., loans at least 3-months in arrears) for Spain’s banking sector reaches 7.42% or €131.9 billion. That is equivalent to 13% of Spain’s gross domestic product.
- December 20: Spain sells 5.64 billion of three- and six-month treasuries at an average yield of 1.735%, down from the previous sale’s 5.11% on 22 November. Most credit the ECB’s move to provide banks with three-year loans for the increased investor confidence.
- December 30: Italy sees funding costs remain stubbornly high as it sells 10-year bonds at 6.98%, barely below the 7% threshold that many consider the dividing line between solvency and insolvency; all within the context of the €30 billion austerity package announced 16 December.
- January 6: Italian debt costs jump again as 10-year bond yields rise to 7.12%, necessitating the European Central Bank to step in to markets to buy Italian and Spanish debt to help keep a lid on yields.
- January 12: German GDP contracted in the fourth quarter of 2011, putting additional strain on the European sovereign debt crisis as Germany is the country standing behind almost all bailout mechanisms.
- January 12: Spain sells €9.98 billion of 3-year treasury notes at an average yield of 3.384%, down from 5.187% at the previous 1 December auction.
- January 12: To the relief of many investors, Italy sells €12 billion of bills at a rate of 2.735% down from 5.952% at its most recent auction.
- January 13: Standard & Poor’s cuts the rating of nine eurozone nations, including the AAA-rated nations of France and Austria. Furthermore, the ratings agency changes the outlook to “negative” for 13 eurozone nations.
- January 16: Standard & Poor’s downgrades the credit rating of the EFSF from AAA to Aa+. Deteriorating economics of the EFSF’s contributors is stated as the reason for the downgrade.
- January 17: Despite having its credit rating lowered the day before, the EFSF sells €1.501 billion of six-month treasury bills at a yield of 0.2664% and a bid-to-cover ratio of 3.1x.
- January 20: Negotiators come to initial terms with private investors about a writedown of Greek sovereign debt, though details are scarce.
- January 20: Bowing to demands made by the ECB President Mario Draghi, European Union members agree to return to spending discipline limits. The agreement does not include a provision requested by Germany that EU members build debt limits into their constitutions.
- January 22: Discussions between Greece and its creditors snag over a disagreement in the level of interest rates to be assigned to new debt issued in exchange for old sovereign debt.
- January 25: Defying private creditors the ECB insists that it will not agree to a writedown of its own Greek debt holdings.
- January 30: Under a new fiscal compact proposal, power is granted to the European Court of Justice to impose sanctions on EU member nations that do not comply with Maastrict Treaty economic targets. Also discussed at the discussions is the belief that economic growth must be combined with austerity measures to help Europe recover from its sovereign debt woes.
- February 7: Greek Prime Minister Lucas Papademos announces his intention to convene his nation’s leaders in order to gain consensus on budget cuts necessary to secure the next round of bailout funding from the Troika.
- February 7: European Central Bank agrees to exchange its Greek bonds at a price below par value in an effort to achieve a deal between Greece and its creditors.
- February 9: Greece’s leaders reach an accord over cuts to budgets, wages and pensions. Eurozone finance ministers insist that the agreement be put to a vote of the Greek parliament before additional bailout monies be paid to Greece.
- February 10: German Finance Minister, Wolfgang Schaeuble, says that Greece’s new planned austerity measures are not enough.
- February 14: Eurozone gross domestic product (GDP) falls by 0.3% in the fourth quarter of 2011. Nine of the seventeen Eurozone members saw economic contraction, including Germany.
- February 14: Seven of the seventeen individual European central banks craft new rules that will allow for lower quality collateral to be deposited with them by European banks.
- February 21: A new Greek debt deal is finally agreed to between Greece, its creditors and Eurozone finance ministers. Details of the plan include: current creditors agreeing to lose 53.5% of the face value of their debt to satsify the IMF; the ECB and other European central banks take no loss on debt holdings with any profit made on the holdings transferred to Greece; a lower interest rate on new debts; and the oversight of a debt servicing account by official creditors. The next step is getting a large percentage of the debt holders to agree to the debt swap that will allow for new bailout monies to be given to Greece. Particularly controversial is the Greek legislature’s retroactive change to debt covenants executed by passage of a new law called “collective action clauses.” The new debt deal triggers fears about whether or not the agreement constitutes a default and thus massive payouts on credit default swaps (CDS).
- February 24: Greece formally launches its debt swap plan for private creditors, the Private Sector Initiative (PSI). The Finance Ministry needs at least 90% of the face amount of the bonds to participate in the deal for it to proceed without it constituting a default event. However, a separate threshold of 75% tendered is also thought to be acceptable under an agreement with private sector creditors. It is uncertain what recourse creditors who do not tender their bonds will have under this alternate plan.
- February 25: Organization for Economic Cooperating and Development (OECD) figures show that Greeks, contrary to popular opinion, actually work the most number of hours in Europe. However, Greece is also amongst the least productive nations in the survey.
- February 28: ECB announces that Greek sovereign debt can no longer be used as collateral.
- February 28: Standard and Poors (S&P) announces that it considers Greece to be in default on its sovereign debt obligations.
- February 28: Much attention is paid to the International Swaps and Derivative Association’s (ISDA) discussions about whether or not the Greek debt restructuring plan will constitute a default event.
- February 29: ECB lends €529.5 billion of inexpensive three-year loans to 800 different lenders. These loans are in addition to €489.2 billion to 523 banks in late December 2012.
- February 29: It is announced that among the beneficiaries of the write-down exemption clause in the new Greek debt deal is the European Investment Bank (EIB), which also has its bonds.
- February 29: Head of Germany’s Bundesbank, Jens Weidmann, publicly criticizes the ECB’s relaxation of collateral rules.
- March 1: The International Swaps and Derivatives Association declares that the recent Greek debt restructuring does not constitute a default event.
- March 1: It’s announced that unemployment in the eurozone hit 10.7% in January 2012.
- March 2: Spanish Prime Minister Mariano Rajoy announces that Spain will violate its budget target for the year. The announcement is in contravention to the recently agreed to fiscal compact.
- March 9: ECB President Mario Draghi states that the central bank has done enough to combat the sovereign debt crisis, thus laying the ground work for exiting record low interest rates and economic stimulus.
- March 9: Greece closes a €200 billion ($266 billion) restructuring deal with its creditors. The ISDA declares that the restructuring does constitute a credit event and that there will be payouts to holders of credit default swaps.
- March 13: EU finance ministers vote to suspend payments to Hungary because of its failure to hit budget targets.
- March 13: Spain bows to pressure from EU finance ministers and agrees to make bigger budget cuts than originally intended on 2 March 2012.
- March 14: Eurozone governments agree to a second bailout program for Greece in the amount of €130 billion ($169 billion) in conjunction with funds from the International Monetary Fund.
- March 16: Spain’s central bank announces that the nation’s debt has hit 68.5% of gross domestic product (GDP) — the highest level since 1990.
- March 16: IMF formally approves its share of bailout funds for Greece: €28 billion.
- March 19: EFSF bonds are sold in the amount of €1.5 billion for 20-year paper. The issue is nearly 3x oversubscribed.
- March 20: Greece formally votes to accept its second round of bailout funds: 213 for the bailout, 79 opposed, and 8 abstaining.
- March 26: A Japanese finance minister indicates that his nation is interested in lending more money to the European bailout fund, the EFSF.
- March 26: The ECB allows its member central banks to reject certain types of collateral being offered to them by financial institutions.
- March 27: The Organization for Economic Cooperation and Development (OECD) urges eurozone states to increase the size of their crisis firewall to at least €1 trillion.
- March 28: In a reversal from October/November 2011, China announces its intention to contribute to European bailout funds.
- March 29: Strikes spread throughout Spain in protest to increased austerity measures insisted upon by eurozone leaders.
- March 30: European leaders commit to a new €500 billion firewall to be added to the current firewall amount of €300 billion. The amount is lower than many expected.
- March 30: Greece states that it may need a third bailout.
- April 1: A number of large European banks that received funds in the European Central Bank’s Long-Term Refinancing Operation (LTRO) announce that they are returning large portions of the inexpensive three-year funding they received. Banks include Italy’s UniCredit, France’s BNP Paribas and Société Générale, and Spain’s La Caixa.
- April 2: Eurostat, the EU’s statistics agency, announces that the eurozone unemployment rate ticked up to 17.134 million people, or 10.8%. This is the highest level since June 1997. Furthermore, the manufacturing index contracted to 47.7.
- April 5: An International Monetary Fund official, Gerry Rice, states that Spain faces “severe” challenges. He highlights the poor grip Spain has on its regions’ indebtedness and growing borrowing needs and commensurate interest cost increases.
- April 9: Spain states that it will cut €10 billion in spending on education and on health.
- April 10: The Wall Street Journal reports that in the first quarter European companies sought debt financing more from public markets than from banks in a marked change from normal practice. Many speculators have fretted about how the EU can grow if its businesses do not have access to bank funding.
- April 11: A German bond auction goes uncovered as investors balk at the record low rates being offered.
- April 11: Spanish Prime Minister Mariano Rajoy states that Spain’s future is on the line in its efforts to tame rising debt yields.
- April 12: Greece’s unemployment rate rose to 21.8% in January.
- April 16: Spain warns its regions that it may seize control of their finances in order to help shore up ailing finances.
- April 19: Denmark’s largest banks fire Moody’s Investors Service in rating the nation’s debts due to the volatile nature of the ratings.
- April 23: Bloomberg reports that in 2011 the total debt level in the eurozone rose to its highest level ever.
- April 24: Budget plan in Spain is passed with the toughest austerity measures since the Franco dictatorship.
- April 24: The auction of the European Financial Stability Facility’s latest debt issue goes well with a 2.2x over subscription and a 77 basis point pricing (at the low end of the offering sheet).
- April 26: Momentum grows for revising the EU treaty to spell out how countries can implement growth, not just enforce budgetary discipline.
- April 27: Standard & Poor’s downgrades Spain two notches to BBB+ because of the increased severity of its recession.
- April 30: According to data released by Eurostat, eight nations in the eurozone are in recession: Spain, Belgium, Greece, Ireland, Italy, the Netherlands, Portugal, and Slovenia. In the greater 27 nation EU, the United Kingdom, Denmark, and the Czech Republic are also all in recession.
- May 1: Thousands protest austerity measures in Greek May Day rally.
- May 2: Eurostat announces that unemployment has risen to a 15-year high of 10.9%.
- May 5: The presidential election in France brings to power the first socialist in over a decade, Franҫois Hollande.
- May 5: Greek parliamentary elections usher in new parties mostly opposed to austerity deals negotiated with the Troika. Many begin to fear a Greek exit from the eurozone.
- May 7: Klaus Regling of the EFSF says that the funds in the bailout mechanism should be more than enough to head off any eurozone crisis.
- May 7: Discussions about forming a new coalition government in Greece break down.
- May 11: Spain announces that it will force banks to increase provisions against €123 billion of real estate loans by about €30 billion. The increased provision raises coverage from 7% to 30%. The nation also announces that it will hire two auditors to value banks’ assets in a fourth attempt to clean up its banking industry. Spain also says that it will provide funds to those institutions that need support of up to €15 billion and without increasing the budget deficit.
- May 15: Eurostat reports that the eurozone economy grew at 0.1% in the first quarter 2012 as compared to the fourth quarter 2011. However, there is a growing divide between the “haves” and “have-nots” with the German economy growing 0.5%, while Italy’s contracts by 0.8%.
- May 15: Franҫois Hollande is sworn in as French president then flies to Germany to meet with Chancellor Angela Merkel.
- May 15: Greece agrees to repay in full a €435 million bond after declaring earlier in the year that it would default on any investors that did not participate in its €206 billion debt swap.
- May 16: It is reported that on 14 May Greek depositors withdrew €700 million from banks sparking fears of a bank run.
- May 17: Greece swears in its caretaker government and parliament before runoff elections can be held in June.
- May 17: The European Central Bank says that it will stop lending to some banks in Greece to limit its risk exposure to the troubled country.
- May 18: Greece’s radical left party head, Alexis Tsipras, says that if Europe cuts off funding that Greece will stop paying its debts.
- May 18: Frankfurt, Germany, sees mass anti-capitalist protests that lead to the city being shut down.
- May 22: Germany states that it is opposed to one possible solution that is being discussed by many in the financial and political world: common Eurobonds. These bonds would be the obligation of every tax payer in the eurozone and proponents feel that it is a way of assuaging the fears of investors about debt crisis contagion.
- May 23: Germany’s central bank, the Bundesbank, says that a Greek exit from the eurozone would be substantial but manageable. These comments come in the midst of a feverish discussion about Greece’s likely exit from the eurozone.
- May 24: Heated exchanges between France and Germany about Eurobonds are reported to have taken place at the 18th European sovereign debt crisis summit in two years.
- May 24: Spanish Prime Minister Mariano Rajoy called on the European Central Bank to act to bring down rising borrowing costs after Spanish bond yields approached the levels that pushed Greece, Ireland, and Portugal into bailouts.
- May 28: Spain moves to bail out its third largest bank, Bankia, with a €19 billion infusion. This effectively nationalizes the bank.
- May 30: The European Union executive branch says that the eurozone should establish a common banking union that allows each to share in the burden of bank failures; Germany objects. Addtionally, the European Commission says that funds from the new bailout facility should be allowed to be given to failing banks directly rather than pushing their governments into bailouts. Further, the commission urges Belgium to keep a tight rein on its finances to in order to meet 2012 deficit targets.
- May 30: The European Central Bank declares it is opposed to Spain’s bailout of Bankia.
- May 30: Spain says that it will pay for the bailout of Bankia by issuing treasury bonds. The news sends Spanish credit default swaps (CDS) soaring.
- June 3: Germany signals that it’s hard-line approach to the European crisis may be softening as it outlines conditions for sharing more risk with other eurozone countries on the condition of individual European governments being willing to decrease their own sovereignty in favor of a united European sovereignty.
- June 4: Portugal indicates that it will inject €6.6 billion into its largest banks. Monies are to come from the €12 billion earmarked for bank bailouts in last year’s EU-IMF bailout program.
- June 5: The Group of Seven (G-7) nations agree to coordinate their response to the European sovereign debt crisis.
- June 7: Spain’s credit rating is lowered three notches by Fitch from A to BBB.
- June 8: Germany’s Angela Merkel says that her nation is prepared to do whatever is necessary to tackle the European sovereign debt crisis.
- June 9: Spain becomes the fourth European nation to seek a bailout asking the European Union for up to €100 billion in aid for its banking sector. Exact numbers are to be determined once the audit is announced.
- June 12: France says that the fiscal union proposed by Germany must be done concurrently with debt crisis measures.
- June 14: The World Bank announces it is prepared to help Eastern European nations cope with the sovereign debt crisis.
- June 14: Angela Merkel states that Germany’s financial strength “is not infinite.”
- June 17: Greece holds its runoff elections with New Democracy leader Antonis Samaras eking out a very slim victory over the socialist party’s Alexis Tsipras. Coalition talks begin the next day.
- June 18: Data released by Spain’s central bank show that bad debts held by the nation’s banks rose to an 18-year high.
- June 20: Greece forms a three-party coalition government composed of the New Democracy, Socialist, and Democratic Left parties. New Democracy leader, Antonis Samaras, is sworn in as Greek prime minister.
- June 20: Spain’s budget minister, Cristobal Montoro, announces that his nation does not need a bailout from the European Union.
- June 22: Leaders from France, Germany, Italy, and Spain back an announced €130 billion plan to support economic growth in Europe.
- June 22: The European Central Bank states that it will now accept some mortgage-backed securities, car loans, and loans to smaller firms in exchange for loans it gives to eurozone banks. This is a significant relaxation of credit standards on the part of the ECB.
- June 25: Spain formally requests €100 billion in aid for its banks from the eurogroup — details about the plan are scant. Moody’s downgrades 28 of the 33 banks in its coverage universe.
- June 26: Cyprus announces that it needs a bailout from its eurozone brethern. It is estimated that a bailout will cost €4 billion.
- June 26: Greece appoints a new finance minister, Yannis Stournaras, an economics professor.
- June 29: Eurozone leaders agree to a deal allowing banks to receive aid directly from the permanent bailout fund, the European Stability Mechanism. Additionally, it is announced that the ESM will not have senior status when it takes over the debt of Spanish banks. This arrangement awaits the appointment of a single banking regulator. Last, a €120 billion stimulus package is agreed to by the leaders.
- July 2: Unemployment in the eurozone hits 11.1%, according to Eurostat.
- July 3: In a reversal, the European Central Bank tightens its lending rules for banks seeking capital via their low-cost loan program. Specifically, it caps at current levels the amount of government-guaranteed debt that banks can offer as collateral.
- July 5: The ECB cuts interest rates to record lows; by 25 basis points to 0.75%.
- July 5: Greece’s new finance minister admits that the country is off track in its debt-reduction plans.
- July 10: Eurozone finance ministers agree to a plan for Spain’s €100 billion bank bailout plan. It is expected that the first €30 billion will be delivered by the end of July.
- July 16: In a reversal, the ECB says that senior holders of Spanish bank debts will now have to accept losses. This position was initially telegraphed by ECB President Draghi on 9 July.
- July 16: Germany’s Federal Constitutional Court (its highest court) delays until 12 September a ruling on whether or not to suspend the European Stability Mechanism. The decision leaves the ESM only half-funded.
- July 17: Greece seeks extra money from creditors to cover a €3.1 billion bond redemption maturing 20 August.
- July 18: Agreement is reached by the Greek coalition government on austerity measures of €11.5 billion.
- July 23: Mario Draghi, president of the European Central Bank, states that the euro is not in danger from a eurozone breakup.
- July 27: EU regulators agree to €18 billion in aid for four Greek banks: Alpha Bank AE, EFG Eurobank Ergasias SA, Piraeus Bank SA, and National Bank of Greece SA.
- August 2: ECB President Draghi says that the central bank is ready to buy bonds from troubled banks again.
- August 7: Spain’s national statistics institute (INE) announces that the number of companies operating in the country is at a five year low. Not surprisingly, the industries with the largest losses are tied to real estate and construction.
- August 10: It is announced that Greek unemployment in the month of May hit a record of 23.1%. For under 25-year olds — the population most likely to engage in political protest — the rate hit a staggering 54.9%.
- August 14: Gross domestic product (GDP) for the eurozone shrank in the second quarter by 0.2% as compared with the first quarter. Germany’s slight outperformance compensated for underperformance in the other 16 nations of the eurozone.
- August 21: BdB German Banking Association announces that it wants the European Central Bank to have sole regulatory responsibility for all euro-region banks. It recommends the creation of a legally independent body within the ECB to oversee bank supervision.
- August 22: Greek Prime Minister, Antonis Samaras, calls for more time to carry out policy measures designed to address his country’s debt problems. These comments were made just prior to the arrival of Luxembourg Prime Minister Jean-Claude Juncker. Simultaneously, a study from the Irish central bank shows that Greece has undertaken the most severe austerity measures (as measured by tax hikes and spending cuts) in EU history.
- August 28: It is reported, though not officially confirmed, that the ECB is pressuring the Basel Committee on Banking Supervision to relax the language of a drafted liquidity rule. The ECB wants Basel’s new rule to allow for some riskier assets, such as asset-backed securities and business loans, to qualify as legitimate assets for banks in meeting heightened capital requirements.
- August 28: Catalonia becomes the third Spanish region to ask the nation’s central government for a €5 billion bailout. The region faces €5.6 billion of further bond maturities in 2012.
- August 30: Germany’s Association of German Chambers of Industry and Commerce (DIHK) reports that labor costs in Greece, Ireland, and Spain have dropped. Further, the countries are reported to be lowering their trade imbalances.
- September 3: Spaniards withdrew a record €75 billion euros from Spanish banks in July; an amount equal to 7% of gross domestic product.
- September 6: The IMF approves a new €920 million tranche for Ireland, the latest in financial aid that started in 2010 (see above).
- September 7: Herman van Rompuy publicly declares that Greece’s future is within the eurozone. His comments are designed to quell speculation that the tiny nation is set to exit the eurozone.
- September 10: The European Commission (i.e., its antitrust authority) approves Spain’s state aid of the BFA banking group, the parent of troubled Bankia SA. Bankia is at the forefront of the Spanish banking crisis.
- September 12: Germany’s Constitutional Court refuses to block ratification of the eurozone rescue facility, the European Stability Mechanism (ESM).
- September 12: European Commission President José Manuel Barroso unveils plans for a unified supervisory system for the eurozone to be headed by the European Central Bank.
- September 14: Unemployment in the eurozone is unchanged in the second quarter, according to Eurostat. This is the first non-negative number in more than a year.
- September 18: Greece reports that its current account entered a surplus in July of €642 million; this is the first surplus since May 2010.
- September 19: A European Commission proposal to give the European Central Bank responsibility for overseeing all banks in the EU is rejected by German Chancellor Angela Merkel’s ruling coalition. Also rejected is a proposal aimed at uniting deposit insurance throughout the EU. Merkel’s coalition instead suggests that only systemically important banks be subject to the new proposals.
- September 20: Business activity in the eurozone as measured by the “purchasing managers index” falls sequentially to 45.9 from 46.3. This is the lowest level recorded in three years. Any level below 50 indicates a contraction.
- September 22: French President Francois Hollande and German Chancellor Angela Merkel publicly disagree over greater integration of the EU’s banking system, with Hollande favoring it, and Merkel not favoring it.
- September 24: To help bail out its regional governments Spain proposes selling €6 billion of bonds through the state-run lottery operator, Sociedad Estatal Loterias & Apuestas del Estado SA.
- September 25: Spanish protests number 6,000 in Madrid and are broken up by police using rubber bullets.
- September 26: Protests in Athens, Greece, erupt in violence, and tear gas is fired at the tens of thousands or protestors.
- September 26: Finland, Germany, and the Netherlands all say that troubled banks’ debts should not be put on the books of the European Stability Mechanism. This new position directly contradicts an agreement reached in June.
- September 27: Details of the latest proposed Spanish austerity measures are announced. Among them are: a 12% average cut in ministerial spending; a freeze on public sector pay; establishment of a public spending auditor; and a “cash for clunker cars” program.
- October 1: Bailing out its banks will widen the budget deficit of the Spanish government and increase its debt load, too.
- October 1: Unemployment in the eurozone reaches an all-time high of 18.2 million according to Eurostat. For those under 25 in Spain, it is 52.9%.
- October 1: The Greek government submits its 2013 budget draft. The plan outlines further austerity measures of around €8 billion designed to placate the nation’s lenders.
- October 2: Spain’s regional governments agree to budget deficit targets set by the central government. It is hoped that the agreement will allow the Spanish government to negotiate in good faith with the nation’s creditors and prospective bail out arbiters.
- October 3: Portugal’s debt agency, IGCP, is able to exchange €3.76 billion of debt maturing in 2013 for debt maturing in 2015, reducing the upcoming refinancing risk of the country.
- October 5: Germany’s parliamentary budget committee approves Portugal’s next debt tranche.
- October 16: Portugal announces its 2013 budget. It includes a raise in the average tax rate from 9.8% to 13.2%, as well as additional spending cuts.
- October 17: The Financial Times reports that a secret legal opinion prepared for EU finance ministers states that the plan for a single banking regulator in the eurozone is illegal.
- October 19: European leaders agree to a single banking supervisor for the eurozone to be up and running by early 2013. This agreement clears the way for the European Stability Mechanism to directly recapitalize banks, rather than having to act through national governments. It is hoped that this will break the vicious cycle (describe above in this post’s commentary) of interconnected sovereigns and their systemically important banks.
- October 22: Eurostat reports that the eurozone’s fiscal deficit fell in the preceding year to 4.1% of gross domestic product (GDP) from 6.2% in 2010. However, public debt rose from 85.4% of GDP to 87.3% of GDP.
- October 23: Spain’s economy shrinks again, by 0.4% in the second quarter 2012.
- October 31: Eurozone unemployment situation achieves another record in September, hitting 18.49 million people, and putting the rate at 11.6%, up from 11.5%.
- November 7: Greece’s parliament passes yet another austerity package 153 vs. 128. Aid amounting to €31.5 billion will now be given to the troubled Mediterranean nation. Further, passage also allows for renegotiation of the terms of the nation’s €174 billion bailout.
- November 8: Benchmark interest rate of 0.75% is left unchanged by the European Central Bank.
- November 8: Elstat, Greece’s national statistics office, announces that unemployment is 25.4% in August, up from 24.8% in July. For those under 24 years of age, unemployment is a staggering 58.0%.
- November 13: Eurogroup approves a two-year extension to Greece’s fiscal adjustment period. Ministers also agree to put off until the following week a decision about whether or not to disburse the next aid tranche to Greece, as well as how to restructure Greece’s debt.
- November 14: Strikes and violence sweep through economically troubled European nations; in particular Spain, Portugal, and Greece.
- November 15: Third quarter gross domestic product (GDP) shrinks 0.1% in the eurozone. This result compares to a second quarter shrink of 0.2%. Countries worst hit include: Greece, Italy, Spain, Portugal, Austria, and the Netherlands.
- November 19: Moody’s downgrades the sovereign debt of France from AAA to AA1.
- November 20: Due to the downgrade of France’s credit rating the day before, the European Financial Stability Facility delays floating its offering of three-year maturity debt.
- November 21: European leaders fail to reach an understanding of how to restructure Greece’s aid package, thus delaying the next aid tranche.
- November 23: European Union leaders fail to reach a deal on a common budget for its 27 members. A delay is expected until early 2013.
- November 27: The IMF and eurozone reach a debt-reduction agreement for Greece amounting to €40 billion. The reduction is expected to help Greece reemerge from its crippled state by 2020.
- November 28: Greece announces that it will borrow €10–14 billion to finance the repurchase of debt demanded under the new terms of its bailout agreement.
- November 28: EU Commission President, Jose Manuel Barroso, says that he supports the 17-member eurozone nations integrating their economies faster than the wider, 27-member EU. This will facilitate a unified budget and the ability to issue eurozone-wide bonds.
- November 30: Mario Draghi, ECB President, publicly states that the European sovereign debt crisis is far from over. He insists that members must tighten budgets and create a banking union in order to leave the “fairy world” that led to Europe’s financial problems.
- December 1: Credit ratings are lowered for the EFSF and European Stability Mechanism by Moody’s. The European Financial Stability Facility is provisionally cut to Aa1 from AAA, while the ESM is cut to Aa1 from AAA.
- December 3: Greece’s Public Debt Management Agency offers to buy back at a slight premium to market prices almost half of its debts outstanding.
- December 3: Eurozone manufacturing contracts for the ninth straight month in October.
- December 5: Greece’s offer to buy back half of its outstanding debt leads to Standard & Poor’s cutting the nation’s credit rating from CCC to SD, or selective-default.
- December 13: Eurozone finance ministers vote to release long-delayed aid payments to Greece. Separately, Greece announces that its buyback plans fell short of intentions, with only €31.9 billion tendered.
- December 13: Unemployment in Greece hits 24.8% in the third quarter, a rise from the second quarter’s 23.6% rate. “Long-term unemployed” — those who have looked for work for more than one year — hits 62.6%.
- December 13: After nearly endless negotiations EU finance ministers announce that they have reached an agreement to form a banking union. A single banking regulator — the ECB — is thought to be a key to resolving the three-year-old crisis. Authority is granted to force troubled banks to close their doors and for bank capital ratios to be raised.
Starting in 2013, this timeline will no longer be updated. To continue to keep abreast of breaking developments, follow Jason A. Voss, CFA, on Twitter.
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