International Financial Markets and Institutions

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The majority of the Eurozone countries are struggling with national debts and large deficits in their budgets. This has resulted in the loss of confidence by investors as well as unsettled financial markets. Financial institutions such as the European Commission (EC), the European Central Bank (ECB), and the International Monetary Fund (IMF) have played a significant role in resolving this crisis. They have integrated both long-term and short-term measures to prevent the problem from escalating as well as address the underlying issues. The main focus is on building strong budgetary rules and discipline to help in safeguarding long-term financial stability to prevent new debts. These countries have also been keen on putting their public finances and economy in order by introducing reforms, especially cutbacks in spending. They are working within the limits set by the European Union budgetary rules. However some countries are genuine in their inability to meet their payment obligations, such countries have been allowed to seek assistance from the temporary European rescue funds although this is done under very strict conditions. The IMF participated in economic adjustment programs and financial assistance to the affected countries including Portugal, Greece, and Ireland. Working with the EC and ECB, IMF has facilitated the economic adjustment programs and has monitored the progress by reviewing quarterly based on economic missions (Franz & Thomas, 2012). The following is a discussion on how these institutions have helped in solving the Eurozone Crisis.

European Commission (EC)

The EC focuses mainly on the budget discipline to build strong economic governance and prevent further economic crises. Countries found to exceed or break the defined debt limits are subject to swifter financial sanctions, which were introduced towards the end of 2011. The commission checks the draft budgets by Eurozone countries to confirm whether they are in line with the rules set by the EU. On occasions where the drafts do not match the expectations, they recommend changes. Although the governments are free to ignore the changes recommended by the commission, the swift financial sanctions give the commission an extra level of oversight on the budgets. Countries that do not comply risk legal action by the EU. The commission has played a role in establishing a more integrated and effective framework for setting policies. In so doing, Eurozone countries agree that, in the first six months of the year, the commission should make suggestions be approved by the governments. This is on occasions where the fiscal policy is headed to the following year and includes an exercise in October in which draft national budgets are vetted. Any variations of the plans agreed on by the government at the beginning of the year can be identified and corrected. Through these procedures, the commission has managed to put the countries under strict surveillance and reduce the financial threat faced by these countries (Franz & Thomas, 2012).

The European financial stabilization mechanism in conjunction with the IMF and the European commission envisioned the selling of bonds and using the money for lending. This was envisioned to make a total of 440 billion dollars for the distressed Eurozone countries. The commission further participated in equipping stronger sanctions to serve as a financial firewall. This would minimize the probability of defaults and promote cooperation among the countries involved. Discipline is emphasized by the commission; it checks member state budgets before voting is done in the parliaments. In Feb 2009, a proposal was sent by the commission to come up with a systematic Risk board and a supervisory system and strengthen control on budget discipline. The two systems would help during the crisis and help the financial markets during the post-crisis period (Rogers, 2012).

The European Central Bank (ECB)

ECB’s main role is to provide price stability. Setting key interest rates is the primary task that helps the bank in achieving objectives. Being the sole issuer of banknotes, ECB seeks to manage the Eurozone foreign currency reserves to keep the exchange rates in check. It also helps the national authorities in supervising financial markets and institutions. It also helps in authorizing the national banks to issue banknotes and monitor trends in prices. The Eurozone debt crisis has forced the ECB to perform more than it is required, an issue that has raised concerns as to whether it violates the mandate. It promoted quantitative easing in which it purchased treasury bonds worth more than 2 trillion dollars. This initiative was meant to encourage borrowing, spur hiring, and promote employment. For instance, ECB introduced a securities market program in Greece to help in solving the debt crisis facing the nation. It purchased Greek government bonds and extended the process to other affected nations like Italy, Ireland, Portugal, and Spain. This enabled liquidity to indebted sovereigns and helped in bringing down the rising cost of borrowing to the major economies. Although the decision by ECB to buy bonds in secondary markets attracted a lot of debate, the initiative helped the indebted nations to bear with the hard structural reforms, fiscal measures, and the strict cost adjustments (Lapavitsas, 2012).

ECB played a crucial role as the lender of last resort and took exceptional measures in inserting liquidity in the banking sector and saving the financial system from collapsing. The additional goals created by ECB included job creation, supporting economic growth as well as maintaining stable exchange rates. It has established monitoring activities that help in identifying vulnerability sources and making an evaluation of the systems resilience degree and the potential shocks. This step has been extremely useful in creating a better understanding of the systematic risks that come with the increasing financial integration. It helps in the provision of emergency liquidity that may be required as a result of using a single currency for the entire Euro system. The ECB participates in the financial stability monitoring through the identification of the financial vulnerabilities, it monitors the arrangements made for crisis management and evaluates to ensure that there is adequate cooperation among the central banks (Berg, 2005). ECB’S main emphasis was that the design of unconventional tools should ensure a straightforward exit it further noted that, if need be, it could provide its paper or even offer additional short-term facilities to Facilitate deposits and mop up liquidity. This is an indication that the ECB is ready to promote liquidity to the extent of directing its resources to curb the crisis (International Monetary Fund, 2009). The ECB has also undertaken a series of measures to reduce the volatility experienced in the financial markets. Working in collaboration with the Federal Reserve, ECB ensured that the dollar swap lines were reactivated as a measure to improve liquidity. Further measures included the allotment of long-term Refinancing operations that would ensure that countries could pay the large sums over a longer period (Lapavitsas, 2012).

The International Monetary Fund (IMF)

The IMF has been actively involved in the rescue actions by the European Union to fight the debt crisis experienced by some of the European Monetary Union Countries. Just after the world financial market crisis, Hungary sent a request to IMF for a standby arrangement in which additional financial support was offered in using the Balance of Payments facility. This package amounted to 20 billion dollars and marked the start of numerous programs performed through joint efforts by the EU and IMF. In December 2008, the IMF offered another standby Arrangement to Latvia to help in adjusting financial programs. A loan was also granted to Romania amounting to 13 billion dollars this including financial assistance from the World Bank and other international financial institutions, as well. In 2009, Greek experienced budget deficits of about 12.5% of GDP; they kept worsening until 2010 when the EU and the IMF intervened by offering financial support, as well as an economic adjustment program. It was designed to run for three years and was supported through bilateral loans from EU economies and amounted to 110 billion dollars. This program involved the Greek government, the EC, ECB, and IMF and was called Troika. This program was formed to address the problem of high public debt and reduced competitiveness in the Greek economy. The loans were disbursed on the condition that reform progress was evident and controlled through close monitoring (Franz & Thomas, 2012).

Similarly, Ireland obtained financial assistance from IMF in which the three-year program amounted to 85 billion dollars. Portugal also ran the program for 78 billion dollars. Unlike Greek, the two countries were assisted through the extended fund facility arrangement. Mechanisms were adopted to provide steady funding to fill the financial gaps experienced despite the financial assistance offered. In this case, finances were obtained through decreased rates on lending and extension of debt maturities. For instance, in Greek, debt maturities were extended up to 30 years to improve the government’s sustainability and financial profile in regards to debts. Another strategy was to source funds through voluntary private sector involvement. This included cutting on the outstanding government bonds held in the financial sector thus the IMF offered continued support without extending new financial resources. The main aim was to solve the crisis within the Euro area without asking for external help. In contrast, ECB believed that countries would use the balance of payments as a financing mechanism, and this would mean that these countries would do without the help of the IMF. However, the IMF was ready to participate in the economic adjustment programs in which decisions were made by EU heads of governments (Franz & Thomas, 2012).

Some Endangered countries like the US feared that there was a possibility of this crisis spreading to them and urged the IMF to pump additional funds to the EU countries experiencing a crisis. The IMF has grown in terms of reputation and expertise based on 60 years of lending experience and encouraging reforms as well as in handling the financial crisis. This helped in resisting such political influence from threatened countries and put it in a position to enforce tougher programs. It had an enormous influence on Euro countries to agree easily and quicker to the terms and conditions for these programs. The IMF has also enabled Euro countries to agree and stipulate macroeconomic policies that affect more than one country. Therefore, through the IMF, there is proper coordination between Euro countries and donor countries, which promotes global cooperation. Given that financial support for countries under financial crisis poses moral hazard problems, there is a need to prevent the default or exit of a country. The programs provided by IMF provide strong and credible conditions that ensure that the possibility of default or exit is limited. IMF loan disbursement is only done upon adherence to the agreed reform steps which are normally approved by the EC and ECB officials, as well as the troika of the IMF. The IMF has been successful in fighting the Euro crisis because programs fight crisis causes and enforce the necessary economic reforms. It also acted as an insurance mechanism to ensure that any risks encountered would be shared by all the member countries and not just the EU alone (Franz & Thomas, 2012).

Notable Changes by EC, ECB, and IMF on Eurozone Countries

Although there have been challenging macroeconomic conditions, the adjustment programs undertaken by the three institutions have contributed a lot in solving the debt crisis experienced by the Eurozone countries. Through the ECB, bank balance sheets have progressed well with remarkable downsizing as noted in Ireland. The country has benefited from the personal insolvency bill that has helped in addressing the borrower’s financial distress while it maintains discipline in debt servicing. Most of the governments have established Operational and financial restructuring plans and presented them to the EC, and this is a crucial step towards financial discipline. Banks have put efforts towards improving the quality of their assets, and this is evident in the way they have piloted mortgage modification options. Financial institutions have also strengthened the management of distressed SME loans and some have even made arrangements to increase the payment periods. Ireland showed progress by meeting the fiscal targets for 2012 and improved on the consistency in achieving financial program objectives. Although the ECB has not achieved the objective of creating employment opportunities, there is progress in the plans to utilize the enhanced resources by the European investment bank to promote education, health care, and transport sectors. This is bound to strengthen fiscal frameworks and increase investment which indirectly contributes to increased employment opportunities (European Central Bank, 2012).


Solving the Eurozone debt crisis is not an issue of financial stability but the political will to restore the countries’ financial status. Although the crisis could not be predicted, the restoration programs that have been put in place will help in preventing similar occurrences in the future. The European commission’s role in instilling Budget discipline serves to stop the probability of countries exceeding the set limits, it not only solves the crisis but minimizes the possibility of the debt crisis. The EBC has gone out of its way to promote liquidity and economic adjustment programs. These institutions have focused on building a strong economy in which the member countries have a sole goal to fight the sovereign debt crisis. The economic adjustment programs promote international competitiveness in the wake of globalization. Troika may have been born as a result of an emergency in which some countries felt that the political interests in Europe may have been diverted. However, it has served to grant the distressed countries an opportunity to restore their economies and establish measures to evade the debt crisis in the future.

Reference List

Berg, J 2005, Elements of the Euro area: integrating financial markets, Aldershot , Ashgate.

European Central Bank, 12 July 2012 – Statement by the EC, ECB, and IMF on the Review Mission to Ireland, Web.

Franz, S & Thomas J 2012, The Role of the IMF in the European Debt Crisis, Web.

International Monetary Fund, 2009, Euro area policies: 2009 Article IV consultation : staff report, public information notice on the Executive Board discussion, and statement by the Executive Director for member countries, Washington, D.C., International Monetary Fund.

Lapavitsas, C 2012, Crisis in the Eurozone, London, Verso Books.

Rogers, C 2012, The IMF and European economies: crisis and conditionality, Houndmills, Basingstoke, Palgrave Macmillan.

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