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By Jason Stipp | 05-10-2010 02:35 PM

Don't Unfasten Your Seatbelt Yet

The EU bailout plan could face hiccups in the short term, and long-term question marks still hang, says Morningstar markets editor Jeremy Glaser.

Jason Stipp: I'm Jason Stipp from Morningstar. The combined IMF-EU bailout for troubled European countries seems to have soothed the market on Monday, but what could be the short- and long-term consequences? Here with me to talk about that is Morningstar's markets editor, Jeremy Glaser. Jeremy, thanks for being here.

Jeremy Glaser: Jason, my pleasure.

Stipp: So, first off, this bailout plan: the markets are up today, global markets are up. It seems like it is being received well. What exactly is it? What's behind the bailout? How have they structured it?

Glaser: This is really a bailout of almost unprecedented proportions. If you think about it in terms of dollar terms, it is bigger than TARP, and this really is the European Union coming out and saying: "We are going to stand behind the euro, and we are going to do whatever we need to do to keep these countries from defaulting, such as Greece and potentially even Portugal, Spain, or Italy."

So there is a couple of different moving parts, and the exact specifics of it aren't so important to most investors, but basically there is an initial fund that they will be able to come up with very quickly that will be able to disperse money.

Then there is a second larger fund that will create a special purpose entity that will be able to borrow money based on the credit of all of the European or the Eurozone nations, will be able to disperse up to 440 billion euros out to countries that need that money to make their debt payments.

The International Monetary Fund will step in with 50 cents of a dollar of the money that was put into the special purpose entity, and then the countries that take the money will have to agree to the IMF austerity terms. They will have to bring their budget deficits down pretty substantially and make sure that they are on the road to actually improving their finances and aren't just taking the money.

Then there will also be conditions for some countries that could potentially get into trouble, as Portugal and Spain, to get their deficits under control faster than they originally expected.

There is a lot of moving parts here, but the overall thought is that this is going to just probably put a bunch of money behind it and flush liquidity into countries that really need it. Separately, the European Central Bank is also going to start buying debt, which is something that they haven't done before and something that even just a few days ago said they weren't even considering and that will help ease the movement in the markets and try to bring some of those spreads down.

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