10 YEARS OF THE EUROZONE PAST, PRESENT AND FUTURE

Transcription

1 10 YEARS OF THE EUROZONE PAST, PRESENT AND FUTURE

2 EDITORIAL Ricardo Oliveira Partner Head of EU and Competition Practice Area Economic history has been marked by a continuous struggle between creditors and debtors on the nature of money as a measure of economic value. Debtors have consistently wanted more money to be created in order to inflate their debts away, whereas creditors have been in favour of a restriction of the supply of money to preserve the real value of their receivables. In order to alleviate ensuing tensions, countries have created constraints on the creation of money by setting up independent central banks and defining inflation targets. Historically, changes in monetary systems have coincided with major economic crises. Most recently, the end of the gold-dollar peg in the 1970 s changed the nature of money, since the role of the dollar as a measure of value became blurred. The resulting reduced constraint on debt gave rise to a huge increase thereof and the world has consequently accumulated more claims to wealth than there is wealth. In the US, years of easy money made available by US Federal printing policies, created an environment of cheap credit and negative real interest rates, that led to excessive risk taking by creditors and debtors alike, which resulted in a debt boom. In China, the absence of an open international market for the Renminbi has prevented the currency from appreciating as a result of the country s export boom. As a result, the export cycle was artificially prolonged, which led not only to inflation but also to the accumulation of a huge amount of foreign exchange reserves. Those reserves were, to a very large extent, invested in US Treasuries which artificially brought Treasury yields down and compounded the easy money environment in the US. In Europe, most experts agree that the Euro legal framework seemed flawed from the outset. Under the Euro arrangements, Eurozone Member Countries would share the same currency and the same monetary policy overseen by the European Central Bank (ECB), while keeping their own individual fiscal policy. With Europe s peripheral countries being able to borrow money at Germany s much lower rates, they went on a borrowing spree and in the process became less and less competitive mainly due to the fact that increased, spending was not backed up by increased production. Europe now finds itself in financial difficulties and, as a consequence, Europe s main economies are now being forced to impose fiscal austerity on the periphery economies in exchange for bailouts. This is causing a slow down in economic growth and, in some cases, potentially recession. Most experts will agree that the ECB s reluctance to take action in the early stages of the crisis, resisting offsetting fiscal austerity with US-style monetary easing and instead raising interest rates while shrinking its balance sheet, may have compounded Europe s debt crisis. Later it did, however, reverse course with an interest rate cut and an expansion of its balance sheet through peripheral countries Treasury bond buying, which eased some of the pressure. Although the recent ECB measures have helped stabilise financial markets, a definitive recovery in confidence requires long-term structural solutions. Various suggestions have been made by analysts and experts. General consensus seems to be towards some form of sovereign debt joint and several liability regime with the associated features (e.g. common tax collection, coordination of economic policies and joint debt issuance). This may not, however, be 2

3 feasible in the short term in view of the existing political landscape in Europe. Moreover, the creation of EU federal debt may not be enough to eliminate the problems created by the economic gap between Europe s main economies and the periphery economies in terms of their competitiveness. Since peripheral economies can no longer simply devalue their currency and inflate their way out of debt, the only possible alternatives available seem to be growth or default. Growth is unlikely in the near term, since bringing these countries back to competitive levels would entail measures including severe cuts in real wages which, in the end, is not only negative for those countries citizens, but also for the economies from which they import goods and services. Default is not a realistic option for Europe s overleveraged banks. In both cases these are difficult pills to swallow and short term growth and a return to competitiveness in the periphery economies may prove challenging. While inflation seems like a more attractive and popular solution in peripheral economies, it is unlikely that creditor economies, mainly Germany, would be willing to endorse it. Financial analysts have recently suggested that the ECB could turn the tide by committing to unlimited peripheral economy Treasury bond buying. However, most experts agree that this is an unlikely approach for the ECB to take. Europe s periphery could be heading for a difficult deflationary healing process that may take years to work out. In short, the Eurozone debt crisis is far from over. In fact, it may only just be beginning in earnest. Portuguese Law Firm of the Year Chambers European Excellence Awards, 2009; Shortlisted 2010, 2011/ Who`s Who Legal Awards, 2006, 2008, 2009, 2010, 2011/The Lawyer European Awards- Shortlisted,2010, 2011 Best Portuguese Law Firm for Client Service Clients Choice Award - International Law Office, 2008, ª Most Innovative Law Firm in Continental Europe Financial Times Innovative Lawyers Awards, 2011 Corporate Law Firm of the Year - Southern Europe ACQ Finance Magazine, 2009 Best Portuguese Tax Firm of the Year International Tax Review - Tax Awards 2006, 2008 Mind Leaders Awards TM Human Resources Suppliers

4 THE EUROZONE CRISIS EXPLAINED EUROPE HAS ACCUMULATED A HUGE AMOUNT OF GOVERNMENT AND PRIVATE SECTOR DEBT WHICH THEY MAY NOW STRUGGLE TO REPAY. 10 years ago the Euro was introduced in the (then only) 11 Eurozone countries as currency. The arrival of the Euro had been anticipated since its introduction to the monetary system as a monetary concept in With Greece joining the Eurozone in 2001 and many other new EU members signing up later, the project was hailed as a success at the time. 10 years on and the Eurozone, with its 17 current members, now finds itself in financial and political turmoil. The recent Greek Tragedy almost brought the Eurozone to its knees and now Italy and Spain are wobbling, joining Portugal and Ireland. The last months of 2011 were marked by a frenzy of summits and talks among European leaders which focused on the current Eurozone crisis. So where do we all stand now? THE HEART OF THE EUROZONE CRISIS REVOLVES AROUND TWO MAIN PROBLEMS: 1. DEBT Europe has accumulated a huge amount of government and private sector debt which they may now struggle to repay. The debt is primarily held by EU banks and increasingly also by the ECB as it buys up debt in an effort to stabilise the Eurozone. This has resulted in a loss of confidence by investors in the European banking system. Heavily indebted countries like Spain, Greece, Italy, Ireland, and Portugal need help to manage their financial situations. EUR 281 bn has already been paid out in bailouts and emergency loans and more may be needed to prevent the crisis spiraling out of control. The biggest fear of politicians and investors is that a worsening of the financial situation in Greece, Italy or any of the other member states, could trigger a domino effect within the Eurozone, leading to its collapse and potentially (re)triggering a global financial crisis. The potential resulting negative effect on the global economy is why non-eu countries like the US and China are also concerned with resolving the crisis. Germany, with currently the strongest economy in the Eurozone, has been footing most of the bailout bill so far. It has a vested interest in keeping the Eurozone going, since it needs the Eurozone for its export market. But Germany s pockets are only so deep. Third parties like China have been asked to step in, but until there is stability in the Eurozone, they remain reluctant to invest. 2. ECONOMIC GROWTH It looks like the EU economy might enter into a recession again with the economy forecasted to shrink in Q by 1%, and 0.4% in Q This may negatively impact countries already implementing austerity measures in an effort to manage their debt while the current economic climate actually requires them to adopt stimulus policies. In order to avoid a severe recession or even possibly a fully-fledged depression in the peripheral countries, a number of analysts have suggested that Germany and other Eurozone core countries, with more room to maneuver within their budgets, should reflate their economies aggressively. However, it seems unlikely in view of the current political stance adopted by Germany that this approach will be taken. 1 OECD Economic Outlook, Volume 2011/2 OECD 2011 Preliminary Version 2

5 SO WHAT HAS BEEN DECIDED SO FAR? 26 OCTOBER 2011 EU SUMMIT uedocs/cms_data/docs/pressdata/ en/ec/ pdf 26 OCTOBER 2011 EU SUMMIT This was the first of three major EU talks in Q4 of 2011 and predominantly focused on the situation in Greece and its potential knock-on effects for the rest of the Eurozone. The summit concluded on 26 October 2011 with EU leaders resolving to attack the Eurozone crisis from three angles: Private sector lenders holding Greek debt need to agreed to take a 50% loss, cutting Greece s debt to 120% of its GDP by It would otherwise grow out of control; The Eurozone bailout fund needs to be boosted from EUR 440bn to EUR 1 tn, and Banks will be required to raise around EUR 160 bn in additional capital to help protect themselves against potential sovereign default. Greece then dropped a bombshell on 27 October with the then Greek Prime Minister Papandreou announcing the intention to hold a referendum on the measures to be applied in Greece, effectively letting the Greek people decide if they wanted to stay in the Eurozone. There were strong concerns among EU leaders that, if Greece were to leave the Eurozone, it could result in the beginning of the end for the Euro with other financially weak countries likely to have to follow suit as confidence in the EU banking system would further diminish. Greece withdrew its plans to hold a referendum but quickly found itself in political crisis as the then Prime Minister began losing his governments confidence. G20 SUMMIT 3 AND 4 NOVEMBER g20/english/for-the-press/newsreleases/g20-leaders-summit-finalcommunique.1554.html G20 SUMMIT 3 AND 4 NOVEMBER 2011 The G20 Summit in Cannes took place during perhaps some of the most turbulent days of the Eurozone crisis. While it was not specifically intended to deal with the Eurozone crisis, with growing speculation that Greece may leave the Eurozone, potentially resulting in a collapse of the Eurozone, it was no surprise that the summit primarily focused on the financial situation in the Eurozone and its potential effect on the rest of the world s economies. G20 leaders presented their final communiqué on 4 November 2011 which included the following items. The G20: Commits to move «more rapidly» towards greater exchange rate flexibility, without specifically mentioning China; Agrees to support the IMF and give it more money if necessary (although the details of the «support» are to be worked out in a separate meeting in February 2012); Welcomes Italy s invitation to the IMF to monitor its economic reforms; Calls on countries with strong public finances to take steps to boost domestic demand; Welcomes the Eurozone s plans to restore confidence and financial stability; and Sets up a task force on youth employment. The Cannes Action Plan was criticised by the markets for being short on detail and not containing enough hard commitments and targets. 3

6 8 AND 9 DECEMBER 2011 EU SUMMIT uedocs/cms_data/docs/pressdata/ en/ec/ pdf 8 AND 9 DECEMBER 2011 EU SUMMIT At the EU Summit held on 8 and 9 December 2011, coincidentally the 20th anniversary of the Maastricht treaty, a roadmap for a fiscal compact was agreed on by 26 of the 27 Countries with the UK vetoing treaty changes due to insufficient safeguards to its financial sector. The Eurozone Plus countries committed themselves to hammering out an international agreement by March in lieu of EU treaty changes. Some of the key points of the roadmap include commitments on: Balancing budgets: the annual structural deficit may not exceed 0.5% of GDP; Including budgeting rules in national legislation of constitutional or quasiconstitutional rank; Automatic consequences for a breach of the 3% deficit ceiling; Accelerated implementation of the European Stability Mechanism (ESM), the Eurozone s permanent bailout fund, aimed to enter into force in July 2012; the existing European Financial Stability Facility (EFSF) will remain active until mid The overall ceiling of the EFSF/ESM of EUR 500bn will be reviewed in March 2012; Eurozone and other EU states will confirm within 10 days the provision of funds to the IMF of up to EUR 200bn in the form of bilateral loans to help it deal with the crisis; and Voting rules in the ESM will be changed to allow decisions by a qualified majority of 85% in emergencies, although that remains subject to confirmation by the Finnish parliament. The UK s poignant decision not to be a part of any Eurozone deal, is met with conflicting opinions in the media and on the political scene. With all the other EU countries (albeit a small number made their approval subject to national parliamentary approval) in on the deal, concerns are voiced that this could split the EU into a two speed union. The Eurozone deal gets a cool reception form the markets and the plan is criticised for still being too general. The ECB hails it as a step in the right direction but warns that it will not yet act more aggressively towards buying up debt. The IMF also agrees that there has been progress but is clear in saying that this is not the whole solution. 4

7 30 JANUARY 2012 EU SUMMIT uedocs/cms_data/docs/pressdata/ en/ec/ pdf DRAFT TREATY ON STABILITY, COORDINATION AND GOVERNANCE IN THE ECONOMIC AND MONETARY UNION europa.eu/media/579087/treaty.pdf 30 JANUARY 2012 EU SUMMIT EU leaders met in Brussels to discuss, among other things, the fiscal compact agreed upon during the the previous EU summit in December EU leaders drew up a draft Treaty on Stability, Coordination and Governance in the Economic and Monetary Union. The 16-article treaty covers the following key points: The introduction of the balanced budget rule which effectively means that that national budgets should be balanced or in surplus; this principle will be deemed respected if, as a rule, the annual structural deficit does not exceed 0.5% of GDP; The balanced budget rule is to be incorporated into national (constitutional) legislation; The European Courts of Justice may impose a penalty of up to 0.1% of GDP, payable to the ESM, if the balanced budget rule is not transposed to national legislation correctly or within the given timeframe; An automatic correction mechanism will be triggered in the event a government deviates from the balanced budget rule; There will be reversed qualified majority voting in respect of the decision whether to place a country in an excessive deficit procedure; and The treaty also includes provisions on the coordination and convergence of EU Member State s economic policies and on governance of the Eurozone. In particular Euro Summit meetings will take place at least twice a year. 25 of the 27 members of the EU agreed to sign up to the treaty. As predicted, the UK did not agree to be a party to the treaty but this time the Czech Republic, which is not a Eurozone member but, like other new EU members, is committed to joining, confirmed it too would not sign up to the treaty citing constitutional reasons. Will the Euro survive? Will the EU stay in tact? Will Portugal Spain, Italy or any of the other countries in financial trouble default? Will they need bailouts? Will the fiscal compact work? Has the UK lost its influence in the EU? Will market confidence be restored? The events of the last monthshave perhaps left us with more questions than answers. Only one thing is certain: nothing is certain anymore. 5

8 TIME LINE THE EURO WAS INTRODUCED TO REDUCE TRADING COSTS, BOOST TOURISM AND SMOOTH THE ECONOMY. SO WHAT HAS HAPPENED? SEE OUR TIMELINE FOR A MORE DETAILED LOOK AT THE EVENTS THAT HAVE LED UP TO THE CURRENT EUROZONE CRISIS E-Day: Euro currency introduced in 11 countries including Portugal, Spain, Italy and Ireland. Greece was not initially part of the Eurozone Greece joins the Eurozone. Using the Euro, it begins borrowing money at low rates to pay for its public spending which it cannot afford on its own income Notes and coins are introduced Lehmans falls the start of the global financial crisis.eu leaders agree on a EUR 200 bn stimulus plan to help boost growth April France, Spain, Ireland and Greece are ordered by the EU to reduce their deficits. October In Greece, Papandreou s party wins the emergency general elections called due to anger over corruption and spending by the former government. November Some EU members states debt starts to grow as a result of the Dubai sovereign debt crisis, causing concern. December By now, Greece has run up debts of EUR 300 bn, the highest in modern history EU leaders remain convinced that, while problematic, it is a matter that should be resolved domestically. Greece insists it will not default on its debt January Severe irregularities in Greece s accounting procedures are discovered by the EU. Greece s budget deficit is revised upwards from 3.7% to 12.7% of GDP - more than 4 times the maximum allowed by the EU. February Greece proposes austerity measures. But these are not strong enough for the EU which requires further cuts in spending. The austerity plan is very unpopular with the Greek people and leads to rioting. April Greek deficit is reported to be even worse than thought at 13.6% of GDP. May Eurozone members and the IMF agree a EUR 110 bn bail-out for Greece. The Euro continues to fall and the other heavily indebted countries are viewed with further concern. Ireland begins to fail. November Eurozone members and IMF agree a EUR 85 bn bailout for Ireland. EU denies Portugal will be next Estonia joins the group of Eurozone countries which has been growing in numbers since 1999, bringing the total number of members up to 17. February A permanent bailout fund called the European Stability Mechanism (ESM) worth around EUR 500 bn is put in place by EU finance ministers. April Portugal requests help from the EU to deal with its financial situation. May Eurozone members and the IMF agree a EUR 78 bn bailout for Portugal. July Greece adopts a new round of austerity measures under pressure from EU finance ministers and amidst speculation that Greece may be the first country to have to leave the Eurozone. A second bailout for Greece is agreed. A EUR 109 bn package designed to resolve Greece s problems and prevent them spreading to other Eurozone countries. 6

9 August European Commission President Mr. Barroso warns that the Eurozone debt crisis is spreading beyond its borders. The ECB confirms it will buy Italian and Spanish government bonds to ease borrowing costs in an attempt to stop the spread of the Eurozone crisis. September Italy passes EUR 50 bn austerity budget. In the face of strong public opposition, some measures are watered down and concerns grow that it will not be enough. The European Commission predicts a virtual standstill of economic growth at just 0.1% for Q (that growth is later readjusted by the OECD in November to a contraction of 1%). Inflation looks set to remain high at around 3%. Even the Eurozone s private sector shrinks for the first time in 2 years. October Financial leaders from the EU, IMF and the rest of the world call for urgent measures to be taken as the Eurozone crisis worsens. 21 October EUR 8 bn of the first of the bailout packages for Greece is approved by Eurozone finance ministers. Plans continue for a second bail-out package for Greece. 26 October - EU Summit: Three front attack on Europe s sovereign debt problems agreed among European leaders: - Private sector lenders holding Greek debt will need to take a 50% loss, cutting Greece s debt to 120% of its GDP by It would otherwise grow out of control; - The Eurozone bailout fund will be boosted from EUR 440 bn to EUR 1 tn; and - Banks will be required to raise around EUR 160 bn in additional capital to help protect themselves against potential default. Greece is to receive a EUR 130 bn additional bailout in return for more, unpopular, austerity measures. 27 October Greece threatens the Eurozone crisis plan by moving to call a referendum on the bailout deal. The referendum was withdrawn but Greece finds itself sinking into political turmoil. 3-4 November G20 summit in Cannes: Eurozone countries restate their commitment to get behind the Euro. World leaders agree that IMF funds must be boosted to help out the Eurozone and stabilise world economy. China agrees to assist indirectly and Italy asks the IMF for assistance in monitoring the execution of its debt reduction commitments.the Italian government s borrowing cost rises from 6.37% to a Euro-era high (at the time) of 6.64% as fears grow over political uncertainty in Rome. 3-9 November Amidst political turmoil as a result of the failed referendum proposal, Greek Prime Minister George Papandreou resigns. 10 November The European Union drastically cuts its growth forecast for the Eurozone in 2012, from a predicted 1.8% to just 0.5% confirming there is a real risk of a new recession. 11 November Lucas Papademos, a former vice president of the ECB, who is not an elected MP becomes the new Greek Prime Minister and the new unity coalition takes its station. They form a Technocratic government of experts rather than just politicians and will remain in power until elections, probably early this year. 12 November Italian Prime Minister Berlusconi formally resigns after losing his government s confidence. The austerity measures demanded by the EU are designed to restore the markets confidence in the country s economy, are passed by both houses of parliament. 7

10 2 See footnote 1. 3 Protocol 12 sets out details of the excessive deficit procedure referred to in article 126 of the Treaty on the European Union. 17 November New Italian Prime Minister and former EU Commissioner Mario Monti and his Technocrat government of prominent economists and other experts, win an important confidence vote. They are tasked with bringing Italy out of economic crisis. 23 November Germany suffers probably its worst bond auction ever. Over a third of Bunds went unsold in an auction of EUR 6 bn of 10-year debt. Analysts fear that the «extremely poor» sale means Germany is being dragged into the crisis. European Commission President Jose Manuel Barroso unveils plans for Eurobonds, in the face of German opposition. Germany is rather pushing for political and fiscal reform at EU level that could see countries sending their national budgets to Brussels. 25 November Italy was forced to pay record interest rates in a EUR 10 bn auction of Treasury bonds. The rate of interest for the new debts due to be repaid in six months was 6.504%, compared with 3.535% in the last comparable sale on 26 October. The rate for two-year borrowing was 7.814%, up from 4.628% last time. 28 November OECD warns of a European recession predicting that the Eurozone economy will shrink by 1% in Q4 of 2011 and by 0.4% in Q1 of November Eurozone ministers agree to expand the bailout fund but they say it is unlikely they will be able to reach the EUR 1 tn target set in October. 30 November The ECB, along with five other central banks including the US Federal Reserve, the Bank of England and the Bank of Japan, announce a joint action to lower interest rates on dollar liquidity swaps. 5 December Nicolas Sarkozy and Angela Merkel meet in Paris for a week of meetings involving European leaders, the ECB and US Treasury Secretary Timothy Geithner, culminating in Brussels at the end of that week with an EU summit. Ratings agency Standard and Poor s put almost all the Eurozone countries including Germany and France on «credit watch» due to fears over the debt crisis. This effectively means that Germany, France, Austria, the Netherlands, Finland and Luxembourg which all have top AAA ratings, would have a 50% chance of seeing their ratings downgraded within the following 90 days. Ireland and Italy propose even tougher austerity measures. 7 December EC President Mr. Van Rompuy s Interim Report (dated 6 December 2011) for the EU Summit is leaked. It includes the following suggested measures: - Revision of Protocol Nº 12 3 and the inclusion of a budget balancing rule in national legislation; - National debt should be brought below 60% of GDP; - Greater integration towards a fiscal compact ; - Enhanced role for EU institutions with more intrusive powers in case of lack of implementation; - Leaving the door open to the concept of common debt issuance; - Allowing the ESM to directly recapitalise the banking institutions; and - Lifting the limitation of consolidation of the ESM and the EFSF increasing the Eurozone bail-out capacity. 8

11 France and Germany submit a letter to Mr. Van Rompuy outlining their proposal for the Euro Plus Pact. It includes: - A common legal framework on:. financial regulation;. labour market;. corporation tax and financial transactions tax;. policies that support growth; and. better use of European funds within the Eurozone; - A Stability and Growth Union; - Procedures to correct breaches of 3% deficit of GDP ceiling; and - Procedures for debt reduction by Eurozone countries with debt higher than 60% of GDP. 8 December The ECB cuts interest rates back to a historic low of 1%. 9 December After round the clock talks at the EU Summit, 26 of the 27 EU leaders agree on the following key points for a new «fiscal compact» to tackle the Eurozone s debt crisis: - Significantly stronger coordination of economic policies in areas of common interest; - Eurozone member states budgets should be balanced or in surplus; this principle will be deemed respected if, as a rule, the annual structural deficit does not exceed 0.5% of GDP; - A similar rule will also be introduced in Eurozone member states own national legal systems; they must report national debt issuance plans in advance; - As soon as a Eurozone member state is in breach of the 3% deficit ceiling, there will be automatic consequences, including possible sanctions, unless a qualified majority of Eurozone states is opposed; - The ESM, the Eurozone s permanent bailout fund, is due to enter into force in July 2012; the existing EFSF will remain active until mid The overall ceiling of the EFSF/ESM of EUR 500 bn will be reviewed in March 2012; - Eurozone and other EU member states will confirm within 10 days the provision of funds to the IMF of up to EUR 200 bn in the form of bilateral loans to help it deal with the crisis. - Voting rules in the ESM will be changed to allow decisions by a qualified majority of 85% in emergencies. On the basis that there were insufficient safeguards to its financial sector, the UK uses its veto to block changes to EU treaties which require all 27 countries to agree. The Eurozone Plus countries commit to finalise a new intergovernmental treaty based on the points already agreed, by March The markets show their lack of confidence in the new EU plan as the Euro drops against the dollar in the week after it is released. 18 December Rating agency Fitch downgrades France s outlook from stable to negative. It retains its AAA credit rating for the time being. Fitch concluded that in its opinion a comprehensive solution to the Eurozone crisis is technically and politically beyond reach. 20 December The EU fails to raise the EUR 200 bn agreed in the December 9 plan. The EU only manages to raise EUR 150 bn after the UK declines to contribute. 21 December The ECB offers cheap three-year loans, lending EUR 489 bn euros to Eurozone banks who rush to take up the loans. The ECB hopes that the Eurozone banks will use the extra funds to buy up sovereign debt. 9

12 27 December The ECB receives record cash deposits of EUR 412 bn reflecting the lack of confidence among Europe s banks about lending money to each other. Banks pay approximately 1% interest on the loans they receive from the ECB, whereas the ECB only pays them 0.25% annualised interest on the spare cash they place in the ECB s deposit facility, effectively making a loss. 29 December Italian borrowing rates remain high at 6.98% on 10-year bonds as Italian Prime Minister Mario Monti calls for a united response to the crisis. Italy is preparing a pack of measures to encourage the Italian economy January In an unprecedented bond auction, investors pay to lend Germany money as it sells EUR 3.9 bn of six-month bonds with an average yield of %. This is deemed a clear sign of the lack of confidence in the other Eurozone countries by analysts. Concerns rise as the EUR 14.5 bn Greek debt repayment is scheduled for March. Without the second bailout funds, Greece will not be able to pay and will default. Germany s Chancellor Angela Merkel urges that an agreement with Greek bondholders must come soon for Greece to receive the vital second bailout. 13 January The negotiations between Greece and its private sector lenders over the 50% debt writedown stall. European stock markets drop amidst rumours that France and other governments are about to have their credit ratings cut by S&P. 14 January S&P downgrades France, Italy, Spain, Cyprus, Portugal, Austria and other governments. Mainly as a consequence of France s downgrade, the EFSF s credit rating is also downgraded which experts deem a major blow to the Eurozone recovery plan. The downgrade is met with frustration from the Eurozone governments. Economic affairs commissioner Olli Rehn said the move was «inconsistent» as the eurozone was taking «decisive action» to end the debt crisis. 18 January The World Bank warns the developing world as global economic growth slows. The organisation cuts its growth forecasts to a 0.3% contraction for the Eurozone in Greek debt write-down talks resume. 20 January An initial agreement on the Greek debt write-down is reached between the Greek government and the private sector lenders. Italy approves reform measures designed to boost its economy. 24 January EU finance ministers reject the initial Greek debt writedown deal on the basis that the offered interest rate of 4% is still too high to be sustainable. Talks between Greece and the private sector lenders continue on an on-off basis as they attempt to come to a mutually satisfactory agreement January Davos World Economic Forum: The Eurozone crisis is a topic that cannot be avoided at the World Economic Forum in Davos. The mood is generally somber although the main EU leaders remain stoically optimistic throughout. 30 January EU Summit: EU leaders meet to discuss, among other things, the draft Treaty on Stability, Coordination and Governance in the Economic and Monetary Union. The the key points of the new treaty are: - The introduction of the balanced budget rule which effectively means that national budgets should be balanced or in surplus; this principle will be deemed respected if, as a rule, the annual structural deficit does not exceed 0.5% of GDP; - The balanced budget rule is to be incorporated into national (constitutional) legislation; 10

13 - The ECJ may impose a penalty of up to 0.1% of GDP, payable to the ESM, if the balanced budget rule is not transposed to national legislation correctly or within the given timeframe; - An automatic correction mechanism will be triggered in the event a government deviates from the balanced budget rule; - There will be reversed qualified majority voting in respect of the decision whether to place a country in an excessive deficit procedure; and - The treaty also includes provisions on the coordination and convergence of EU Member State s economic policies and on governance of the Eurozone. In particular Euro Summit meetings will take place at least twice a year. 25 of the 27 members of the EU agree to sign up to the treaty with the UK and the Czech Republic declining. February The ongoing will they, won t they discussions regarding Greece s debt mountain continue between, not only Greece s private sector lenders, but also with the Troika of the IMF, the ECB and the EU who want deeper cuts in Greece s budget before they will release the funds Greece desperately needs to repay EUR 14.5 bn of debt in March. 2 February The new treaty to create the ESM is signed. The world waits with baited breath. Greece must come to an acceptable agreement with its private sector lenders and the Troika if it is to receive the bail-out funds it needs to meet the payment of EUR 14.5 bn of maturing bonds in March. The markets, led by the rating agencies, remain unconfident in the current financial climate. Global financial institutions such as the IMF and the World Bank continue to issue warnings to the global economy to prepare for what is to come. This Guide is intended for general distribution to clients and colleagues and the information contained herein is provided as a general and abstract overview. It should not be used as a basis on which to make decisions and professional legal advice should be sought for specific cases. The contents of this Guide may not be reproduced, in whole or in part, without the express consent of the author. If you should require further information on this topic, please contact Ricardo Oliveira (ricardo.oliveira@plmj.pt), Hugo Rosa Ferreira (hugo.rosaferreira@plmj.pt) or Jodie Lazell (jodie.lazell@plmj.pt). 11

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