As with the majority of financial crises, what really triggered the European Sovereign debt crisis was a loss of confidence. Hard on the heels of the worst economic crisis since the Great Depression, it emerged that Greece had fudged the economic indicators which allowed it to enter the Euro in the first wave. The financial position that Greece found itself in at that time was also worse than the then government had let on. As a consequence, investors (and ratings agencies) lost confidence that Greece would be able to honour its financial obligations. As doubts mounted, the credit ratings fell and markets demanded more and more interest to support Greek bond issues – without the issuance of new bonds, Greece would have been unable to meet her obligations. In the end, the interest Greece was being forced to pay in the markets became totally unsustainable and she had to turn to her EU partners and the IMF for the first of two loans that kept the country afloat.
Greece borrowed a total of €240 billion from the IMF/EU and in addition to interest, the deals required Greece to agree to a raft of reforms to tax, pensions, public expenditure, employment legislation and to agree to the sell-off of some state held assets as conditions attached to the loans. The package brought with it biting and hugely unpopular austerity measures as the nation struggled to manage its deficit and put its house in order.
Yesterday, Greece returned to the international money markets with an offer of €3 billion worth of five year government bonds. The interest rate was set at between 5 and 5.25% interest, but the sale was eight times oversubscribed and the interest on the bonds was backed off to 4.95%. The sale sparked the interest of 550 investment institutions and marked Greece’s first bond issue since 2010. The level of demand meant that €20 billion could have been sold.
In the wake of the Greek crisis, Ireland, Portugal Cyprus and Spain needed to obtain loans from the EU and IMF (the Spanish loan was not a sovereign bailout, but restricted solely to the banking sector), after market interest rates became unsustainable. In the end, a line was drawn under the crisis when the ECB announced that it would intervene in markets if rates became unsustainable for the beneficiaries of a bailout. This was largely credited for taking the heat out of interest hikes on Italian and Spanish bonds despite the fact that neither had asked for such a bailout and therefore, theoretically at least, would not qualify for the support. With the return of Greece to the bond markets at reasonable rates (considering its credit rating is still considered to have junk status), it seems as though the European Sovereign debt crisis may have been consigned to history.