After the Bust, the Denial, 2007–2009

This chapter examines the financial crisis that had begun in early 2007 in the United States. Euro area banks had taken big risks both in the U.S. and at home; almost instantly, they had become enmeshed in the crisis. The global financial implosion had transformed into an unnerving global economic downturn. U.S. authorities had responded with vigor, and by mid-2009, the U.S. was on its way to financial and economic recovery. In the euro area, the European Central Bank (ECB) had remained in denial and national authorities had struggled to tame their domestic banking crises. As the crisis had unfolded, government guarantees that promised to protect creditors and ECB liquidity had propped up euro area banks. However, delays in dealing with insolvent banks, who had gambled and lost, were certain to impede further economic recovery and, ultimately, inflict large costs on governments.