The Sovereign Debt Crisis 2010-2011

The Sovereign Debt Crisis 2010-2011 A European Approach Enrique Viaña

Rzeszow, 10 May 2011

What is de SDC? • The SDC is a recurring turmoil in the global markets for securities, which makes it difficult por periphery members of the EMU – European Monetary Union – there to finance their budgets. • Membership to the EMU is a requisite for a country to be listed in the SDC: – Thus, the financial rescues of Iceland and Hungary by the IMF in 2008 are not episodes of the SDC. – The first country to suffer the SDC was Greece, early in 2010.

Causes of the SDC /1 Apparent causes: the turn of the EMU from fiscal stimuli to fiscal consolidation, in the fall 2009. - Up to that point, the EMU alongside the whole EU and other advanced economies followed the IMF instruction in the aftermath of Lehman Brothers’ bankrupcy (Sept 2008) to foster aggregate demand by means of expanding public expenditure. - The ECB easied the policy through unlimited lending to banks. (Banks bought debt however much there was in supply.)

Causes of the SDC /2 Profound causes: Competition between euro and the US dollar (and, to a much lesser extent, the pound sterling) for the more competitive to be cashed by global dealers as a preferred reserve currency. - Such competition began in 1999. - It has intensified during the global crisis, which is a crisis ignited in Wall Street, the HQ of the dollar area.

Crisis of the dollar /1 • The US dollar was signaled a reserve currency at a global scale, in substitution for gold, by the Bretton Woods Conference (July 1944). • While the US economy ran external surpluses, all went well: the US lent others the money they spent in buying American goods. • The expectation was for the US to build a mature financial position.

1) Building a mature financial position A sells B as much as X

A

X>M

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B sells A as much as M

A builds a financial position, not yet mature A lends B as much as X — M

2) A mature financial position B pays A as much as M interest rate

A

B B sells A as much as M

Balance due = 0

Crisis of the dollar /2 • Yet, the US economy began to run increasing deficits before it could build a strong financial position. • Dollar so overmarched the international necessity for transaction purposes. • A period of global inflation followed in the 1970s; the gold exchange standard came to an end, and so did the pegged exchange rates as accorded in 1944.

Financial dominance, not mature

B uses A’s money to buy goods and services

A sells B as much as X

A

X