The European sovereign debt crisis Essay Example | Topics and Well Written Essays - 2000 words

The European sovereign debt crisis - Essay Example in the minds of many is how the financial debt crisis of the few countries could have caused such a global debt scare, yet those countries are not even the major economies of the Euro Zone. Thus, this discussion seeks to analyze how the financial debt crisis that started with the few countries eventually affected the whole of the Euro zone. The analysis will focus on two major areas of the financial markets; the bond markets and the foreign exchange, as the notable areas affected by the debt crisis. In this respect, the contagion process of the debt crisis from the few countries to the whole of the Euro zone will be analyzed. Greece is the major player as far as the European sovereign debt crisis is concerned, considering the fact that it is only when the sovereign debt crisis of Greece came to the fore that the real financial crisis facing the Euro zone started being considered. By the turn on the 20th century, Greece was one of the first growing economies in Europe (Fouskas, 27). However, the financial crisis of 2007/08 affected Greece notably, because its economy was dependent on tourism and exports, which slowed down as a result of the financial crisis, thus slowing down the economic growth in the country. To address this slow-down, the Greece government increased its spending in the economy, which in turn increased its sovereign debts (Fouskas, 132). The increased sovereign debt of Greece meant that the country’s budget deficit was increasingly becoming higher, compared to the country’s GDP. This effectively increased the borrowing rates of the country, which rose to a point where it b ecame clear that the country would no longer be able to borrow from the internal markets, while at the same time indicating a high possibility of sovereign debt default (Armingeon and Kai, 424). In reaction to the high sovereign default risk by Greece, the credit rating of Greece was downgraded to junk status, also known as the BB+, which effectively meant that the