Discuss critically the background to the recent sovereign debt crisis in the EU

Option A: Sovereign Debt Crisis

“We need to have risk-weighted assets for sovereign exposures. We learned that during the crisis. They are not risk-free assets. Introducing capital requirements would help break the link between countries stressed debt and banks.”
Daniele Nouy, Head supervisor at the European Central Bank

Background:

You have recently secured a junior analyst job with one of the three largest credit rating agencies. Your first assignment was to investigate the recent sovereign debt crisis with a view to reassessing the sovereign ratings of EU countries. Your assessment will have far reaching implications on the banks’ exposures with the region.

Ensuring financial stability:

Using the Davies and Ng (2011) article on “the rise of sovereign credit risk: implications for financial stability” as the starting point , write a 2,000-word business report on the following:

a. Discuss critically the background to the recent sovereign debt crisis in the EU.
b. How has the crisis impacted on banks’ credit risk exposures especially as it concerns making capital provisions for their credit portfolios?
c. What are the wider implications for policy makers both within the region and globally?

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