Didn’t Greece give us democracy? And is debt rollover something your dog might do? We help you understand the eurozone crisis.
To be perfectly honest, in our private life, the eurozone crisis hasn’t really affected us. Well, it has, but not to the extent that it has us scrambling out of the door to build barricades and protest against austerity measures.
They issued a huge amount of government bonds – it’s a bit like someone going crazy on their credit card. The results were tragic.
In public, however, it’s a different story – the eurozone crisis spikes news bulletins and screams out from every newspaper headline. And we nod and discuss it during mini-summits over our morning espresso.
But we don’t really know what it all means, do we? We may roll our tongues over words such as ‘bond yields’ and ‘credit rating’, but it’s useless because, despite being in the English language, they all sound as if they are words from some secret code.
And you cannot be blamed for not bothering to find out what such terminology means, because you have more urgent things to do. So we’ve done all the homework for you and prepared a list of easy definitions for you – next time you nod when you hear the word ‘inflation’, you’ll really know what it means.
PIIGS
This doesn’t come with an apple stuck in its mouth. And it doesn’t have anything to do with the cover art from a Pink Floyd album. Rather, the acronym groups together the five European countries which are facing particular financial crisis: Portugal, Italy, Greece, Spain and, since 2008, Ireland. If you want to point fingers, it’s these countries you should turn to.
Bonds
No, it’s not a reunion of James Bond impersonators. Rather, it’s a mechanism governments use to borrow cash in order to finance projects and growth. The lenders are usually commercial banks or institutions.
When already weak economies such as Greece, Italy, Portugal and Spain joined the eurozone, they found that they could borrow money at much more favourable rates than when they had their national currency. Moreover, they had the backing of stronger economies. Therefore, they issued a huge amount of government bonds – it’s a bit like someone going crazy on their credit card. The results were tragic.
Bond yields
This is one of the more difficult terms. The yield on a bond is the return that a lender expects to make on a sovereign debt issue – it’s a sort of interest as a percentage of the original loan.
Bond yields rise when lenders lose confidence that they will ever get their cash back and so decide to sell off their bonds at a discount. When this happens, it’s a sure sign that a country is getting into deeper trouble.
Greece
Sadly, Greece is no longer synonymous with the cradle of civilization that gave us democracy. And neither is it associated with the holiday bliss of sipping ouzo in the sun. Rather, Greece now means crisis – the country finds itself caught in the grips of austerity measures and billions of euros in debt.
What led Greece to this situation is a boiling cauldron of unsustainable levels of public sector wages, mass tax evasion and borrowing on a gargantuan scale.
Sovereign debt
To understand sovereign debts, you must first come to terms with ‘government bonds’. The latter are issued by the government to raise money from the public to meet future expenses and growth. Thus, those who buy government bonds – the bond holders, are lending money to the bond issuer, that is, government.
When bonds are issued in the local currency, they are called government bonds. In the case of the eurozone, bonds are issued in an international currency, and these become known as sovereign bonds.
If in need of huge capital, a country will issue sovereign bonds to other countries – therefore, sovereign debt.
Austerity
Austerity on a personal level means cutting down on your entertainment budget or not buying those new pair of high heels. But austerity on a national level is harsher and elbows everyone in the stomach.
For Greece, austerity measures (paired with EU support) are the only way out, meaning reduced pay for public sector workers, cuts to social programmes and no more early retirement, at least for those who were lucky enough to keep their jobs. All measures which have made the Greeks very angry.
Credit rating
The credit worthiness – that is, the likelihood of default – of a company or of a whole country is measured using credit rating. This is issued by a credit rating agency such as Standard and Poor’s. Credit ratings are not calculated using some complex mathematical formula – rather, credit rating agencies employ their judgement and experience. Credit ratings are then used by individuals or entities purchasing bonds issued by a company or government.
Debt rollover
If your dog is called Debt and it does one of its party tricks, then the event could be called ‘debt rollover’. Within the context of the eurozone crisis, debt rollover is when banks extend a loan for a longer period because the borrower cannot afford to pay a loan and is at risk of defaulting.
Recovery
Means exactly what it says on the label. Following a series of summits, borrowing rates have stabilised and European leaders have approved stricter fiscal rules to curb government borrowing. Moreover, European banks have been boosted by the injection of €530bn of cheap loans from the European Central Bank. Brussels has expressed optimism that finally, the eurozone is emerging from its two-year sovereign debt crisis. We’ll just have to wait, see and probably learn some more technical jargon.