The European sovereign debt crisis Assignment Example | Topics and Well Written Essays - 2000 words

The European sovereign debt crisis - Assignment Example Consequently, the euro debt crisis is crucial as one intends to study its spillover effects. This is because the crisis was characterized by decisions and events at a political level (Acharya and Steffen, 2012, p. 12). In this case, the Euro debt crisis will be viewed as a financial phenomenon that affected the European region. Historical events associated with the Euro sovereign debt crisis will investigate the negative watches and downgrades on European governments, financial markets, stock, and bond markets. The Euro sovereign debt crisis reached its peak in March 2012 after Greece conducted the largest sovereign debt restructuring. Countries such as Spain, Ireland, Italy and Portugal were also facing serious financial crisis. It is essential to note that all member states of the European Monetary Union provided loan guarantees. As a result, the creditworthiness of the region was at stake (Ahearne, Griever and Warnock, 2004, p. 316). The effect of this event was that all member st ates of the Euro, even states that had sound public finances, were subjected to downgrades or placed on negative watches by global rating agencies. Some of the countries lost their investment grade statuses. This is an alarming signal for international investors. Before, the first country was downgraded, speculation against the EURO was attracted and the stock markets turned down. As a result, some countries began losing their access to capital markets. European Union politicians devised a plan to accuse credit rating agencies, which worsened the crisis (Andrade and Chhaochharia, 2010, p. 2431). Changes in funding conditions used by banks are important in the assessment of financial intermediaries. These intermediaries supply credit to the economy. Since 2009, the remuneration on deposits in core European Union countries remained unchanged. However, there were large dispersions compared to the period prior to the crisis. The costs of the deposits increased significantly in several p eripheral countries (Angeloni and Wolff, 2012, p. 19). This reflected the difficulties that banks were experiencing as they tried to obtain funds through market sources. In 2012, these rates decreased owing to the improvements in market confidence that triggered the cut in ECD interest rates. Funding difficulties experienced by peripheral countries adversely affected the financial conditions, non-financial corporations and households. For instance, the charge of short-term loans to a non-financial corporation augmented unexpectedly in peripheral countries, in 2011. In countries such as Portugal and Greece, the interest rates neared the levels of 2008 (Arezki, Candelon and Sy, 2011, p. 9). Reactions of the European Money Markets The sovereign debt crisis sent ripples all over the international banking systems. This prompted interventions by central banks and governments on a scale that is comparable to the programs instituted during the 2008 financial crisis. European authorities ple dged financial support to the tune of 1 trillion EURO. This support was meant for the recapitalization of the challenged Euro area countries (Arteta and Hale, 2008, p. 59). The European Central Bank injected an exceptional amount of liquidity in order to mitigate the effects of the banking system balance sheet disclosure especially the deteriorating sovereign debt. European banks hold huge amounts of debt securities in government. They hold these debts as securities because the Capital