The Spectre of the Eurozone Debt Crisis

Four years and a couple of trillion dollars worth of rescue packages after the eruption of the sub-prime crisis in 2007, we are nowhere near resolution of the “North Atlantic Financial Crisis”. The Great Recession may have ended in late 2009/ early 2010 but global growth has not really recovered and the world is now staring at the possibility of a “Eurozone Financial Meltdown”. If that does happen then it could be a more prolonged recession this time around.

In the aftermath of the 2007 meltdown, economies with three traits were at risk: (a) those whose banking systems had huge exposure to toxic assets; (b) those who had an unsustainable debtdeficit situation; and (c) those who had a large chunk of sovereign debt held externally. The Eurozone with a single common currency but different country-specific configuration of debts and deficits turned out to be the most vulnerable. If Iceland (not a member of the European Union) was the first to show signs of a major problem, Ireland followed soon after and then it was Greece with the most severe financial and economic challenges. With the assurance of an implicit EU guarantee, the speculators in the government bond market became more active in repricing the debt of weaker economies and they started believing that the Greek problem was, after all, a problem of Germany as well since the latter was the biggest economy in the single currency area. Since contagion was a real issue, what started with Greece slowly spread to Portugal, Spain and even Italy.