expectations in arranging a nearly $1 trillion commitment for its ailing members and paved the way for the European Central Bank to begin purchases of debt on Monday.
Markets rallied around the world in response to the concerted defense of the euro, a package that exceeded in size the United States bank bailout two years ago.
Major stock indexes in the United States rose about 4 per cent on Monday, while a leading index of blue-chip stocks in the euro zone rose more than 10 per cent. The premium that investors had been demanding to buy Greek bonds plunged.
But by Tuesday, that rally appeared to have sputtered out, with many Asian markets down slightly. And as details crystallised of the package's main component — a promise by the European Union's member states to back 440 billion euros, or $560 billion, in new loans to bail out European economies — the wisdom of solving a debt crisis by taking on more debt was challenged by some analysts.
“Lending more money to already overborrowed governments does not solve their problems,” Carl Weinberg, chief economist of High Frequency Economics in Valhalla, New York, said in a note.
“Had we any Greek bonds in our portfolio, we would not feel rescued this morning.”
Such concerns may be part of the reason the euro fell back when American markets opened, after surging in Asian and European trading, to end the day at about $1.28.
Another big issue is whether bailing out economies creates moral hazard. Other countries may continue to skirt the kinds of actions that would lower their budget deficits and debt loads — steps painful to the public and dangerous to politicians — because they too can expect to be rescued.
It is clear that Europe’s fund will require the sustained support of the 27 EU nations — not to mention its richest member, Germany, which has until now deeply opposed a bailout.
Indeed, for all the excitement about the scale of the effort, it is important to remember that the core fund does not now exist. The fund, known as a special purpose vehicle, would raise money by issuing debt and making loans to support ailing economies. The European countries would guarantee that fund.
So the package is merely a commitment for the vehicle to borrow money if a large economy like Spain, which represents 12 per cent of the output in the euro zone, asks for assistance. The International Monetary Fund is pledging 250 billion euros to support the effort. Sixty billion euros under an existing lending programme pushes the total to near $1 trillion.
The fund is therefore more a theoretical construct than the Troubled Asset Relief Programme that was created in the US, and that is where things get tricky.