Reply #27: NPR Planet Money: Is Europe's Bailout 'A Gigantic Con Game'? [View All]

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10/31/11 Is Europe's Bailout 'A Gigantic Con Game'?

Italy needs the backing of Europe's bailout fund. But Italy's a huge economy — much, much bigger than Greece, Portugal, and Ireland combined. And the Europeans don't want to put enough money into their bailout fund to back Italy. So they're getting creative.

The rest of Europe is likely offer investors insurance that will pay back the first 20 percent of any losses on new Italian bonds.

So if I buy an Italian bond for $100, and Italy can't pay back $10, or $15, or $20 of my bond, the rest of Europe will make up the difference. Beyond that, it's between me and Italy. But this insurance itself comes from money that Europe is borrowing from investors.

"It's actually a gigantic con game," says Satyajit Das, an author and financial risk consultant. "It's money being moved around at a frantic rate because they don't have the money. That's the fundamental problem with the European Financial Stability Fund."

If the insurance plan doesn't work, the Europeans also have a plan B. "The second solution is, let's place a call to China," Das says.

China might take this call— because China wants a lot from Europe. They want Europe's economy to be strong. Europe is China's biggest customer. China is becoming a major world power. And it wants a central place on the world stage. If China bails Europe out. Then Europe will owe China some big favors.

audio at link, appx 4 minutes
http://www.npr.org/blogs/money/2011/10/31/141802499/is-europes-bailout-a-gigantic-con-game