Global policymakers unleashed an emergency rescue package worth about $1-trillion to stabilise world financial markets and prevent the Greek debt crisis from destroying the euro currency.
The rescue, hammered out by European Union finance ministers, central bankers and the International Monetary Fund in marathon talks at the weekend, was the largest package in over two years since G20 leaders threw money at the global economy following the collapse of Lehman Brothers.
The size of the package surprised financial analysts and the euro rose close to 2% while stocks in Asia firmed.
The US Federal Reserve reopened currency swap lines with several central banks and Group of Seven and Group of 20 finance ministers weighed in with their backing for the measures.
EU monetary affairs commissioner Olli Rehn told a news conference the package of measures “proves we shall defend the euro whatever it takes”.
The emergency measures are worth much more than any previous attempts by the 27-country EU or the 16-state single-currency group to calm markets.
They come after the Greek crisis drove sovereign debt yields and insurance on this debt to record levels.
Financial markets had started to punish other euro zone debt of members with bloated budgets such as Portugal, Spain and Ireland, in what Sweden’s finance minister described as “wolfpack behaviours”.
The $1-trillion package consists of €44-billion in guarantees from euro area states, plus €60-billion in a European instrument.
EU finance ministers said the International Monetary Fund was expected to contribute €250-billion, taking the total to €750-billion, or about $1-trillion.
However, IMF head Dominique Strauss-Kahn did not offer any specifics but said said any IMF action would be on a “country-by-country basis”.
The European Central Bank said it will buy euro zone government bonds to help support fractured markets, abandoning its resistance to full-scale asset purchases.
The ECB said in a statement that the step, dubbed the “nuclear option” by many economists, was justified because of government promises to meet strict budget targets and step up consolidation efforts.
The euro currency, which last week sank to a 14-month low against the dollar, rose as high as $1,2950 before slipping back on the ECB decision to buy debt. By mid-morning it was changing hands at $1.2930.
“Getting them to agree on a number is crucial,” said Tony Morriss, market strategist at ANZ in Sydney. “But to me what appears more important is the establishment of swap lines and quantitative easing (QE). And while QE may weigh in the longer term, the euro seems to be stabilising, at least in the near term,” Morriss said.
The ECB said the scope of the purchases was yet to be determined, but added they would be offset by liquidity-absorbing operations so that the stance of monetary policy is unaffected.
The ECB last year announced a 60-billion programme to buy covered bonds but this would be its first move into buying government debt.
Gold prices, considered a safe haven investment, fell as much as 1,5% after touching near record highs last week.
The central bank swap facility is meant to ease fears of a dollar shortage as investors dump riskier assets and move back into the US dollar. The cost of interbank three-month US dollar funds saw its largest rise in 16 months on Friday.
The move is designed to ensure there is enough money and confidence in the global financial system to stave off 2008-style credit crunch.
Ministers from Spain and Germany said eurozone countries would speed up their efforts to tackle their fiscal problems.
Jitters over eurozone finances have set global markets on edge and created the conditions for a nearly 1 000-point drop in the Dow Jones industrial average on Thursday. Authorities are investigating what triggered the dramatic move.
Both the EU and the IMF has already approved a €100-billion package to support Greece, whose budget deficit blew out last year to 13,6% of GDP.
To secure the funds, Greece has committed to deep budget cuts that have already caused violent public protests in the country as it moves to get the deficit back down to the EU limit of 3%.
Policymakers around the globe are worried the crisis in Greece could spread to other countries, fears compounded by the unexplained shock plunge in US stocks on Thursday.
In Europe, officials said they would fight speculative investors they blame for aggravating the public debt crisis.
“We now see … wolfpack behaviours, and if we will not stop these packs, even if it is self-inflicted weakness, they will tear the weaker countries apart,” Swedish Finance Minister Anders Borg told reporters in Brussels before the EU meeting.
Economists estimate that if Portugal, Ireland and Spain eventually come to require bailouts similar to Greece’s, the total cost could be about €500-billion. – Reuters