How the Financial Difficulties Impacted on Euro Debt Markets - Essay Example

The European economy includes 48 states and more than 731 million people. The wealth and economic growth of Europe’s different states vary one another and this difference can be clearly seen in a rough East-West divide. The majority of Western European states have higher GDPs and living standards whereas many of the Eastern European economies are still struggling to attain an improved growth rate. The recent European sovereign debt crisis negatively affected Europe’s economic status. This paper will analyze how the financial difficulties faced by the Irish and Greek governments have impacted on Euro debt markets.

In the opinion of Stange (2010), the financial crisis of 2008 was the root cause of the 2008-2011 Irish financial crisis which led the country to recession for the first time since the 1980s. In September 2008, the Irish government officially declared that the country was in recession and the nation experienced a steep fall in employment in the following months. In January 2009, 326,000 Irish people claimed unemployment benefits; this figure was the highest since records began in 1967 (Labour and the totemic gesture, 2011). The Irish financial crisis became worse subsequent to a series of banking scandals in the country. This situation caused the ruling Fianna Fail party to lose its public support significantly. The nation’s Irish Stock Exchange (ISE) general index dropped from 10,000 points in April 2007 to 1,987 points in February 2009;  and this decline indicated a 14-year low general index value (RTE News, 24 Feb 2009). The last time the index stood below the 2,000 level was the mid-1995. The credit expansion as a result of the rapid growth of the Irish economy during the Celtic Tiger years was the major reason that led to the 2008-2011 Irish financial crisis. This credit expansion had included a property bubble that petered out in 2007. Since Irish banks were already in over-exposure to the Irish property market, they came under severe pressure as a result of the global financial crisis of 2007-2010. The 2008-2011 Irish financial crisis greatly hit Euro debt markets. This situation caused a sudden decline in the euro value and it produced negative effects across many European countries. As a result of the Euro debt market crisis, European Central Bank was forced to raise its interest rates. Although, regulators designed range of policies to improve the situation, the euro debt market could not easily overcome the situation. Due to this debt market crisis, foreign investors hesitated to invest in Euro countries, which in turn worsened the situation.

As Romeo (2010) reports, in order to overcome the dreadful consequences of the debt crisis, the Greek government requested the activation of the EU/IMF bailout package. The Greek debt rating reached BB+ (a junk status) due to the strategic failures of the Greek government.  In addition, the Greek two-year bond’s yield was decreased to 15.3% in the secondary market. The rating agency Standard and Poor’s anticipated that investors may lose 30-50% of their money if the government could not bring the situation under control rapidly (Ewing & Healy, April 27, 2010). Many economists opined that high government spending regardless of weak revenue, high salary despite low productivity, low export growth rate, and tax reversion are the primary causes of the Greek financial crisis. The government’s increased borrowing from abroad can also be attributed to the Greek debt crisis that badly affected euro debt markets. Even though Greece constitutes only 2.5% of the eurozone economy, the higher intensity of the Greek debt crisis adversely affected the euro’s foreign exchange rate value. In addition, the Greek debt crisis raised deficit challenges to other European countries since they had invested in Greece. As Chibber (July 21, 2010) reports in the BBC News, the Greek debt crisis stunted the growth of euro countries across the globe. In order to mitigate the impacts associated with the debt crisis, the Greek policymakers framed some regulative financial strategies that also adversely impacted the advancement of the euro debt market. Those framed regulative economic policies seriously affected the trade relations between the US and the European countries and this situation further amplified the euro debt crisis.