The Scariest Boring Phrase In Finance : Planet Money Usually, people try to pump up the drama when they tell a story. Sadly, a lot of people in finance have the opposite instinct.
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The Scariest Boring Phrase In Finance

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The Scariest Boring Phrase In Finance

The Scariest Boring Phrase In Finance

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One thing we've learned over the past couple of years: Arcane financial jargon that most of us non-experts might not understand can have a big impact on, well, us.

Today, Alex Blumberg and Adam Davidson from our Planet Money team examined one bit of financial jargon that is threatening to grow into another global crisis.

ALEX BLUMBERG: A lot of people, when they try to tell a story, they try to pump up the drama: I caught a fish, Adam, and I swear it was bigger than my sister. You should have seen the teeth on this thing.

ADAM DAVIDSON: Now, sadly, the people who pump up drama, they don't tend to work in finance. People in finance seem to have the opposite instinct. They take dramatic things and then use complex jargon to make them sound as boring as possible.

Like right now, several countries in Europe might be effectively bankrupt. Now that is dramatic.

BLUMBERG: But finance people, this is how they say that. They say sovereign credit spreads in Europe are widening.

Unidentified Man #1: Credit spreads in Europe, they've widened to record levels over the past couple of months.

Unidentified Man #2: They're still above 9/11, they're above the '81 recession, and they're above the '74 recession.

Unidentified Man #3: (Unintelligible). That's again an indication that credit risk is rising.

BLUMBERG: That's all footage from CNBC. So what does this mean? Why is it dramatic to say credit spreads are widening?

DAVIDSON: Here, let's demonstrate. Alex, why don't you play the role of a financial basket case. You have a horrible credit score, you never pay your bills on time, you've got lots and lots of debt.

BLUMBERG: I'll try.

DAVIDSON: Oh, you could do it easily, I know. And I'll be who I am, a responsible citizen, a great job, sterling credit history.

BLUMBERG: I think that role's going to be a stretch for you.

DAVIDSON: Not for me. All right, let's both apply for the same loan from the same bank. All right, action.

BLUMBERG: Oh, man. They lent me this 100 bucks I asked for, but I have to pay it back with 30 percent interest.

DAVIDSON: Yeah, that's because you're a financial basket case. They don't trust you. Me, on the other hand, I got that same $100 loan, and they trust me so much, I only have to pay 5 percent interest. End scene.

BLUMBERG: So that difference there between the 5 percent to responsible citizens like Adam and the 30 percent to basket cases like me, that is called the credit spread.

All right, and let's go back and apply this to Europe. Germany right now is the responsible citizen there, the Adam, if you will. They're in the best financial shape, and when they borrow money, they pay a low interest rate.

But other countries, they are seeming more and more like me, basket cases: Ireland, Portugal, Spain, Greece. It's costing them more and more to borrow money. The interest rates they have to pay are going higher and higher. In other words, credit spreads between them and Germany are widening.

DAVIDSON: Now this week, it's not like back in April and May, when there were all those terrified newscasts about the imminent collapse of the European economic system. This week, instead, all we hear is that dull phrase: Credit spreads across much of Europe have widened.

BLUMBERG: But that actually means things could well be worse than they were in April and May. There is a real and apparently growing fear that some countries in Europe have not gotten their financial act together and are in more serious trouble than people imagined. If credit spreads widen more, we could see an already sick global economy get much sicker.

DAVIDSON: And this serious, dramatic fact is right there hiding in plain sight on the business news pages behind that incredibly dull phrase: Credit spreads are widening.

I'm Adam Davidson.

BLUMBERG: And I'm Alex Blumberg, NPR News.

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