\n<\/p>\n
The eurozone sovereign debt crisis came hot on the heels of the 2008 financial crisis.<\/p>\n
The main focus throughout was Greece<\/a>. That\u2019s where it kicked off, when an incoming Greek government revealed that the national balance sheet was in a much worse condition than anyone had thought.\u00a0\u00a0<\/p>\n To cut a long (and pretty boring) story short, the headline struggle during the eurozone crisis was \u201cwho carries the can for Greece\u2019s inability to repay its sovereign debt?\u201d\u00a0\u00a0<\/p>\n If the eurozone had been the US \u2013 with not just shared monetary policy, but also shared debt issuance and fiscal policy \u2013 the problem could have been solved easily. In effect, Greek debt would have been backed not just by Greek taxpayers, but also by the European Central Bank and the rest of the eurozone\u2019s taxpayers.\u00a0\u00a0\u00a0<\/p>\n But that\u2019s not the way the eurozone worked (and still doesn\u2019t). German taxpayers specifically were not keen to be on the hook for Greek debts.\u00a0\u00a0<\/p>\n<\/div>\n So the answer largely ended up being a) Greek bondholders, who saw the value of their debt written down; and b) the Greek population, who endured a severe depression as Greece \u2013 under the duress of the single currency \u2013 deflated its way back to something approaching solvency.\u00a0\u00a0<\/p>\n So that\u2019s the headline story. But during this whole process there was a much bigger underlying concern. That was the fear of \u201ccontagion\u201d.\u00a0\u00a0<\/p>\n At the end of the day\u00a0\u2013 although it took the eurozone authorities a long time to come to the conclusion \u2013\u00a0Greece was sufficiently small that it could have left (or been ejected from) the eurozone, without jeopardising the survival of the single currency.\u00a0\u00a0<\/p>\n By contrast, there were plenty of other countries with messy balance sheets too. And markets weren\u2019t slow to pick up on this.\u00a0\u00a0<\/p>\n Investors had spent most of the early years of the eurozone (ie, the 2000s) driving bond yields closer across the region. The assumption was that the euro was just the start. Countries that shared monetary policy<\/a> would eventually have to share fiscal policy too. So a Greek bond was just as good as a German bond, because they were all backed by the same thing.\u00a0\u00a0<\/p>\n That assumption was shattered by the Greek debt crisis. As a result, investors started to differentiate between eurozone countries. Bond \u201cspreads\u201d \u2013 that is, the gap between \u201csafe\u201d German debt and higher-risk countries \u2013 blew out. In other words, countries with the worst balance sheets saw their cost of borrowing rise.\u00a0\u00a0<\/p>\n<\/div>\n The \u201cperipheral\u201d countries included, alongside Greece, Portugal, Ireland, Spain and Italy. Portugal and Ireland, being relatively small nations, basically knuckled under and imposed similar sorts of austerity packages to Greece. Spain\u2019s finances were in fact not that bad – its main problem was a massive housing bubble.\u00a0\u00a0<\/p>\n But Italy \u2013 Italy was a problem<\/a>. A sclerotic economy plus a heavily-indebted balance sheet. Moreover, it was too big to push around. Imposing a depression on Greece was possible. Not so Italy, one of the founding member states.\u00a0\u00a0\u00a0\u00a0<\/p>\n Faced with the risk that some countries, and Italy specifically, would in effect be locked out of borrowing in sovereign debt markets, the eurozone had to take action. That\u2019s where Mario Draghi, then head of the European Central Bank (ECB) came in. In 2012, he said he would do \u201cwhatever it takes\u201d<\/a> to save the euro.\u00a0\u00a0<\/p>\n In the end, that eventually added up to an open-ended commitment to buy the sovereign debt of the most troubled countries, which would in turn keep spreads from exploding, and allow troubled countries to continue borrowing.\u00a0\u00a0<\/p>\n It worked. Contagion was halted. Greece continued to cause the odd spasm of fear, but with the risk contained to Greece itself, wider markets calmed down.\u00a0\u00a0\u00a0\u00a0<\/p>\n For a while, the fundamental problems of the eurozone faded into the background. The Brexit vote almost certainly helped \u2013 it\u2019s always good for cohesion to have something to triangulate against.\u00a0\u00a0<\/p>\n But more important was the ongoing deflationary backdrop. High interest rates were not going to be a problem and central bank intervention was regarded as standard for most major economies.\u00a0\u00a0\u00a0<\/p>\n<\/div>\n Finally, Draghi \u2013\u00a0the saviour of the eurozone \u2013 went from being the head of the ECB to being the Italian prime minister.\u00a0\u00a0<\/p>\n But now everything is changing. And suddenly, existential fears about the eurozone are erupting again.\u00a0\u00a0<\/p>\nHow financial contagion nearly shattered the euro\u00a0<\/h3>\n
Italian political strife is rearing its head again\u00a0<\/h3>\n