Acting with unusual speed, the European Union has come up with an unprecedented $750 billion rescue package to combat the fast-spreading debt crisis that has engulfed Europe. Another $321 billion is to be provided by the International Monetary Fund. On the day the package was announced, financial markets across the world bounced back sharply reversing the steep declines of the previous three days. In India, the benchmark stock indices staged one of the biggest one-day rallies seen over the previous year. Since then, the stock markets have moderated, as it came to be felt that this huge package will only provide a breather and not address the basic causes that brought about the crisis in the first place. The urgent task is to check the rapid spread of contagion. The crisis that had its origins in Greece's fiscal problems has spread to the rest of Europe, although only three other countries — Portugal, Spain and Ireland, all with high levels of public indebtedness — are seen to be particularly vulnerable. The fears that the troubles in Europe would morph into another global crisis seem exaggerated. However, in the United States and many other developed countries, the European crisis might choke the already feeble recovery.

There are some similarities between the latest crisis and the previous one. Both had their origins in what were unlikely sources. The U.S. sub-prime housing market was hardly a familiar name even to bankers in many developing countries. Greece with just 2.5 per cent of the euro zone's GDP was least expected to threaten the euro and the monetary union or export its problems to many parts of the world. As in the previous crisis, the globalisation of financial markets has meant Greece's domestic problems rattling markets across the world. Private capital has stopped flowing into countries with strained finances. The euro has sunk to a 14-month low and the bond markets, reflecting the uncertainty, are quoting at increased spreads. Financial markets and governments will be looking for positive cues in the wake of the massive package. It is not clear in what shape the euro and the monetary union will emerge after the crisis. Euro sceptics are having a field day pointing out, among others, the relative inflexibility of the euro mechanism to tackle a crisis such as the one in Greece. In India, the crisis in Europe has, apart from having its impact on stock prices, raised question marks on the private sector's overseas borrowing. And once again, the crisis has shown the fickle nature of foreign portfolio money managers.

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