Practical analysis for investment professionals
01 December 2011

Key Players In the European Sovereign Debt Crisis

Posted In: Economics
Jean-Claude Trichet, President of the European Central Bank (ECB)

Complicating matters in resolving the European sovereign debt crisis have been the large number of players, each of whom has a stake in the outcome of the crisis. Individual nations have played a role in the crisis, none more so than Greece. Tiny, in terms of gross domestic product (GDP), the Mediterranean birthplace of democracy has served as a crucible, testing the democratic underpinnings of the European Union.

Yet Greece is not alone in fomenting the sovereign debt crisis confronting Europe. Portugal, Italy, Greece, and Spain are currently the nations most in danger of defaulting on their sovereign debts. Collectively these nations have become known as the PIGS for their government’s largish appetite for debt. Yet there are many other nations in both the European Union and eurozone whose fiscal picture is also not rosy.

In fact, total debt in the eurozone is projected by the International Monetary Fund to be €8,364 billion at the end of 2011 and €8,714 billion at the end of 2012. These debt figures compare to total eurozone projected GDP of €9,447 billion in 2011 and €9,687 billion in 2012. Assuming those figures are roughly accurate, then the eurozone taken as a whole is expected to have total sovereign debt to GDP of 88.5% in 2011 and 90.0% in 2012.

The Maastricht Treaty requires eurozone nations to have no more than 60% of total sovereign debt to GDP on an ongoing basis. However, special exceptions do apply in the event of an economic emergency.

A previous piece in this series, “Statistics Germane to the European Sovereign Debt Crisis,” provided a detailed overview of key figures in the crisis. This installment will provide an overview of the key players — from institutions to individual personalities — who are struggling to address the crisis.

Key Players


European Union

Established by the Maastricht Treaty on 7 February 1992, the European Union has 27 individual states that have each agreed to economic and political union. Important for the resolution of the European sovereign debt crisis, decisions are made by a two-tiered system that makes decision making more opaque.

Members of the European Union


Austria (EZ) Belgium (EZ)
Bulgaria (O) Cyprus (EZ)
Czech Republic (O) Denmark (X)
Estonia (EZ) Finland (EZ)
France (EZ) Germany (EZ)
Greece (EZ) Hungary (O)
Ireland (EZ) Italy (EZ)
Latvia (O) Lithuania (O)
Luxembourg (EZ) Malta (EZ)
Netherlands (EZ) Poland (O)
Portugal (EZ) Romania (O)
Slovak Republic (EZ) Slovenia (EZ)
Spain (EZ) Sweden (X)
United Kingdom (X)


EZ = members of the eurozone. O = countries obligated under treaty to eventually join the eurozone. X = countries exempted from joining the eurozone.


Of the eurozone nations, 12 of the 17 have debt to GDP levels above 60%, while 14 of the 27 wider EU nations have debt to GDP in excess of 60%. In fact, the largest nations (by GDP) in the EU have some of the highest debt levels. According to the International Monetary Fund, debt levels at the end of 2011 are projected as follows:

  • France: 86.9% debt to GDP, with GDP €1.99 trillion
  • Germany: 82.6% debt to GDP, with GDP €2.57 trillion
  • Italy: 121.1% debt to GDP, with GDP €1.59 trillion
  • Spain: 67.4% debt to GDP, with GDP €1.09 trillion
  • United Kingdom: 84.8% debt to GDP, with GDP £1.53 trillion

The European sovereign debt crisis is brought into focus when considered in the context of the eurozone “convergence criteria” (see below). Specifically, members of the eurozone are required to carry debt to GDP levels greater than 60%, and total debt levels are supposed to be shrinking. Debt levels throughout the EU and the eurozone have grown in every member state (save Bulgaria and Sweden) since 2006.


Established in 1999, the eurozone includes the 17 members states of the European Union that each use the euro (€) as a common currency. Requirements known as the euro convergence criteria (also known as the Maastricht criteria) have to be met for inclusion in the eurozone. These criteria are based on Article 121(1) of the Treaty establishing the European Community (also known as the Treaty of Rome) and are as follows:


Price Developments

  • Treaty provisions
    • The achievement of a high degree of price stability; this will be apparent from a rate of inflation which is close to that of, at most, the three best-performing Member States in terms of price stability.
    • The criterion on price stability referred to in the first indent of Article 121 (1) of this Treaty shall mean that a Member State has a price performance that is sustainable and an average rate of inflation, observed over a period of one year before the examination, that does not exceed by more than 1½ percentage points that of, at most, the three best-performing Member States in terms of price stability. Inflation shall be measured by means of the consumer price index on a comparable basis, taking into account differences in national definitions.
  • Application of treaty provisions
    • With regard to “an average rate of inflation, observed over a period of one year before the examination”, the inflation rate is calculated using the increase in the latest available 12-month average of the Harmonized Index of Consumer Prices (HICP) over the previous 12-month average.
    • The notion of “at most, the three best-performing Member States in terms of price stability”, which is used for the definition of the reference value, is applied by using the unweighted arithmetic average of the rate of inflation in the three countries with the lowest inflation rates, given that these rates are compatible with price stability.

Fiscal Developments

  • Treaty provisions
    • The second indent of Article 121 (1) of the Treaty requires:
      “the sustainability of the government financial position; this will be apparent from having achieved a government budgetary position without a deficit that is excessive, as determined in accordance with Article 104 (6)”.
    • Article 2 of the Protocol on the convergence criteria referred to in Article 121 of the Treaty stipulates that this criterion
      “shall mean that at the time of the examination the Member State is not the subject of a Council decision under Article 104 (6) of this Treaty that an excessive deficit exists”.
  • Excessive deficit procedure: Article 104 sets out the excessive deficit procedure. According to Article 104 (2) and (3), the European Commission shall prepare a report if an EU Member State does not fulfil the requirements for fiscal discipline, in particular if:
    • the ratio of the planned or actual government deficit to GDP exceeds a reference value (defined in the Protocol on the excessive deficit procedure as 3% of GDP), unless:
      • either the ratio has declined substantially and continuously and reached a level that comes close to the reference value; or, alternatively,
      • the excess over the reference value is only exceptional and temporary and the ratio remains close to the reference value;
    • the ratio of government debt to GDP exceeds a reference value (defined in the Protocol on the excessive deficit procedure as 60% of GDP), unless the ratio is sufficiently diminishing and approaching the reference value at a satisfactory pace.
  • Additional provisions
    • The report prepared by the European Commission shall take into account whether the government deficit exceeds government investment expenditure and all other relevant factors, including the medium-term economic and budgetary position of the Member State.
    • The Commission may also prepare a report if, notwithstanding the fulfilment of the requirements under the criteria, it is of the opinion that there is a risk of an excessive deficit in a Member State. The Economic and Financial Committee shall formulate an opinion on the report of the Commission.
    • Finally, in accordance with Article 104 (6), the EU Council, on the basis of a recommendation from the Commission and having considered any observations which the Member State concerned may wish to make, shall, acting by qualified majority, decide, after an overall assessment, whether an excessive deficit exists in a Member State.
  • Procedural issues and the application of Treaty provisions: For the purpose of examining convergence, the ECB expresses its view on fiscal developments. With regard to sustainability, the ECB examines key indicators of fiscal developments in the relevant period, considers the outlook and challenges for public finances and focuses on the links between deficit and debt developments.

Exchange Rate Developments

  • Treaty provisions
    • The third indent of Article 121 (1) of the Treaty requires:
      “the observance of the normal fluctuation margins provided for by the exchange-rate mechanism of the European Monetary System, for at least two years, without devaluing against the currency of any other Member State”.
    • Article 3 of the Protocol on the convergence criteria referred to in Article 121 (1) of the Treaty stipulates that:
      “the criterion on participation in the exchange-rate mechanism of the European Monetary System referred to in the third indent of Article 121 (1) of this Treaty shall mean that a Member State has respected the normal fluctuation margins provided for by the exchange-rate mechanism of the European Monetary System without severe tensions for at least the last two years before the examination. In particular, the Member State shall not have devalued its currency’s bilateral central rate against any other Member State’s currency on its own initiative for the same period.”
  • Application of treaty provisions: The Treaty refers to the criterion of participation in the European exchange rate mechanism (ERM until December 1998; superseded by ERM II as of January 1999).
    • First, the ECB assesses whether the country has participated in ERM II “for at least the last two years before the examination”, as stated in the Treaty.
    • Second, with regard to the definition of “normal fluctuation margins”, the ECB recalls the formal opinion that was put forward by the EMI Council in October 1994 and its statements in the November 1995 report entitled “Progress towards convergence”:The EMI Council’s opinion of October 1994 stated that “the wider band has helped to achieve a sustainable degree of exchange rate stability in the ERM”, that “the EMI Council considers it advisable to maintain the present arrangements”, and that “member countries should continue to aim at avoiding significant exchange rate fluctuations by gearing their policies to the achievement of price stability and the reduction of fiscal deficits, thereby contributing to the fulfilment of the requirements set out in Article 121 (1) of the Treaty and the relevant Protocol”. In the November 1995 report entitled “Progress towards convergence” it was recognised by the EMI that “when the Treaty was conceived, the ‘normal fluctuation margins’ were ±2.25% around bilateral central parities, whereas a ±6% band was a derogation from the rule. In August 1993 the decision was taken to widen the fluctuation margins to ±15%, and the interpretation of the criterion, in particular of the concept of ‘normal fluctuation margins’, became less straightforward”. It was then also proposed that account would need to be taken of “the particular evolution of exchange rates in the European Monetary System (EMS) since 1993 in forming an ex post judgement”. Against this background, in the assessment of exchange rate developments the emphasis is placed on exchange rates being close to the ERM II central rates.
    • Third, the issue of “severe tensions” is generally addressed by examining the degree of deviation of exchange rates from the ERM II central rates against the euro. This is done by using such indicators as short-term interest rate differentials vis-à-vis the euro area and their evolution and also by considering the role played by foreign exchange interventions.

Long-Term Interest Rate Developments

  • Treaty provisions
    • The fourth indent of Article 121 (1) of the Treaty requires:
      “the durability of convergence achieved by the Member State and of its participation in the exchange-rate mechanism of the European Monetary System being reflected in the long-term interest-rate levels”.
    • Article 4 of the Protocol on the convergence criteria referred to in Article 121 of the Treaty stipulates that:
      “the criterion on the convergence of interest rates referred to in the fourth indent of Article 121 (1) of this Treaty shall mean that, observed over a period of one year before the examination, a Member State has had an average nominal long-term interest rate that does not exceed by more than 2 percentage points that of, at most, the three best performing Member States in terms of price stability. Interest rates shall be measured on the basis of long-term government bonds or comparable securities, taking into account differences in national definitions.”
  • Application of treaty provisions
    • First, with regard to “an average nominal long-term interest rate” observed over “a period of one year before the examination”, the long-term interest rate has been calculated as an arithmetic average over the latest 12 months for which HICP data were available.
    • Second, the notion of “at most, the three best performing Member States in terms of price stability” which is used for the definition of the reference value has been applied by using the unweighted arithmetic average of the long-term interest rates of the three countries with the lowest inflation rates. Interest rates have been measured on the basis of harmonised long-term interest rates, which were developed for the purpose of assessing convergence.

Monetary policy within the eurozone is the purview of the European Central Bank (ECB). Decisions by members require unanimous consent before being enacted. Therefore, each state possesses an absolute veto power over any eurozone proposal. This has clearly been an obstacle to an efficient resolution of the crisis as a consensus of 17 nations is difficult to attain.

On 2 May 2010 Greece, the eurozone and the International Monetary Fund agreed to a €110 billion loan to Greece. An immediate €45 billion in loans was provided at an interest rate of 5%. The loans are pari passu with other debt of the EU, whereas the IMF has been given a senior position. It is expected that the loans should cover Greek funding needs for three years: €30 billion for 2010 and €40 billion each for 2011 and 2012.

As a response to the crisis, one of the proposed solutions has been for current members of the eurozone to exit the common currency — specifically, Portugal, Italy, and Greece. However, there is no provision for how a member could exit or be expelled.

European Financial Stability Facility (EFSF)

Quick Facts
  • Size of facility: €780 billion capital pledges; €440 billion in loan guarantees
  • Disbursements made: €17.7 billion to Ireland, up to €85 billion in commitment; up to €78 billion to Portugal
  • Credit rating: AAA, outlook: stable
  • Chief Executive Officer: Klaus Regling
  • Disbursement criteria: All disbursements from the facility must be agreed to unanimously by eurozone finance ministers.

The EFSF was established 9 May 2010 by the 27 members of the European Union, with a certain closure date of 30 June 2013 if no funds were dispersed from the mechanism. However, as funds have been used to assist Ireland and Portugal, the EFSF will survive until the last obligation is fully repaid.

The EFSF is a special purpose vehicle (SPV) organized as a limited liability company under Luxembourg law and an off-balance-sheet liability of the ECB. The EFSF is designed to serve as a bailout mechanism for economically troubled EU member states.

Initially, the EFSF was provided initial capital of €440 billion by members of the eurozone, with an additional €60 billion in loans that can be provided by the European Financial Stabilization Mechanism (EFSM). Loans provided by the EFSM are technically secured by the European Commission and use the EU budget as collateral. The International Monetary Fund has agreed to provide an additional €250 billion of bailout capacity.

On 21 July 2011 it was agreed that eurozone members would enlarge the capital guarantees of the EFSF up to a total of €780 billion. Additionally, the EFSF enlarged its lending capacity up to €440 billion. Ratifications of the enlargement were concluded on 13 October 2011.

Here is a breakdown of the contributions to be made by the individual eurozone members:

Guarantees to the EFSF (€ Millions)


Original Enlargement
Austria €12,241.43 €21,639.19
Belgium €15,292.18 €27,031.99
Cyprus €863.09 €1,525.68
Estonia €1,994.86
Finland €7,905.20 €13,974.03
France €89,657.45 €158,487.53
Germany €119,390.07 €211,045.90
Greece €12,387.70 €21,897.74
Ireland €7,002.40 €12,378.15
Italy €78,784.72 €139,267.81
Luxembourg €1,101.39 €1,946.94
Malta €398.44 €704.33
Netherlands €25,143.58 €44,446.32
Portugal €11,035.38 €19,507.26
Slovak Republic €4,371.54 €7,727.57
Slovenia €2,072.92 €3,664.30
Spain €52,352.51 €92,543.56
€440,000.00 €779,783.16

Note: Estonia entered the eurozone after the creation of the EFSF and is therefore exempted.

Notice that many of the troubled nations in the eurozone are being asked to contribute to the EFSF. If you remove the troubled nations (Portugal, Ireland, Italy, Greece, and Spain) out of the EFSF’s stated €440 billion lending firepower, then you are left with €278.4 billion of firepower. If you remove the troubled nations out of the enlarged firepower, then you are left with a total bailout capacity of €494.2 billion.

So far the EFSF has been tapped by two nations, Ireland and Portugal. On 28 November 2010 a financial package of up to €85 billion was agreed to by Ireland, members of the eurozone, and the IMF. Portugal has also utilized the EFSF, calling for assistance of €78 billion on 17 May 2011. In total, the two bailouts are for a maximum of €163 billion.

Currently the EFSF carries a AAA rating that is backed by the strength of the tax base of its contributors.

Technically the EFSF is a private entity that can issue its own bonds or other debt instruments; this is done in conjunction with the German Debt Management Office. Germany, therefore, has an addtional vested interest in the administration of the EFSF differing from that of other EU and eurozone nations. Bonds issued by the EFSF are backed by eurozone members’ pledges that are in proportion to their share in the paid-up capital of the European Central Bank (ECB).

The EFSF is allowed to disperse funds in order to: provide loans to eurozone countries, recapitalize banks, or buy sovereign debt. However, these funds can only be dispersed if the following criteria are met:

  • Funds are requested by a eurozone member.
  • A bailout program has been negotiated between the requesting eurozone member and the European Commission and the IMF.
  • All of the finance ministers of the eurozone (technically the Eurogroup) unanimously approve the bailout agreement. In general, they must all agree that a requesting nation cannot borrow at acceptable market interest rates.
  • A memorandum of understanding is signed between all parties.

On 27 October 2011 the eurozone agreed to a new plan to increase the firepower of the EFSF up to €1 trillion by offering insurance to purchasers of eurozone members’ debt. Two methods were proposed:

  • The EFSF will effectively issue credit default swaps on European sovereign debt by insuring the first 20% of losses.
  • The EFSF will create special purpose vehicles (SPVs) to attract private investors and/or sovereign wealth funds, such as those of China, Russia, and Japan. The SPVs would offer to take the first 20% of losses that these investors might suffer. Effectively, this method is like a collateralized debt obligation (CDO).




European Banking System

European banks tend to raise capital through offerings of bank securities. This means that their funding costs are higher than that of their U.S. brethern. The fortunes of the European banking system seem to be intimately related to those of European sovereigns due to their many billions of euro of European sovereign debt holdings.

European Central Bank (ECB)

Quick Facts
  • Headquarters: Frankfurt, Germany
  • President: Mario Draghi

Established by the Treaty of Amsterdam 2 October 1997 the ECB administers the monetary policy of the 17 eurozone states (see above). It has an explicitly stated priority of maintaining price stability (i.e., low inflation) throughout the eurozone, with other monetary functions considered subordinate. Specifically, the ECB tries to maintain an inflation rate of 2% based on the Harmonized Index of Consumer Prices — a consumer price index for the eurozone states.

Other ECB responsibilities include: defining and implementing eurozone monetary policy; conducting foreign exchange operations; managing the foreign reserves of the eurozone; and aiding in the settlement of securities transactions in the eurozone. The ECB is also the sole authority that can grant euro banknotes.

Technically the ECB is set up as a corporation governed directly by European law and has shareholders and equity. Shareholders are the individual eurozone members’ central banks and the equity capital is €5 billion. Shares in the ECB are not transferable and cannot be collateralized. Paid-up capital in the ECB by eurozone members was €5.2 trillion at the end of June 2011.

During the European sovereign debt crisis the ECB has conducted various operations to counteract the crisis. Examples include:

  • Loaning of billions of euro to troubled European banks in 2007 to stabilize the European financial system.
  • Buying eurozone members’ debts in order to provide for liquid markets for these securities, and hence, a price floor.
  • Lowering interest rates in order to help provide liquidity for the European financial system and to provide economic incentives to borrow.

Many commentators on the European sovereign debt crisis have urged the ECB to engage in a form of “quantitative easing” (i.e., printing money) in order to inflate the eurozone out of its crisis. However, the ECB is strictly forbidden from deviating from its singular focus on price stabilization. Furthermore, it has steadfastly maintained its independence and stated its unwillingness to engage in anything resembling quantitative easing.

International Monetary Fund (IMF)

Charged with fostering international economic cooperation, the IMF is an intergovernmental organization that was created on 27 December 1945 by 29 countries. Specifically, the IMF concerns itself with stabilizing currency exchange rates and promoting international trade, increased employment, and fiscal stability.

Currently the IMF has more than 180 members. Decisions made by the IMF require an 85% super majority with members having different voting weights. Here are the 10 largest members and their vote weightings:

  1. United States: 16.77%
  2. Japan: 6.24%
  3. Germany: 6.13%
  4. United Kingdom: 4.30%
  5. France: 4.30%
  6. China: 3.82%
  7. Italy: 3.16%
  8. Saudi Arabia: 2.81%
  9. India: 2.34%
  10. Canada: 2.56%

The IMF is primarily involved in the European sovereign debt crisis in two ways:

  • Contributing €30.0 billion of the €110 billion loan package to Greece on 2 May 2010 (see above).
  • Promising up to €250 billion to the EFSF on 9 May 2010 (see above).

International Swaps and Derivatives Association (ISDA)

Founded in 1985, the ISDA has played a role in the European sovereign debt crisis as the arbiter as to whether or not restructurings of European sovereign debts constitutes a ‘default’ event. The ISDA feels that it is a leader in promoting risk management practices and processes and policymaker engagement.

In late October 2011, the ISDA caused tensions to rise in the European sovereign debt crisis when it ruled that the newly negotiated eurozone plan to end the crisis was not a default event because bond holders were asked to accept a “voluntary” haircut of 50%. Due to this ruling the many trillions of euro in credit default swaps were not forced to be exercised.

U.S. Banking System

The U.S. banking system is different from its European cousins in that it predominately raises capital via customer deposits, thus lowering its funding costs. The U.S. banking system is largely independent from the United States other than adhering to financial regulations. Banks in the United States have said that their exposure to the European sovereign debt crisis is limited and lower than it was during the financial crisis of 2008–2009.

World Bank

A source of financial and technical assistance to developing countries, the World Bank serves a mission to fight poverty globally. Some European sovereign debt crisis followers have suggested that the World Bank could play an important role in helping to alleviate the crisis.




Greece (Projected debt to GDP of 165.6% in 2011 and 189.1% in 2012)

The first of the European nations to feel the weight of a too high debt to GDP was Greece. In 2006 debt to GDP was 106.1% but is expected to grow to 165.6% by the end of 2011, according to the IMF. Not surprisingly, Greece was among the first nations in the eurozone and European Union to seek economic assistance.

On 2 May 2010 both the eurozone nations and the IMF agreed to lend €110 billion to aid Greece. Specifically, the IMF gave €30 billion under its standard lending agreement (the Stand-By Agreement), whereas the eurozone countries gave €80 billion in the form of bilateral loans. The IMF monitors the agreement through a quarterly review process.

Identified as core issues facing Greece were: its severe fiscal problems with deficits and too much public debt; and a noncompetitive economy.

Terms of the agreement include:

  1. The government’s finances must be sustainable. That requires reducing the fiscal deficit and placing the debt-to-GDP ratio on a downward trajectory. Since wages and social benefits constitute 75% of total (non-interest) public spending, public wage and pension bills — which have grown dramatically in recent years — have to be reduced. There is hardly any other room for maneuvering in terms of fiscal consolidation.
  2. The economy needs to be more competitive. This means pro-growth policies and reforms to modernize the economy and open up opportunities for all. It also means that costs must be controlled and inflation reduced so that Greece can regain price competitiveness.
  3. Rigorous fiscal adjustment. With the budget deficit at 13.6% of GDP and public debt at 115% in 2009, adjustment is a matter of extreme urgency to avoid the debt spiraling further out of control. Accordingly, the Greek government plans to implement rigorous fiscal measures, far-reaching structural policies, and financial sector reforms. Key elements of the reform package are:
    • Fiscal policies. Fiscal consolidation—on top of adjustments already under way—will total 11% of GDP over three years, with the adjustment designed to get the general government deficit under the 3% level by 2014 (compared with 13.6% in 2009).
    • Government spending. Spending measures will yield savings of 5.25% of GDP through 2013. Pensions and wages will be reduced and frozen for three years, with payment of Christmas, Easter, and summer bonuses abolished, but with protections for the lowest-paid.
    • Government revenues. Revenue measures will yield 4% of GDP through 2013 by raising the value-added tax, and taxes on luxury goods, tobacco, and alcohol, among other items.
    • Revenue administration and expenditure control. The Greek government will strengthen its tax collection and raise contributions from those who have not carried a fair share of the tax burden. It will safeguard revenue from the largest tax payers. It will also strengthen budget controls. The total revenue gains and expenditure savings from these structural reforms are expected to gradually total 1.8% of GDP during the program period.
    • Financial stability. A Financial Stability Fund, funded from the external financing package, is being set up to ensure a sound level of bank equity.
    • Entitlement programs. Government entitlement programs will be curtailed; selected social security benefits will be cut while maintaining benefits for the most vulnerable.
    • Pension reform. Comprehensive pension reform is proposed, including curtailing provisions for early retirement.
    • Structural policies. The government is to modernize public administration, strengthen labor markets and income policies, improve the business environment, and divest state enterprises.
    • Military spending. The plan envisages a significant reduction in military expenditure during the period.

Thus, far Greece has implemented four austerity packages. Here is an overview of the packages:

1. Austerity Package One. Aspects of the package were implemented on 9 February 2010 and included a freeze in the salaries of all government employees, a 10% cut in bonuses, as well as cuts in overtime hours, public employees, and work-related travel.

2. Austerity Package Two. The Economy Protection Bill of 5 March 2010 is designed to save €4.8 billion annually by:

  • Cutting Christmas, Easter, and leave-of-absence bonuses by 30%
  • Cutting an additional 12% in public bonuses
  • Cutting 7% from the salaries of public and private employees
  • Raising certain value-added taxes (VATs) from 4.5% to 5%, from 9% to 10%, and from 19% to 21%
  • Raising the tax on motor fuel to 15%
  • Raising taxes on imported cars up to 10%–30%

On 23 April 2010, after realizing the second austerity package failed to improve the country’s economic position, the Greek government requested that the joint eurozone and IMF bailout package of €110 billion be activated. This was due to upcoming debt maturities whose principal amounts needed to be rolled over. In response the European Commission, the IMF and ECB set up a tripartite committee (the Troika) to prepare an appropriate program of economic policies that would secure the loan. In return the Greek government agreed to implement further measures.

3. Auserity Package Three. On 1 May 2010, former Greek Prime Minister Geroge Papandreou announced a new round of austerity measures desgined to save €38 billion through 2012. The bill was submitted to Parliament on 4 May 2010 and approved on separate votes on both 29 June 2010 and 30 June 2010. Measures included:

  • An 8% cut on public sector allowances (in addition to the two previous austerity packages) and a 3% pay cut for public sector utilities employees.
  • A limit of €1,000 introduced to the biannual bonuses of public sector employees, with bonuses abolished entirely for those earning more than €3,000 a month.
  • A limit of €500 per month to 13th- and 14th-month salaries of public employees; abolished for employees receiving more than €3,000 a month.
  • A limit of €800 per month to 13th- and 14th-month pension installments; abolished for pensioners receiving over €2,500 a month.
  • Reimplementation of a tax on high pensions.
  • Extraordinary taxes imposed on company profits.
  • A rise in the recognition of the value of property, which would increase property tax receipts.
  • A rise of an additional 10% tax on imported cars.
  • Proposed changes to the laws governing layoffs and overtime pay.
  • Increases in VATs from 4% to 5.5%, from 9% to 11%, and from 19% to 23% (compare with above amounts under Austerity Package 2).
  • A 10% rise in luxury taxes and “sin” taxes.
  • Equalization of men’s and women’s pension age limits.
  • A measure designed to increase the average retirement age for pensions as there are changes in life expectancy.
  • The creation of a financial stability fund.
  • Increase of average retirement age for public sector workers, from 61 to 65.
  • Reduction of the number of public-owned companies, from 6,000 to 2,000.
  • Shrinking of the number of municipalities, from 1,000 to 400.

4. Austerity Package Four, agreed to 29 June 2011. New measures included:

  • A plan to raise €50 billion by denationalizing companies and selling national property.
  • An increase in taxes for anyone with a yearly income of more than €8,000.
  • Extra taxes for anyone with a yearly income of more than €12,000.
  • An increase in VAT in the housing industry.
  • An extra tax of 2% for combating unemployment.
  • An increase in taxes for pensioners.
  • The creation of a specialized government body with the sole responsibility of utilizing national property.
  • New property taxes paid through an owner’s electricity bill to skirt nonpayment.

Ireland (Projected debt to GDP of 109.3% in 2011 and 115.4% in 2012)

Ireland required a bailout from the EFSF because of the Irish government’s guarantees for its largest banks. The banks were damaged when the Irish property bubble burst, eventually leading to increased borrowing costs for the government of Ireland as its bank guarantees as a percentage of GDP were rising precipitously. This led to the government negotiating a €85 billion bailout agreement on 29 November 2010 with the ECB and the IMF.

Portugal (Projected debt to GDP of 106.0% in 2011 and 111.8% in 2012)

Because of policies that led to over-expenditure and investment bubbles, Portugal was on the verge of bankruptcy at the end of 2010. Some have aruged that Portugal’s crisis was triggered by bond traders, rating agencies, and speculators. Whatever the cause, on 17 May 2011 the eurozone leaders approved a €78 billion bailout package.

Equally divided between the European Financial Stabilization Mechanism, the EFSF, and the IMF, the average interest rate on the bailout loan is targeted at 5.1% — just slightly higher than Greece’s initial bailout loan interest rate of 5%. In exchange for the €78 billion, Portugal agreed to eliminate its share in Portugal Telecom and to pave the way for its privatization.

Italy (Projected debt to GDP of 121.1% in 2011 and 121.4% in 2012)

On 15 July 2011 and 14 September 2011, Italy’s government passed austerity measures meant to save €124 billion. As of 29 November 2011, Italy has not sought a bailout for its economy. However, its government is in disarray and unable to agree on austerity measures. Furthermore, Italy has large refinancing needs for impending debt maturities and its government bond yields have recently exceeded 7% — a level that is believed unsustainable for Italy fiscally.

United States (Projected debt to GDP of 99.6% in 2011)

Many participants in the European sovereign debt crisis feel that the United States and its financial/real estate crisis of 2008–2009 are the culprits driving the current crisis. However, the Untied States’ primary effect on the European sovereign debt crisis seems to be the interlinking of its banking system with that of Europe.


As a part of the 26 October 2011 agreement made by the eurozone, the EFSF was to have its €200 billion net bailout capacity increased fivefold to €1 trillion by creating a special purpose vehicle (SPV) funded with contributions by other sovereign nations. China was considered to be an essential part of this SPV. But before China contributes to the EFSF, it is reportedly looking for greater economic and poltical accommodation from the EU.


Russia was also considered to be an essential part of the SPV mentioned above. Not surprisingly, Russia is asking for greater political and economic integration before contributing to the EFSF.


Because the Swiss franc has appreciated rapidly relative to the euro, the Swiss have been active in currency markets, trying to weaken the Swiss franc.


Because the Japanese yen has appreciated rapidly relative to other currencies, the Japanese have been active in currency markets, trying to weaken the Japanese yen.




José Manuel Barroso

  • Nationality: Portuguese
  • Role: European Commission, President
  • His story: Formerly the Prime Minister of Portugal, Barroso is credited with having righted his country’s economic ship.

Silvio Berlusconi

  • Nationality: Italian
  • Role: Former Prime Minister
  • His story: As part of a deal with other Italian lawmakers, Berlusconi resigned on 12 November 2011 after parliament passed a wide range of budgetary and economic reforms. His political career was longer than 17 years.

Mario Draghi

  • Nationality: Italian
  • Role: European Central Bank, President
  • His story: Formerly Italy’s central banker, he began his tenure at the ECB in November 2011 and cut interest rates by 25 basis points. He has maintained his predecessor Jean-Claude Trichet’s aversion for propping up sovereign debts through large purchase programs of such debt.

François Hollande

  • Nationality: French
  • Role: President
  • His story: France’s first socialist president in a generation.  It is widely believed that he won election by opposing the budgetary austerity measures favored by his successor, Sarkozy, for restoring the fiscal health of France.  Instead, the president gained popularity by emphasizing modifying European treaties to explicitly account for the importance of economic growth policies.

Christine Lagarde

  • Nationality: French
  • Role: International Monetary Fund, Managing Director
  • Her story: Appointed in the summer of 2011 from her former position as France’s finance minister. She helped to make France’s labor market rules more flexible and is believed to have helped France weather the 2008–2009 recession well.

Angela Merkel

  • Nationality: German
  • Role: Chancellor
  • Her story: Along with France’s president, Nicolas Sarkozy, she has helped to direct a resolution to the European sovereign debt crisis. Merkel has been in office since 2005 and faces reelection, which some say has hampered her ability to negotiate a resolution.

Mario Monti

  • Nationality: Italian
  • Role: Prime Minister
  • His story: Formerly a European Union official from 1995 to 2004 serving as a financial regulator and competition commissioner, Monti is now in charge of the Italian government, trying to craft a plan for ending its economic crisis.

Giorgio Napolitano

  • Nationality: Italian
  • Role: President
  • His story: As Italy’s economic crisis escalated, Napolitano pushed the candidacy of Mario Monti for prime minister.

Lucas Papademos

  • Nationality: Greek
  • Role: Former Prime Minister
  • His story: Former vice president of the European Central Bank from 2002 to 2010. Additionally, Papademos was the governor of the Bank of Greece from 1994 to 2002. Headed up an interim, emergency government through 16 May 2012.

George Papandreou

  • Nationality: Greek
  • Role: Former Prime Minister
  • His story: Papandreou was first to announce in 2009 that Greece’s budget deficit was nearly twice what had been reported by his successor’s government. He oversaw the effort to pass austerity packages in Greece, as well as negotiating for its bailout package from fellow eurozone countries and the IMF. Papandreou stepped down in early November 2011 to make way for a new coalition government to resolve the Greek sovereign debt crisis.

Panagiotis Pikrammenos

  • Nationality: Greek
  • Role: Prime Minister, interim
  • His story: Pikrammenos is interim prime minister of Greece while new elections are held as a governing coalition could not be formed.

Klaus Regling

  • Nationality: German
  • Role: European Financial Stability Facility, Chief Executive
  • His story: Regling helped establish the euro in the 1990s and now heads up Europe’s bailout fund.

Olli Rehn

  • Nationality: Finnish
  • Role: European Union Economic and Monetary Affairs, Commissioner
  • His story: Helped oversee the admission of both Bulgaria and Romania into the European Union.

Herman Van Rompuy

  • Nationality: Belgian
  • Role: European Union, President
  • His story: He is a the former budget director of Belgium who helped his country gain admittance to the eurozone.

Antonis Samaris

  • Nationality: Greek
  • Role: Head of Greece’s opposition party
  • His story: A conserviate economist, Samaris has argued that instead of austerity Greece should cut taxes to close its budget deficit. This has angered both Germany and France. However, he is favored to win Greece’s upcoming elections.

Nicolas Sarkozy

  • Nationality: French
  • Role: Former President
  • His story: Worked alongside Germany’s chancellor, Angela Merkel, to craft an end to the sovereign debt crisis.

Jean-Claude Trichet

  • Nationality: French
  • Role: European Central Bank, former president
  • His story: He was president of the ECB from 2003 to November 2011. Trichet is credited with maintaining price stability in the eurozone and helping to mitigate the damage from the 2008–2009 recession.

Evangelos Venizelos

  • Nationality: Greek
  • Role: Finance minister
  • His story: Appointed in June 2011 by former Greek Prime Minister George Papandreou, he has been renominated to the position as finance minister by interim Greek PM, Lucas Papademos.



About the Author(s)
Jason Voss, CFA

Jason Voss, CFA, tirelessly focuses on improving the ability of investors to better serve end clients. He is the author of the Foreword Reviews Business Book of the Year Finalist, The Intuitive Investor and the CEO of Active Investment Management (AIM) Consulting. Voss also sub-contracts for the well known firm, Focus Consulting Group. Previously, he was a portfolio manager at Davis Selected Advisers, L.P., where he co-managed the Davis Appreciation and Income Fund to noteworthy returns. Voss holds a BA in economics and an MBA in finance and accounting from the University of Colorado.

Ethics Statement

My statement of ethics is very simple, really: I treat others as I would like to be treated. In my opinion, all systems of ethics distill to this simple statement. If you believe I have deviated from this standard, I would love to hear from you: [email protected]

8 thoughts on “Key Players In the European Sovereign Debt Crisis”

  1. James Smith says:

    EXCELLENT comprehensive survey – MANY THANKS for your effort !!!

  2. Thanks James, much appreciated. Please check out my other posts on the European sovereign debt crisis if you would like more information. My goal was to serve as the one-stop shop for information.

  3. Rishab says:

    Very nice and article, Gave a detailed analysis of the crisis.
    Just to add one fact here, about 30 % of reserves held by Central banks across the Globe is in Euro and that is also another factor which affects countries..

    1. Hello Rishab,

      Thank you for your feedback. Do you happen to have a source for the information you provided that may be linked to? If so, I am happy to incorporate that data into our “Facts” page about the European sovereign debt crisis.

      With smiles!


  4. Rahul gupta says:

    Hi Jason,
    I am a level 3 candidate for cfa. Your article on euro zone sovereign debt crisis increased my understanding of topic. You writing style is interesting and I read all articles posted by you. I am waiting for more posts from you.

  5. Hello Rahul,

    Thank you for your kind words. If you direct your Internet browser to: you can see all of the latest posts, not just by me, but my colleagues, too.

    Good luck with Level III!

    With smiles,

    Jason A. Voss, CFA

    1. Ezgi says:

      Thank you so much, it helped me a lot for my exam on IPE.

      Regards from Turkey

      1. Thank you Ezgi. Turkiye is one of my very favorite countries. Good luck on your exams!


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