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Spanish bailout won’t alleviate the eurozone crisis

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Kai Ryssdal: I know. You read the business and economic headlines Saturday, saw that Spain had gotten a $125 billion bailout, and you said, look, the European debt crisis is over.

Hate to break it to you, but that’s just not the way the global economy works. To explain exactly how bailouts do work nowadays, we’ve got our New York bureau chief Heidi Moore on the line. Hey Heidi.

Heidi Moore: Hey Kai.

Ryssdal: So in a nutshell here, what happened?

Moore: Well you know that Monty Python line, ‘No one expects the Spanish Inquisition’? Well, everybody expected a Spanish bailout. Which is what this is — it’s not a bailout of the banks, it’s a bailout of Spain’s government. Try to wrap your mind around this: it’s the banks bailing out the government, which is bailing out the banks.

Ryssdal: You’ve got to explain that, help me out.

Moore: Yeah, here’s how we can tell. So about two weeks ago, we were hearing about a Spanish bank bailout that would be about $37 billion euros, right? Last week: $60 billion euros. Today: $100 billion euros. What does that tell us? The banks aren’t swallowing that much bad debt. It tells us that there’s a bigger use and that’s probably the government’s use. The Spanish government is in trouble. It’s the fourth largest economy in the eurozone, and so they want to avoid this look of another bailout, so calling it a bank bailout makes it look better.

Ryssdal: Yeah, and that kind of makes sense. Speaking of the whole fourth largest economy thing, let me ask you this: There were reports this weekend and early this morning of this text message that the Spanish prime minister sent to his finance minister in the heat of these negotiations, and he said to his finance guy, ‘Hold on, wait a minute: we have some leverage, we are the fourth largest economy in the eurozone — Spain is not Uganda,’ he said. So now do the Spaniards and the Italians and anybody who’s big and who comes later, do they have leverage over the eurozone and the Germans?

Moore: Far more than Uganda, which isn’t even in the eurozone, so I question his geography as well as his texting skills. But yes, Spain does have leverage now, and here’s why: Because everyone knows that a breakup of the eurozone would hurt every country in the eurozone — it’s not as easy as we talk about. And it certainly emboldens other countries to ask for better terms. Spain’s getting good terms, suddenly everybody’s going to back to the drawing table and saying, ‘Hey, we’re Greece, we’re Italy, we’re Portugal, we’re Ireland — we want this to look better for us.’ And before you know it, it’s chaos.

Ryssdal: Right, and we’ll actually get to that in a bit with Stephen Beard’s piece. But let me ask you another sort of more macro thing. You and I talked about this: In the financial crisis here, you know, you can recapitalize and bail out bad debt until the cows come home, right? But until somebody takes the loss, it’s a bad debt on the books. Has this done anything to alleviate the fundamental problem in Spain and in Europe?

Moore: No, because the fundamental problem is, as you mentioned, denial. And this does nothing to avoid that denial. Spain’s property bubble popped — think about this — around the same time as ours, back in 2008. And they’re just taking those losses now. So they pushed off that pain for four years, that’s the extent of European denial.

I asked somebody in Europe about this, who’s been watching this carefully. His name is Anthony Peters; he’s a chief strategist with SwissInvest in London, and he told us not to even try to compare this our property bubble — that’s how big Spain’s problem is.

Anthony Peters: Ireland and Spain makes the property bubble in the United States look like a kid’s toy. We are talking really, really serious problems.

And by way of example, he pointed out there’s a house in Ireland for every single Irishman — that’s how much they overbuilt.

Ryssdal: You’d think we’d planned it this way, but we really didn’t: Ireland coming up later with Stephen Beard. That was Heidi Moore in New York City for us. Thanks Heidi.

Moore: Thank you Kai.

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