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Defusing Europe debt bomb: What now?; As threat of worldwide recession abates, answers begin to emerge from Greek crisis

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.

A bailout fund for the Continent will be beefed up, and banks will take a 50 percent loss on their holdings of Greek government bonds. The banks will also put more money aside to cushion the blow from future losses.

Investors are cheering. The Dow Jones industrial average surged by almost 340 points Thursday, the euro rose, and even the stocks of battered European banks gained ground.

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

>Q: What was the original problem?

A: 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, a group of 27 nations that allow goods and workers to cross their borders freely.

When Greece fell into recession two years ago, bondholders worried that 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.

The challenge was to figure out a way to fix the problem so Greece didn't have to come back for bailout after bailout.

>Q: Is the risk from Europe gone?

A: 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.

The EU accounts for 20 percent of the world's economic output. It is a big trading partner for many countries. A recession there could push other economies into recession.

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

A: 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 amid riots, strikes and despair.

Problems lurk at the European banks, too. The plan calls for banks to raise 106 billion euros, or about $150 billion, as a cushion against future losses. But that might not be enough to protect against losses on holdings of Greek, Italian and other countries' bonds. Before the summit meeting, the International Monetary Fund estimated banks needed 200 billion euros more to protect themselves.

What's more, even that lower cushion might do a lot of harm. It could force banks to cut back on lending even more.

>Q: What about U.S. banks?

A: Unlike their European counterparts, U.S. banks do not hold a lot of European government bonds. But they may be exposed in other ways.

U.S. banks and other financial institutions have sold investors a type of insurance policy known as credit default swaps. They require the banks to pay billions of dollars if Greece and other indebted European countries default, or stop paying back their debt.

Even though Greece won't have to pay the face value on its bonds, European leaders structured the deal so that the banks wouldn't have to pay the credit default swaps.

>Q: If there are so many questions, why did U.S. stocks jump?

A: Actually, they've been moving up for a while. Stocks have risen in five of the last six trading days through Thursday, and are up by 14 percent this month.

Credit a bit of good timing. Anxiety over this latest summit was rising just as U.S. companies were reporting surprisingly good third-quarter profits. They are expected to be up by 14 percent for companies in the Standard & Poor's 500, the eighth quarter in a row of at least 10 percent gains. Record profits are expected for the full year.

>Q: Will fear continue to recede from the stock market?

A: It depends partly on the U.S. economy. Many analysts and economists think the recovery will eventually pick up speed. But if Europe does push the United States into recession, you can forget about those impressive corporate profits and surging stock prices.

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