In early 2010, the eurozone faced an individual challenge as market liquidity began to drain from Greek government bonds and banks, following the revelation by the newly elected government of George Papandreou that the actual budget deficit was twice what the previous government had disclosed.
Two years later, this has migrated into a systemic crisis. Spreads are widening dangerously on government bonds issued by Italy. Interbank lending is freezing up as banks fear each other’s sovereign exposures, forcing the European Central Bank (ECB) to provide ever more liquidity at ever longer tenors. And at the time of going to press, even AAA rated eurozone economies such as France were on watch for possible sovereign downgrades by ratings agency Standard & Poor’s, which cited growing disruption to bond market access across the eurozone.