Global Markets Rally After EU Leaders Set Debt Plan

Oct 28, 2011
Originally published on October 28, 2011 7:48 am
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It's MORNING EDITION from NPR News. I'm Ari Shapiro. Steve Inskeep is visiting member station KQED in San Francisco today and Renee Montagne is away. The financial markets celebrated yesterday. U.S. stocks had one of their best days in weeks. The Dow jumped nearly three percent. And prices in Europe went through the roof too. The surge came after the announcement that European leaders have finally agreed on a comprehensive plan to tackle their debt problems, after weeks of stop-and-go negotiations.

NPR's Jim Zarroli is in Brussels, where the meeting took place, and he joins us now. Good morning, Jim.

JIM ZARROLI, BYLINE: Good morning.

SHAPIRO: Investors have been worrying about this debt crisis for a long time now. Does this one-day stock rally mean the problems are solved?

ZARROLI: Well, you might think so, yeah. I mean it was like the floodgates opened yesterday; all of this anxiety just kind of poured out. We saw big increases in the French stock market, the German stock market, and that spread to the United States. I think people were just ready to jump on any sign of a breakthrough. Ironically, you know, investors were sort of dancing a jig, but a lot of economists were taking a look at this plan and thinking, well, you know, it has some holes in it.

SHAPIRO: Well, what worries those economists? What are these holes? How big are they?

ZARROLI: Well, there are lots of holes, really. I mean for instance, one of the key parts of the plan involves the stabilization fund that's supposed to back up troubled economies like, you know, like Italy, like Greece. The aid is right now about 440 billion euros. European leaders want to increase it to more than a trillion euros. That's fine, but no one's really sure where the money is coming from. They say they hope to attract some private investors but they don't have any commitments.

SHAPIRO: Well, another idea that's been put forward is forcing banks and other investors to take a bigger loss on their holdings of Greek debt. What could the consequences of that be?

ZARROLI: Greece is still going to have a really big debt load for a long time to come; they just owe so much money. And there's another problem and it's kind of complicated. It involves the market for credit default swaps. Now, a credit default swap is a kind of bet that an investor makes on whether someone is going to default on his debts, and a lot of people over the years have bought credit default swaps on Greek debt. In other words, you know, they're placing bets on whether Greece will default.

Now, the question is: If Greek bondholders are forced to take a haircut on part of the bonds they own, does that count as a default? European leaders are saying no. Well, this is voluntary; we're not forcing anyone to do this. But a lot of investors are disagreeing with that. And if they go out and say, you know, we won the bet, pay us for the credit default swap, then a lot of the firms that sold them will end up losing money and that would be, you know, another potentially serious burden on the financial system at a time when really it's not all that equipped to handle it.

SHAPIRO: Jim, I feel like this is the scene in the monster movie where everybody is celebrating that the monster is dead and then it turns out it's actually not dead. If the debt crisis is the monster, what are the chances that it's actually not dead? How big are these problems you're talking about?

ZARROLI: Well, these are major challenges. You know, they can probably be resolved if Europe has the political will to do so. And of course, that's been the problem all along. Europe has come out with these action plans and called these summits. Ultimately, though, they really haven't wanted to buckle down and do what it takes to really resolve the crisis. Now they really seem to be putting out an effort this week to move things forward. And you know, the financial markets, at least so far, seem ready to believe that they mean it this time.

SHAPIRO: That's NPR's Jim Zarroli in Brussels. Thanks, Jim.

ZARROLI: You're welcome. Transcript provided by NPR, Copyright NPR.