Questions and answers about Europe's debt crisis

NEW YORK — After 14 summit meetings, stock market turmoil and even a fistfight between Italian lawmakers, European leaders have finally agreed on a rescue package that will stop the debt crisis there from dragging the world into recession.


That’s the hope, at least.

A bailout fund for the continent will be beefed up, and banks will take a 50 percent loss on their holdings of Greek government bonds. The banks will also put more money aside to cushion the blow from future losses.

Investors are cheering. The Dow Jones industrial average surged almost 340 points Thursday, the euro rose, and even the stocks of battered European banks gained ground.

But dangers lurk. The bank losses and the new cushion might not prove enough. The plan could exact big pain in the short term, hobbling a weak European economy. The region could still fall into recession, and drag the U.S. economy down with it.

Here are some questions and answers about what happened and what it means.


Q: What was the original problem?

A: The Greek government spent too much, didn’t collect enough in taxes and had to sell bonds to make up the difference. It ran up budget deficits well beyond limits set by the European Union, a group of 27 nations that allow goods and workers to cross their borders freely.

When Greece fell into recession two years ago, bondholders worried they wouldn’t get their money back. To make sure they did, the EU started lending money to Greece, essentially allowing it to use new debt to pay off old debt.

Greece shares a currency, the euro, with 16 countries, so its problems are Italy’s problems, and Spain’s, and Germany’s, too. And many other European countries have debt problems of their own.

The challenge was to figure out a way to fix the problem so Greece didn’t have to come back for bailout after bailout.

Q: Is the risk from Europe gone?

A: No. Even if the rescue package keeps Greece and the European banks afloat, the crisis has already damaged the European economy. Some manufacturers have slashed production and hoarded cash. Banks are demanding higher rates for loans, if they’re lending at all.

On Monday, an important economic indicator suggested business activity in the zone of nations that use the euro currency shrank in October for the first time in three years.

The European Union accounts for 20 percent of world’s economic output. It is a big trading partner for many countries. A recession there could push other economies into recession.

Q: How vulnerable is the U.S.?

A: Some good news out Thursday suggests the U.S. is in better shape to weather any blow. The economy grew almost twice as fast over the summer as it did in the spring. But it’s still dangerously weak.

Federal Reserve Chairman Ben Bernanke told Congress earlier this month that the economic recovery was “close to faltering.” And the co-founder of the Economic Cycle Research Institute, a forecasting firm that predicted the last three downturns, said a recession was all but inevitable. Consumer confidence is the lowest in two and a half years.

“It almost looks like the world is worrying itself into another recession,” Klaus Kleinfeld, the CEO of Alcoa, said Oct. 11.

One danger from Europe is that it could buy fewer U.S. goods. Europe buys 20 percent of U.S. exports.