The Absolute Moron’s Guide to the Euro Crisis — Part II

By
We'll take this slowly.
We'll take this slowly.

A lot of confusing things have happened since we brought you our first Absolute Moron’s Guide to the Euro Crisis. Building panic over next weekend’s Greek elections, a new French president, and terms like “Grexit” and “Frob” probably made you put down the newspaper and turn on Basketball Wives weeks ago. We don’t blame you.

Still, it’s important to understand this stuff, since it will come up at your office picnic this month. So without further ado, we present our second FAQ for people who have no clue what is going on with the mess in Europe.

Ugh, this Europe thing is still happening?
Well, yes. The most recent thing is the Spanish bank bailout, which was announced last weekend.

Ooh, Spain! I went to Ibiza on spring break during college. They pronounce it “Eeveetha.” This guy named Ignacio took me to a rave and I swear we were dancing until like 7 a.m.
That’s great. Anyway, after months of speculation and hand-wringing, Spain agreed to take a bailout — which some people are calling "Spailout" because it's fun to combine words — that will help it recapitalize its banks.

Recapitalize? Is that like when you’re texting on an iPhone and you want to type “mark” but it keeps changing it to “Mark” because it thinks you’re talking about your friend Mark and then you scream at Siri, "I'm not talking about Mark, Siri!!!"
That was a good effort, but no. Recapitalization is a fancy way of saying that Spain’s damaged banks needed to raise a whole bunch of money in order to avoid dragging down the entire Spanish economy — not to mention Europe, the United States, and the rest of the money-loving world. This weekend, Spain finally admitted it needed outside help, and asked the European Union for a big bailout package.

How big a package are we talking? Heh.
Really big. Huge. The details of the package won’t be finalized until after June 21. But it will be somewhere in the neighborhood of 100 billion euros.

And that's what, in American?
That’s about $125 billion, or about a fifth of the size of TARP, the U.S. bailout fund that was used to buy toxic assets off the books of big banks and other firms at the height of the financial crisis.

Does Spain have a TARP?
Sort of. It’s called FROB. But instead of buying up bad assets, FROB will be used to inject capital directly into the Spanish banking system.

Why couldn’t Spain bail out its own banks, like we did?
Because Spain is part of the E.U. It doesn’t have the authority to print euros like we can print dollars, and its fiscal house is in such disarray that borrowing that kind of money on its own would be prohibitively expensive.

You lost me at “fiscal house.” Anyway, did the bailout work?
Not exactly. The market responded well to Spain’s bailout announcement for a few hours on Monday, but the effects quickly wore off. Spain’s stock index closed negative for the day, and Spanish bond yields rose back to levels that indicate that investors still aren’t feeling confident about the nation’s chances of solving its overall fiscal and economic problems.

Oh. So I guess you could call it a "failout." Ha ha! See what I did there?
Yes, very clever. Also, there are still a lot of question marks surrounding the bailout — where the $125 billion will come from, what the terms of the bailout will mean for existing Spanish bondholders, and whether the troika will require Spain’s government to enforce any spending cuts.

THE TROIKA. Sorry, it just sounds like a badass weapon from Game of Thrones.
It does. But it's just a shorter way to refer to the three institutions that are supervising the Spanish bailout — the European Union, the European Central Bank, and the International Monetary Fund.

Ah. I prefer my definition.
Fine. Anyway, we haven’t even begun to talk about Italy, or about the Greek elections this weekend.

Oy. Well, I have to go pick up the new MacBook Pro, so can you give me the 30-second versions?
I can try. Basically, investors are now getting scared that Spain’s problems will spread to Italy, and Italy will also eventually need a bailout. (The fancy word for this is “contagion risk” and has nothing to do with that movie where Gwyneth Paltrow gets the flu.) Italy’s business leaders are urging government officials to seek relief from the E.U., and the stock indexes are falling as investors get nervous and look for safer places to invest.

Mamma mia!
Yes, mamma mia. Also, this weekend is the Greek legislative elections. Basically, there is a very close contest brewing between a right-wing coalition that supports Greece's bailout and a left-wing coalition that opposes it. In particular, the leftist party wants to renegotiate the E.U.'s austerity measures.

What are “austerity measures?"
Basically, it means enforced cuts in government spending and basic social services. It's sort of like being forced to go on a diet, but as a country.

And people like that?
No more than you would like it if drinking giant sodas became illegal. There have been riots in Greece and Spain. And investors worry that if Syriza, the leftist party, wins a bunch of seats in Parliament, Greece could pull out of the euro entirely.

What would Greece pulling out of the euro mean?
No one really knows. Greece would be forced to switch all its bank accounts and reissue all its existing financial contracts in drachmas. So would any other countries that have contracts with Greece. Government leaders have apparently discussed instituting capital controls to avoid a bank run, which could include limiting the movement of money across borders, and maybe even closing down ATMs.

No ATMs? But how will Greek people get their Air Yeezys?
Right. It's very serious. And if Greece imposed capital controls, or even started sounding like it might, that could be catastrophic. Moody’s, a ratings agency that ponders these things, has said that the entire European Union could be threatened as a result of a Grexit.

A what now?
A “Grexit.” That's what some financial journalists are calling the possibility of Greece leaving the euro.

Why do financial journalists make up words like “Spailout” and “Grexit?”
Because they are bored, miserable creatures.

Aren't you one of them?
Yes. Yes I am.