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'Pure Politics' In D.C.; A True Crisis In Europe

From left, Greek Prime Minister George Papandreou, European Council President Herman Van Rompuy and European Commission President Jose Manuel Barroso participate in a news conference after eurozone leaders agreed on a second bailout package for Greece.
From left, Greek Prime Minister George Papandreou, European Council President Herman Van Rompuy and European Commission President Jose Manuel Barroso participate in a news conference after eurozone leaders agreed on a second bailout package for Greece.

While the U.S. seems to be walking into a sovereign debt crisis, European countries are trying desperately to avoid one.

"What we have is a bunch of really idiotic kabuki theater going on in Washington and a bunch of politicians playing around with a ridiculous debt ceiling which shouldn't exist in the first place," Reuters blogger Felix Salmon tells Guy Raz, host of weekends on All Things Considered. "And that's pure politics. What we're seeing in Europe is real, undeniable economics."

European leaders have just worked out a new plan to tackle Greece's debt crisis. They would agree to ease lending terms to Greece, Ireland and Portugal, while private investors would voluntarily swap their Greek bonds for longer maturities at a lower interest rates. The deal is being referred to as a "selective default" for Greece.

"This is a really big deal because we've never had a member of the European Union default on its debt before," Salmon says.

One of the big fears is that if Greece defaults, Italy might be next. Salmon says Italy has so much debt right now that a default there is becoming more likely. If that happens, he says, the consequences will be enormous.

"The problem with Italy is that it is really big. It's the third-largest economy in the eurozone, and what that means is that banks all over Europe have a huge amount of Italian debt," he says. "If they have to take losses on that debt, they become inadequately capitalized, and the entire European banking system could be brought to its knees."

Salmon isn't sure Italy will have to default on its debt anytime soon, but he says the default in Greece is only the first.

"I don't think anyone really believes this is the last time we're going to see something like this," he says. "It's going to happen in Greece again because this isn't enough to solve Greece's problems. It's going to happen in Portugal, it's going to happen in Ireland."

Until the defaults and semi-defaults come to an end, Salmon says "there's going to be massive question marks over the future of the eurozone."

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