Pretty Soon You’re Talking Real Money

Via Dealbook:

European leaders agreed on Monday to provide a huge rescue package of nearly $1 trillion in a sweeping effort to combat the debt crisis that has engulfed Europe and threatened markets around the world, James Kanter and Landon Thomas Jr. write in The New York Times.

For the moment, the market is thrilled, but we shall see what the longer-term brings.

Tyler Cowen sums it up nicely:

Question: does this sentence sounds scary or non-scary?: "“We shall defend the euro whatever it takes,” Mr. Rehn said."

Mohamed El-Erian, Peter Boone and Simon Johnson, and Felix Salmon have more detailed reactions.  I’m sure that more commentary will emerge later.

Comments

[Joe]

If European nations cannot already pay back loans people made to them, how do they expect to pay back nearly $1 trillion?

[Kim Krawiec]

Well, the southern euro nations clearly can’t and have now shifted that risk onto the northern nations. Sill, I think there’s a good bit of skepticism about whether the plan is workable, especially in the long-term. It will be interesting to see how markets respond over the next few days. A one-day surge after an announcement of a trillion dollar backstop and a big, coordinated bond-buying program is one thing, but the details of the plan itself are still a bit vague, and the PIIGS will have to implement austerity and other measures to make the thing work. I suppose the optimistic view is that the bailout buys time – austerity measures can be implemented, markets can settle, and risk can be shifted in an orderly fashion from investors who thought they bought reasonably safe European debt to investors willing to hold much riskier assets. I’m not sure that I buy that story, but who the heck am I, other than a random law prof with Typepad access? I find the more plausible argument to be that they had no choice at some level – if not “shock and awe in defense of the Euro” it would have to be a bank bailout. And that brings its own set of problems, as we know from our own experience. I’ll probably do a post over the next few days trying to lay out the “for” versus “against” arguments that are floating about.