Compressed History of the Eurozone Crisis

In 2010, there was a very serious problem in Europe known as the Eurozone crisis, which was more or less a direct result of the American financial services firm Lehman Bros. going bankrupt.

In the following post, allow us to retrace a quick history of what happened in 2010 and 2011 in Greece, Spain and Ireland, the countries who fared worst during those years. In next week’s post, we’ll take a look at how those countries are doing now.

We’re not offering opinions, but allow us to say that the Eurozone crisis as far as international financial and banking crises go is pretty good reading!

The crisis that would soon erupt into austerity measures, riots and billions of dollars in bailouts throughout southern Europe begins in November 2009 in the small, oil wealthy nation of Dubai on the Arabian peninsula. Officials report that they may be forced to default on their international loans as the basis points to ensure their credit default swaps (CDS) rose by hundreds of points. Eventually, these fears subside, but they have the effect of leading  investors and creditors to wonder if other nations are similarly unable to pay off their loans.

Greece, 2010
As it happens, all roads lead to Greece. The finance minister takes a pay cut. The ruling socialist party declares tax reforms. The country’s credit rating is downgraded. The Greek stock market follows suit and crashes. Strikes break out in Athens. And, all of this before year’s end.

By March, the EU agrees a bailout is necessary.

In conjunction with the pending bailout, Greece passes a series of what are considered harsh austerity measures. These include pay cuts, tax hikes and a pledge to cut down the public deficit from around 13% of the GDP nearer to 9%.

In April, the details for the bailout are finalized. Greece has the option of activating about $30 billion at a 5% interest rate from foreign banks. It claims it is hoping to raise money to cover its debts on its own markets. Later in the month, Greece holds a meeting with the IMF (International Monetary Fund) due to international pressure and finally activates the full EU loan, receiving about €45billion, all of which must be repaid. Greece’s debt is downgraded to “Junk” level. More rioting in Athens. Spring 2011 is the lowest point for Greece.

This Vanity Fair article provides a great broad sight of some previous financial issues in Greece that compounded into the subsequent debt crisis.

Spain, 2010
In 2010, Spain is in the process of making austerity cuts to fund a huge deficit and deal with a 20% unemployment rate. These measures are very unpopular at home. In April, both Spain and Portugal have their debt downgraded. By May, Spain’s Fitch credit rating is cut from AAA to AA+. It is downgraded yet again in September.

That July, Spain’s cajas or small regional banks fail “the Stress Test.” The Eurozone fully expect either Spain and Portugal to be the next to require a Greek sized loan. In October, over 4 million are jobless. In November, Spain elects conservatives who pledge to reduce spending. By April of 2012, after continued budget cuts Spain is really no better off. Next week we’ll take a closer look at what’s causing this.

Ireland, 2010
Ireland has its debt rating downgraded in July, 2010. This is on the heels of a burst housing bubble in Ireland with its banks holding billions of euros of loans no one can repay. This is the beginning of the Irish Banking Crisis. That March, the ECB (European Central Bank) warns it may raise interest rates which would battle inflation on the continent, but would make it very difficult for Ireland to pay off its already sizeable debt. In September, Ireland is in a full-fledged recession. By November, the country accepts bailout money. Throughout 2011, Ireland receives billions and billions from the Eurozone fund and the IMF (International Monetary Fund). At this point, the Irish are lamenting the indubitable passing of the Celtic tiger.

Ireland created this organization in 2012.

We hoped you enjoy our compressed history of this crisis. Maybe things are better, maybe they’re not. Give us a read next week to find out! Or you can give us a call at 425-483-6600 to talk about your taxes!