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Europe's Credit Crisis

In December 2009, the new prime minister of Greece, George A. Papandreou, announced that his predecessor had disguised the size of the country's ballooning deficit. That declaration set in motion a chain of events that threatened not only the finances of Greece, but of other southern-tier European states, like Spain, Portugal and Italy, shook markets worldwide and raised deep doubts about the future of the euro and European integration.

… The roots of the crisis go back to the strong euro and rock-bottom interest rates that prevailed for much of the past decade. Greece and other southern European countries took advantage of this easy money; in the process, some of them, like Athens, built up formidable levels of debt, others, like Spain, set off gigantic housing bubbles, and all of them became less competitive than their northern neighbors. When the global economy crumpled, those chickens came home to roost.

The financial crisis has highlighted the constraints of euro membership for these struggling economies. Unable to devalue their currencies to regain competitiveness, and forced by E.U. fiscal agreements to control spending, they are facing austerity measures just when their economies need extra spending. Other countries, like Germany, the Netherlands and Austria, have kept deficits down while retaining an edge in global markets by restraining domestic wage increases. France lies somewhere between the two camps.

The chief difficulty in working out a package to support Greece was the popular sentiment in Germany, deeply concerned about becoming the answer to the debt problems of all of Europe's endangered economies, that Greece should pay a penalty for its former profligacy.

After rounds of deep budget cuts and months of vague pledges of support from the rest of Europe failed to stop the steady rise of interest rates the market was demanding to finance Greece's debt, Mr. Papandreou in April 2010 formally requested a promised $60 billion aid package, calling his country's economy "a sinking ship.''

But global investors, who had seen Greece's bonds downgraded to junk status, were not reassured, forcing the I.M.F. and Greece's European partners to hastily prepare a far larger package. The new plan, announced May 2 and passed by Parliament on May 6, calls for 110 billion euros, or $140 billion, in loans over the next three years to avoid a debt default. In exchange, Greece had to accept deep cuts that will lead to years of sacrifice.

Yet support for the euro continued to erode, markets began to sink worldwide and signs of a renewed credit crunch in Europe appeared. Against this anxious backdrop, European leaders on May 9 agreed to provide nearly $1 trillion as part of a huge rescue package. Only hours later, central banks began the direct buying of euro zone government bonds directly - an unprecedented move to inject cash into the financial system.

Officials were hoping the size of the rescue package — a total of $957 billion — would signal a "shock and awe" commitment to such troubled countries as Greece, Portugal and Spain, in the same vein as the $700 billion package the United States government provided to help its own ailing financial institutions in 2008.

After a brief respite following the announcement of the bailout plan, fear in the financial markets rebounded over worries that the continent's biggest banks face strains that will hobble European economies. Investors feared that the only solution for debt-strapped governments who are unable to devalue their currency would be a restructuring that would cost their bondholders billions. Since many of those are European financial institutions, the fallout could be felt on both sides of the Atlantic.

PART 2

1 СOMPREHENSION CHECK

Answer the following questions:

1. What were the first steps taken by the new administration to confront the crisis?

2. What was the situation like in 2008 both in the US and across Europe?

3. What signs of recovery loomed in 2009?

4. What evidence proves that Wall Street overcame the negative impact of the credit crisis?

5. What does the author mean by the phrase, “ When the global economy crumpled, those chickens came home to roost”?

2 COLLOCATIONS

Match the words in the left-hand column with the words and phrases in the right-hand column

VERB + NOUN collocations

1 confront

a) doubts

2 lay down

b) cash

3 embrace

c) the crisis

4 smooth over

d) an edge

5 avoid

e) a proposal

6 face

f) the discord

7 raise

g) American style

8 retain

h) resistance

9 inject

i) differences

ADJECTIVE + NOUN collocation

1 bumpy

a) respite

2 formidable

b) banks

3 austerity

c) recovery

4 unprecedented

d) overhaul

5 brief

f) tests

6 reeling

g) levels

7 battered

h) measures

8 fraught

i) move

9 rigorous

j) markets

10 regulatory

k) markets

3 FIND THE WORD

1) Find the verbs meaning rise or fall

fall rise

4 EXPLAIN the following financial terms and notions:

broad regulatory overhaul

former profligacy

retain an edge in global markets