Tue, May 11, 2010 page1

• EU creates US$1 trillion package to rescue euro

  SHOWING THE MONEY It took EU finance ministers 11 hours to reach a deal where eurozone countries, the EU and IMF will prop up troubled economies

  • AP AND AFP
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  The EU put up a staggering 750 billion euros (US$1 trillion) yesterday to contain its spreading government debt crisis and keep it from tearing the euro 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.

  “This is shock and awe, Part II and in 3D,” said Marco Annunziata, chief economist of Unicredit bank.

  

  EU Commissioner for Economic and Monetary Affairs Olli Rehn, left, and Spanish Finance Minister Elena Salgado give a joint press conference at the end of the ECOFIN council meeting yesterday at EU headquarters in Brussels.

  PHOTO: AFP

  He 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.”

  European leaders negotiated into the early hours of yesterday before reaching a deal in which governments that use the euro would join the EU and IMF in putting up loans available to prop up troubled economies.

  Under the three-year plan, the European Commission — the EU’s governing body — will make 60 billion euros available while countries from the 16-nation eurozone would promise backing for 440 billion euros.

  The IMF would contribute an additional sum of at least half of the EU’s total contribution, or 250 billion euros.

  “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.

  “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.

  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 US Federal Reserve joined with other central banks in the effort as well.

  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 US President Barack Obama discussed the crisis by phone with German Chancellor Angela Merkel and French President Nicholas Sarkozy last week.

  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 eurozone nations.

  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.

  German Chancellor Angela Merkel said her government would approve the rescue plan today before parliament gave it “quick but thorough” consideration.

  Many investors, rattled for weeks by the prospect Greece would default on its mountain of debt, showed relief.

  The euro climbed as high as US$1.3064, up from the 14-month low of US$1.2523 it hit late last week.

  The Frankfurt stock market’s DAX index of leading shares gained more than 5 percent yesterday following the announcement of the massive rescue package. 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.

  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 re-emergence of strains in US 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 US$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 Japan.

  European newspapers gave mixed reviews to the rescue plan yesterday.

  London’s the Guardian took a nuanced position, calling the bailout plan “a last ditch attempt that will either foreshadow a consolidation of the euro, or, if it fails, lead to the crash and disintegration of the single currency.”

  On the Financial Times blog, Mohamed El-Erian, chief executive of the investment banking firm Pimco said Europe had entered “uncharted waters.”

  In Vienna, the liberal daily Kurier balked at the sum: “And what next?”
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