European Debt Crisis: What, Why and How

[Parag Soni]

What is European Sovereign Debt Crisis? What are the reasons for this?
What are remedies to solve such problems? What sort of problems govt.
is facing in implementing those solutions?

What is European Debt Crisis?
European Sovereign Debt Crisis consists of 3 words: European (They are
in European Countries like Germany, Spain, Greece, Ireland, Portugal,
France etc.) + Sovereign Debt (I would explain them little later) +
Crisis (which mean intense difficulty or problems being faced by these
countries)

What is Sovereign Debt?
To understand Sovereign Debt, we must first understand what are bonds,
especially types of bonds that can be issued by the governments in
order to raise money to bridge there budgetary deficits. (Budge
deficit means difference between Govt. Expenditure and Govt. Revenue)
If govt. issues bonds in local markets with local currency, it is
considered as govt. bonds, and if these bonds are issued in
international markets (In foreign market with foreign currency), it is
known as sovereign bonds. So, basically both the issues result in
debt, but the later issued in foreign market is known as sovereign
debt.

What are the reasons of European Sovereign Debt Crisis?
Majority of the foreign countries faced tremendous deficits during
2007-10 due to Banking Crisis in 2008 in US and European Countries,
Global Recession in 2009 and the effects of subprime crisis that
happened in US in 2008. These caused tremendous pressure on govt. of
these countries. Under immense pressure of handling such huge
deficits, they started floating sovereign bonds. This debt grown is
size because interest was not paid; let the principal value go off.
So, basically, many countries of EU became the debtors to each other.
(Remember European Union is a union of 16 countries)

Remedies:
1. Increase GDP, but not possible in short run
2. Increase in Tax Base, but will have adverse impact on fiscal policy
3. Introduction of new money market instruments but Banks and Govt.
are not working in coordination with each other
4. Last option that is Quantitative Easing which simply means printing
new notes to finance budgetary deficits. But, this will lead to
Inflation, and can cause devalue of their currency in Forex market
which obviously EURO would not prefer.

List of Countries with highest Sovereign Debt (In Decreasing Order):
US, Japan, Greece, Ireland, Portugal, UK, Germany, France, Spain

It is really a giant issue as far as European Economy is concerned,
but having basic understanding of it, what do you think where it will
stop??? what shape it will take for developing country like BRIC?

[shah akash]

hi,
 i have Read it.
According to me  this time  there  is a huge crisis and this  would create huge problems for other country also. this kind of problems occured due to  western country's  govt policy
 now it will have huge impact on india also  becuase  our export business is relied on US and eueropian country. but our govt policy is somewhat good so india will withstand  with this situation and will grow @ 8.5% GDP.

[Parag Soni]

Dear Akash,

U r right. India would be least affected by this crisis. Majority of
the country including US and Japan are under crisis apart from
European countries. If we talk about Japan, they are playing safe bcz
they are having their govt bonds issue and not sovereign bonds. The
condition of US is very much apparent. If France, Germany, Italy and
Spain report bankruptcy, the day would see collapsing of world
economy. This is mainly because they are the strength of EU. As far as
India is concerned, we are little safe due to stability of our economy
in terms of monetary and fiscal policy...If you want to know more
about, go to thinkplaninvest.com. This is what my understanding is on
this 1 page after reading 17 pages article!!!

Anyway, nice discussing with you.

Regards,
Parag

[shah akash]

due to this USA rating has been fallen down by AAA to AA+ (source from S&P credit rating body).

[Parag Soni]

Yup Akash...that's a fact...It's all due to sub prime and sovereign
debt crisis....

--
Thanks & Regards,
*Parag Soni*
Student of MBA,
S.K.Patel Institute of Management and Computer Studies, Gandhinagar
Mobile: +91 9904540127
Alternate Id: win_...@yahoo.com