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The European sovereign debt crisis during 2010-2011 - Essay Example

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The European sovereign debt crisis during 2010-2011

Historically, when a sovereign nation’s governmental debt exceeds the annual GDP of the country, the risk increases proportionately that the country will default on all or a portion of the debt requirements, particularly in the circumstances where the debt instruments are held by foreigners or in another currency than the national coin. The ability of sovereign nations to generally print money without formal external control is well established and the example of Zimbabwe is an extreme example of this, but the United States has also reached a debt level that is over $15.5 trillion USD or near 100% of the annual GDP outlook, while the economy is also declining and recessionary,. The U.S. Federal Reserve may also print money to bailout banks in the U.S. and abroad, as it has done following the Lehman bankruptcy, but the Eurozone situation is more complex. Nations like Greece now have their debt valued in Euros rather than Drachma and the sovereign is no longer able to print money, deflate the currency, and cover government debts in the manner of the U.S. central bank. Instead, it appears as if Greece will either default or be bailed out by other Eurozone members, while Wall Street and stock markets around the world react daily to these events and news stories as they herald serious consequences for the international economy that is interconnected during the era of globalization. Political Dynamics of the Eurozone Economy The Eurozone is a political experiment that involves a common currency (the Euro) and a number of sovereign nations that retain their political autonomy in budgetary and domestic affairs while moving together towards ever greater unity in government on the supra-national level. This dichotomy has led to the nations of the Eurozone abandoning their national currencies, but still operating domestically with differing levels of economic production, taxation, social expenditures, and national debt levels. The U.K. and Switzerland remain outside of the Eurozone and under their own traditional currencies, the Pound and Swiss Franc. Germany, France, and other Northern European nations are generally seen as being economically stronger than the Southern European countries, with the acronym “PIGS” being used for the countries Portugal, Italy, Greece, and Spain with the worst economic outlook, budgetary problems, and largest national debt requirements in comparison to GDP. Ireland has been considered a part of this group by some (PIIGS), as the country experienced generally the same problems in an overheated banking, real estate, and finance sector which formed a bubble and popped, leaving the taxpayers and national government responsible for the bailout. Yet, while Ireland and Iceland have already crashed previously before the 2008-2009 meltdown in their national economies due to the problems in financial regulation and overextension of risk taking via leverage in investment banking, the ...Show more

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The European Sovereign Debt crisis during 2010-2011 Name: Class: Date: Table of Contents Table of Contents 1 Introduction 2 Political Dynamics of the Eurozone Economy 3 Financial Threat to Banks from Sovereign Debt Holdings 4 The PIGS – Portugal, Italy, Greece, and Spain 6 The Greek Sovereign Debt Crisis and Effect on the Stock Markets 7 Correlation of Global Financial Markets & Hedging Risk 9 Conclusion 10 Sources Cited 11 Introduction The European Sovereign Debt Crisis has been a main factor in stock market performance in the years 2010 – 2011, primarily because of the large potential exposure that global banks may have to capital losses if the sovereign debt that they hold in governmen…
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