LINDA WERTHEIMER, HOST:
The cost of borrowing is the best way to gauge the severity of Europe's crisis. Here's Zoe Chace of NPR's Planet Money team.
ZOE CHACE, BYLINE: Andrew Balls has a front seat to the European debt crisis. That's because he's someone who lends money to European countries. He's at one of the biggest bond outfits in the world: PIMCO. He says, if you look back over the course of the year, there is one moment that stands out, a tipping point.
ANDREW BALLS: So what happened was in May, or thereabouts, there was a big argument about what should happen with Greece.
CHACE: May 2011. Germany was pushing for an immediate default on Greek debt.
BALLS: They would call it something more polite. They would call it private sector involvement.
CHACE: Private sector involvement - a nice way of saying, bond investors, you're going to lose a bunch of money. Andrew Balls didn't have any skin in that particular game. He'd stopped lending money to Greece long ago. But he was watching. Here's what he saw.
BALLS: The German government, which 18 months ago had said there would never be a default in the eurozone, was now calling for a default. The European Central Bank was saying no, this is a terrible idea. This would be a disaster. So as an investor watching this, you thought, wow. This is coming apart.
CHACE: If the Europeans don't have a plan to rescue little Greece, a small country of no particular importance...
BALLS: What happens if a big, systemically important country gets into trouble?
CHACE: For Andrew Balls, it was like watching a house on fire take down a whole neighborhood, because no one could agree how to fight the fire.
BALLS: The fire trucks have shown up, and they're all arguing with each other. They're arguing with the police and the ambulance services at the same time. Everyone's shouting.
CHACE: That would be Germany and the European Central Bank, for example.
BALLS: And the fire is spreading. So watching this all year, as an investor, you decide just to step away.
CHACE: An investor stepping away means something very specific. It means they've decided that a country is much riskier than before, so they start charging them more to borrow money. In Italy's case, their interest rate jumped from four to seven in a matter of months - not because Italy itself became riskier, but because the people who are supposed to back Italy up if things go bad couldn't agree how to do it.
Investors watch each other as carefully as they watch the countries they're investing in, and they are pulling back, one country at a time. You can tell by how much more it costs these countries to borrow money. It's getting more expensive now, even for a strong country like France. After investors dump their Spanish and Italian debt, they're looking warily around the rest of Europe, like, who's next. And suddenly, France isn't looking so strong. Zoe Chace, NPR News, New York. Transcript provided by NPR, Copyright NPR.