European Debt Crisis 2011

Through 2011 the European sovereign-debt crisis escalated as concerns over Greek, Irish, Portuguese, Spanish and Italian government solvency widened periphery bond spreads to record levels. Standard & Poor's downgraded the United States from AAA in early August, contributing to a sharp risk-off move; the S&P 500 fell roughly 19% from its April peak to its October low. European bank stocks were among the worst performers globally. The crisis was contained, gradually, by ECB liquidity operations and ultimately by Mario Draghi's July 2012 "whatever it takes" speech and the announcement of OMT.

• US long-dated Treasuries — counter-intuitively rallied even as the US itself was downgraded, because they remained the deepest safe-haven market available.
• Gold made an all-time nominal high in September 2011 as real interest rates collapsed.
• German Bunds and the Swiss franc — the two regional safe-haven trades — appreciated to the point where the SNB instituted a peg.
• Defensive sectors (staples, healthcare, utilities) and US large-caps relatively outperformed European banks and European peripheral equities.

• European bank equity and subordinated bank debt — several institutions required state support or were restructured.
• Greek, Portuguese and Irish sovereign bonds, where holders ultimately took losses.
• Cyclical European equities and small-caps, which underperformed both their US counterparts and the European defensives.
• Direct exposure to peripheral sovereign credit without a hedge for the redenomination risk that was openly discussed.

• Currency-union sovereign credit can behave more like corporate credit than like reserve-currency sovereign credit — issuers without their own central bank carry default risk that traditional sovereign-bond models understate.
• Central-bank credibility is a discrete variable. The market accepted Draghi's 2012 commitment essentially overnight, and peripheral spreads compressed quickly thereafter.
• Home-country bias in European bank deposits, equity and bonds compounded losses for euro-area savers who held all three at once.