Eurozone Crisis Case

The Euro – Case and Reading

1. The euro zone and the subprime crisis

a. The Federal Reserve’s initial response to the subprime crisis consisted of using their Troubled Asset Relief Program (TARP) to pursue. This allowed them to remove risky financial assets and injected cash into the economy, sometimes referred to as “quantitative easing”. The ECB, however, focused on providing liquidity to the market. Banks relied on ECB deposits to complete daily transactions that would have been otherwise provide by the money market. The ECB also lowered the Main Refinancing Operations (MRO) to 1%. The ECB eventually followed the Federal Reserve’s strategy in May 2009. I think it differed because the ECB had to deal with several countries and a common currency, as compared to the Federal Reserve which deals with one sovereign country.

b. Banking insolvency in Europe was handled by nationalizing troubled financial institutions and guaranteeing a portion of the consumer deposits. By nationalizing troubled financial institutions, banks were recapitalized. In addition, by issuing guarantees on bank deposits, cash was injected into the economy to cover the failed deposits and recapitalization of banks. This also increased fiscal expenditures of governments.

2. The euro zone, from financial crisis to sovereign crisis

a. The ECB was concerned about purchasing Greek debt due to “moral hazard” because the ECB needed to be equitable and set precedent. The ECB considered how other countries would react if the ECB bailed out Greece without any consequences. The ECB wanted to give the impression that a country could become insolvent and expect to be bailed out.

b. The ECB purchase program of Sep ’12 (Outright Monetary transactions) was unique because the ECB promised to buy sovereign bonds, if the providing country agreed to a fiscal adjustment