Everything you need to know about the European debt crisis in one post

by Dylan Matthews

Washington Post
August 5, 2011

Since the financial crisis hit in 2008, a wave of debt crises have swept the European Union, threatening various countries with default and putting the future of the euro in danger. Here’s what's happened, by country.

Greece: Greece had a debt load of over 100 percent of GDP in 2001, when it joined the euro. But joining the euro lowered interest rates on its debt, because the bond markets no longer worried about inflation or a devalued currency. The result was an economic boom fueled by low interest rates, and ever-increasing debt due to a lower cost of borrowing. Greece hired Wall Street firms, most notably Goldman Sachs, to help hide its debt so as not to run afoul of E.U. rules. In October 2009, the conservative government was voted out, and the new socialist government announced that deficits were more than double previous estimates. Greek debt was immediately downgraded. The situation worsened in February 2010, when institutional bondholders started selling off Greek debt and ratings agencies kept downgrading it. Greece responded with a round of austerity measures.

In April 2010, Greek Prime Minister Georges Papandreou asked the International Monetary Fund and the EU to put together a rescue package. This was quickly followed by S&P downgrading Greek debt to junk status; a few months later, Moody’s did the same. The European Central Bank moved to shore up Greece, and the E.U. and IMF settled upon a $145 billion bailout, conditioned on Greece adopting austerity measures worth a staggering 13 percent of GDP. The E.U. also created the European Financial Stability Facility (EFSF), a body intended to streamline future country bailouts.

The bailout/austerity package was a failure, leading to plummeting growth that actually worsened Greece’s financial situation. This past June, S&P reduced its rating of Greek debt yet again to CCC, the lowest rating of any government in the world. This spurred Papandreou to reshuffle his cabinet and force a confidence vote for his government. If the vote succeeded, it would have signaled Papandreou had enough support to pass additional austerity measures needed to ensure a second bailout. If it failed, the government would have fallen. The measure passed. As it was being debated, France and Germany hashed out another bailout package, which was finalized by the E.U. last month, that would provide another $145 billion and encourage private bondholders to help out. Moody’s responded by downgrading Greek debt yet again, and declaring that default was “virtually 100 percent” certain.

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