The European Union spearheaded a $1 trillion plan on Monday to contain Europe's spreading debt crisis and keep it from tearing the euro currency apart and derailing the global economic recovery.
Central banks around the world joined the coordinated effort to prop up the euro and repel speculative attacks against Europe's weakest countries. The European Central Bank used what analysts called its "nuclear option" buying public and private debt to shore up liquidity in "dysfunctional" markets and lower borrowing costs. The US Federal Reserve separately reopened a currency "swap" program to ship billions of dollars overseas, pumping more short-term cash into the financial system.
Many investors, rattled for weeks by the prospect Greece would default on its mountain of debt, showed relief. The euro climbed as high as $1.2984, up from the 14-month low of $1.2523 it hit late last week. 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."
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 euro250 billion. "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.
"We now see herd behaviors in the markets that are really pack behaviors, wolf pack behaviors," Swedish Finance Minister Anders Borg said Sunday. If unchecked, "they will tear the weaker countries apart. So it is very important that we now make progress."
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.
Some eurozone nations, meanwhile, blamed financially weak nations and a lack of European cooperation for the crisis. "I'm against putting all the blame on speculation," said Austrian Finance Minister Josef Proell. "Speculation is only successful against countries that have mismanaged their finances for years."
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 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 $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.