Europe's Sovereign Debt Crisis; DSK's Scandal

Europe's sovereign debt crisis seized global stock markets for the good part of 2011. Debt problems that started in Greece spread to larger players on the Continent, namely Italy, Spain and France. Portugal became the third eurozone country to seek and receive aid in April. The eurozone also approved further bailout money for Greece in the summer as the country faced an imminent default.

By September, fears escalated that Italy would be next to ask for assistance. The euro fell below $1.30 and hovered just a bit above that. Sovereign borrowing costs across the eurozone surged with Italian 10-year bond yields spiking dangerously to unsustainable levels. By the fall, major ratings agencies warned of a possible mass downgrade to credit ratings in the region.

Because Germany is the lone player of the eurozone that can provide credible funding that would resolve the crisis, the country faced intensifying pressure to make sacrifices for what it viewed as its profligate neighbors.

Dominique Strauss-Kahn

The economic crisis became as much a political one. Three prime ministers in the eurozone resigned over the course of the year as challenges of introducing fiscal austerity led to a deep divide among domestic political parties. Greece swore in Lucas Papademos, while Italy swore in Mario Monti as the notorious Silvio Berlusconi era receded, both in an attempt to renew investor confidence in the future of their economies and to pass cost-cutting measures that would appease international creditors. The European Central Bank also welcomed a new leader, Mario Draghi.

2011 was also the year that the debt crisis took the first victims within the financial sector. Belgium's biggest lender Dexia succumbed to the crisis in early October, followed by American brokerage firm MF Global.

As Europe's leaders -- led by Germany's Angela Merkel and France's Nicolas Sarkozy -- struggled to provide a backstop to the crisis, a global debate ignited over how big a role central banks should play in bringing relief to debt-laden eurozone nations and to a strained financial system.

The European Central Bank was forced to buy up government debt to cap soaring costs for government. At the end of November, top central banks of the world were forced to offer joint aid amid an intensifying crisis. Just before the new year, the ECB decided to extend billions in cheap loans to more than 500 banks in order to pump additional liquidity into the region.

Whether Europe has seen the worst of its debt problems remains uncertain going into 2012. Eurozone nations have agreed to a new pact on limiting government debt over the long term, although Britain has refused to take part. Germany, France and their neighbors remain hard-pressed to reach a consensus over how to fully fund the region's emergency rescue fund and whether to save the euro at all costs. Risks loom large as a worsening crisis could push the U.S. economy into a recession and drag down major economies in Asia.

While the twists and turns of the debt debacle captured the attention of the global financial community, a European side story of illicit sex brought down the career of a prominent official -- International Monetary Fund Director Dominique Strauss-Kahn, sending shock waves through international media.

Prosecutors dismissed sexual assault charges against Strauss-Kahn, at the time a leading political challenger to Sarkozy for the presidency of France. New York City prosecutors dropped the case against Strauss-Kahn after doubting the credibility of the hotel maid who accused him of sexual assault. Strauss-Kahn had insisted the sex was consensual. The case set off a months' long media frenzy, as TV vans camped outside DSK's temporary living quarters in downtown Manhattan. -- Chao Deng

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