The Impact Of Bond Market On European Government Debt Problems

Prior to the crisis, the market comprised mainly bonds issued by the Australian banks and asset‑backed securities. Together these accounted for just over half of the outstanding stock of Australian bonds in June 2007. Bonds issued by the public sector were a relatively small share of the market, at 16 per cent of the total outstanding

The Eurozone is facing a serious sovereign debt crisis. Several Eurozone member countries have high, potentially unsustainable levels of public debt. Three—Greece, Ireland, and Portugal—have borrowed money from other European countries and the International Monetary Fund (IMF) in order to avoid default. With the largest public debt and one of the largest budget deficits in the Eurozone, Greece is at the centre of the crisis. The crisis is a continuing interest to Congress due to the strong economic and political ties between the United States and Europe.

With the impending Presidential election consuming the American news cycle, major media outlets and the general public alike have neglected a growing crisis within one of the world's most important centers of commerce and culture. Despite the domestic rancor over stimulus packages, runaway debt and rampant unemployment which has inspired fierce political debate here in America, the fact remains that many European countries have borne the brunt of the global recession currently decimating national economies. The so called Euro Zone, a consortium of 17 neighboring nations which belong to the European Union (EU) and have adopted the Euro as their common currency, has experienced unimaginable financial disarray during the last decade. In the modern age of globalized economic structures, the increasing instability emanating from European markets is now threatening to spread to Asia, America and around the world.

Greek crisis I n recent times, the Subprime mortgage crisis in the US seems to have metamorphosed into the Euro crisis. Since early 201 0, the Eurozone has been facing a major debt crisis. Such countries as Greece, I reland and Portugal have accumulated unsustainable levels of government debt.

In Europe, as it is plagued by high unemployment, feeble wage gains, and a decent credit market the international recession continues to thwart economic recovery. These factors set tremendous restraint on consumer disbursement and company investment, the latter of which is restricted to considerable excess capacity and issues about the durability and sustainability of recovery. Italy and Spain carry on to fight, while Germany has gained from exports to China, and Greece has become practically insolvent. In reality, in accordance with the panelists, all holders of Greek bonds must take a 30 % "haircut" on

In the most recent of the world’s financial crises everyone has had to find a way to live a little, or in some cases a lot, more frugally. In the case of Portugal who joined the EU in 1986 and adopted the Euro currency in 1999, frugal is no longer enough (European Commission). While they are attempting to squeeze their way into a highly competitive market with exportable products and an appealing labor market for investors, they must also battle the European financial crisis. Not only does the financial crisis have Portuguese consumers zipping up their wallets but it also elicits questions as to whether their government can issue more bonds without defaulting on their current obligations.

Background: From 2009 onwards several Eurozone countries have come under pressure from the financial markets as a result of rising debt levels, economic contraction and decreasing solvency indicated by all major rating agencies. Through raising funding prices on the markets and the lack of trust in these Eurozone members – they were not able to finance themselves to sustainable costs anymore. One country after the other (Greece, Ireland, Portugal, Spain and Cyprus) had to be “rescued” by the then established financial support measures such as the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM). In exchange for these “bail-outs” countries had to fulfill certain economic conditions – mostly spending cuts – which led in turn to political change and instability.

Firstly, interest on debt is tax deductible, therefore, debt is the least costly source of long-term financing as this is a tax saving for the frim. Thus, creditors or bondholders require a lower return on debt as it is considered a reflectively less risky investment. Secondly, the capital structure of a firm is flexible due to debt financing. Ultimately, bondholders are creditors and they do not have voting rights, hence, they are not involved in decision making and business operations. Additionally, the major advantages of equity finance are as follows. Firstly, the capital provided is to finance the businesses short term needs and future projects. Secondly, the business will not have to pay any additional bank expenses such as interest on loans, thus allowing the business to use the money for business activities. Lastly, investors anticipate that the business will develop thus they help in exploring and executing thoughts. Certain sources, for example, venture capitalists and business angel can bring significant skills, abilities, contacts and experience to businesses and they can also provide expertise advice to businesses (Hofstrand,

The European sovereign debt crisis, which made it difficult or impossible for some countries in the euro area to repay or re-finance their government debt without the assistance of third parties (Haidar, Jamal Ibrahim, 2012), had already badly hurt the economies in “PIIGS”, Portugal, Ireland, Italy, Greece and Spain. This financial contagion continues to spread throughout the euro area, and becomes a dangerous threat not only to European economy, but also to global economy.

According to the analysis above, the euro crisis could be partly ascribed to previous financial crisis in 2008. After deeply investigation, the failure could have a lot of thing to do with government regulation and management. The reasons for European sovereign debt crisis could categorized into two main issue; income and solvency problem as analyze above. Hence, this part will examine the failure of both private and public sectors from the angle of accounting.

Concerns about the safety/stability of foreign assets relative to the United States. People want to invest and save their money in a currency that is not in danger of becoming worthless (like Germany’s after World War I )

Though bonds provide such safety, their yields are very low and have little potential for capital appreciation in the long-run for both the issuer and receiver. Besides, the low interest-rate of bonds makes the return on holding cash virtually non-existent (Voya & Scotia, 2009). Convertible bonds, however, offer a middle ground between the safety of bonds and the upside potential, and risk, of stocks. For this firm seeking income, higher-yielding convertibles bonds are the right options they can explore. This allows for the downside protection of a

The yields given by Greece government bonds are very high. It reached 61% in July 2011 for a 5-year bond, while the 10-year bond in Jan 2012 reaches 35%. The government bonds in Portugal, Cyprus and Ireland have similar yields like Greece. High bond yields is burdensome to the country. In order to solve this problem, Enhanced Debt Management is one of the solution.

The burden of debt in the European Union, especially in Greece and Ireland, is detrimental to the continent 's economy and people. Not only is it an issue throughout Europe itself, but it has become a dominant issue in global economics as well. As these European governments struggle to get back on their feet, the fate of the euro is clinging for life. It has become clear of the extremely high deficits, some at over 100% GDP, which are attached to several EU countries. This European crisis is a continuation of the global financial crisis, but also an issue which was brought upon themselves, largely by Greece. The Greek government

Europe is about to enter its third recession in the last three years, says The Economist. Prices fall in eight European countries, inflation fell to 0.3% and the region is prepared to deal with deflation and economic stagnation. The debt crisis in Greece has had a profound impact on the countries of the European periphery (Ireland, Portugal, Spain and Italy) but also had serious consequences for some larger countries because this debt was contracted primarily with French banks and Germans. At the same time, while the government promotes economic measures since 2010 to get support from multilateral agencies, millions of people are suffering the consequences of the crisis without consolation in the short term.