Will Europe’s debt crisis plan work?

Marketplace Staff Sep 26, 2011
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Will Europe’s debt crisis plan work?

Marketplace Staff Sep 26, 2011
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Tess Vigeland: European bank shares rose today and stock markets regained some poise. The source of this small burst of optimism? A glimmer of hope that a solution to the eurozone debt crisis may finally be in sight. Reports have surfaced of a plan that could at last fix a problem that’s dogged financial markets for almost two years and now threatens to plunge the global economy into another recession. But if this optimism sounds all too familiar, well, it is. We’ve been here before. Marketplace’s European bureau chief Stephen Beard joins us from London with some of the details. Hi Stephen.

Stephen Beard: Hello Tess.

Vigeland: So what is the plan?

Beard: Well there are three main elements. First, you let the Greeks default on 50 percent of their national debt, then you stop the contagion this might cause — you stop the speculators betting that other eurozone countries might also default by really beefing up the eurozone bailout fund, and they’re talking about increasing it five times so that it is worth $3 trillion. Then thirdly, you use that fund to not only ward off the speculators, but also to pump money into those European banks, who are sitting on potentially huge losses on the European government bonds that they hold.

Vigeland: So whose plan is this? Where did this come from?

Beard: Well they don’t really know whose it is. It emerged from off-the-record briefings on the fringes of these two big international meetings in Washington over the weekend — the G20 and the IMF. Now the Europeans came under fierce attack at these meetings. Countries like the U.S., China, and others were lining up to criticize the Europeans for not tackling their debt crisis. The Europeans were said to be absolutely shell-shocked by this reception. So this plan may have been their response to try and soothe the Americans and the Chinese, and soothe the financial markets. Or, conspiracy theory, it might be the Americans leaking this to put pressure on the Europeans to get a grip.

Vigeland: Well you know, Stephen, over the past couple of years we have had more than our share of plans to try to solve this European debt crisis. Could this one work?

Beard: It could. I mean, it looks much more like the sort of thing that investors have been calling for. They’ve been calling for a so-called bazooka to blast the problem. This could be it. But there’s a big question about whether it’s going to be deployed or not. There’s still a lot of argument about some of the details here. Also, the word is that this plan won’t be formally unveiled for six weeks, which is an eternity in financial market time. So there’s still plenty of scope for further crises and panics and all the thrills and spills of the market.

Vigeland: Well let’s go with what happens next then. Is there any sort of date that we should be focusing on in the next twist of this incredibly long-running drama?

Beard: This week could be pretty critical because you’ve got a number of countries, including Germany, that have their parliaments voting for a previous rescue package. Now if any of those countries reject that package, it’s back to square one. It’s all up in the air again. In a crisis that economist Paul Krugman says bores and terrifies him. It bores him because it’s dragged on for so long. But it terrifies him because the longer it drags on, the more likely it is to cause a global economic disaster.

Vigeland: All right. Marketplace’s Stephen Beard joining us from London, thank you.

Beard: OK Tess.

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