The Eurozone: The European Sovereign Debt Crisis
European sovereign debt crisis triggered by the financial crisis of America swept across whole European countries. Why the Eurozone is too weak to resist the crisis? Are there any problems of the Eurozone? The sovereign debt crisis has spilled over to the banks, which increases the credit risk exposure of the banks. It is necessary for us to understand how the crisis impacts banks’ exposure and what are the reactions of the banks with respect to their capital provision. Finally, what those policymakers within the region or around the world do in order to underpin European and global financial stability?
Background of the EU sovereign debt crisis.
Subprime mortgage crisis of the United State had a negative impact …show more content…
For example, some Eurozone core countries like Germany, Italy and France are more advanced than those peripheral countries like Greece, Ireland. Specifically, Germany 's GDP accounts for 20% of the total GDP of the euro area, Germany, France and Italy accounted for up to 50%. After the establishment of the Eurozone, those core countries take advantage of their original dominance in regime, technology and finance, enjoying the benefits of regional integration and single currency area in which a unified monetary policy is inclined to the objectives of the core countries, which leads to more serious development imbalances. In addition, the industrial structure in some countries are irrational. For example, Greece exports agricultural and primary metal products which lack higher added value. Moreover, their economic developments over depend on the credit and the real estate bubble is serious. (Aizenman et al, …show more content…
Internal reasons which are crucial include both economic structural defects and the drawbacks of the system of Eurozone. In addition, sovereign debt crisis further propagates the banks, which causes a serious problems of the banks’ credit risk exposure through four main channels. For example, a deterioration of the sovereign creditworthiness causes lots of damage to the banks which holds a large amount of the sovereign bonds. Moreover, in order to defend the default risk from the sovereign bonds, banks increase the minimum capital requirement than before to maintain a sustainable banking system. Lastly, policy makers within the Eurozone make a consensus that the home bias relationship between domestic banks and sovereign countries should be minimised for increasing banks’ loss-absorption capacity and for reducing banks’ price distortions. Globally, the new Basel framework which includes new regulations and directives has been established by policy makers to enhance the defects of Basel I and II. For example, banks should improve the quality and quantity of the capital. In addition, banks are required to manage the liquidity of cash flows and the availability of capital. Moreover, leverage ratio is recommended to use for offering a safeguard against the risks associated with the risk models underpinning risk weighted assets. Besides, Pillar I, II,