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European Sovereign Debt Crisis Report Assignment

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Added on  2020-04-01

European Sovereign Debt Crisis Report Assignment

   Added on 2020-04-01

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European Sovereign Debt CrisisStudent Name:Student ID:Subject Name:Subject ID:Date Due:Professor Name:Page | 1
European Sovereign Debt Crisis Report Assignment_1
Impacts on the bond markets and other markets The European sovereign debt crisis had a great impact on markets and several implications. The impacts of the debt crisis were so deep to the world's economy that we can still observe them today especially at the Eurozone's countries such as Greece,Spain, Italy, Ireland and Portugal[ CITATION Lan121 \l 1033 ]. High volatility of theeuro markets has been a significant factor during the crisis period. Those high levels of volatility can lead to high interest rates of borrowing for the countries with debts and as a consequence to high bond yield spreads. Several European countries at the same time faced collapse in their financial institutions and government debt. This led to rising spread amongst bond yield spreads in government securities from the year 2008 which started in Iceland with its banking system collapse and spread to Greece, Ireland and Portugal[ CITATION Von11 \l 1033 ].Fig. 2. Bond yield spreads for EU-15 central governments, January 1991-May 2009.As we can see in figure 2 the bond yield spreads for the EU-15 central governments during May 1991 till October 2006 were low, whereas the bond yield spreads during Page | 2
European Sovereign Debt Crisis Report Assignment_2
October 2006 and May 2009 were extremely high. Investors seeing higher associated risks with bond investing needed higher return for compensation of such risks. There was a vicious cycle present that led to surge in demand for higher yield bonds leadingto higher borrowing costs for all country’s that were experiencing crisis situation. Fiscal strain operating within the country especially in Greece led to demands for higher yields and subsequently investors losing their confidence affecting selling. European Union acted gradually by opting for bailouts of nations especially troubled economies. In totality the European Union along with International Monetary Fund disbursed a total of 110 billion euros to Greece alone. Then Portugal and Ireland opted for bailouts, following establishment of EFSF providing emergency lending to countries in difficulty. The Long Term Refinancing Operation (LTRO) established programs for bailouts for countries. Various countries held on to their reserves for their economic growth and boost their bank balances. Several endeavours were made by European policy makers for stabilising their financial markets, to save their fiscal health. With ECB coming into action investors became bully globally reinvesting again in bond markets of smaller nations.Government bonds are historically considered as the safest investment. After the crisis, investors starting to lose their confidence in the stock market and as a result they stop investing on it. Consequently, investors turned to government bonds and this led to a rise in the demand of bonds[ CITATION Aiz13 \l 1033 ]. Therefore, Central Banks tried to increase their holding of government bonds. Because of the increased demand, the price of the bonds has been raised.European countries believed collapse or Euro along with financial contagion by the International Monetary Fund (IMF). Several countries in the European Union including Greece received bailout funds for preventing crisis within their economy for slowing down of public sector debt. Demand for governmental bonds or sovereignpaper rising which eventually led to their inability to pay[ CITATION Arg12 \l 1033 ]. These banks resorted to third party financial institutions as European Central Bank (ECB), European Financial Stability Facility (EFSF) and International Monetary Fund (IMF) for their payments. There were a total of 17 countries Page | 3
European Sovereign Debt Crisis Report Assignment_3

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