What have you always wondered about the economy? Tell Us
European Debt Crisis

Spain’s bailout: Good idea or moral hazard?

Christopher Werth Jun 11, 2012
HTML EMBED:
COPY
European Debt Crisis

Spain’s bailout: Good idea or moral hazard?

Christopher Werth Jun 11, 2012
HTML EMBED:
COPY

Jeremy Hobson: Well whenever these bailouts happen, whether for banks or for countries, there’s the question of moral hazard. If you bail someone out, do others stop trying to fix their own problems and assume they’ll be bailed out as well?

Reporter Christopher Werth has that part of the story.


Christopher Werth: Think of moral hazard like this: If your neighbor were to stop paying their mortgage, but the bank forgave them and let them keep the house, wouldn’t everyone on your block want the same deal. In this case, since Spanish banks got a bailout without the government having to impose new spending cuts, will other European countries see an opportunity?

Stefan Schneider is a chief economist at Deutsche Bank.

Stefan Schneider: You are risking that other countries are saying OK if country A got a better deal, we want to have a better deal.

Take Greece, which heads into an election next week. Some candidates are saying they want to stay in the euro, but without the tough budget cuts. But Schneider says Spain’s bailout shows that countries that work to control their deficits, like Spain has done, will be rewarded with favorable terms.

Schneider: It’s a good incentive and not a moral hazard at all.

Philip Whyte of the Centre for European Reform says there are times when it’s right to be concerned about moral hazard, and there are times when it’s not.

Philip Whyte: You know the eurozone is possibly weeks or months away from break up and it seems to me that middle of an existential crisis is a very dangerous time to be excessively worried about moral hazard.

In London, I’m Christopher Werth for Marketplace.

Marketplace is on a mission.

We believe Main Street matters as much as Wall Street, economic news is made relevant and real through human stories, and a touch of humor helps enliven topics you might typically find…well, dull.

Through the signature style that only Marketplace can deliver, we’re on a mission to raise the economic intelligence of the country—but we don’t do it alone. We count on listeners and readers like you to keep this public service free and accessible to all. Will you become a partner in our mission today?

Your donation is critical to the future of public service journalism. Support our work today – for as little as $5 – and help us keep making people smarter.