World stocks surge on EU’s $1 trillion rescue package for euro

World stocks surge on EU’s $1 trillion rescue deal

LONDON — World markets surged Monday as investors were galvanized by the European Union’s surprisingly large $1 trillion plan to defend the embattled 16-country euro currency and prevent a spreading government debt crisis from choking off the global economic recovery.

In Europe, the FTSE 100 index of leading British shares closed up 264.40 points, or 5.2 percent, at 5,387.42 as investors put aside concerns about last week’s inconclusive election, leaving a government has yet to be formed.

Meanwhile, Germany’s DAX surged 302.82 points, or 5.3 percent, at 6,017.91 while France’s CAC-40 was the best-performing major European index, ending 327.70 points, or 9.7 percent, to 3,720.29.

Some of the biggest gains were recorded on the stock exchanges of the countries that have been in the markets’ line of fire over the last few weeks and months — both the main indexes in Greece and Portugal ended around 10 percent higher.

The euphoria was replicated on Wall Street — the Dow Jones industrial average was up 420.65 points, or 4.1 percent, at 10,801.08 around midday New York time while the broader Standard & Poor’s 500 index spiked 48.45 points, or 4.4 percent, at 1,159.33.

“Default risk has been quashed and the market reaction has been euphoric,” said Jane Foley, research director at Forex.com.

Monday’s dramatic market moves were spurred by news that the European Commission will make €60 billion ($75 billion) available for loans and guarantees to indebted European countries.

Beyond that, the eurozone promised backing for another €440 billion ($570 billion), should it be necessary, and the International Monetary Fund would contribute an additional sum of at least half of the EU’s total contribution, or €250 billion.

In addition, the European Central Bank announced what many analysts called its “nuclear option” — buying public and private bonds to lower borrowing costs and increase liquidity.

Meanwhile, the U.S. Federal Reserve restarted its dollar swap operations, in which it offers billions of dollars overseas to boost banks’ cash positions in return for foreign currency. Central banks around the world were also involved.

“This is shock and awe, Part II and in 3-D, with a much bigger budget and a more impressive array of special effects,” said Marco Annunziata, chief economist at UniCredit Group in London.

“This truly is overwhelming force, and should be more than sufficient to stabilize markets in the near term, prevent panic and contain the risk of contagion,” he said.

Last week, the markets were in turmoil as sentiment towards a €110 billion ($142 billion) loan package for Greece turned sour as investors feared Europe’s response was too little and too late to keep confidence in the euro from deteriorating and potentially collapsing.

Markets realized that the draconian austerity measures demanded by Greece’s bailout are likely to keep the country in recession, if not depression, for years and complicate paying down heavy debt loads. The images of violent protests in Athens and the prospect that such mayhem could spread to other European countries — such as Portugal and Spain, where borrowing costs were rising ominously — and derail the global recovery caused investors to fear the worst.

Faced with rising social unrest — and the threat of more — and the currency in turmoil, Europe’s leaders finally took decisive action.

The early response in the currency markets was encouraging as the euro to just below $1.31 from Friday’s close of around $1.2750 — last week it had fallen to a 14-month low of $1.2523.

The rally soon came to a halt, with the euro falling back towards $1.2850 as investors realized that many of the problems afflicting the single currency haven’t just vanished overnight.

“The bolder than anticipated announcement of up to €750bn in loans and guarantees for euro-zone governments together with ECB government bond purchases hopefully reduces the immediate risk of financial market meltdown in the region but it does not change the fundamental need for aggressive fiscal consolidation that will keep the peripheral economies in recession for quite some time,” said Jennifer McKeown, senior European economist at Capital Economics.

Nevertheless, the EU package has helped ease the likely pain for the debt-laden countries of the eurozone — for example, the difference between yields on Greek 10-year bonds and their benchmark German equivalents was at 5.57 percentage points, down around 5 percentage points.

Oil prices recovered too but gold prices and U.S. Treasuries — both considered safe havens at a time of unease — both fell back sharply.

Meanwhile, the British pound gave up early gains as prospects of a deal between the Conservative Party and the Liberal Democrats to form a coalition government diminished. Matters were complicated further when Prime Minister Gordon Brown, said he would quit by September, paving the way for a possible Labour Party deal with the Liberal Democrats.

Brown’s dramatic statement renewed concerns in the markets about Britain’s political future, and the pound dropped around a cent to $1.880.

Earlier, Asian investors applauded the EU’s moves, even though the debt crisis is a particularly European concern at the moment. Japan’s Nikkei 225 stock average ended 1.6 percent higher at 10,530.71 while Hong Kong’s Hang Seng index jumped 2.5 percent to 20,426.64.

Associated Press writers Carlo Piovano in London and Alex Kennedy in Singapore contributed to this report.