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EU struggles through bailout vote -

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Economics correspondent Stephen Long discusses the week in the financial markets that focused on
the fragility of the EU.


ALI MOORE, PRESENTER: Well joining us now for our Friday night chat about the economic issues of
the week is economics correspondent Stephen Long.

Stephen, welcome.


ALI MOORE: Another day, another downgrade of a nation state's credit rating, this time it's Spain.
What does that mean?

STEPHEN LONG: I don't think it's going to mean a terrible lot, actually, Ali. Because in this case
it's not unexpected and I don't think it will be catastrophic. It's really telling us what we
already knew about Spain, but the underlying dynamics are a worry, basically another country
downgraded, which means banks holding bonds have to raise more capital, that the cost of funding
those countries goes up and the whole spiral continues.

ALI MOORE: Of course the G20 Finance Ministers are meeting again. Are they going to make any
progress, or are they making any progress at all on these various rescue plans we've talked about
over recent weeks?

STEPHEN LONG: The details of the latest rescue plan, and I use that term advisedly, have pretty
much leaked out. And it seems that what is going to be announced is that they're looking at a
bigger hair cut for the banks that hold Greek bonds, 21 per cent initially they agreed to, they'll
be looking at up to 60 per cent losses on those bond holdings.

ALI MOORE: That's essentially an organised default, isn't it, really?

STEPHEN LONG: It is. It's clearly a default. It's clearly, already it's a joke to say that Greece
isn't in default. It is in default. This is going to be an organised default on Greece's debt. And
then they're talking about increasing the capital that banks have to hold against government debt
or sovereign debt to almost double what was agreed to when they did the stress testing of banks
about their exposure. And that will mean that banks have to raise hundreds of billions more euros
to cover this and the question is where does that money come from? Well, they're beefing up this
European financial stability facility, putting more money into it, but you can see that really the
bank losses are going to take a fair bit of the money even in this beefed up facility. So what
they're going to do then to try to make it all work, because they have to guarantee governments as
well through this, is they'll guarantee the first part of losses on any government debt, about 20
per cent, the rest comes from the private sector. Now, that's essentially a confidence trick,
because if any of the major countries get into trouble, Italy or Spain, then the whole thing
doesn't work. Ultimately the only way you can see this working is the European Central Bank
eventually bank rolling it and monetising the debt. And I think that's where it will head.

ALI MOORE: And of course, even if they've come to an agreement, one of the problems with all the
bailouts is that everything has to be agreed by everyone in the Eurozone. And we saw that this
week, didn't we, with Slovakia, which managed to vote against one of the previous bailout packages?

STEPHEN LONG: Yes. Well we saw this weird situation which I think really spooked a lot of people
where Slovakia, a tiny country and only recently, last couple of years, became a member of the
Eurozone, voted down the bailout package, which meant potentially the whole upgrading of the
European financial stability facility could have fallen over. But it was tied to a confidence vote
on the Government. The Government fell over. Now they've voted for the package. But it just does
show that vulnerability and the difficulties of getting unity in Europe to seal this achieve. Now
there is a big backdrop in Europe of the Second World War and the desire for unity and we never
want to see terrible events again, but push comes to shove, there's also a lot of political
interest in instability even within member States. How you get all this to work out, oh, it's a big

ALI MOORE: Indeed. And certainly there's plenty of people already talking about how they can
restructure those sort of voting arrangements to mean that smaller countries that don't really have
a stake, or any money in it, skin in the game, so to speak, can't hold the rest of the Eurozone to
ransom. Stephen Long, many thanks for joining us.

STEPHEN LONG: You're welcome.