EU sets up $1 trillion eurozone/IMF defense package to protect euro from disintegration

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EU creates $1 trillion package to save euro

BRUSSELS — The European Union put up a staggering $1 trillion Monday to contain its spreading government debt crisis and keep it from tearing the euro currency 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 and stocks soared on the news.

European leaders negotiated into the early hours of Monday before reaching a deal in which governments that use the euro would join the EU and International Monetary Fund in putting up euro750 billion in loans available to prop up troubled governments.

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 U.S. Federal Reserve joined with other central banks in the effort, reactivating a currency swap program used during the earlier stages of the financial crisis to ship dollars overseas to be pumped into banking systems as short-term credit.

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

Policy makers worried it could shake the world economy the way the bankruptcy of U.S. investment bank Lehman Brothers did in 2008, making banks fearful of lending to businesses, hammering stocks and killing off economic recovery.

Many investors, rattled for weeks by the prospect Greece would default on its mountain of debt, showed relief. The euro climbed as high as $1.3064, 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.

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 U.S. Federal Reserve joined with other central banks in the effort, reactivating a currency swap program used during the earlier stages of the financial crisis to ship dollars overseas to be pumped into banking systems as short-term credit.

The overnight decision immediately jumpstarted markets worldwide. The euro immediately shot back to life and up to $1.30, recovering from Friday’s 14-month low of $1.2523.

Stocks too basked in the glow. France’s CAC-40 stood out in Europe, surging 285.08 points, or 8.4 percent, to 3,677.67. Athens’ main index was up nearly 10 percent and Lisbon’s PSI 20 jumped 9 percent too.

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.

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. It reached the point where President Barack Obama discussed the crisis by phone with German Chancellor Angela Merkel and French President Nicholas Sarkozy.

Policy makers worried it could shake the world economy the way the bankruptcy of U.S. investment bank Lehman Brothers did in 2008, making banks fearful of lending to businesses, hammering stocks and killing off economic recovery.

It also raised long-term worries that the crisis would force a weaker member such as Greece out of the euro.

Analysts said the measures had put out the fire for now by eliminating fears that governments would lack funds to pay off their debts. But several raised long-term worries about spreading debt of budget sinners to more responsible governments, and pointed to the lack of tough rules to keep debt from piling up again.

“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.”

Marco Annunziata, chief economist of Unicredit bank, 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.”

“This is shock and awe, Part II and in 3-D,” he said.

Under the three-year plan, the European Commission — the EU’s governing body — will make €60 billion ($75 billion) available while countries from the 16-nation eurozone would promise backing for €440 billion ($570 billion). The IMF would contribute an additional sum of at least half of the EU’s total contribution, or €250 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.

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.

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 U.S. 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.

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AP Business Writers Aoife White, Emma Vandore in Brussels and Jeannine Aversa in Washington, and Associated Press writers Elaine Ganley in Paris, Matt Moore in Frankfurt, Alex Kennedy in Singapore and Daniel Wagner in Washington contributed to this report.