1. The world financial instability and the Euro zone crisis - Chapter 3 Jacques SAPIR CEMI-EHESS

2. 3 The December 2011 crisis and its partial solutions

3. 1. A rapid worsening of the Crisis since August 2011 and the quick increase of interest rates. The degradation of long-term rates. –An indicator of general solvency market estimates. –The process of de-uniting the Eurozone. The degradation of short-term rates. –Short-term worries. –The speculative dimension. The “spreads”. –How are they computed. –What the study of historical movement is teaching us. The destruction of the only real asset of the Euro zone: lower interest rates for all. –Were low rates have been a financial bubble?

4. Italy (10 Y)

5. Italy 2 Y

6. Spain 10 Y

7. Spain 2 Y

8. Belgium 10 Y

9. Germany 10 Y

10. France to Germany spreads (10Y)

11. Interest rates have climbed to unseen levels before dropping down following the ECB intervention. Could this situation be sustained? Is the ECB really “monetizing” the debt? Interest rates on Sovereign and Corporate debts? The spread of French rates to German ones is now on par to what has been the situation before the introduction of the Euro zone. Even after the dropping down of interest rates, levels are still much too high for countries like Italy and Spain. Italy: a problem with the accumulated debt. Spain: Public finance out of control? Insolvency or a simple liquidity crisis? –External solvency. –Internal solvency.

12. 2. Bank on the brink: the stress-test issue and the liquidity crisis. What a stress-test is. –Theoretical view: a “worst case simulation”. –The critical importance of inserting realistic assumptions. The intra-European debt market. –Sovereign debt –Corporate debt. The CDS on banks are very high and banking sectors all over Europe have seen their valuation coming down. –The development of a new market. –CDS at bay: Greece. –What would be a world without CDS? The collapse of the intra-European debt market.

15. 3. The collapse adverted or only postponed? –Why the risk of a collapse was real by early December 2011. The quick rise of interest rates on Italy and Spain. The collapse of the short term intra-bank liquidity market. The evil synergy between the bank crisis and the sovereign debt crisis. –The political reaction. The December 9th summit: no place for disagreements. The European Central Bank and its brinkmanship.

16. Conclusion: Problems still unsolved. –The “budget federalism” so far concerns only the expenditure side of State budgets. No real transfers. Fiscal discipline and Growth. Political worries. –The disciplinarian side of the December 9th agreement is subject to a lot of critics and of adjustments. –There is still no solution to the recessive effects of “austerity plans” and the EZ could well be on a deflationary path.