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In phase 2 of the Eurozone Crisis, beginning in the summer of 2011,
we start to see the crisis move not just from Greece, Ireland and Portugal.
But now, the contagion starts to infect the larger countries of Spain and Italy.
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And marked the beginning of this with what later became the second Greek bailout.
The preliminary agreement of a second bailout for Greece was in July of 2011,
and that was to be for 109 billion euros.
This was later increased to 130 billion when the agreement was finalized in 2012.
This was intended to put once and for all the Eurozone sovereign debt
part of the crisis behind us and reassure markets that
the leaders were prepared to do what was necessary to put the crisis behind.
It didn't work out that way.
So really in all attempts as you have heard from Secretary Geithner,
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what policymakers are trying to do is come with enough force, such that
confidence can be restored overall in the economy by market participants.
In this particular case, what we see from history is this just wasn't enough.
And in fact, we see that directly in rates.
Spreads on Spanish and Italian sovereign debt, which up until this point
had be somewhat contained, increased dramatically in the summer of 2011.
Leading to a statement from the ECB on August 7th that it would buy bonds from
those countries, Italy and Spain, in order to maintain stability of their debt.
This was a very big move for the European Central Bank.
And it was the start of a series of
fairly significant moves that were unprecedented in its history.
The European Central Bank was set up with a single mandate.
And that single mandate was to keep inflation hold to a steady currency.
We don't wanna have a high inflation rate.
It was not asked, worry about stability.
It was not required in it's mandate to worry about unemployment.
The federal reserve on the other hand, in the United States has a dual mandate
to worry both about full employment and about inflation.
That provides a little more wiggle room in cases like this.
So the actions that are taken by the ECB here, hard to immediately
see how those actions are related to inflation keeping a stable currency.
And there would be court challenges that would take place over the subsequent
several years about whether the ECB was actually exceeding their mandate.
And this would be step one in that process.
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Italy and Spain, after the announcement from the ECB, respond by doing their part.
And even though they haven't received a bail out that has any specific conditions,
Italy and Spain never less react with austerity policies.
So either promises of balanced budgets in the future, cutting of spending,
or raising of taxes in the present.
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By early 2012, the financial situation is more stable.
Bond yields have come down, but there's a deep, in this case a double dip
second recession that has taken hold throughout the Eurozone.
And the levels of unemployment are dangerously high from a social
perspective.
In Spain and Greece, they're at 20%, and
youth unemployment levels in these countries are near 50%.
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In March of 2012 Greece entered a technical default on some of their bonds.
When they forced haircuts on some of their bond holders.
So some of their bond holders had voluntarily agreed to
take less than a hundred cents on the dollar in US parlance.
And then they forced that upon other bond holders,
which meant that technically they were in default.
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In July of 2012 the ECB president, Mario Draghi,
stated that the central bank would do whatever it takes to preserve the Euro.
This speech and subsequent actions to calm financial markets worked.
And there was generally a calming down,
a lowering of the spreads, on sovereign bonds.
But, this calming of financial markets was combined with
the actual real effects of the austerity policies that got us to this point.
And the weakness in the countries in the slow growth persisted.
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Andrew MetrickMichael H. Jordan Professor of Finance and Management
Timothy GeithnerLecturer in Management, Yale SOM, Former U.S. Secretary of the Treasury
