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May 10, 2010


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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.

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