The eurozone crisis didn’t emerge from a clear blue sky five years ago. Greece’s economic problems were well known; in 2004, it admitted fudging its deficit figures to qualify for euro membership, and a year later Athens brought in an austerity budget to, it hoped, bring down borrowing.
But the left-wing Pasok government still shocked the financial markets and its EU neighbours on 18 October. Fresh from winning a general election, it announced that Greece’s budget problems were far worse than imagined; a deficit equal to 12% of national output, not the 6% forecast by the previous government.
That admission triggered market panic, tumbling share prices, credit rating downgrades – setting the tone for the years ahead.
It was a wild autumn, five years ago – with the ripples of financial panic reaching as far as Dubai:
But Europe was the crucible of our story. By spring 2010, the eurozone was entering full-blown crisis mode, and the Guardian was starting to live-blog every twist and turn of it.
In February, the situation turned violent as riot police fired on protesters in Athens during a one-day strike.
Christos Katsiotis, a representative of a communist-party affiliated union, drew the battle lines against austerity, saying:
“It’s a war against workers and we will answer with war, with constant struggles until this policy is overturned,”
And struggle they did. But overturn the policy, they did not.
A €45bn Greek rescue plan was cobbled together by the IMF and the EU, before Standard & Poor’s dramatically upped the ante on 27 April 2010 by slashing Greece’s credit rating to Junk.
The following day, politicians and eurocrats began scrambling to hammer out a larger rescue package for Greece:
That was the time when puns about Acropolis Now, and ‘making a drachma out of a crisis’ were in vogue:
But there wasn’t much time for jokes. By May 2010 the markets were reeling, just as Britain went to the polls in a nail-biter of a general election.
With investors flapping, Europe acted, agreeing a €110bn bailout for Greece, and then a €750bn funding plan to hold the eurozone together.
The markets rallied! Then tumbled the very next day! Investors recognised the true horror of Europe’s toxic bank debts, and the restrictions imposed by the single currency.
The crisis rumbled on, relentlessly; November 2010 saw Ireland follow Greece into bailout misery.
Dublin signed up for years of austerity in return for €90bn of loans, largely to cover the cost of nationalising its broken banking sector.
Despite the UK coalition government’s aversion to eurozone bailouts, it made an exception for the Republic.
Chancellor George Osborne has previously cited Ireland as a great example to follow; bet he’d like us to forget this little gem…
PM Brian Cowen, who had helped preside over the pre-crisis boom, looked a broken man, even as he declared that:
“It’s about growing the economy. We are a small, resilient, proud people.”
He clung on through the winter, and then hoofed out by the electorate.
But not before his government were dubbed “Useless Gobshites” by the Irish Daily Star, which has a real talent for cutting through the, er, junk….
The price of the bailout was a massive austerity package; cuts across the board (although not to Ireland’s controversial corporation tax system), and tens of thousands of job losses.
The severity of the budget angered some politicians, but economists argue that Ireland had no alternative:
So Ireland chose to hang in with the eurozone. But by now, Europe’s citizens knew what was in store.
There were massive anti-austerity protests on the streets of Lisbon, even as Ireland was agreeing its bailout.
As we reported on November 24th 2010:
Trades unions brought parts of Portugal to a grinding halt as a general strike shut down most public transport in protest at cuts being introduced to stave off an Irish-style debt crisis.
Most flights in and out of Portugal were cancelled, ferries across the River Tagus remained at their berths, metro stations were closed and only a handful of trams ran as Lisbonites sought other ways to get to work. Angry British tourists were among those left stranded at airports.
But one lesson from the eurozone crisis is that protests on the street can’t hold back the inevitable. And in May 2011, the next domino fell – as Portugal became the third country to seek a rescue loan.
We knew the script by now — Brussels summits, where the debt crisis cast a shadow over plans to stabilise the eurozone. A domestic political crisis – Lisbon’s government had collapsed, in the face of the looming capitulation.
And a credit rating agency, throwing fuel on the fire. As we wrote in March:
Portugal’s situation worsened when the Fitch rating agency downgraded the country’s sovereign debt by two notches, to A- from A+, a move likely to increase its already record borrowing costs.
In May, the inevitable. A €78bn bailout package was agreed- with the same unpalatable medicine alongside.
By this stage, euroscepticism was on the rise. In Finland, the True Finns had picked up 39 seats in Finland’s 200-strong parliament last month, and were lobbying against bailing out Europe’s weaker countries.
But the financial markets still looked like a more fearsome beast.
And on August 4th 2011, the wheels came right off the market confidence in an old-style panic, led by eurozone fears:
• World stock markets have tumbled amid fears that Italy and Spain will be dragged deeper into the euro debt crisis, and that America might be entering a double-dip recession.
• Wall Street suffered its biggest selloff since 2008, with the Dow Jones dropping 512 points
• Gold and oil have also fallen sharply.
• UK debt remains a safe-haven, with 10-year bond yields falling.
But that was just the prelude to the big drama, as America lost its AAA credit rating.
Newsdesks across Britain raced to dispatch reporters to the City to watch the drama as, umm, traders stared nervously at electronic screens in monastic quiet:
The day turned into a rout, with over £43bn wiped off the FTSE 100.
4.39pm: Ouch! The FTSE 100 has now officially closed, and the blue chip index has fallen 178.04 points to 5,068. That’s a decline of 3.39% today.
Cue a dramatic autumn. Greece now needed a second bailout, with its economy in recession and its government on the ropes. And this time, Europe was going to insist that private investors shared the pain.
But arguments over the haircut that bondholders should take rumbled on for weeks. And overshadowing it all, Italy and Greece’s government were both wobbling.
26 October 2011 was eurozone crisis D-Day, as leaders met for another of those crucial summits. And the mood was electric, with Italian MPs trading blows in Rome and Angela Merkel calling it the biggest crisis in decades.
In a major boost for German leader Angela Merkel, the German parliament has voted overwhelmingly to expand the European Financial Stability Fund (EFSF), the eurozone’s rescue fund.Addressing the Bundestag before the vote, Merkel said Europe was facing its toughest challenge since the end of the Second World War. “If the euro fails, Europe fails,” Merkel said.
After fisticuffs in parliament the Italians have agreed on a package of the economic reforms demanded by EU leaders. Silvio Berlusconi is arriving in Brussels with a 15-page ‘letter of intent’ setting out Italy’s commitments.
And overnight, Sarkozy, Merkel, et al hammered out a deal:
• The firepower of the EFSF bailout fund will be increased to $1.4tn (€1tn)
• Banks agree 50% writedown in the face value of Greek government bonds
• Athens will be handed a new €100bn bailout early in the new year
European leaders had an eye on the rest of the world:
8.41am: Apparently, Sarkozy rushed out of the leaders’ meeting in the wee hours of this morning to be the first to give a press conference.
Announcing the enlargement of the bailout fund to $1.4tn, he stressed: “$1.4tn – yes I said dollars. I’m not giving this information for European markets but for global markets.”
And traders, drunk on ‘hopeium’, drove the FTSE 100 up to a three-month high.
But then came the hangover. November 2011 is a month seared into the memory of eurozone crisis combatants. Two governments fell. Two elected leaders were replaced by technocrats.
Greece’s prime minister, George Papandreou, was the author of his own downfall. Having agreed a second bailout deal, laced with fresh austerity, G-Pap decided that it was only fair to give Greeks the chance to accept, or reject it.
This passion for democracy went down badly with fellow EU leaders, gathered in Cannes for the G20. And that’s when the drama really started.
Finance minister Evangelos Venizeloz, sensationally, flew back to Greece and announced that the referendum was a dreadful idea and should be scrapped.
While the Greek government wobbled, the ECB — under the new leadership of Mario Draghi — slashed interest rates. And late that night, Papandreou’s precious referendum was off.
• George Papandreou has abandoned his plan to hold a referendum, amid scenes of open warfare in his own party. Finance minister Evangelos Venizelos forced the move in an early-morning speech, saying Greece’s eurozone membership was too important to risk.
• Opposition leaders are resisting Papandreou’s efforts to create a caretaker government of national unity. They are calling for his resignation instead.• Vote of confidence will still take place on Friday night. Papandreou may quit even if he wins• The European Central Bank surprised the markets – by cutting interest rates to 1.25%
The next day was also stuffed with activity. In Cannes, European countries came under real pressure from America to step up to the plate and shore up the eurozone. The summit (Silvio Berlusconi’s last waltz on the world stage as a political leaders) achieved little, though, and merely welcomed measures agreed last month.
Political correspondent Andy Sparrow remarked:
This is meant to be the “firewall” leaders have been talking about. At the moment it is looking more like a hay one than a concrete one.”
In Greece, crowds flocked to Syntagma Square for their prime minister’s swansong.
He promptly quit the next day, triggering one of the most tense weeks in the eurozone’s history.
While Greece struggled to find a new leader, the spotlight turn dramatically to Italy. There, the national debt had climbed towards 1.9 trillion euros while Silvio Berlusconi bunga-bunga’d around.
But there was no time for partying as Italy’s borrowing costs rocketed. Suddenly, 7% was on everyone’s lips – the danger zone for Italian borrowing costs.
Berlusconi’s end was swift. On Tuesday 8 November he dramatically lost his majority in a budget vote. Investors dumped Italian bonds, the Italian president met with Silvio, and the great survivor of Italian politics offered to quit.
But it took until Friday for Greece to be bustled into accepting a technocratic government, led by Lucas Papademos, a former senior official at the ECB.
And in Italy, senators finally agreed an austerity package, paving the way for former European commissioner Mario Monti to become PM.
But even then, there was more tension as Monti struggled to form a government; bond yields tore through that 7% mark on the “most worrying day” in the crisis so far.
The installation of Monti as PM did, for a while, calm the eurozone, as did the news that the ECB was aggressively buying up Spanish and Italian bonds to push down yields.
And there was time for further drama; another EU summit to ‘save the euro’, but this time David Cameron vetoed plans to rewrite the Lisbon Treaty.
2011 ended with the UK looking more isolated in Europe than for years…
And we headed off for Christmas, with Bank of England governor Mervyn King warning that “the warning lights are flashing red” across the Eurozone.
Onto 2012. And the year began with record unemployment, weak growth, and the night of the credit rating downgrades.
S&P wasn’t hanging about, downgrading nine countries and casting France’s AAA rating into the abyss.
The French and UK governments has already fallen out, in a slightly unedifying (but terribly entertaining) spat over who had the worst economy.
But soon the focus returned to Greece, and its second bailout package.
This, let the history books show, was the era of the all-night negotiations. On 20 February, EU leaders gathered to decide whether Athens had done enough to receive its second bailout package, worth around €110bn.
The leaders met, hugged, talked, and talked, late into the night while the press pack lingered (or snoozed)
But finally a breakthough….
…that held the eurozone together.
As we wrote, bleary-eyed, that morning:
Eurozone finance ministers have agreed the details of a €130bn financial package for Greece, after 14 hours of negotiations in Brussels.
• The deal, it says, will cut Greece’s debt-to-GDP ratio to 120.5% of GDP by 2020, in line with previous targets. This will be achieved by private creditors taking a deeper cut on their existing Greek bonds, of 53.5% of their face value. The European Central Bank will also contribute, by passing the profits from its Greek bondholdings onto the national central banks, who will then pass it onto Greece.
• Greece will now begin negotiations with its private creditors over the terms of the package. It also appears that the Athens parliament plans to pass laws tomorrow to force losses onto bondholders who decline to take part in the ‘voluntary’ scheme.
• The deal was welcomed by all sides in Brussels, with Greek PM Lucas Papademos calling it a ‘historic moment’.
There were more hurdles to jump – March saw Greece hammer out the details of the debt swap with private investors, who took large haircuts to bring Greece’s huge debt mountain down.
But this crisis is about politics as much as finance. And in May, the electorate had their way — turfing out French president Nicolas Sarkozy, and also failing to give any ‘mainstream’ Greek party a majority.
• France struck out in a major new direction on Sunday, ejecting Nicolas Sarkozy from the presidency and voting in Socialist party candidate François Hollande. He campaigned against unpopular austerity measures, on a platform of promoting growth as opposed to the mere elimination of debt.
• In Greek parliamentary elections voters rejected two mainstream parties who had helped negotiate austerity plans meant to pull the country out of its debt crisis in favor of extreme candidates who echoed the popular outcry against austerity. The move cast further doubt on Greece’s long-term ability to stay in the eurozone.
Mohamed El Erian, chief executive of bond fund giant Pimco, summed it up:
The common message from the electorate is undeniable, reminiscent of a famous line in the 1976 movie Network: “I’m as mad as hell, and I’m not going to take this anymore!”
That Greek vote still sends shivers down the spine; the break-up of the eurozone was on….
Cue a second vote, in June. And left-wing leader Alexis Tsipras was making the running, as we wrote on the 9th May:
Today, the battle to form a new Greek government continues. Alexis Tsipras, leader of Coalition of the Radical Left party (Syriza), will use his mandate to attempt to reach a deal with other parties. But an agreement looks elusive, and it appears that another election will be held soon.
Tsipras’s call yesterday for Greece to ditch the austerity measures agreed with its lenders continues to reverberate, fuelling predictions that the country could quit the eurozone.
The following four weeks were box-office; at one stage, Angela Merkel even suggested a referendum on Greece’s euro membership (ironic, given this had brought down George Papandreou the previous autumn).
Then, the Bundesbank chipped in, saying the eurozone could cope without Greece anyway:
The word of the day was ‘eurobonds’ — shared debt to push down borrowing costs in the periphery. No chance, said Germany, not without political union and budget restraint.
But without Germany’s help, peripheral countries were in trouble.
As Greeks returned to the polling booths in June 2012, borrowing costs across the single currency were rising. Syriza held the lead, and the talk across the City was that Grexit was a certainty.
But it wasn’t. In the event, the right-wing New Democracy party came home first, hammering out a coalition with the rump of the Pasok party.
And with Spain agreeing a rescue plan for its banking sector, a measure of calm was returning…
Angus Campbell, head of market analysis at Capital Spreads, commented:
For now the two elephants in the room, namely Greece and Spain, have morphed into kittens following the Spanish bailout and newly formed Greek coalition today. Now investors are focusing on the prospect of more money being pumped into the system in a bid to prevent a slump in global growth.
But the calm didn’t last long. By July, Spain was feeling the heat, with bond yields surging over the 7% mark.
Rather worryingly, Spanish and Italian bond yields are back at pre-EU summit levels. The Spanish 10-year yield has broken through the 7% danger mark again, up 25 basis points at 7.038%. The Italian equivalent has risen through 6%, another important level – up 5 bps at 6.046%.
And there were even rumours, wild and incorrect, that Finland might quit the euro.
There was a double-whammy of gloom; rumours that Greece might not get its next bailout cash, and opposition to further austerity in Spain:
And with shares sliding, and eurozone bond yields on the rise, it took Mario Draghi, ECB chief, to calm the crisis. Decisively and unexpectedly. Draghi used a speech in London to declare that the euro was a bumblebee (it shouldn’t be able to fly, but it can). Now it must become a real bee.
Bamboozled? Don’t be; his next words were clearer: We’ll do everything within our mandate to save the eurozone.
That was the prelude to Draghi’s OMT programme; a pledge to buy unlimited quantities of bonds from eurozone countries who were locked out of the markets.
The programme was swiftly criticised by the German Bundesbank….
… and it’s never actually been deployed. But the prospect of the ECB unleashing a ‘bazooka’ worked; bond yields dropped, and kept falling for the next two years.
And there the story rested. Mario Draghi had saved the eurozone.
Of course, it wasn’t as simple as that. Autumn 2012 was punctuated by more signs that the eurozone economy was fragile, and arguments in Athens over whether Greece was meeting its bailout obligations.
Spain remained tense too — with riot police attacking protesters that autumn:
Angela Merkel even visited Greece; a six-hour flying visit, which saw 50,000 protesters defy an Athens lock-down.
There were ugly scenes; people were tear-gassed, a Nazi flag was burned, and one group even drove around in a German WW2 jeep.
Two protesters dressed in German military uniforms waved a red-black-and-white swastika flag and held out their arms in the Nazi salute.
The banners in Syntagma carry slogans such as: “Merkel out, Greece is not your colony” and “This is not a European Union, it’s slavery”.
But with Merkel’s plane flying Greek and German flags, and the chancellor speaking about learning lessons from the crisis, it was a signal of some normality returning to the eurozone.
Another year rolled round, and in January 2013 a confident Draghi could even say that the eurozone was benefiting from ‘positive contagion’.
But Europe’s economy was shrinking, as the region’s austerity programmes stifled demand.
Italian politics was a mess again too, with Mario Monti resigning after finding that pushing through unpopular economic reforms was too challenging even for him. A general election created deadlock, with strong support for the radical M5S party.
The markets reacted with their customary poise:
And Kit Juckes of Société Générale was pithy as ever:
The cognoscenti will be focusing on the fact that the Italian election was a clear anti-austerity protest by the people of the eurozone’s third-largest economy.
Austerity delivers an even higher debt levels as it induces perma-recession, so what’s the point?
The deadlock lasted for weeks, until the left and right agreed a coalition, with Enrico Letta as PM. He had a rough time of it, eventually ousted by fellow leftist Matteo Renzi, who felt he would make a better fist of the reform process. He still might….
There were ructions elsewhere too that February; Bulgaria’s government fell, after powerful anti-austerity protests.
But it was Cyprus which became the theatre for the latest act in the crisis that won’t die. Its banks were in trouble, partly because they had taken haircuts on their investments in Greek bonds.
And this was a gold-plated fiasco. One weekend, eurozone leaders agreed that Cyprus should be bailed out with €10bn, but only if bank accounts were taxed to pay the rest of the bill.
Even Russian president Putin weighed in:
That was just the start. In a wild week, MPs in Nicosia revolted, refusing to accept that every saver should pay a levy.
Millions of euros were flown into Cyprus, while politicians tried desperately to find a solution. Even the church weighed in: The Archbishop of Cyprus urged Russians not to flee the country, while humble parishioners faced tough times.
And with Cyprus’s future completely in the balance, eurozone leaders met in Brussels on a murky Sunday to try to find a compromise to hold their currency union together.
While they haggled, readers in Cyprus monitored the cash machines for us:
First one meeting, then another, as Cyprus’s president Nicos Anastasiades tried to reach a deal with Herman Van Rompuy and José Manuel Barroso.
Then it emerged that Anastasiades had threatened to resign during a heated exchange with European Union and IMF officials over a rescue package for his country, a senior official taking part in the negotiations said on Sunday.
Anastasiades objected to a proposal that two Cypriot banks be shut down if Cyprus is to meet the terms of the bailout being offered by the EU and IMF, the official said.
“He offered to resign,” the source said, describing the meeting, which included IMF Chief Christine Lagarde, European Central Bank President Mario Draghi, European Council President Herman Van Rompuy and other top officials, as tense..
Oh the drama. But Cyprus pulled back from the abyss. A deal was done. Its second biggest bank would close. Heavy losses for those with over €100,000 in the banks; capital controls for everyone. One euro was no longer the same across the region. If it was a ‘Cyprus euro’, you might not be allowed to get your hands on it.
Over to EU’s economic affairs chief Olli Rehn, in the early hours:
“It has been another hard day’s night,” he says, adding that he won’t say it is “a long and winding road”.
And a strange kind of normality returned.
The eurozone crisis hasn’t really dominated the world news in the same way since (although the market turmoil of recent days suggests another bout of panic could be approaching).
Events became more mundane. Eurocrats, especially those ending their terms of office, would talk about the ‘existential threat’ to the euro having been repelled. Mario Draghi would rail against complacent governments, urging them to use this opportunity to make reforms.
Worth noting, too, that the ECB has not matched the balance sheet expansions of the central banks of Japan or the US. That monetary stimulus has also rippled through to Europe, pushing down peripheral bond yields, as Open Europe analyst Pieter Cleppe pointed out this week:
There were other changes. Greece’s famous riot dog, Loukanikos, died after years barking at police in the face of tear gas.
And one problem was replaced by another; the threat of deflation as austerity continued to drive down demand. Growth came to a halt. France stagnated. Germany, that Northern powerhouse, proudly posted a budget surplus and slipped to the brink of recession; politicians in Berlin declined to make a connection.
The eurozone still lacks the political union that critics say is essential. Greece’s debts remain alarmingly high. Italy struggles to grow. Extremist parties continue to make ground. This crisis is resting, not resolved.
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