EU Kicks the Can With Nearly $1 Trillion Package

European policy makers unveiled an unprecedented loan package worth almost $1 trillion and a program of bond purchases as they spearheaded a global drive to stop a sovereign-debt crisis that threatened to shatter confidence in the euro.
Jolted by last week’s slide in the currency and soaring bond yields in Portugal and Spain, European Union finance chiefs met in a 14-hour session in Brussels overnight. The 16 euro nations agreed in a statement to offer as much as 750 billion euros ($962 billion), including International Monetary Fund backing, to countries facing instability and the European Central Bank said it will buy government and private debt.
The rescue package for Europe’s sovereign debtors comes little more than a year after the waning of the last crisis, caused by the U.S. mortgage-market collapse, which wreaked $1.8 trillion of global credit losses and writedowns. Under U.S. and Asian pressure to stabilize markets, Europe’s governments bet their show of force would prevent a sovereign-debt collapse and muffle speculation the 11-year-old euro might break apart.
“Europe wants to give the impression that they are not dealing with the crisis on a piecemeal basis and are addressing it in a comprehensive fashion,” Venkatraman Anantha-Nageswaran, who helps manage about $140 billion in assets as global chief investment officer at Bank Julius Baer & Co. in Singapore, said.
“It might temporarily calm nerves but questions will come back later on how they will pay for this package when all of them need fiscal consolidation,” Anantha-Nageswaran also said.
The euro headed for its biggest two-day rally since March last year, climbing 1.4 percent to $1.2930 as of 2:46 p.m. in Tokyo after advancing on May 7 on forecasts an agreement would be reached over the weekend.
Asian stocks also rallied, with Japan’s Nikkei 225 Stock Average rising 1.5 percent and the MSCI Asia Pacific Index up 1.3 percent. Futures contracts on the U.S. Dow Jones Industrial Average gained 243 points to 10,578.
“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 will counter “severe tensions” in “certain” markets by purchasing government and private debt, and the bank restarted a dollar-swap line with the Federal Reserve.
“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,” Marco Annunziata, chief economist at UniCredit Group in London, said in an e-mailed note. “This is Shock and Awe, Part II and in 3-D.”
Treasuries tumbled on investors’ increased appetite for risk, with yields on benchmark 10-year U.S. notes rising to 3.57 percent from 3.43 percent at last week’s close. German bunds opened lower, sending 10-year yields up about 12 basis points.
The steps came after failure to contain Greece’s fiscal crisis triggered a 4.1 percent drop in the euro last week, the biggest weekly decline since the aftermath of Lehman Brothers Holdings Inc.’s collapse. European stocks sank the most in 18 months, with the Stoxx Europe 600 Index tumbling 8.8 percent to 237.18.
The ripple effect in the U.S., including a brief 1,000- point drop in the Dow Jones Industrial Average on May 6, prompted President Barack Obama to call German Chancellor Angela Merkel and French President Nicolas Sarkozy to urge “resolute steps” to prevent the crisis from cascading around the world.
Under the loan package, euro-area governments pledged 440 billion euros in loans or guarantees, with 60 billion euros more in loans from the EU’s budget and as much as 250 billion euros from the International Monetary Fund.
“They will have bought themselves a significant amount of time to do the right thing,” said Barry Eichengreen, an economics professor at the University of California, Berkeley.
Markets worldwide are reeling from Europe’s debt saga. Gold rose to a near-record of $1,214.90 an ounce in New York last week, and the MSCI World Index of equities dropped to a three- month low. Investors fleeing European markets parked money in U.S. Treasuries, pushing the 10-year note yield down 23 basis points to 3.43 percent.
In a step that skirts EU rules barring direct central bank lending to governments, the ECB said it will conduct “interventions” to ensure “depth and liquidity” in markets. The purchases will be sterilized, meaning they won’t increase the overall money supply in the financial system.
“This sets a precedent for the rest of the life of the Central Bank and will have likely surprised even the most seasoned observers,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London. “While the ECB’s intervention might attract bad press regarding its mandate and independence, we believe that this was necessary to short circuit the negative feedback loop which was getting more and more threatening for the global economy. ”