Loading the player...

What is the 'European Sovereign Debt Crisis'?

The European sovereign debt crisis is a period when several European countries experienced the collapse of financial institutions, high government debt and rapidly rising bond yield spreads in government securities. The European sovereign debt crisis started in 2008 with the collapse of Iceland's banking system and spread primarily to Portugal, Italy, Ireland, Greece and Spain in 2009. The debt crisis has led to a loss of confidence in European businesses and economies (see The European Banking Crisis Explained).

BREAKING DOWN 'European Sovereign Debt Crisis'

The European sovereign debt crisis was ultimately controlled by the financial guarantees of European countries, who feared the collapse of the euro and financial contagion, and by the International Monetary Fund. Rating agencies downgraded several eurozone countries' debt. For example, Greece's debt was, at one point, moved to junk status. As part of the loan agreements, countries receiving bailout funds were required to meet austerity measures designed to slow down the growth of public-sector debt.

The History of the European Sovereign Debt Crisis

The European sovereign debt crisis began at the end of 2009. The peripheral eurozone member states of Greece, Spain, Ireland, Portugal and Cyprus were unable to repay or refinance their government debt or bail out their beleaguered banks without the assistance of third-party financial institutions such as the European Central Bank, the International Monetary Fund and the European Financial Stability Facility. Seventeen eurozone countries voted to create the EFSF in 2010, specifically to address and assist the European sovereign debt crisis.

Some of the contributing causes of the sovereign debt crisis include the financial crisis of 2007 to 2008, the Great Recession of 2008 to 2012, the real estate market crisis and property bubbles in several countries, and the peripheral states’ fiscal policies regarding government expenses and revenues. The European Sovereign Debt Crisis peaked in 2010 to 2012. In 2009, Greece revealed that its previous government had grossly underreported its budget deficit, signifying a violation of EU policy and spurring fears of a euro collapse via political and financial contagion.

A 2012 report for the United States Congress stated, “The eurozone debt crisis began in late 2009 when a new Greek government revealed that previous governments had been misreporting government budget data. Higher than expected deficit levels eroded investor confidence causing bond spreads to rise to unsustainable levels. Fears quickly spread that the fiscal positions and debt levels of a number of eurozone countries were unsustainable."

In 2010, with increasing fear of excessive sovereign debt, lenders demanded higher interest rates from eurozone states with high debt and deficit levels making it harder for these countries to finance their budget deficits when faced with overall low economic growth. Some affected countries raised taxes and slashed expenditures to combat the crisis, which contributed to social upset within their borders and a crisis of confidence in leadership, particularly in Greece. During this crisis, several of these countries including Greece, Portugal, and Ireland had their sovereign debt downgraded to junk status by international credit rating agencies, worsening investor fears.


In early 2010, the developments were reflected in rising spreads on sovereign bond yields between the affected peripheral member states of Greece, Ireland, Portugal, Spain and, most notably, Germany. The Greek yield diverged in early 2010 with Greece needing eurozone assistance by May 2010. Greece received several bailouts from the EU and IMF over the following years in exchange for the adoption of EU-mandated austerity measures to cut public spending and a significant increase in taxes. The country's economic recession continued. These measures, along with the economic situation, caused social unrest. In June 2015, Greece, with divided political and fiscal leadership, faced sovereign default.

The following month, the Greek people voted against a bailout and further EU austerity measures, which raised the possibility that Greece might leave the European Monetary Union (EMU) entirely. The withdrawal of a nation from the EMU is unprecedented, and the speculated effects on Greece's economy, if it returned to using the Drachma, ranged from total economic collapse to a surprise recovery. The Greek economy is still highly uncertain with unemployment rate at approximately 21 percent in 2018 and a shrinking GDP as of 2016.

The "Brexit" Movement

In June 2016, the United Kingdom voted to leave the European Union in a referendum. This fueled eurosceptics across the continent, and speculation that other countries would leave the EU soared (see: Italexit, Oustria and Frexit). It is a common perception that this movement grew during the debt crisis, and campaigns have described the EU as a "sinking ship." The UK referendum sent shock waves through the economy. Investors fled to safety pushing several government yields to a negative value, and the British pound was at its lowest against the dollar since 1985. The S&P 500 and Dow Jones plunged then recovered in the following weeks hitting all-time highs as investors ran out of investment options because of the negative yields. (See more about bond yields here).


A combination of market volatility triggered by Brexit, questionable politicians and a poorly managed financial system worsened the situation for Italian banks in mid-2016. A staggering 17 percent of Italian loans, approximately $400 billion-worth, were junk, and the banks needed a significant bailout. A full collapse of the Italian banks is arguably a bigger risk to the European economy than a Greek, Spanish or Portuguese collapse because Italy's economy is much larger. Italy has repeatedly asked for help from the EU, but the EU recently introduced "bail-in" rules that prohibit countries from bailing out financial institutions with taxpayer money without investors taking the first loss. Germany has been clear that the EU will not bend these rules for Italy.

Further Effects

Ireland followed Greece in requiring a bailout in November 2010 with Portugal following in May 2011. Italy and Spain were also vulnerable. Spain and Cyprus required official assistance in June 2012. By 2014, the situation in Ireland, Portugal and Spain had improved due to various fiscal reforms, domestic austerity measures and other unique economic factors. However, with an emerging banking crisis in Italy and the instabilities following Brexit, the road to full economic recovery is anticipated to be a long one. 

  1. Grexit

    Grexit, an abbreviation for "Greek exit," refers to Greece's ...
  2. Sovereign Debt

    Sovereign debt is issued by the national government in a foreign ...
  3. Sovereign Risk

    Sovereign risk is the risk that a central bank will impose foreign ...
  4. European Union - EU

    The European Union is a group of countries that acts as one economic ...
  5. European Monetary System - EMS

    The European Monetary System (EMS) is an arrangement between ...
  6. Austerity

    Austerity is defined as a state of reduced spending and increased ...
Related Articles
  1. Insights

    Understanding the Downfall of Greece's Economy

    Greece has defaulted on its debt. Such an unprecedented event has left many wondering how Greece’s situation ever got so messy.
  2. Investing

    How A Greece Crisis Affects The U.S.

    Greece's ongoing financial crisis poses a threat to the nascent U.S. economic recovery due to the latter's close ties with Europe.
  3. Insights

    Is A Greek Euro Exit Finally About To Happen?

    The Eurozone crisis involving Greece has been a nagging thorn in the side of the European Union ever since the financial collapse of 2008–2009.
  4. Insights

    The Alpha And Omega Of Greece's Debt Crisis

    The Greek debt crisis has its origins in the fiscal profligacy of previous governments, proving that nations cannot afford to live way beyond their means.
  5. Investing

    4 Misconceptions About The Eurozone Crisis

    The eurozone crisis is complicated and rapidly changing. One such misconception is that Greece is the cause of the problem.
  6. Tech

    How Would The Euro Trade If If A Grexit Occurs?

    In the event of a Grexit, the euro could head towards parity with the USD.
  7. Investing

    The History of Sovereign Debt Relief

    Europe has recently been plagued by sovereign debt crises, sparking bailouts and debt relief measures.
  8. Insights

    Will Germany's Bailout Save Europe?

    Germany has committed even more money to what may prove to be a fruitless cause.
  9. Investing

    5 Ways The Greek Crisis Could Affect Your Personal Finances

    Keeping an eye on what is happening in Europe could help prepare you for what the future may hold.
  10. Retirement

    Should You Retire in Greece This Year?

    The Greek financial crisis has left the nation in a vulnerable economic state. Does that make it a good place for expat retirees or the opposite?
  1. What are the typical day-to-day responsibilities of a Chief Operating Officer (COO)?

    Learn how a country's debt crisis affects the world, including how currency values, inflation and output are affected on ... Read Answer >>
  2. Is Cyprus considered a tax haven?

    Explore the factors that resulted in Cyprus abandoning its status as a tax haven, including the terms for the bailout of ... Read Answer >>
  3. What impact would deflation have on the national debt?

    Learn what deflation is, common problems of deflation and the impact that deflation can have on an economy and a country's ... Read Answer >>
Hot Definitions
  1. Current Assets

    Current assets is a balance sheet account that represents the value of all assets that can reasonably expected to be converted ...
  2. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  3. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  4. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
  5. Depreciation

    Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life and is used to account ...
  6. Ratio Analysis

    A ratio analysis is a quantitative analysis of information contained in a company’s financial statements.
Trading Center