European bourses turned euphoric on Monday following the announcement of a special European fund to bailout failing Euro zone economies and the decision by the European Central Bank to purchase government securities from nations like Greece, Spain, Portugal, Ireland or Italy, considered to be close to sovereign default.
Markets responded strongly and positively to the news with bourses in Spain rising by 13 per cent while stocks in Greece, whose economy has been tottering on the verge of bankruptcy these past weeks, rose by as much as 10 per cent. Paris and Milan saw a rise of over 12 per cent.
Euro zone ministers, joined by ministers from the 11 EU countries outside the euro, argued long and hard in a session that started at 4 pm on Sunday afternoon and ended in a dramatic 2 am press conference with the announcement of a huge euro 750 billion plan to put paid to market panic over European debt. Central banks in Germany, France and Italy all said they began buying government bonds on Monday.
The ECB also reactivated unlimited fixed-rate offerings of three-month loans, a key tool in the ECB's efforts to fight the credit crisis. The message has gotten through: the euro zone will defend its money, French Finance Minister Christine Lagarde told reporters in Brussels early today after markets punished inaction last week. ECB policy makers said they would counter severe tensions in certain markets by purchasing government and private debt, and the bank restarted a dollar-swap line with the Federal Reserve.
Inability to craft a convincing package in time would have left deficit-plagued countries at the mercy of speculators, Finance Minister Anders Borg of Sweden, a non-euro member, said as the meeting began. After much haggling, and remonstrance, mainly by Germany, Euro zone finance ministers agreed to the creation of a special body, not unlike a European version of the International Monetary Fund, that could raise as much as billion euro by generating additional debt which would be underwritten by individual governments. That money could then be loaned to countries struggling to pay off debt. Obviously, such receiving countries will not be part of the guarantors' league. The IMF put an additional 250 billion euro into the kitty and even those EU governments, which do not belong to the Euro zone, have agreed to chip in with 60 billion euro. This will come out of the EU's budget and can be made available immediately. However, investors are expected to remain cautious about the details and the conditionality clauses attached to the programme, the mechanism of the release of the funds and how it will ultimately be funded by each government, including any future possible recapitalisation of the IMF.