Examine the new policies proposed to solve the financial and sovereign Essay

Examine the new policies proposed to solve the financial and sovereign debt crisis in Europe. Your report should include a brief - Essay Example Understanding complex economic relationship in layman’s view point will be the crux of this essay. In the third part, the study will analyze proposed solution for resolving sovereign debt crisis in terms of advantages and disadvantages for countries with high credit ratings. In the last section, the essay will summarize the personal view of the researcher on sovereign debt crisis. Table of Contents Table of Contents 3 Introduction 4 Sovereign Debt Crisis 4 Banking System and Sovereign Debt Crisis 5 Analysis of Proposed Solution for Solving Sovereign Debt Crisis 9 Reference 11 Appendices 13 Introduction The essay will try to shed some light on new policies which are being proposed to solve the financial and sovereign debt crisis in Europe. The essay will try to analyze these policies in terms of their capability of resolving sovereign debt crisis. Aim of this report to analyze real underlying problems related to sovereign debt crisis. Organisation for Economic Co-operation and Development (2011) has reported that European banking sector failure and sovereign debt crisis is correlated; hence the study has the scope to analyze issues related to sovereign debt crisis on the ground of banking sector failure in Europe. Sovereign Debt Crisis Research scholars such as Barr (2010) have stated that sovereign debt crisis started during 2009 in Portugal, Ireland, Italy, Greece and Spain or PIIGS economies. Boyes (2009) and Gross (2009) have stated that fiscal deficit of PIIGS economies was increased during 2009 as a result of sovereign debt crisis. Papadimas and Graham (2010) have stated that sovereign debt crisis was triggered due to high borrowing costs for Euro zone countries. Lynn (2010) has defined sovereign debt crisis as financial crisis which created problems for some European countries to re-finance or repay government debt without taking support from third party. Generally, economic performance of European countries is determined by their ability to settle their external debt obligation, level of fiscal deficit of a country is determined by country’s sovereign debt default risk (Pescartori and Sy, 2004). In such situation, if a country fails to repay external borrowings from international market with the help of issuance of bonds then economic growth of that country is bound to get hampered. Banking System and Sovereign Debt Crisis Regulation Economists have stated that European banks underpriced the risks which have contributed significantly to sovereign debt crisis. Risk-weighted asset optimisation of banks nullified the significance of Tier 1 ratio which is amended by Basel rules. Prior to sovereign debt crisis, banks were allowed to use internal derivatives to decrease risk associated with assets but unfortunately majority of European banks failed control leverage risks which was associated with rise of funding problems. In Europe, many of the banks tried to form capital market banking system in order to decrease risk asso ciated with high leverage ratio (Mody (2009); Gerlach et al (2010); Goldman Sachs Global Economics, 2010; and CGFS-BIS,2011). For example, investors went for short and long credit in capital market which increased risk for banks. Lack of efficient regulatory framework not only increased risks for banks but leveraged risk for investors also. Multilayer Relation Mouchakkaa (2012), who is Executive Director of Morgan Stanley Investment Management, has pointed out that â€Å"