The UK Takes a Stance on the Euro Zone’s Debt Problems

Those in the UK are taking note of the problems that the Euro Zone has been encountering regarding its debt problems. Not only has the set of countries had major problems with debt, but the way in which the governments have been dealing with such debt and other financial problems leaves much to be desired. The current strategy has the EU bailing out all of the member countries which cannot borrow funds at normal rates. In order to bail out these countries, the EU and the IMF have offered loans at very low rates. While this made the risk of a country defaulting lower, it certainly did not totally alleviate the problem.

The market for bonds has been full of problems. Starting in 2013, there will be a permanent device put into place for a bail out which will remain permanent. In this agreement, the methods in which a country’s debts may be settled will change drastically.

The issue for some investors in the UK is that the status of the debts will change since the bail outs will favour official creditors over investors which are private entities. Because of these elements of the bail-out deal, private investors in the United Kingdom and elsewhere will likely be less interested in investing in the markets of the EU.

The matter at hand is that investors in the UK and other countries may not want to hold the bonds of some of the EU nations. When the old ones are financed again, the new deficits which were created by the European Union and the International Monetary Fund will be owned more and more by official, public sources. This will crowd out private investors as a result. As the number of separate investors in the bonds market decreases, the amount of loss which may have to be handled by this smaller group of investors will put the market in an unbalanced state. The central bank of Europe, otherwise known as the ECB, has tried to make the markets more stable but has instead caused the amount of stock held by private investors to decline significantly.

Many economists have been calling for a second look at the bail-out plan which promises to put the system in an unfamiliar state. Economists in the UK often look at the amount of gross public debt compared to gross domestic product. Wealthy economies such as that of the United Kingdom have large budget deficits. While the United Kingdom under David Cameron has been reducing the deficit at record levels, other countries, especially those in the EU have not taken on the same aggressive stance that the UK has.

The important thing to consider in all this is that the current levels of debt and deficit may not be of particular importance. The thing to be aware of is that the long-run effects of the debt situation could put the UK and other countries into financial crisis yet again. With the recent legislation being introduced in the Euro Zone, many investors in the UK have been concerned about the future of bonds in those countries which stand to benefit from the bail outs in 2013.