A sovereignty debt crisis is a debt crisis that comes as a result of a country being unable (or is unwilling) to pay back its debt. Debt crises can begin due to a multitude of reasons including a new government cabinet being unwilling to sort out the debts left from their predecessors, misreporting of debts, and low economic growth resulting in budget deficits.
Why Europe Could Be Headed for Another Debt Crisis
At the moment, there are concerns that the Eurozone (countries that use the Euro) is headed for another debt crisis. In 2009, events in Greece led to the first Eurozone debt crisis as the country’s three leading credit rating agencies downgraded its government bonds because the country hadn’t done enough to reduce its debt. In March 2012, Greece triggered the largest sovereign default on its debt on record, which showed its staggering inability to pay its debt back.
The debt crisis plunged the Euro into disarray and led to austerity measures around the EU. Naturally, countries would like to avoid this happening again. However, the risk of recession and another debt crisis is rising. Germany recently saw a drop in industrial production and, as the largest economy in Europe, could be a sign of a slow down in other European countries. Italy may have recently struck a budget deal with the European Commission but it, as well as other southern European countries like Greece, Portugal, and Spain, are still vulnerable, especially if they are unable to compete on exports with countries in the north like Germany.
A common Eurozone budget may help the countries in the south but it may not solve everything and the global finance market seems to know it. These concerns are recognised in the fact that the Euro is a lot weaker than the United States Dollar. Weak economies, economic uncertainty and political turbulence are all reflected in exchange rates and the popular pairing of EU/USD is showing just how skittish the market is at the moment regarding Europe.
What Can Countries Do in a Debt Crisis?
Countries trying to pull themselves out of a debt crisis will typically take these two options: stimulate the economy or employ austerity measures. In the 2009 Eurozone debt crisis, it chose to do the latter. As a business owner, that may mean lower interest rates, increase value-added tax rates and a rise in taxes on higher-income people in general. This could mean that a larger portion of your money is paid as taxes, which will hurt your bottom line.
Alternatively, governments could stimulate the economy. This may look like increasing spend on infrastructure (thus improving trade links, allowing easier access to goods, services and workplaces), forgiving student loans (encouraging students to spend), and offering tax breaks for exports (allowing businesses to benefit from stronger economies).
As it stands, the Eurozone isn’t in a debt crisis. However, some think it will be in one, meaning that European economies and government financial policies could soon drastically change.
