Greece Bailout May Not Stop Financial Contagion

Europe has approved a $140 billion bailout deal for Greece. But markets have very little faith in the aid package, or the show of European unity. Investors are worried that a financial contagion is spreading throughout the continent. Host Scott Simon learns more from NPR's Jim Zarroli in Brussels.

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SCOTT SIMON, host:

This is WEEKEND EDITION from NPR News. I'm Scott Simon.

Greece is a tiny part of the world economy, but right now it's the country everyone in the financial markets is talking about. This week, stock markets fell around the world, including in the U.S., all because of a nagging fear that Greece won't be able to pay back all of the money it owes. That's raising questions about whether other countries are in similar trouble.

NPR's Jim Zarroli is in Brussels, where European leaders were meeting on Friday. Jim, thanks very much for being with us.

JIM ZARROLI: Hi, Scott.

SIMON: Governments of Europe have already committed to giving Greece $140 billion to help settle its debts. So why are the financial markets reacting this way?

ZARROLI: Yeah, I have to say it's a little bit surreal. I mean, you know, in the United States we've seen this huge run-up in stock prices for more than a year. The economy's recovering. We had those good job numbers yesterday. And yet, you know, in the past few days all of the major stock indexes have just seen their gains wiped out for the year.

We had that big, strange drop in the Dow on Thursday that federal regulators are looking into. We had another triple-digit loss in the Dow yesterday, and it's all tied to what's happening in Greece. And it's kind of a strange juxtaposition. I mean, Greece owes a lot of money. Some of it's coming due. European leaders aren't thrilled about having to help out.

But, you know, I'm here at this summit now and if you talk to people here, there's not doubt the bailout is going through. I mean, Europe just doesn't have any choice.

SIMON: But of course, isn't the concern of a lot of people that countries like Spain and Portugal are not far behind - and in fact, how do they stand in comparison to Greece?

ZARROLI: Well, a lot of countries owe money right now. The debt levels in the United States and in the United Kingdom, compared to the size of their economies, are actually higher now than they are in Spain. But investors don't just look at debt levels when they're deciding where to put their money. I mean, they look at other factors.

Spain, for instance, pays very high wages - which means, you know, it makes products, it exports them. They tend to be too expensive. So it doesn't have a lot of money coming in. And people look at it and say, well, how is Spain going to get the money to pay what it owes? So they don't lend it money.

And of all of the countries in the eurozone, Greece is in the worst shape. It doesn't export much; it has a huge, well-paid government workforce; and it owes, by far, the most money.

SIMON: Well but the rescue package is designed to help them pay off their debts, though, right?

ZARROLI: Yeah, well, it will help Greece pay off some of its near-term debt, but you have to remember that, you know, even if Greece does everything that the other countries want it to, even if it cuts pay and benefits, four years from now, it is still supposed to have a debt-to-GDP ratio of 150 percent, and that is really big. So nobody thinks Greece is going to get out of debt. I think what they're hoping is that they, you know, they can buy - that European leaders can buy some time and keep it from defaulting, because that would be just a huge disaster.

Some of the big French banks own a lot of Greek debt, so do the German banks. They would all suffer big losses. And then, you know, would they be able to pay off their debts? So, there'd be the same kind of ripple effect that you saw after the collapse of Lehman Brothers.

SIMON: There have been these enormous demonstrations in Greece over the past week, and we have to note that three people were killed when demonstrators set fire to a bank. Now, they've been protesting an austerity budget that the government has adopted in anticipation of the bailout. Is the Greek government going to have some problems selling this bailout to its own people?

ZARROLI: They are. And, you know, this bailout is unpopular all over Europe. I was in Germany this week. I mean, it's clear people just don't like having to help out Greece. I heard people say, you know, we should kick Greece out of the eurozone. The problem is, there's really no legal way to do that right now. But I think it's safe to say that, you know, this whole crisis - and the response - is really putting the idea of European unity to a big test.

SIMON: Jim Zarroli in Brussels, thanks so much.

ZARROLI: You're welcome.

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