1 March 2012

1. The European sovereign
debt crisis, EMU and
Turkey
Dirk Verbeken
European Commission
Istanbul, 24 February 2012
European Commission, Economic and Financial 1
Affairs

2. The global financial crisis
has evolved through phases
 Phase 1: US mortgage market crisis
 Phase 2: Global credit crisis
 Phase 3: Global economic and financial crisis
 Phase 4: Sovereign debt crisis
European Commission, Economic and Financial 2
Affairs

3. Interaction of sovereign and
bank-balance sheets
 Credit risk transferred from banks to government
2008/9
 Government finances weakened further by recession
 Investors focus on public debt sustainability
 Pressure in sovereign debt markets
 Banking sector vulnerable via sovereign exposures
European Commission, Economic and Financial 3
Affairs

4. The vicious circle
Slowing economy
Banking sector
Sovereign crisis fragility
European Commission, Economic and Financial 4
Affairs

5. Responses to the crisis
 Remove market uncertainty relating to Greece
 Budgetary consolidation and growth in vulnerable Member States
 Firewall against contagion in sovereign debt markets
 Reinforcement of the EU banking sector
 Strengthening of euro-area governance framework
European Commission, Economic and Financial 5
Affairs

6. Greece
 Early 2010: confidence lost
 May 2010: € 110 bn package
 Mid-2011: new package, easier
conditions for existing loan
 End-2011: upward revisions deficit,
slower growth
 Feb 2012: € 130 bn package
European Commission, Economic and Financial 6
Affairs

7. Action on vulnerable Member States
 Ireland: good programme implementation 
market confidence is returning
 Portugal: structural reforms aim at switch
from consumption to exports
 Italy: new government adopted package to
address twin challenges
 Spain: new government adopted package
for fiscal reform at all levels of government
European Commission, Economic and Financial 7
Affairs

8. Firewall 1
Up to €750 bn financial stability
package
(support in the form of loans
under strict conditionality)
EFSM - €60 bn EFSF - €440 bn
IMF – up to €250 bn
European Financial European Financial
International Monetary
Stabilisation Mechanism Stability Facility
Fund
European Commission, Economic and Financial Affairs
European Commission, Economic and Financial 8 8
Affairs Delegation of the European Union to China

9. Firewall 2: ESM
 Capital size and structure:
 Size: € 500 bn
 Paid-in capital; callable capital; guarantees;
 AAA rating
 Instruments:
 Loans (ESM stability support)
 Bond purchases (Primary market support facility)
 Pricing: in line with IMF pricing
European Commission, Economic and Financial 9
Affairs

10. Reinforcing the banking sector
 Restore confidence
 9% capital ratio
 submit plans to deal with shortfall
 ECB measures
 easing of collateral requirements
 reduce reserve requirements
 LTRO with 3-y maturities
European Commission, Economic and Financial 10
Affairs

11. Governance Reform
 Strengthening the SGP
 Preventing and correcting macroeconomic
imbalances
 Reinforcing economic surveillance
European Commission, Economic and Financial 11
Affairs

12. Reform of the SGP
 More focus on public debt
 Strengthening Enforcement
Wider range of sanctions
Triggered at an earlier stage
More automaticity
European Commission, Economic and Financial 12
Affairs

13. Macroeconomic
Surveillance
 Preventive arm:
– Alert mechanism – scoreboard
– In-depth country analysis
– Recommendation on how to tackle
imbalances
 Corrective arm:
– Excessive imbalances position
European Commission, surveillance
 stricter Economic and Financial 13
Affairs

14. Europe 2020
 Structural reforms to raise potential
growth
– Smart consolidation
– Reforms with low costs for the budget
– Priority to growth-stimulating reforms
European Commission, Economic and Financial 14
Affairs

15. Fiscal Compact
 Legally binding balanced budget rule
 Automatic correction mechanism
 Ex-ante coordination of debt issuance
 Ex-ante coordination of major
economic policy reforms
 Euro Summit meetings
European Commission, Economic and Financial 15
Affairs

16. Route to a stable EMU
Restore confidence via
 Sound public finances
 Spur growth and competitiveness
 Stable achitecture (‘reinvent EMU’)
 Deepening integration and financial
market reform
European Commission, Economic and Financial 16
Affairs

17. What about Turkey?
 Declining demand and confidence in
the EU markets affect Turkish exports,
FDI and growth prospects.
 In a G20 and IMF context, Turkey has
a say and a role to play.
 The Derviş-plan and the way it was
implemented by the government show
that there is a way out…
European Commission, Economic and Financial 17
Affairs

18. European Commission, Economic and Financial 18
Affairs