The Debt Deal

In March 2012, Greece announced a deal with its private lenders(Private Glubiger).
The Greek government forced them to accept a bond swap (Aktientausch) under bad
conditions. Most of the private lenders accepted the bond swap and therefore lost billions.
They accepted that because, otherwise, the risk was to loose all the money they borrowed the
Greeces government. This bond swap was a condition for Greece to get new credits from
Europe and the International Monetary Fund (IMF). (Otherwise they would not receive
money from EU)
Downgrading Frances Credit Rating
In January 2012, the rating agency Standard & Poors (agency which deals with the
creditworthiness of countries) downgraded Frances creditworthiness from AAA to AA+. The
rating of 9 countries of the Euro zone was also downgraded as a warning signal that their
crisis is far from being over and stronger actions are needed to sort out their debt problem. A
downgrading by one of the rating agencies means that the interest rate of new credits
increases, aggravating(making worse) a countrys deficit in a vicious circle ( The worse the
creditworthiness of a country the more debts they have to pay). It was, therefore, demanded
by the French and Italian Prime Ministers to promote economical growth in the euro zone.
(Do not want to save money but to invest in economy, beispiel Straenbau)
An Escalating Spiral of Debt
The major challenge in the euro zone is to prevent a financial collapse in Spain and
Italy. Greece and Portugal are virtually bankrupt since 2010 and their governments cannot
find buyers for their bonds. Since then, these countries have been reliant on financial
transfers from the European Union and the International Monetary Fund(Gter Geldgeber
fr Staaten der Welt). The situation in the euro zone has been compared to the situation in
the USA and Japan. In the USA, the Federal Reserve (Notenbank->oberste Bank) bought
loans (Darlehen) and spent billions to prevent a deeper economical crisis. But, apart from the
government, banks and investors also took large losses, supporting the financial system of
the USA. Europe is more reluctant (zurckhaltend) to accept permanent losses on
government bonds to protects private holders (Private Geldgeber) from so-called haircuts. (If
a part of the debts is not payed back at all) The background is that may bonds are in the
hands of alien corporations (auslndische Gesellschaften) and the result could be that
Europe struggles in future to find credit grantors (Kreditgeber). Despite a lesser deficit in the
whole euro zone of roughly 90 % of GDP compared to 100 % for the USA and 200 % in
Japan, Italy, Portugal and Greece faced steep increases in their deficits.
Backlash Against Austerity (Sparprogramm)
There is an increasing resistance 0f the people against a stringent austerity policy and
the governments in France and Greece were punished for this course during the last
elections. But, Germany has not changed its course of fiscal discipline. The dilemma is, that
spending more money for economical growth will increase the deficit, especially in the most
affected countries Greece and Portugal.

Spain Accepts Bailout for Ailing Banks (gebrechlich)

The banking sector in Spain is comparable to the bursting (platzen) of the US housing
bubble in 2006. Spanish banks encouraged people to buy properties although it was
predictable that many of them could not afford it. In June 2012, Spain was pushed to accept a
bail out (Rettungsgeld) of 100 billion euros for its cash-starved banks. Spains economy is the
fourth biggest in the euro zone and the help was offered because it was feared that instability
in Spain could cause a domino effect in the euro zone and a world-wide crisis. Spanish
officials always denied that the country is in a similar position like Greece or Portugal.
The ECB Steps Up
In July 2012, the president of the European Central Bank (ECB), Mario Draghi, said
that the ECB will take every necessary step to guarantee the future of the euro. The ECB
would even buy government bonds without the usual guaranty. This announcement calmed
down the markets during the summer. Details were given later. A program called Outright
Monetary Transactions was started where the ECB buys bonds with maturities (Laufzeiten)
up to 3 years with no limits and without insisting on senior creditor status. Senior creditor
status means that in the case of default (Pleite), the remaining money is paid first to them.
The announcement bought time for the euro zone, but the risk is that when pressure from the
financial markets is reduced, politicians are tempted to delay unpopular decisions. Therefore,
these measures could make it more difficult to sort out (regeln) the euro crisis in long-term.
In the next years, the European Stability Mechanism (ESM) will buy bonds without
guarantees directly from governments to keep the interest rates low. To prevent inflation, the
same amount of probably more valuable bonds will be sold. There is increasing fear of the
powerful central bank of Germany that such a policy will force inflation.