Europe announces vast contingency fund, racing to contain crisis

By Howard Schneider
Washington Post Staff Writer
Monday, May 10, 2010; A01

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.

The very debate in Europe marks a dramatic turnaround. European finance and political officials took months to deliberate a bailout package to keep heavily indebted Greece from defaulting on its loans -- time during which confidence slipped in other European governments and put the 16-nation European monetary grouping under threat.

On Friday, as they gave final approval to aid for Greece, European heads of state also said a larger effort to support the euro was needed, and they set their finance ministers to work developing a program over the weekend.

"We are going to defend the euro," Salgado told reporters. "We have to give more stability to our currency. . . . We will do whatever is necessary."

The emergency measures in Brussels came as the IMF gave final approval to the rescue package for Greece.

Combined, the two programs, along with the ECB action, are meant to assure investors that European governments are financially stable and that the euro nations will collectively stand behind the currency. Ministers from the larger European Union approved the support program, though the main focus is on supporting the value of the euro, and the funding will come almost entirely from the countries that use the common currency.

As President Obama lobbied European leaders to take what a White House statement described as "resolute" action to protect an evolving economic recovery, Europe's response to the crisis in Greece continued to roil regional politics.

German Chancellor Angela Merkel's ruling party appeared headed for defeat in regional elections that were turning, in part, on her support of emergency loans for Greece. British leaders continued sorting through the results of an election that produced no clear winner but may lead to the ouster of the Labor Party government of Prime Minister Gordon Brown.

Emotions remain high in the Greek capital. What was advertised as a vigil for three bank employees killed in an Athens firebombing last week turned into a haranguing denouncement of government budget cuts and the "foreign occupation" of Greece by the IMF.

The program is one of the IMF's most extensive, but fund officials said it was warranted both by the risks Greece posed to the economic recovery and the aggressive steps Greek officials have been willing to take to right the country's finances.

About $26 billion will be available immediately, enough for Greece to make a large debt payment later this month. Overall, the program is meant to give Greece three years of "breathing room" to balance its budget and restructure its economy without having to borrow on the open market.

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