The impact of Greece's debt crisis

A man walks outside the headquarters of Bank of Greece during a demonstration against government's austerity measures in central Athens.

TEXT OF INTERVIEW

Tess Vigeland: There are good and bad updates today about the financial crisis in Europe. The good: Germany and the International Monetary Fund reaffirmed their commitment to bail out Greece. The bad: Spain become the third European country in two days to have its bond rating downgraded. Yesterday, it happened to Greece and Portugal. With us now to discuss the European crisis and its wider implications is our European Bureau Chief Stephen Beard, in London. Hi Stephen.

STEPHEN BEARD: Hello, Tess.

Vigeland: Why has this crisis taken what seems to be a sudden and fairly dramatic turn for the worse?

BEARD: S&P's downgrade of Greek government debt to junk status has done it. It's the clearest signal yet that Greece could actually default and bond holders then wouldn't get all of their money back. Perhaps not much of their money. It means that a whole bunch of investment funds are now not allowed to buy Greek government bonds or to continue holding them. So the bonds have become toxic. And just to give you a taste of, a flavor of this, Tess, the cost of borrowing some Greek bonds hit almost 20 percent today. That's Banana Republic territory. It means the market regards countries like Azerbaijan and Lebanon as less of a risk than Greece, which is a member of the eurozone.

Vigeland: Amazing. Give us a little bit of perspective on the latest rescue package for Greece. What's involved there?

BEARD: Well, we had the head of the IMF, the European Central Bank, and the German Chancellor Angela Merkel meeting in Berlin today to talk about this rescue package. The big stumbling block has been Germany, which has pledged a big chunk of the rescue package. It has offered Greece emergency loans of about $11 billion. But the German government has got to pass legislation to free up this cash. And there's a lot of hostility in Germany towards this. I mean the German taxpayers feel Greeks have been profligate and that instead of knuckling down and accepting some austerity, all the Greeks seem to do is go out on the streets and protest. Nevertheless the German government wants some stability back in European financial markets, and the loans could be approved within a week.

Vigeland: Yeah, I mean at some point just out of selfishness you would think that they would need to help because isn't there a danger of contagion throughout the eurozone?

BEARD: S&P yesterday downgraded Portugese government debt, not quite a junk status, but a downgrade nevertheless. And today we heard the rating agency also downgraded Spanish government debt. And this is very worrying because Spain is a much bigger economy than Greece -- three or four times the size. And it's pretty unlikely that the Germans and the rest of the eurozone would have much of an appetite for bailing out an economy the size of Spain. So all of this is undermining confidence in the euro and raising questions about its long-term future.

Vigeland: Well, that's not really all it's undermining. You know the U.S. stock market has apparently caught a bit of the European cold. Why has the Greek crisis gone global at this point?

BEARD: There is a deeper anxiety at work here. It's about government debt. Many governments have spent billions bailing out their banks and stimulating their economies. So this year they'll be borrowing billions more than they usually do. The U.S. alone is going to be borrowing more than $1 trillion. And the Greek crisis has crystallized a fear: What if investors don't want to buy these bonds? How many governments will go bust, and what will do that to the world's still quite fragile economic recovery?

Vigeland: Marketplace's Stephen Beard joining us from London with some perspective on what's going on in Greece and the rest of the eurozone. Thanks so much.

BEARD: OK, Tess.

About the author

Stephen Beard is the European bureau chief and provides daily coverage of Europe’s business and economic developments for the entire Marketplace portfolio.

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