Markets Welcome E.U. Rescue Package
By JAMES KANTER and LANDON THOMAS Jr.
Published: May 10, 2010
BRUSSELS — Global markets rallied Monday, reversing the steep declines of recent days, after European leaders agreed to provide a huge rescue package of nearly $1 trillion to combat the debt crisis that has engulfed Europe, and central banks began injecting cash into the financial system.
Martin Oeser/DDP, via Agence France-Presse — Getty Images
A trader in front of a board displaying the German DAX index on Monday at the stock exchange in Frankfurt.
Thierry Roge/Reuters
Elena Salgado, right, the Spanish finance minister, announcing the deal with Olli Rehn, the European commissioner for economic affairs, on Sunday.
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In an extraordinary meeting that lasted into the early hours of Monday morning, finance ministers from the European Union agreed on a deal that would provide $560 billion in new loans and $76 billion under an existing lending program to countries facing instability. Elena Salgado, the Spanish finance minister, who announced the deal, also said the International Monetary Fund was prepared to give up to $321 billion separately.
Officials were hoping the size of the program — a total of $957 billion — would signal a “shock and awe” commitment to such troubled countries as Greece, Portugal and Spain, in the same vein as the $700 billion package the United States government provided to help its own ailing financial institutions in 2008.
On top of the unprecedented sum, the European Central Bank reversed its position of just a few days ago and said it would buy government and corporate debt. And the world’s leading central banks, including the U.S. Federal Reserve, announced a joint intervention to make more dollars available for interbank lending.
Central bank purchases of euro-zone government bonds began Monday, although the E.C.B. did not immediately release details.
The initial market reaction was ecstatic. The euro jumped back above the $1.30 mark for the first time in a week, to $1.3030 from $1.2757 late Friday. Greece’s 10-year borrowing costs plunged by almost half — an astonishing 5.9 percentage points — to 6.5 percent.
In morning trading, the Euro Stoxx 50 index, a barometer of euro zone blue chips, rose more than 8 percent, while the FTSE 100 index in London rose 3.5 percent, following on more modest gains in Asia.
European banks were the early winners. In France, BNP Paribas soared 14 percent and Credit Agricole rose 16 percent; Germany’s largest bank, Deutsche Bank, gained 10 percent.
Trading in U.S. equity index futures suggested stocks would open sharply higher on Wall Street.
The package was much larger than expected, and represented an audacious step for a bloc that had been criticized for acting tentatively, and without unity, in the face of a mounting crisis.
Philippe Gijsels, head of research at at BNP Paribas Fortis Global Markets in Brussels, said the central bank action was in some ways the most crucial, because the E.C.B. would be in effect funding government budget deficits by monetizing their debt.
The trick now, he said, would be to ensure that Greece and other countries in similar straits are held to their promises to straighten out their finances.
“The debt is still in the system,” Mr. Gijsels said. “Eventually all these problems will rise again.”
The E.C.B., which had said buying bonds was not even on the agenda at its regular meeting last Thursday, announced the reversal early Monday after an emergency telephone conference by members of its Governing Council. The purchases began Monday, but the central bank did not immediately say which government bonds the banks are buying or what amounts. A Bundesbank spokesman also declined to provide details.
It is likely the banks are bonds from Greece and such countries as Portugal or Spain, as the E.C.B. tries to stop a sell-off of debt from those countries that would push up their borrowing costs.
In its statement, the E.C.B. said that the liquidity that the bond purchases will pump into the European financial system will be “sterilized,” or offset with other monetary operations to drain liquidity from the system. In doing so, the bank seemed to be trying to answer criticism that buying bonds is the same as printing money and could lead to inflation.
The E.C.B. also said it would lend unlimited dollars to banks that can provide collateral in return. The action appeared to be an attempt to take pressure off the euro. While many analysts still consider the euro to be overvalued against the dollar, the E.C.B. may want to avoid a sudden drop in the currency, which would be disruptive for businesses and boost the price of oil and other commodities in euro terms.
Underscoring the urgency of the situation, President Barack Obama spoke to the German chancellor, Angela Merkel, and the French president, Nicolas Sarkozy, on Sunday about the need for decisive action to restore investor confidence. The actions by the United States represented significant concern that the European crisis could spill over and hinder the American recovery.
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New political complications in two of Europe’s most important countries added to the challenge. In Germany, voter anger at the effort to save Greece cost Mrs. Merkel an important regional election Sunday, undermining her leadership, and in Britain the government remained in a state of suspended animation because of the inconclusive parliamentary elections last week.
Financial unease has been mounting. Riots in Greece, ever-tightening terms of credit and the unexplained free fall in the American stock market last Thursday have compounded the sense that the European Union’s inability to address its sovereign debt crisis might lead to the type of systemic collapse that followed the fall of Lehman Brothers.
The debt crisis began with Greece teetering toward default, and fear quickly spread about other weak economies like Portugal, Spain and even Italy. Previous efforts by the European Union to shore up investor confidence were viewed as too little, too late, with the markets making clear that they were looking for a bolder plan.
Olli Rehn, the European commissioner for monetary policy, described the arrangement as “a consolidation pact” that would be “particularly crucial for countries under speculative attacks in recent weeks.” He specifically mentioned Portugal and Spain.
Mr. Rehn said the I.M.F. would provide “half as much as the European Union” following lengthy talks with fund officials.
“We shall defend the euro whatever it takes,” Mr. Rehn said.
What emerged from the discussions, which covered more than 10 hours, represented a partial retreat from a system discussed earlier in the day that would have radically expanded the powers of the European Commission to raise funds.
Instead the ministers devised a system that would speed up the pace at which states that use the euro could lend to one another, but on a bilateral and voluntary basis.
One of the crucial decisions that ministers made was to create a so-called special purpose vehicle to disburse the $560 billion in new loans, should that support be required by member states in economic difficulties.
The use of such a financial instrument reflected the difficulties that individual European governments — and Germany’s in particular — had in committing huge sums to a central authority. Having a body like the European Commission, Europe’s executive body, oversee the economic management of the bloc was seen by some countries as a clash with national sovereignty.
In a statement after their meeting, the ministers emphasized that the special purpose vehicle would expire after three years and that its use would be strictly dependent on “national constitutional requirements.”
The language most likely reflected the reservations of some governments to providing even more money than is available in bailout packages already approved.
Ministers said their first line of defense against financial turmoil was to employ an existing loan program, which they expanded by $76 billion, and to use the further loans approved Monday as a “complement” as required.
There were many complications in trying to forge a consensus. They included defining the role of Britain, which lies outside the euro zone and had said it would not help in propping up the euro, as well as the European Central Bank. The fractiousness underscores the frailty of a monetary union in which the richest member, Germany, is also the most opposed to a financial rescue.
Since it became clear that Greece would not be able to meet its financial obligations and fears spread that other indebted nations like Spain, Portugal and Ireland would have similar troubles, Europe has responded fitfully.
The meetings on Sunday represented an extraordinary convergence of diplomatic activity, crammed into a tight time frame. Political leaders including Mr. Sarkozy of France said early Saturday, at the end of an earlier summit meeting, that a loan mechanism intended to restore confidence should be ready by Monday morning. That effectively left the European Commission and finance ministers a single weekend to change the way the European Union operates its finances.
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