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CIAO Focus, February 2012: Europe's Escalating Debt Problem

After weeks of discussions and political negotiations, the heads of state of the Eurozone reached an outline agreement to bring to an end the financial crisis in the region on the evening of October 26th. The three-pronged plan deals with the key elements of the crisis: reducing Greece’s debt burden, avoiding a credit crunch and preventing contagion to other countries.

The first part of the plan, the Greek debt restructuring, aims to reduce Greek government debt from 160% of GDP to 120% of GDP by 2020. The Eurozone leaders’ communiqué indicates that to achieve this goal, private bond holders of Greek debt will assume a voluntary 50% haircut via a new debt swap. Up to €30 billion will be contributed by the Eurozone members to this proposed debt swap in the form of ‘sweeteners’ and the exchange of bonds is planned to take place in January 2012.

The second part of the package aims at avoiding an outright contraction of credit in the region by capitalizing European banks. Banks will need to raise €106 billion of extra capital by June 2012. Most of the effort will be undertaken by Greek, Spanish and Italian banks, which will have to raise €30, €26 and €15 billion respectively.

In the case of France and Germany, the requirements are less demanding; four French banks will together have to raise capital by €8 billion, while thirteen German banks will raise €5.2 billion. Banks will be required to increase their tier one capital ratio to 9% by June 2012, with this target being in line with Basel III standards. Institutions struggling to meet these requirements will be prevented from distributing dividends and paying bonuses.

--Oxford Economics


From the CIAO Database:

The European Crisis Deepens

The Enduring Popularity of the Euro throughout the Crisis

Eurozone finally agrees a deal but uncertainties remain unresolved

Europe's debt crisis: Where and when will it end?

State of the union: Can the euro zone survive its debt crisis?


Outside Sources: *

In Depth: Greek Dept Crisis (Financial Times)

Eurozone crisis (The Guardian)

How will the euro crisis end?: Interactive Feature (BBC News)

Europe’s Debt Crisis: Timeline (Wall Street Journal)

Tracking Europe's Debt Crisis: Interactive Feature (New York Times)

* Outside links are not maintained. For broken outside links, CIAO recommends the Way Back Machine.