Investors Breathe Sigh Of Relief After Greek Voting

Markets in Asia and Europe initially responded positively to the results of the Greek election. Of greatest concern, is another rise in Spanish interest rates to another euro-era record.

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LINDA WERTHEIMER, HOST:

Markets in Asia and Europe initially responded positively to the results of the Greek election, but stocks have become mixed in Europe, and in the U.S., Wall Street opened lower. Of greatest concern is another rise in Spanish interest rates to another euro-era record.

NPR economics correspondent John Ydstie is with us to sort through the market reaction and the next steps by policymakers to deal with Europe's problems.

Welcome, John.

JOHN YDSTIE, BYLINE: Hi, Linda.

WERTHEIMER: Now, there is obviously some considerable relief for investors and bankers who were holding their breath as Greece voted. But it would seem that the Greeks - and, in fact, Europe - are not out of the woods.

YDSTIE: Yeah. I'm sure a lot of investors and bankers and policymakers are exhaling a little bit today. It could have been a wild ride in the markets. But now, the prospect of a disorderly exit from the euro by Greece has receded a bit. Of course, there's still a long, uphill road ahead in terms of trying to stabilize the Greek economy. And if New Democracy can form a government, it's likely they'll quickly begin negotiations on trying to ease terms of the bailout with the IMF, the European Commission and the European Central Bank.

WERTHEIMER: John, the Germans have suggested there would be no renegotiation of the terms. Now there is talk of concessions?

YDSTIE: Yeah. The German position softened a bit today. It's foreign minister suggested it might be possible to give Greece some extra time to meet its budget targets, and the IMF says it stands ready to engage with the new government to restore financial stability, economic growth and jobs. But I think any concessions are likely to be modest - no wholesale renegotiation of the bailout. It's unlikely there will be any easing of the requirements for restructuring the Greek economy, like privatizing government enterprises, opening up the labor markets or reducing the minimum wage.

And even if there are some concessions, things will still be very difficult for average Greeks. The outlook for economic growth in Greece anytime soon is really dim.

WERTHEIMER: So what is the likely effect of this vote on Spain and Italy, which are seen as the next potential bailout countries? Borrowing costs rose for both those countries today.

YDSTIE: That's right. You know, I'm sure officials in both those countries hoped they'd get some breathing room today, but it appears that isn't happening. As you said, Spain's borrowing costs hit another record today, partly because of a report on record levels of non-performing loans in its banks, and rates were higher also for Italian bonds. What's most important for Spain and Italy right now is an effort by European Union leaders to put together a long-term strategy that would ultimately have eurozone countries ceding much of the power over their banks and their national budgets to the European Union, and a framework that contains some of that could be unveiled very soon.

WERTHEIMER: We've also got a summit of G20 leaders today and tomorrow in Los Cabos, Mexico. Are we likely to get some action there to deal with the euro debt crisis?

YDSTIE: Well, the U.S. and other countries will certainly be pushing the Europeans to take more action. Europe's problems are a big drag on the rest of the world economy. Last week, before heading to Los Cabos, Treasury Secretary Timothy Geithner said that all eyes would be on Germany and other major players to clarify proposals for a European banking union and other measures. And we may get some outlines at the G20 meeting, but not a lot of detail. That's more likely to come out of Europe over the next week or so.

The EU will have a leader's summit in Brussels in just 10 days, and there are signs they'll make significant moves there. What's being talked about is a euro-area banking union, where the European Central Bank would become the chief regulator of the largest banks in the euro area, and then there'd be a euro-area deposit insurance scheme put in place. And that could help to stem the flight of money from some of the weak banks in Spain and Italy and stabilize the system and relieve some of the pressures on countries like Spain and Italy.

WERTHEIMER: John, it sounds like they're putting in place a system somewhat like what we have in the United States.

YDSTIE: That's exactly right. There will be a system where you've got an overarching regulator. We have some state regulators in this country, but the Fed is the overarching regulator. And then there's an FDIC to protect our deposits.

WERTHEIMER: NPR's economics correspondent, John Ydstie.

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