Officials put faith in effects of Eurozone bailout

AddThis

A man plays his saxophone in Milan, Italy. The latest Italian reform package also was expected to contain measures aimed at raising the retirement age to match that Germany, which is raising the retirement to 67 for anyone born after 1964.

Photo Credit: The Associated Press

WASHINGTON — President Barack Obama said a new European plan to tackle the continent’s debt crisis would have an impact on the U.S. economy, but he stopped short of saying whether it would be enough to prevent another global recession.

“If Europe is weak, if Europe is not growing, as our largest trading partner that’s going to have an impact on our businesses and our ability to create jobs here in the United States,” Obama said during remarks in the Oval Office.

European leaders agreed Thursday to a deal to have banks take bigger losses on Greece’s debts and to boost the region’s weapons against market turmoil.

While Obama did not address specifics of the deal, he praised European leaders for recognizing that it was in the world’s interest to stabilize the continent’s economy. When asked whether the deal would prevent another recession, Obama would only say that the agreement was a sign of progress.

“The key now is to make sure that it is implemented fully and decisively and I have great confidence in the European leadership to make that happen,” he said.

Obama is due to meet with several European leaders next week in France during the G-20 economic summit.

World stock markets surged Thursday on the news that the leaders had clinched a deal that everyone hopes will prevent the crisis from pushing Europe and much of the developed world back into recession and keep the currency union from unraveling. But analysts were more cautious, noting that the deal remains vague and its success hangs on the details.

The strategy unveiled after 10 hours of negotiations focused on three key points. These included a significant reduction in Greece’s debts, a shoring up of the continent’s banks, partially so they could sustain deeper losses on Greek bonds, and a reinforcement of a European bailout fund so it can serve as a $1.39 trillion firewall to prevent larger economies like Italy and Spain from being dragged into
the crisis.

Q: What was the original problem?

A: The Greek government spent too much, didn’t collect enough in taxes and had to sell bonds to make up the difference. It ran up budget deficits well beyond limits set by the European Union, a group of 27 nations that allow goods and workers to cross their borders freely.

When Greece fell into recession two years ago, bondholders worried they wouldn’t get their money back. To make sure they did, the EU started lending money to Greece, essentially allowing it to use new debt to pay off old debt.

Greece shares a currency, the euro, with 16 countries, so its problems are Italy’s problems, and Spain’s, and Germany’s, too. And many other European countries have debt problems of their own.

The challenge was to figure out a way to fix the problem so Greece didn’t have to come back for bailout after bailout.

Q: Is the risk from Europe gone?

A: No. Even if the rescue package keeps Greece and the European banks afloat, the crisis has already damaged the European economy. Some manufacturers have slashed production and hoarded cash. Banks are demanding higher rates for loans, if they’re lending at all.

On Monday, an important economic indicator suggested business activity in the zone of nations that use the euro currency shrank in October for the first time in three years.

The European Union accounts for 20 percent of world’s economic output. It is a big trading partner for many countries. A recession there could push other economies into recession.

Q: Will the bailout plan be enough to keep the debt crisis from spreading?

A: Maybe. There are a lot of unknowns.

Because the banks are accepting losses on Greek bonds, Greece won’t owe as much as it did before. That helps. But it still has too much debt and needs its economy to grow if it hopes to pay it back.

The new plan sees Greek debt falling to 120 percent of the country’s economic output by 2020 — a level believed to be sufficient to ease investors’ fears. Its debt had been expected to grow to 180 percent. But it’s uncertain whether Greece can dig itself out of recession amid riots, strikes and despair.

Problems lurk at the European banks, too. The plan calls for banks to raise 106 billion euros, or about $150 billion, as a cushion against future losses. But that might not be enough to protect against losses on holdings of Greek, Italian and other countries’ bonds. Before the summit meeting, the International Monetary Fund estimated banks needed 200 billion euros more to protect themselves.

What’s more, even that lower cushion might do a lot of harm. It could force banks to cut back on lending even more, hurting companies and slowing economic growth.