Soverign Debt Crisis

Final Paper

The Sovereign Debt Crisis

In time there comes a moment when a crisis can become out of control. Europe’s sovereign debt crisis is at that point.

The Greek or more commonly know as Europe’s sovereign debt crisis looks dangerously close to that. European Union and IMF negotiators are working with the Greek government to work out an ever growing bail out package. Even while these negotiations are ongoing Greek debt has cause the yield on its two year bonds to soar towards 20% this past week April29, 2010. Now we have more of an issue Portugal’ borrowing costs jumped and Spain’s, Portugal’s, Greece’s, and Italy’s debt was downgraded and came really close to a failed debt auction. European’s stock markets have slumped and the euro fell to its lowest level in a year against the dollar.

Greece has become a symbol of government indebtedness. The crisis began last October when its new government admitted that its predecessor had falsified the national accounts. It fighting to get out from under a budget deficit of 13.6% and debt of stock equal to 115% of GDP. It is unable to get itself out of trouble because of its fiscal retrenchment and lack of expertise. Greece is unable to devaluate its currency because its currency is the euro. With all this the Greek people are unwilling to take pay cuts and lower services needed to make to country more competitive. Most countries are not in debt as bad as Greece. But, Portugal budget defect is high and also uncompetitive; Spain has low debt and cannot restructure its economy, and Italy which is also heavily in debt. Britain whose currency is not the euro has let its currency fall, but its budget deficit is unnerving.

Germany wants to help Greece but also wants to punish it for its mistakes. The Germans want to treat it as a Greek only problem and do not want to loan them any money. German voters do not favor aiding Greece. Also, instead of explaining to the German people why it is in...