From late 2009, fears of a sovereign debt crisis developed among fiscally conservative investors concerning some European states, intensifying in early 2010. This included eurozone members Greece, Ireland, Italy, Spain and Portugal, and also some non-Eurozone EU countries. Iceland, the country which experienced the largest crisis in 2008 (see 2008-2011 Icelandic financial crisis) when its entire international banking system collapsed, has emerged less affected by the sovereign debt crisis, as Icelandic citizens refused to bail out foreign banks in a referendum. In the EU, especially in countries where sovereign debts have increased sharply owing to bank bailouts, a crisis of confidence has emerged with the widening of bond yield spreads and risk insurance on credit default swaps between these countries and other EU members, most importantly Germany.
While the sovereign debt increases have been most pronounced in only a few eurozone countries, they have become a perceived problem for the area as a whole. In May 2011, Greek public debt gained prominence as a matter of concern. The Greek people generally reject the austerity measures, and have expressed their dissatisfaction through angry street protests. In late June 2011, Greece’s government proposed additional spending cuts worth 28bn euros (£25bn) over five years. The next 12 billion euros from the Eurozone bail-out package will be released when the proposal is passed, without which Greece would have had to default on loan repayments due in mid-July.
Concern about rising government debt levels across the globe together with a wave of downgrading of European government debt created alarm in financial markets. On 9 May 2010, Europe’s Finance Ministers approved a rescue package worth €750 Billion aimed at ensuring financial stability across Europe by creating the European Financial Stability Facility (EFSF).
On 2 May 2010, the Eurozone countries and the International Monetary Fund agreed to a €110 billion loan for Greece, conditional on the implementation of harsh austerity measures. The Greek bail-out was followed by a €85 billion rescue package for Ireland in November, a €78 billion bail-out for Portugal in May 2011, then continuing efforts to meet the continuing crisis in Greece and other countries.
In October 2011, Eurozone leaders meeting in Brussels agreed on a package of measures designed to prevent the collapse of member economies due to their spiralling debt. This included a proposal to write off 50% of Greek debt owed to private creditors, increasing the EFSF to about €1 trillion and requiring European banks to achieve 9% capitalisation. As of November 2011, the same Eurozone leaders that extended the package to save the Eurozone have extended an ultimatum toward Greece. Both Sarkozy of France and Merkel of Germany have made it public that both of their governments have reached the end of their patience with the beleaguered Greek economy.