Finance News

European Union agrees on €750bn bailout fund for eurozone

Crisis-hit Europe on Monday announced a monster rescue package running to 750 billion euros between euro countries and the IMF, sending the euro surging in Asian trade. Leaders hope an unprecedented international intervention, worth just shy of one trillion dollars, will represent a game-changing European financial war chest, which will also be backed by European Central Bank action to nudge debt and currency markets.

European Union finance ministers agreed, after marathon talks lasting more than 11 hours, that 440 billion euros would come from the troubled eurozone plus another 60 billion euros from the European Commission coffers.

That would be backed by "at least half as much" again from the International Monetary Fund, Spanish finance minister Elena Salgado said, or another 250 billion euros.

The vast rescue package "proves that we shall defend the euro whatever it takes," said the EU's commissioner for economic and monetary affairs, Olli Rehn of what ultimately involved a pan-European cry for help to the IMF.

The battered euro currency immediately surged to 1.2907 dollars in Asian trade, having hit a 14-month low of 1.2523 dollars last week on fears that marbled European debts could hit the world's financial system in the same way the collapse of Lehman Brothers did two years ago.

Tokyo stocks also rose when trading opened just as the deal was being sealed in Brussels, with the European Central Bank subsequently saying it would "conduct interventions in the euro area public and private debt securities markets."

It said these were justified by "exceptional circumstances," and further announced that central banks in Britain, Canada, Switzerland and the United States will intervene to ensure that dollar shortages do not occur in European markets.

"In response to the re-emergence of strains in US dollar short-term funding markets in Europe, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank are announcing the re-establishment of temporary US dollar liquidity swap facilities," the ECB said.

These moves taken together could represent action that traders and analysts refer to as a "nuclear" option, agreeing to buy euro countries' bonds or accepting toxic eurozone government debt as collateral.

The breakthrough followed urgent telephone calls during Sunday between US President Barack Obama, German Chancellor Angela Merkel and French President Nicolas Sarkozy.

The G7 group swiftly hailed the eurozone actions to secure financial stability.

The figures only emerged after Merkel lost her coalition's majority in the upper German house, as angry voters punished Berlin for its U-turn in agreeing a 110-billion-euro international bailout for Greece -- already dubbed the "fattest cheque in history" by the tabloid Bild.

Desperate to prevent a haemmorhaghing of confidence on markets with debts and deficits already engulfing Portugal, Spain and Italy, Berlin bit the bullet on a mixture of bilateral loans, loan guarantees and credit lines.

These will be made available only to threatened members of the 16-nation eurozone only.

The aid model is practically identical in proportional terms to the system put in place for Greece, which won loan commitments over three years in exchange for radical cuts and other economic reforms.

The Greek rescue was only ratified by the IMF earlier on Sunday.

"The key is that something strong" is thrown down as a gauntlet to speculators, said French Finance Minister Christine Lagarde.

Ministers had been tasked with heading off predatory threats to government finances, commercial banks and wider economic recovery, what Austria's Josef Proll labelled "the biggest challenge since the euro's creation."

Early drama saw Germany's wheelchair-bound Wolfgang Schaeuble hospitalised after suffering an allergic reaction to new medication, and kept in overnight for observation.

The talks were also marked by dispute as Britain's Labour government refused to provide direct guarantees for the euro, amid power-sharing talks at home that were likely to deliver a new Conservative-led government within days.

Essentially, Europe wants to leverage vast borrowings the way governments did with their banks during the global financial crisis -- keeping interest rates down.

An existing 50-billion-euro crisis facility at the EU's disposal was available only to non-euro members, and has broadly been used up to help Romania, Hungary, Latvia.

Source: Financial News
Date: 10.05.2010 [ID: 248]

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