Breaking: World Markets Soar As EU Announces Bailout Plan

May 10, 2010 6 Comments ›› Pat Dollard

Times Online:

Global stocks rebounded dramatically today and the pound was strengthened as investors’ nerves were calmed by the EU plan to restore financial stability across Europe through a €750 billion (£652 billion) rescue deal.

The FTSE 100 rallied 5 per cent, or 255.7 points, to 5,378.7 following the agreement between Europe and the International Monetary Fund.

The plan lifted sentiment as Britain waits to see if the Conservatives and the Liberal Democrats strike a deal to put David Cameron in No 10 in exchange for reform of the electoral system.

Both parties said they would make tackling Britain’s deficit as a priority. The pound, which fell to a 14-month low against the dollar last week, was higher against the dollar, reaching $1.4967 in mid-morning.

After an 11-hour session of talks ministers settled on the package that they hoped would be big enough to prevent Greece’s debt crisis from spreading, lifting markets across Europe.

Countries including Portugal, Ireland and Spain had been considered vulnerable to financial risk after the Greek crisis.

In Germany, the DAX index rise by 3.9 per cent while France’s CAC rose by 6.7 per cent after Japan’s Nikkei ended the day 1.6 per cent higher.

Under the three-year aid plan, the European Commission will make €60 billion available, while countries from the 16-nation eurozone will promise backing for €440 billion. The IMF would contribute an additional sum of at least €250 billion.

The EU safety net deal follows a move by the eurozone leaders to give final approval for an €80 billion rescue package of loans to Greece for the next three years. The IMF also approved its part of the rescue package — €30 billion worth of loans — in Washington on Sunday.

Despite the surge in share prices, the Chancellor Alistair Darling has been forced to defend concerns that Britain is helping to prop up the euro after he agreed to the rescue fund.

Britain’s involvement in the bailout fund could cost taxpayers £15 billion. The country has been exposed to a potential £7 billion cost under the original scheme and its liability under the enhanced plan will be a further £8 billion, Treasury officials said.

Mr Darling said that there was “no way that non-eurozone countries should be asked to underwrite the currency”.

He said: “It is a good deal for Europe and we have minimised our exposure and that is a very, very important feature of what I managed to agree last night.”

The deal comes as Europe attempts a balancing act in rescuing troubled nations. The German Chancellor Angela Merkel has already been criticised by the German people for agreeing aid to Greece and her Christian Democratic Party recorded its worst result in regional elections over the weekend.

The EU’s monetary affairs commissioner Olli Rehn said that the agreement “proves that we shall defend the euro whatever it takes”.

He described the arrangement as “a consolidation pact” that would be “particularly crucial for countries under speculative attacks in recent weeks”.

The European ministers said: “We are facing such exceptional circumstances today and the mechanism will stay in place as long as needed to safeguard financial stability.” Spain and Portugal have committed to “take significant additional consolidation measures in 2010 and 2011,” they said. The two countries will present them to the EU’s finance ministers on May 18.

The EU’s slow response to the crisis and its failure to keep Greece from reaching the brink of bankruptcy triggered slides in the euro and global stocks last week, and intensified fears the crisis would spread.

Officials said that they would fight speculative investors that they blamed 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,” the Swedish Finance Minister Anders Borg.

However, some eurozone nations said that the behaviour of individual governments and a lack of European co-operation was to blame for the crisis. “I’m against putting all the blame on speculation,” said the Austrian Finance Minister Josef Proell.

“Speculation is only successful against countries that have mismanaged their finances for years.”

In a further sign of the squeeze facing Europe’s banks, the US Federal Reserve agreed to re-open its emergency provision of dollars to central banks around the world, including the Bank of England and the European Central Bank (ECB).

The emergency measure seems to have been triggered by a sudden jump on Friday in the rate that banks were charging each other to borrow dollars.

The cost of interbank three-month dollar loans increased at its fastest rate in 16 months.

The Federal Reserve first provided its “dollar swap facility” in September 2007 after banks stopped lending money to each other as the credit crunch tightened. The agreement ended three months ago because the financial markets appeared to have recovered.

The Bank of England said that the arrangements were being reinstated “in response to the re-emergence of strains in the US dollar short-term funding markets in Europe” and to “prevent the spread of strains to other markets and financial centres”.

Banks in Europe, concerned about each other’s exposure to the national bonds of countries such as Greece, have stopped lending to each other. Central banks aim to supply dollars to private banks to encourage them to lend again.

The Bank of England said that it would be lending dollars on a weekly basis from tomorrow. Private banks will be able to borrow any amount for a week, if they provided “eligible” collateral.

The ECB last week agreed that it would accept Greek Government debt as eligible collateral despite its “junk” rating.