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Europe's Debt Solution: More Borrowing

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Europe's Debt Solution: More Borrowing

Planet Money

Europe's Debt Solution: More Borrowing

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STEVE INSKEEP, host:

For a long time, people in the financial industry seemed to be following a "don't ask, don't tell" policy when it came to financial risks. Ireland is the latest country being forced to change that. Like its other European neighbors, it's been spending a lot of money it doesn't have. And it wound up in the situation that debt-ridden countries fear - unable to borrow, at least not at a reasonable rate.

This week, Europe agreed to lend Ireland the money that nobody else will. Alex Blumberg and Chana Joffe-Walt of our Planet Money team report that the money to bail out Ireland comes from a surprising place.

CHANA JOFFE-WALT: The bailout sounds very serious and very substantial.

Mr. SATYAJIT DAS (Financial risk consultant): The European financial stability fund. This is a 750 billion euro, so it's pretty close to a trillion dollar facility.

ALEX BLUMBERG: Satyajit Das is an author and financial risk consultant. And he says two things. One, that trillion dollars, it's not all for Ireland. Two, that trillion dollars doesn't actually exist. In fact, the stabilization fund currently has no money in it at all.

JOFFE-WALT: The trillion dollars, it's more aspirational - a trillion dollars that could be there, if needed.

BLUMBERG: If needed, the Stabilization Fund could borrow money and then lend that money to Ireland. And maybe in the future, other European countries that are having trouble borrowing, like Portugal and Spain.

JOFFE-WALT: But that's confusing, because if people are scared of loaning money to Ireland, Portugal and Spain, why would they loan money to a fund, whose sole function is to loan money to Ireland, Portugal and Spain?

BLUMBERG: Ah, because the fund is safer, it's backed by 14 different European countries who all guarantee your money back.

JOFFE-WALT: Wait. But don't those European countries include Spain and Portugal?

BLUMBERG: Well, yes. They do.

Mr. DAS: Portugal, who can't borrow is guaranteeing this. So you've got basically, people who are being lent to who can't pay you back, and the guarantors aren't solvent either. So exactly, what are you doing?

BLUMBERG: To be fair, other European countries like Germany and France, which are in much better shape, are guaranteeing the fund as well.

JOFFE-WALT: Up until this week, this was all hypothetical, the fund had not actually raised or lent out a single euro.

BLUMBERG: But now that it needs to, the Stabilization Fund is going around and hitting up investors.

Mr. SCOTT MATHER (Managing Director, PIMCO): Certainly they've had several initial conversations with us already.

JOFFE-WALT: Scott Mather is the managing director at the huge bond investor PIMCO. It manages more than a trillion dollars which it invests all over the world, but not in Ireland. Ireland is too risky.

BLUMBERG: But Scott is considering lending money to the Stabilization Fund. It's got all these other countries in Europe guaranteeing it.

JOFFE-WALT: But on the other hand, some of those countries that are guaranteeing it now, might need the Stabilization Fund later to bail them out. Also...

Mr. MATHER: To the extent that countries like Ireland and Portugal draw on the program, and countries like Spain and Italy are required to guarantee some amount of debt, there's no question that's deteriorating their own credit-worthiness.

BLUMBERG: And so the more Ireland taps this fund, the more that adds to Spain's already sizable debt burden?

Mr. MATHER: Correct.

BLUMBERG: So in other words. The more the fund is used, the more likely it becomes that other countries will need to use the fund to bail them out, as well.

JOFFE-WALT: So assuming the Stabilization Fund can convince people like Scott to lend it money, and it thinks it can, that brings us to the very last irony here. Scott stopped investing in Ireland because he manages the funds of very conservative investors.

BLUMBERG: Which are the exact investors the Stabilization Fund now needs to make that aspirational $1 trillion materialize.

Again, here's Satyajit Das.

Mr. DAS: Pension funds and other investors who buy normally highly-rated, which is triple-A rated bonds...

BLUMBERG: So the people who are bailing out Ireland are teachers and postal workers? The people who are actually buying the triple-A...

Mr. DAS: Absolutely, you and me.

BLUMBERG: You and me, pension funds and other...

Mr. DAS: Absolutely.

BLUMBERG: Yeah.

JOFFE-WALT: In January, the Stabilization Fund will issue its first bond. It will ask the Scott Mathers of the world to invest pension and retirement dollars into the project of stabilizing Europe.

I'm Chana Joffe-Walt.

BLUMBERG: I'm Alex Blumberg, NPR news.

INSKEEP: It's MORNING EDITION from NPR News.

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