The Eurozone periphery may breathe a bit lighter. The financial assistance has been sufficient enough to provide the needed amount of credit that allowed to bail out the bankrupt governments and to recapitalize most of the banking system. The economic programs developed from 2009 to 2012 have started to lead towards a slow recovery as the bond yields have declined and the inflation has stabilized or fallen in several peripheral member states. This is good news for the debtors and for the creditors, however the troubles of the Eurozone are far from being over. The austerity measures and low borrowing costs have lead to increasing public debt levels and rocketing unemployment- the worst two companions of the bailout measures.
The EFSF (European Financial Stability Facility) accompanied by the EFSM (European Financial Stability Mechanism) provided the needed financial assistance through issuing bonds, recapilizing banks and buying sovereign debt. The operations were supported by the German Financial Agency and the bonds were backed up by the Eurozone member states. The funds of the EFSM were raised by the EU Commission and it used the EU budget as the collateral. The lending capability of EFSF, EFSM and the IMF was increased from 750 bln (euros) to over 1 trillion by offering insurance to the buyers of Eurozone debt. The goals of these programs were to increase the available credit and to provide liquidity to the financial system. The SMP (Securities Market Program) was created to buy government and private debt securities and it supported the ECB (European Central Bank) aim to improve the level of liquidity on the market.To limit the inflation the SMP absorbed the amount of liquidity that was bought on the debt market. The structure of the financial assistance programs lays out the strength and weakness of the countermeasures meant to contain the crisis. The level of credit is crucial for the recovery of the economy, however the amount of available money dictates the rise of prices. Luckily the inflation has been slowing down or decreasing in the weaker member states. A fast recovery can not be allowed because a quick surge in credit would lead to a quick surge in prices and inflation.
The EFSF and IMF bailouts of Greece, Portugal and Ireland illustrate the success of improved liquidity and the problem of growing public debt. The ECB discount rate on the marginal lending facility has decreased from 1.75 % in 2010 to 1.5 %. The lending rates of commercial banks in Greece and Portugal have increased while Ireland has had a small decrease. It is notable that Ireland has had the fastest decrease in inflation due to tighter credit policy. Similar effect can be seen in the GDP growth level. Ireland had a growth of 0.9% in 2012 while Greece faced a decline of -1.4% and Portugal was struggling with -3.4%. A common problem for all three is the high level of public debt reaching from 84 % to 123%. The indebtness is worsened by a high level of unemployment that exceeds 14 % in Ireland and 25% in Greece. The growing indebtness means a long period of repayments. On the other hand the credit can not be loosened much more without creating further concerns over the level of inflation. The stability of inflation will be paid for with a high level of unemployment and a slow path to recovery.
The EFSF has been substituted by the ESM (European Security Mechanism) that covers a similar scheme while focusing more on debt sustainability and a stricter enforcement of Eurozone measures. The ESM financial support for Spain and Cyprus had similar results as the bailouts of Greece and Portugal. The level of inflation has decreased while public debt and unemployment have increased. The level of economic growth in 2012 was negative. Another improvement to increase debt sustainability was the creation of OMT (Outright Monetary Transactions). The latter program offers yield lowering bond purchases to Eurozone members engaged in bailout measures. It also offers a precautionary program to the Eurozone member states with stressed bond yields. The SMP and the OMT are more successful as guarantors of debt sustainability. Most of the Eurozone governments’ bond yields have decreased between 2010-2012. Ireland has benefited from the scheme, but Portugal and Greece have not yet achieved stability. In general the bond yields are not as much of a concern as the signs of slow stabilization and even slower growth in the bailed out member states.
The currency ratings of Standard and Poor reflect that Greece has had a lot of liquidity support while Portugal has gotten worse and Ireland is not making a fast jump up either. For now Spain and Cyprus are the fort runners of decline with their recent economic downturns. But all is not lost. The Eurozone has managed to do what it takes to prevent from going under, but it is still far from rising above the troubled surface. The liquidity has been provided, the debt has been bought, new measures have been established and the inflation has not been allowed to run amok. The fire has been put out. But the correlation of credit and inflation will reflect in the high level of unemployment, public debt and slow growth of GDP. Some of the periphery has crawled out of the hole, some are yet to do so. But the smoke keeps rising and the dream of a fiscal union where public debt remains under 60% of GDP is still on a very far horizon.
* The data analysis reflects the time period between 2010-2012
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