The European Union and the International Monetary Fund pledged at least €750 billion (Dh3.57 trillion) today to defend the embattled euro, hoping to repel relentless speculative attacks on the weakest of Europe's debt-laden nations and prevent the common currency from disintegrating. Central banks around the world joined the co-ordinated effort to prop up the euro and prevent Europe's debt crisis from derailing the global economic recovery. The US Federal Reserve reopened a currency "swap" programme to ship billions of US dollars overseas in a bid to pump more short-term cash into the financial system and ensure banks have the dollars they need. Separately, the ECB jumped into the bond market, saying it is ready to buy debt from the eurozone - EU nations that use the euro - to shore up liquidity in "dysfunctional" markets.
Many investors, rattled for weeks by the prospect Greece would default on its mountain of debt, heaved with relief. The euro climbed as high as US$1.29, (Dh4.74) up from the 14-month low of $1.25 it hit late last week. Japan's Nikkei 225 stock average rose 1.5 per cent and Hong Kong's Hang Seng index added 1.3 per cent. Futures suggested Wall Street would welcome the euro defence. Dow futures jumped 246 points, or 2.4 per cent, to 10,581 and S&P and Nasdaq futures were both up more than 2.7 per cent.
There was cautious endorsement from analysts who still feared the measures may not be enough to save the common currency, which was adopted by many of the EU's member states in 1999. "It buys time. We don't know if it will be enough. They're trying to give the impression that they're still united. They've bought some breathing space but that's all," said Song Seng Wun, an economist with CIMB-GK Research in Singapore. "This perhaps just postpones the inevitable, the euro may have to ultimately give way, that's the worst case scenario."
Under the three-year plan, the European Commission - the EU's governing body - will make €60 billion available while countries from the 16-nation eurozone would promise backing for €440 billion. The IMF would contribute an additional sum of at least half of the EU's total contribution, or €250 billion. "We shall defend the euro whatever it takes," EU Commissioner Olli Rehn said after an 11 hour meeting of EU finance ministers that capped a hectic week of chaotic sparring between panicked governments and aggressive markets.
Officials hope the massive sums will deter currency speculators from betting on a euro collapse after political posturing and soothing words failed to convince investors that Greece's financial implosion could be contained. Markets had battered the euro and Greek government bonds even as EU leaders insisted for days that Greece's problems were a unique combination of bad management, free spending and statistical cheating that doesn't apply to other eurozone nations.
Market jitters also partly contributed to a nearly 1,000-point drop in the Dow Jones industrials last Thursday. The Securities and Exchange Commission is meeting with heads of exchanges Monday to discuss how conflicting trading rules may have exacerbated the historic stock market plunge. In the end, even longtime sceptic Germany realised Europe had to show the money after financial attacks on Greece's debt seemed poised to spread to other weak European nations such as Portugal and Spain. Fear of default led to investors demanding high interest rates that Greece could not pay, forcing it to seek a bailout. Many feared market scepticism would make Portugal and Spain pay more and more to borrow, worsening their plight.
"We now see herd behaviours in the markets that are really pack behaviours, wolf pack behaviours," Swedish Finance Minister Anders Borg said Sunday. If unchecked, "they will tear the weaker countries apart. So it is very important that we now make progress." Spain and Portugal have committed to "take significant additional consolidation measures in 2010 and 2011," a statement from EU finance ministers said. The two countries will present them to EU finance ministers at their meeting on May 18.
Separately, eurozone leaders on Saturday gave final approval for a €80 billion rescue package of loans to Greece for the next three years to stave off default. The International Monetary Fund also approved its part of the rescue package - €30 billion of loans - in Washington on Sunday. The Fed's move to back the euro defence plan reopens a programme put in place during the 2008 global financial crisis under which dollars are shipped overseas through foreign central banks. In turn, these central banks can lend the dollars out to banks in their home countries that are in need of dollar funding. Swap agreements generally allow one central bank to borrow a currency from another, offering an equivalent amount of its own as collateral.
The Fed said action is being taken "in response to the re-emergence of strains in US dollar short-term funding markets in Europe" and to "prevent the spread of strains to other markets and financial centres." A so-called "swap" line with the Bank of Canada provides up to $30 billion. Figures weren't provided for the other central banks involved. They include the Bank of England, the European Central Bank, the Swiss National Bank, and the Bank of Japan.
* AP