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Bond Market Doubts Eurozone Debt Crisis Is Over

RENEE MONTAGNE, host:

The debt crisis in Europe is still playing out and there are plenty of danger signs ahead. Big bailouts have been put together to rescue Greece and Ireland, but the bailouts and other efforts have not restored the confidence of the bond traders, those who invest much-needed funds today in hopes of turning a profit later. Since the bond markets play such an important role in the crisis, we sent NPR's London correspondent, Philip Reeves, to find out more about them.

PHILIP REEVES: If you could understand how these markets work, then you understand a large part of the crisis itself. To find out more, we've come here to a caf� called the City Coffee Lounge in the middle of the city of London on a bitterly cold winter's morning. And we're joined by Phil Tyson. He's a bond strategist with MF Global.

And I want to begin by asking you a simple question, what do we mean when we talk about the bond markets?

Mr. PHIL TYSON (MF Global): Essentially, a bond's like an IOU that a government will issue in order to borrow money. So investors will invest in the bonds. They will, in other words, be lending the country or the sovereign money; and the sovereign or the country will be then paying a coupon to them, which is like a set interest rate on that money annually or semiannually, for the life of the bond.

REEVES: And the investors, they're in this for a profit?

Mr. TYSON: Exactly, yes, they expect to see the value of their investments go up as most investors do. So they get very concerned, as we're seeing at the moment in Europe, when there is a risk - an increasing risk associated with that investment.

REEVES: And you're seeing increasing risk across Europe, so in order for investors to lend money to countries with shaky economies, they're going to need enticements, like much higher interest rates. But this creates a cyclical problem, because the more a country has to pay in interest...

Mr. TYSON: ...the more it costs a country to fund themselves.

REEVES: This word contagion keeps being bandied around, the idea that this European sovereign debt crisis passes from one country to another. How does it work?

Mr. TYSON: Well, I mean, essentially what you've got is a situation of a big recession. And essentially we saw six months ago in May, we have this bailout of Greece. Six months on, we have a situation where Greece is back to where it was six months ago. And I think all these bond markets and all these investors are looking at this, and they're saying, well, is this really going to be the cure for the problems? And we're not addressing the fundamental problems in the market, which is, you know, how do we get Ireland and Greece and potentially Portugal and Spain out of this hole? Because they are having to sanction significant cuts in spending, and significant tax hikes, which in turn increases a downside risk to growth for their economy. And also if growth is lower, then the budget deficit will get higher, and it's like a vicious circle.

REEVES: We keep talking about this as a sovereign debt crisis, but it looks to me as if a portion, a significant portion of the sovereignty of the nations we're talking about, is actually held by the bond markets.

Mr. TYSON: Yes, exactly. I mean, you know, all these sovereigns are fully dependent on the bond markets to manage their funding. So it's critically important.

REEVES: What do you think a breakup of the euro would actually look like?

Mr. TYSON: I mean people have speculated that, you know, potentially it could be Germany that jumps ship in the end. I think they'll find some sort of solution to avoid this scenario, but if we do go down the breakup route, then I think that it would end up being more of a two-tier effect, where you have the core economies in one euro bloc, and you have the southern European economies either in a euro bloc of their own, or they split up and go their own way.

REEVES: A breakup in the eurozone would cause a major hiatus for the global economy. As the financial markets swing into action in the new year, fears are swirling about the need for another financial bailout in Portugal. It's clear that all eyes will be on these troubled economies throughout 2011.

Philip Reeves, NPR News, London. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

Philip Reeves is an award-winning international correspondent covering South America. Previously, he served as NPR's correspondent covering Pakistan, Afghanistan, and India.