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Its consequential effects were not as severe in developing and emerging economies, or in some other developed economies such as Australia. Governments in developed economies utilised enormous amounts of fiscal and monetary policy stimulus during the height of the GFC to strengthen demand and to restore financial stability in the banking system. Consequently even now interest rates are currently close to zero, while public debt burdens have swelled to the highest levels since the s.

Policy makers have had to resort to less orthodox measures to stimulate demand, including quantitative easing and manipulating the yield curve [1]. Northern hemisphere economies have recovered very slowly and continue to reflect deep malaise in the finance and banking, housing and industrial sectors. Importantly, the seeds of the current European sovereign debt crisis were sown prior to the GFC, were intensified during this time and continue to plague economic recovery in the Eurozone and potentially beyond. They have again focussed the world's attention on issues of globalisation, financial stability, regulatory regimes and political will to take hard decisions.

While various austerity measures and political accommodations devised by European leaders to delay the onset of an "event" have engendered bursts of optimism, financial and equity markets remain nervous and the risk of contagion from an indebted European country default remains elevated.

Sovereign Risk and Financial Crisis : The International Political Economy of the Eurozone

The Australian economy performed better during the GFC than other advanced economies on nearly all relevant indicators, and continues to do so in the face of current European upheavals. Financial conditions were stressed, but the financial system held up remarkably well; the economy slowed, but did not fall into recession; and while unemployment rose, it did so by far less than in many other advanced economies. Although Australia was exposed the combined actions of the Government through discretionary fiscal expansion and aggressive monetary policy responses by the independent Reserve Bank of Australia RBA achieved remarkable outcomes.

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Whilst the delivery of several of the government's fiscal stimulus programs were open to criticism, there is no doubt the underlying strength of the Australian economy and its financial and regulatory system ensured Australia did not go the way of so many other western economies. A range of factors have been advanced to explain the relatively strong performance of the Australian economy during and since the GFC. These include the strength and stability of the Australian financial system; a strong regulatory environment; prudent fiscal and monetary policies pursued by Governments of different political colours over a significant period that have avoided public debt issues while maintaining non-inflationary growth; the flexibility of the exchange rate; and the performance of Australia's major trading partners, particularly China.

As a consequence of this underlying strength and the reasons behind it, lessons leant from the GFC and its limited exposure to European finances Australia is better positioned than most advanced economies to withstand the impact of the current European sovereign debt crisis. This paper examines Australia's response to both the GFC and current European sovereign debt crisis, and suggests why it was as resilient as it was and remains so.

Lessons for policy makers are advocated. The causes of the GFC have been well-documented [3]. The United States sub-prime crisis that began in mid caused financial institutions to lose confidence in lending to each other. A credit crisis throughout late and ensued, with the supply of liquidity and credit to financial institutions, businesses and households gradually drying up, and interbank lending spreads widening. This situation took a dramatic turn for the worse in mid-September with the collapse of Lehman Brothers, the fourth-largest investment bank in the US.

Confidence plunged - due to concerns over counterparty exposure to Lehman Brothers, further major institutional failures, and fear of a systemic crisis. Banks were considerably less willing to lend to each other and global credit markets effectively froze. Other institutions either sought to become commercial banks Goldman Sachs, Morgan Stanley , or failed Washington Mutual.

The contagion spread to Europe, resulting in the collapse of several banks [4]. The Government subsequently announced a plan to purchase equity from financial institutions and guarantee all senior unsecured debt issued by eligible financial institutions, as well as guaranteeing non-interest bearing transaction deposit accounts. European nations also agreed to a package of measures to support the European financial system, including the guarantee of interbank loans and the purchase of equity in banks.

Notwithstanding these responses, a sharp deterioration in global financial conditions, with global financial markets highly stressed and financial institutions coming under extreme pressure, ensued.

Global Currency Reset $247 Trillion Debt Hit With Inevitable Economic Collapse & Stock Market Crash

Equity prices fell under the weight of heightened uncertainty and risk aversion, solvency and liquidity was affected, causing share prices of banks to fall sharply. A sharp deterioration in economic conditions- growth fell from 3. The volume of world trade fell sharply, and the pace of global industrial production growth slowed. Australia was not immune from the global financial crisis but its impact could have been far worse.

Businesses faced tighter credit conditions and higher funding costs, and falling asset prices raised the cost of capital funding from the share market. Business conditions generally, and investment intentions specifically, became subdued and confidence slumped. Sharp falls occurred on Australian share markets.

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Demand for Australia's exports slowed with resulting falls in volumes and prices leading to subsequent falls in terms of trade and the exchange rate. Household financial wealth fell by around 16 per cent through the year to the June quarter The significant fall in consumer confidence resulted in weaker growth in household consumption and dwelling investment.

These combined to affect the Government's budget position and were reflected in revised GDP growth, unemployment rate and revenues [5]. Yet whilst the Australian economy slowed under the weight of global forces, the slowdown was much more moderate and the economy recovered more quickly than in most other advanced countries.

Business confidence recovered following the announcement of the Nation Building and Jobs Plan in February and a further cut in the official cash rate [6]. Consumer confidence rebounded sharply following the announcement of the March quarter GDP outcome, where the economy recorded solid positive growth, avoiding two consecutive quarters of falling real GDP. Australia's unemployment rate peaked at 5. The Government was well prepared to deal with the contingencies flowing from a worsening international economic outlook. Its Budget had been based on striking a balance between tackling inflation and responding to the risks posed by global economic conditions [7].

Additionally the RBA moved to protect growth and financial stability by providing liquidity to financial institutions as international money markets became dysfunctional and reducing the official cash rate rapidly as conditions dictated- an option not available to other economies where interest rates were already low. However the dramatic shift in the macroeconomic outlook required the Government to implement a raft of proactive policy responses that included:.

As a consequence of these and other measures, Australia's major banks retained their AA credit ratings. No Australian bank or other authorised deposit taking institution failed, while in the United States, over banks failed between January and August [12].

Australian banks also remained profitable and were able to access capital markets, enabling them to continue to lend [13]. Whilst nearly all the stimulus was delivered in the package was seen to fit squarely with principles underlying effective discretionary fiscal stimulus- early, temporary and targeted- and complemented the boost to economic activity from interest rate cuts particularly in the first half of International financial institutions strongly endorsed Australia's response to the GFC.

IMF commended the 'quick implementation of targeted and temporary fiscal stimulus' considering that it provided a sizeable boost to domestic demand in and [15]. OECD concluded that Australia's fiscal stimulus package 'was among the most effective in the OECD' and not only 'helped to avoid a recession as usually defined' but also that it 'had a pivotal role in boosting overall confidence' [16].


It attributed the effectiveness of the stimulus to both the size of the measures and the speed with which it was introduced [17]. The immediate effects of this stimulus dissipated from late and the transition from public to private demand accelerated accordingly. The current European sovereign debt crisis has been created by a combination of complex factors that include the globalization of finance; easy credit conditions during the period that encouraged high-risk lending and borrowing practices; international trade imbalances; real-estate bubbles that have since burst; slow growth economic conditions and after; fiscal policy choices related to government revenues and expenses; and policy responses used by nations to bail-out troubled banking industries and private bondholders, assuming private debt burdens or socializing losses.

Its beginnings were manifest when several European countries faced the collapse of financial institutions, high government debt and rapidly rising bond yield spreads in government securities. With the collapse of Iceland's banking system in , the crisis spread primarily to Greece, Ireland and Portugal during In , the crisis touched other significant economies such as Spain and Italy, and even threatened the powerhouses of UK, Germany and France in different ways [18]. Before the GFC, several governments, most notably those of Portugal, Italy, Ireland, Greece, and Spain had been able to finance their deficits at artificially low interest rates.

Some had accumulated unsustainable levels of public debts.

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Markets assumed that if the national situations got worse, these governments would be bailed out by other Eurozone countries in order to forestall a breakup of the euro. Equipped with this implicit guarantee, many governments did not address structural problems such as uncompetitive labour markets or unsustainable welfare systems but papered over these problems with government deficits. As the financial crisis hit government deficits soared due to increasing public spending and falling revenues.

Since Eurozone countries are not able to conduct their own monetary policy, they have a higher default risk than countries that can. Various rescue funds were devised, but with expectations from contributor nations that appropriate austerity measures would be implemented to reign in sovereign debt.

From mid, emergency and longer-term measures have been pursued by Eurozone members and individual states that have included various bank-sponsored rescue packages including those offered through European Financial Stability Facility [19], European Central Bank interventions, European Financial Stabilisation Mechanism and the European Stability Mechanism. Europe's sovereign debt problems, together with a reassessment of European and US growth prospects [20] , have raised risk aversion, and helped trigger a period of heightened turbulence in global financial markets [21].

Downgrades of Europe credit risk in January and February has heightened tensions, with economists and politicians divided on whether austerity measures being required as a condition of bailouts by the larger economies are in fact counter-productive, with the potential to exacerbate weak economic conditions in several countries [22].

Sovereign credit risk - Wikipedia

The continuing turbulence in Greece and uncertainty about rescue packages for ailing economies highlights the more general difficulties faced by Eurozone countries [23]. When the Commonwealth of Australia was created in it brought together the various colonies that had operated almost as independent countries within a political union.

Importantly, the various Sates shared a common language and similar cultures and the new Federal Constitution provided for free trade in goods and services. The political union was accompanied by economic and currency union, thus ensuring all the necessary prerequisites for a strong single entity were created.

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The Constitution that was adopted clearly allocated responsibilities for trade, defence, education and the like between the federal and state jurisdictions. In the case of the Eurozone, currency union may have been achieved but vastly different regulatory systems, cultures and languages have hindered the development of economic union and the third critical element is missing. In understanding why Australia fared so well during and after the GFC, why the potential impact of the current European Sovereign Debt Crisis on its economy is relatively modest, and what lessons may be there for others to emulate, past and recent economic history must be appreciated.

Critical to this is recognising the near two decades of substantial economic reform that occurred in Australia in the 's and 's, and the consolidation of those reforms that subsequently occurred. These reforms, along with the underlying strength of the economy, the soundness of the financial sector, and the significance of trade with the Asian region are the most important factors in explaining these outcomes [24].

Reforming Australia's economy began with the Hawke-Keating Labor Governments of the 's and early 's and consolidated under the Howard Coalition Government from mid's to The Rudd-Gillard Labor Governments subsequently inherited a fundamentally strong economy that would assist in meeting the challenges of the GFC and those associated with the current European difficulties [25], but must be credited with taking some immediate and effective policy decisions as outlined earlier.

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  • Of particular significance in shaping Australia's economy because of its impact and policy responses was the debt crisis that Australia confronted in the mid- to late 's. The Treasurer famously suggested that if substantial economic reforms were not undertaken Australia would become a 'banana republic' [27], and ratings agencies reflected these sentiments by downgrading the country's risk ratings. Subsequently this led to a focus on reducing the budget deficit, the current account deficit and public and private debt levels and drove fiscal consolidation and other major reform proposals.

    The Howard Government extended this further with the introduction of the Charter of Budget Honesty legislation in [28]. The Australian economy was particularly strong going into the GFC, enabling it to weather the storm better than other advanced economies [29].