The ECB's emergency measures and the sovereign-bank feedback loop

From the ECB's own vantage point, delivered by Executive Board member Jose Manuel Gonzalez-Paramo in a November 2011 address on the sovereign debt crisis, the mechanism dragging Greece and other peripheral economies down was less a single shock than a dangerous loop: banks that held large quantities of their own government's bonds suffered losses as sovereign ratings were downgraded, which in turn made it harder for those same governments to finance bank recapitalizations without borrowing even more. Gonzalez-Paramo traced the roots of the crisis to unsustainable fiscal and structural policies pursued well before 2008, noting that euro-area deficits had swung from near balance in 2000 to around 6% of GDP by 2010 while average debt climbed past 85% of GDP, a buildup the Stability and Growth Pact's weak enforcement had failed to prevent. In response, the ECB deployed emergency liquidity support and a Securities Markets Programme to buy distressed government bonds and keep funding markets functioning, a bridge intended to buy time for the EFSF and later the ESM to be built as permanent facilities for conditional financial assistance to countries like Greece and Portugal.