|Published:||May 10, 2010 11:21 AM EDT|
|Updated:||May 10, 2010 11:21 AM EDT|
BRUSSELS (AP) - The European Union put up a staggering $1
trillion Monday to contain its spreading government debt crisis and
keep it from tearing the euro currency apart and derailing the
global economic recovery.
Analysts said the huge sum supplied the "shock and awe"
markets had been waiting for for weeks, at least in the short term,
and the euro soared on the news.
European leaders negotiated into the early hours of Monday
before reaching a deal in which governments that use the euro would
join the EU and International Monetary Fund in putting up euro750
billion in loans available to prop up troubled governments.
The European Central bank will buy government and private debt
to keep debt markets working and lower borrowing costs, a crisis
measure dubbed the "nuclear option," while the U.S. Federal
Reserve joined with other central banks in the effort, reactivating
a currency swap program used during the earlier stages of the
financial crisis to ship dollars overseas to be pumped into banking
systems as short-term credit.
Officials acted after ominous slides in world stocks and the
euro last week that raised fears that the debt crisis would spread
from heavily indebted Greece to other financially weak countries
such as Spain and Portugal and beyond, to the point where President
Barack Obama discussed the crisis by phone with German Chancellor
Angela Merkel and French President Nicholas Sarkozy last week.
Policy makers worried it could shake the world economy the way
the bankruptcy of U.S. investment bank Lehman Brothers did in 2008,
making banks fearful of lending to businesses, hammering stocks and
killing off economic recovery.
Many investors, rattled for weeks by the prospect Greece would
default on its mountain of debt, showed relief. The euro climbed as
high as $1.3064, up from the 14-month low of $1.2523 it hit late
Japan's Nikkei 225 stock average rose 1.5 percent and Hong
Kong's Hang Seng index added 1.3 percent. European markets jumped
higher - major indexes were up more than 3 percent - and Wall
Street was also expected to surge on the open, with Dow futures
also 3.0 percent higher.
There was cautious endorsement from analysts who still feared
the measures may not be enough to save the common currency, which
was adopted by many of the EU's member states in 1999.
"It buys time. We don't know if it will be enough. They're
trying to give the impression that they're still united. They've
bought some breathing space but that's all," said Song Seng Wun,
an economist with CIMB-GK Research in Singapore. "This perhaps
just postpones the inevitable, the euro may have to ultimately give
way, that's the worst case scenario."
Marco Annunziata, chief economist of Unicredit bank, said the
package was one of "overwhelming force and should be more than
sufficient to stabilize markets in the near term, prevent panic and
contain the risk of contagion."
"This is shock and awe, Part II and in 3-D," he said.
Under the three-year plan, the European Commission - the EU's
governing body - will make euro60 billion ($75 billion) available
while countries from the 16-nation eurozone would promise backing
for euro440 billion ($570 billion). The IMF would contribute an
additional sum of at least half of the EU's total contribution, or
"We shall defend the euro whatever it takes," EU Commissioner
Olli Rehn said after an 11 hour-meeting of EU finance ministers
that capped a hectic week of chaotic sparring between panicked
governments and aggressive markets.
Officials hope the massive sums will deter currency speculators
from betting on a euro collapse after political posturing and
soothing words failed to convince investors that Greece's financial
implosion could be contained.
Markets had battered the euro and Greek government bonds even as
EU leaders insisted for days that Greece's problems were a unique
combination of bad management, free spending and statistical
cheating that doesn't apply to other euro-zone nations.
Market jitters also partly contributed to a nearly 1,000-point
drop in the Dow Jones industrials last Thursday. The Securities and
Exchange Commission is meeting with heads of exchanges Monday to
discuss how conflicting trading rules may have exacerbated the
historic stock market plunge.
In the end, even longtime skeptic Germany realized Europe had to
show the money after financial attacks on Greece's debt seemed
poised to spread to other weak European nations such as Portugal
and Spain. Fear of default led to investors demanding high interest
rates that Greece could not pay, forcing it to seek a bailout. Many
feared market skepticism would make Portugal and Spain pay more and
more to borrow, worsening their plight.
Spain and Portugal have committed to "take significant
additional consolidation measures in 2010 and 2011," a statement
from EU finance ministers said. The two countries will present them
to EU finance ministers at their meeting on May 18.
"We are facing such exceptional circumstances today and the
mechanism will stay in place as long as needed to safeguard
financial stability," the ministers said.
German Chancellor Angela Merkel said her government would
approve the rescue plan on Tuesday before parliament gave it
"quick but thorough" consideration.
Separately, eurozone leaders on Saturday gave final approval for
a euro80 billion ($100 billion) rescue package of loans to Greece for
the next three years to stave off default. The IMF also approved
its part of the rescue package - euro30 billion ($40 billion) of loans
- on Sunday.
The Fed's move to back the euro defense plan reopens a program
put in place during the 2008 global financial crisis under which
dollars are shipped overseas through foreign central banks. In
turn, these central banks can lend the dollars out to banks in
their home countries that are in need of dollar funding in
so-called swap agreements.
The Fed said action is being taken "in response to the
reemergence of strains in U.S. dollar short-term funding markets in
Europe" and to "prevent the spread of strains to other markets
and financial centers." A "swap" line with the Bank of Canada
provides up to $30 billion. Figures weren't provided for the other
central banks involved. They include the Bank of England, the
European Central Bank, the Swiss National Bank, and the Bank of