Europe announces vast contingency fund, racing to contain crisis
Monday, May 10, 2010
ATHENS -- European finance ministers threw a trillion-dollar protective wall around the euro on Sunday and the European Central Bank said it would begin buying government bonds if necessary as officials on the continent struggled to contain the spread of a government debt crisis that began in Greece.
After a discussion that ran into the early morning Monday, the finance ministers, the ECB and the International Monetary Fund took separate steps meant to stanch a loss of confidence in European governments that had put the world's nascent economic recovery at risk.
A joint European Union-IMF program will give the 16 nations that share the euro access to nearly $1 trillion in loans if world bond markets abandon them and demand higher interest rates. That dynamic pushed Greece to a near-default before a $140 billion bailout by the IMF and Greece's European neighbors.
The long delay in negotiating Greece's rescue, however, raised doubts about what might happen if other, larger and economically weakened countries, such as Spain, were to run into trouble. As borrowing rates in other countries began to rise last week, world stock markets slid and the euro lost value against other currencies.
Concerned that the problem could evolve into a full-blown crisis -- undermining economic recovery and possibly shattering confidence in the euro itself -- the ministers rushed to put the package together before a new trading week began in Asia.
The action was given an initial vote of confidence, with Asian markets trading higher and the euro strengthening against the Japanese yen.
"This shows we are placing considerable sums in the interest of stability in Europe," said Spanish Finance Minister Elena Salgado, who chaired the meeting.
Under the new program, the 27 members of the European Union would have access to about $80 billion in loans.
Separately, the 16 nations that share the euro as a currency agreed to establish a special entity that could borrow as much as $575 billion, with repayment guaranteed by the group. The money could then be used to support any other eurozone countries that have difficulty borrowing on world bond markets.
The IMF would put about $325 million in additional funding behind the effort.
"These are strong measures," IMF Managing Director Dominique Strauss-Kahn said in a written statement that followed the European decision.
The ECB announced its own measures to protect the euro. The bank said it would, if necessary, begin buying public and private debt on the secondary market "to ensure depth and liquidity in those market segments which are dysfunctional." The bank and the U.S. Federal Reserve also announced that the Fed was reactivating a program of "swap lines" to make sure other central banks have access to enough money to keep world credit markets moving -- a program used when the financial crisis took hold in 2008.