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What it means for Europe, U.S.

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.

But dangers lurk. The bank losses and the new cushion might not prove enough. The plan could exact serious 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.

What was the original problem?

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.

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.

Is the risk from Europe gone?

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.

How vulnerable is the U.S.?

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 weak.

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

Will the bailout plan be enough to keep the debt crisis from spreading?

Maybe. There are a lot of unknowns. Because the banks are accepting losses on Greek bonds, Greece won't owe as much as it did before. That helps. But it still has too much debt and needs its economy to grow if it hopes to pay it back.

The new plan sees Greek debt falling to 120 percent of the country's economic output by 2020 — a level believed to be sufficient to ease investors' fears. Its debt had been expected to grow to 180 percent. But it's uncertain whether Greece can dig itself out of recession.

What it means for Europe, U.S. 10/27/11 [Last modified: Thursday, October 27, 2011 9:31pm]
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