The Euro Area Debt Crisis

Daniel V.

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The Euro Area Debt Crisis

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The Euro Area Debt Crisis, peripheral economies, financial analysts

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Abstract

Over the past decade, productivity in most economies, both in central and peripheral countries has doubled beyond the initial estimates. This has partly been the contribution of implementing robust investment tools and informed investor on maximizing returns.However, the implications of the five-year (2007- 2012) global financial crisis has discredited the appropriateness of individual economic systems to ignite recovery and restore investor confidence.

In particular, the peripheral economies have suffered in the 2010 sovereign debt crisis with several concerns emerging on their normalization ability after a financial catastrophe. The current financial crisis in the Euro area has generated a challenging contagion context for many economies, with multiple factors working towards complexity during real time decision making.The debt crisis in the developed economic systems has attracted financial analysts and economists to scrutinize the origin, present consequences and challenges ahead. Firstly, the origin of the debt crisis is associated with the heightened complacency evident in Europe in the longest period of great moderation with less of macro volatility

Introduction
Origin of the Euro Area Sovereign Debt Crisis
Failure of Economic Tools in the Recovery Process
Implications of the European Sovereign Debt Crisis
Measures to Overcome Sovereign Debt Crisis
Conclusion

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[...] Measures to Overcome Sovereign Debt Crisis With the contagious nature of the debt crisis spreading to other economic sectors, the economists have proposed and implemented measures meant to correct the underlying weaknesses. To start with, countries worst hit by the turmoil have implemented a voluntary debt restructuring to correct the underlying vulnerabilities during high dependency in foreign debt borrowing. For instance, the Greece authorities have initiated negotiations to incorporate special credit enhancement features to replace the sovereign bonds with debt swaps such cofinancing schemes (Institute of International Finance, 2012). [...]

[...] Owing to the declining benchmark interest rates of downgrading government bonds, banks witnessed depressing profitability. Equally, with the financial costs rising in the unstable economies, financial institutions were raising their lending rates to hedge against unforeseeable risk in their assets. This led to shifting the debt burden from the policy failures to affect customers in the real economy (Allen & Moessner, 2012). Moreover, the downgrading of the sovereign debt notes heightened the vulnerability of the affected nations as faced complex economic challenges that the existing economic policies could not settle adequately. [...]

[...] This will require the private creditors participate in refinancing the recovery through debt swaps. Secondly, with the markets focusing on short term activities rather than long-term goals owing to the instability in the environment, there is need for moderate adjustment. In 8 particular, intervention of the central bank is a complement rather than a substitute to regulate the adjustment of economic variables through fiscal policies (Cottarelli, 2012). These interventions exist as firewalls strengthening other measures as the regulating authority to shield replication of future occurrences. [...]

[...] Sovereign debt crisis: Why in Europe and not Elsewhere? Intereconomics, 74-75. Eavis, P. ( 20) Unorthodox Ways to Solve Europe's Debt Crisis. Retrieved April ECFIN. (2010). Quarterly Report on the Euro Area. Brussels. Haugh, D., Ollivaud, P., & Turner, D. ( 2009, July 21). [...]

[...] Origin of the Euro Area Sovereign Debt Crisis Introduction of the Euro towards the last century sparked an incentive medium for European countries to reshape their debt structures and meet the Maastricht criteria. This 3 involved intense financial engineering and elimination of foreign exchange and inflation risks under a unified spell of undifferentiated pricing in government debt securities (Cœuré, 2012). The pricing strategy ignored the fundamentals of logical pricing in economies facing dissimilar contexts due to the complacency with the greatest economic moderation. [...]

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