Eurosystem and Greece

Eurosystem

ECB and Greece

Eurosystem

ECB and Greece

Introduction

Definition: The Eurosystem is the monetary authority of the Eurozone, the collective of European Union member states that have adopted the euro as their sole official currency.

Components: The Eurosystem consists of the European Central Bank and the central banks of the member states that belong to the Eurozone (their function is to apply the monetary policy decided by the ECB).

Objectives: The primary objective of the Eurosystem is price stability. (safeguarding the value of euro) Secondary objectives are financial stability and financial integration.

Basic tasks:

* to define and implement the monetary policy of the Eurozone;

* to conduct foreign exchange operations;

* to hold and manage the official foreign reserves of the Member States; and

* to promote the smooth operation of payment systems.

Case Study: Eurosystem and Greece - The Greek sovereign debt crisis and the Eurosystem

Greece joined in the euro area in 2001, became the 12th country transferring the monetary policy from national central bank to ECB.

In Oct 2009 George Papandreou’s new socialist government confirmed suspicions that previous Greek fiscal data had been misreported. The government budget deficit for 2008 was actually 7.7 percent of GDP, and not five percent. The projected budget deficit for 2009 was amended to 12.5 percent of GDP from an earlier figure of 3.7 percent. Eurostat further changed this figure to 13.6 percent in April 2010. As the situation became clearer, the ratings agencies and the market responded. On 24 April, Standard & Poor’s downgraded Greek sovereign debt to junk. The spreads on Greek government bonds over German government bonds widened from about 2-1/4 percentage points at the start of the year to almost 10-1/2 percentage points in early May, while the five-year CDS spreads for Greek government debt rose from about 250 basis points to close to 1000 basis points....