The surge in global liquidity was the result of

Directions: Answer the given question based on the following passage:

The Global Financial Crisis which began in 2007 led to the Great Recession. It took some unconventional and radical steps such as quantitative easing and bank bailouts to ward-off the dreaded threat of a second Great Depression. The year 2010 witnessed a good recovery raising hopes that things were getting back to normal. However, the onset of the sovereign debt crisis in Europe in late 2010 cast a continuing doubt regarding the nature of the global economy in general and the Euro-Zone in particular. If the Great Recession had prompted a rethink regarding some of the established ideas in economics, finance and public policy, the Euro-Zone crisis has gone a step further in raising issues which are as much politico-socio-cultural as economic and financial. To assess where the Euro-Zone might go from here needs an examination of the basic fundamental factors leading to the crisis.
With the Euro-Zone crisis surfaced several deep-rooted problems that date back to the early years of this century, more or less the same period during which the excesses that resulted in the Great Recession were built up. The surge in global liquidity due to a prolonged period of easy monetary policy had led to a relentless rise in asset prices that encouraged not only sub-prime mortgage lending in USA but also a pile up of debt in the European countries. In the Western world, ‘unprecedented leverage, massive debt creation, and a seemingly infinite sense of credit entitlement prevailed. Financial excesses became the rule rather than the exception, facilitated by financial innovation and the erosion of lending standards and prudential regulation. High leverage was the common theme in the budges of individuals, companies, financial institutions and even governments. High leverage led to the near-collapse of several banks and financial institutions in 2008 and 2009. Although the Great Recession was overcome with a heavy dose of monetary easing by central banks and fiscal stimulus by governments, it ultimately prepared the ground for the sovereign debt crisis. When banks tottered on the brink of collapse, the central banks bailed them out as the lender of last resort. Moreover, the governments recapitalized the banks with tax-payers’ money which imposed a severe strain on their own fiscal health. The taking over of the bad debts of the banks by the governments weakened government finances and turned the spotlight on the credit worthiness of governments itself. As economic growth turned negative due to the Great Recession, the debt burden of several European countries appeared even more onerous. Global markets became wary of their high levels of deficits and debt. As the leverage cycle turned after nearly one and half decades debt intolerance heightened with almost complete ‘risk-off’ in global markets. Greece with a current account deficit of 13.6 percent and a debt-to-GDP ratio exceeding 160 percent became the first target of international speculators. This signalled the onset of the sovereign debt crisis in Europe. By 2011 the debt super-cycle led to the debt-GDP ratio in G-7 countries crossing 100 percent for the first time after World War II. Thus, one way or the other the Great Recession paved the way for the current sovereign debt crisis in Europe. (Sourced from Whither Euro-Zone by Radha Shyam Rathor)