Shares surge after EU loan deal

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Global stock markets have soared after the European Union and International Monetary Fund intervened to stop the Greek debt crisis spreading. Wall Street traded 4% up, after a 5% rise on the main UK and German stock markets, and a 9% surge in France. On Sunday, the EU and IMF agreed a 750 billion euro ($975 billion) loan-guarantee deal. Marco Werman talks with Ken Rogoff, a former chief economist for the International Monetary Fund.

MARCO WERMAN: Now we return to that unprecedented one trillion dollar European emergency package. The funds and loan guarantees are designed to achieve two goals; one is to defend the European single currency, the Euro; the other is to stop the debt crisis in Greece from spreading. Wall Street seems to like the idea. The Dow Jones Industrial Average climbed 405 points to close at 10,785. Ken Rogoff is a former chief economist for the international monetary fund. He says the European plan is ambitious.

KEN ROGOFF: The package is unprecedented in its size and it is intended to provide a backstop, not just for Greece, which is immediately in trouble and it's already had a bail out, but for Portugal, Spain and Ireland. They're trying to send a message to markets that we're going to stand by all government debt in Europe. It's not just the trillion dollar package, in fact that might not even be the most important part. The European Central Bank, Europe's Central Bank, has agreed to start taking on all kinds of government debt, bank debt that it wouldn't have dreamed of and at a scale that it wouldn't have dreamed of earlier given this political backing. Last, but not least, the Europeans are telling financial firms you bet against us, and we'll regulate you into the Stone Age.

WERMAN: So will one trillion dollars send the message that the EU and the IMF won't let the same thing happen to Portugal, Spain and Ireland that happened to Greece? Or is it just kind of economic suicide?

ROGOFF: Well it's a very risky move, both for Europe and the European Central Bank. I would say they clearly kicked the can down the road a year or two, but they haven't solved the fundamental problems. They haven't got the rod out of the system. The governments in Europe are running big deficits, there's very slow growth in the southern countries recession, and they need to solve their problems.

WERMAN: How do you get at those fundamental problems that rot at the heart of these European governments as you call it?

ROGOFF: Frankly, I think the ideal package would have been to allow a couple countries to default, to discipline others, put them on sabbatical from the Euro and then draw this ring fence around the rest. Instead, they're trying to prevent anyone from going down, feeling that's essential for political unity. But it's tough. The scale of how much Greece has to cut back on its deficit is staggering. Frankly, even if they didn't have to pay their old debts, they're having trouble living within their means and not borrowing new money. That's really the problem. That's a problem across Europe. So it's a huge challenge. Is it impossible? No. I'd make an analogy to an overweight person who needed to lose 80 pounds and instead of having to do it in a year, this bail out lets them do it in four years, but it's still very, very tough.

WERMAN: Was that really ever an option, though, to let Greece default on its debt to kind of teach other countries a lesson?

ROGOFF: Not only was it ever really and option, I suspect it's still more likely than not that it's going to happen. They want to postpone it to where their economies are growing more quickly. The governments say we're not going to allow it, but they always say that. It's in a very difficult bind.

WERMAN: Now the United States is still the chief IMF paymaster. How exposed does this loan leave the American tax payers?

ROGOFF: You know, there'll be complaints about it in Congress, but it's small potatoes. It's about a 300 billion dollar loan. Maybe at the outside, we hold a third of that. Technically it's even less. So compared to having Europe collapse and going into a recession, it's a good investment. Politically, we have no choice. We can't walk away from Europe. We can't protest. And frankly, Germany is tougher than we are. Germany is the central country in Europe. We don't really need to crack down when they are already being so tough.

WERMAN: Ken Rogoff, a professor of Economics at Harvard University and a former IMF Chief Economist, Ken thank you very much.

ROGOFF: My pleasure.

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