€€€€Uee... the Euro Shock and Awe of $957 "B" for Billion Rescue Package!

Just to Help You Visualize One Trillion

May 9, 2010
E.U. Details $957 Billion Rescue Package
By JAMES KANTER and LANDON THOMAS Jr.
NY TIMES

BRUSSELS — European leaders, pressured by sliding markets and doubts over their ability to act decisively, agreed on Monday to provide a huge rescue package of nearly $1 trillion in a sweeping effort to combat the debt crisis that has engulfed Europe and threatened markets around the world.

In an extraordinary session that lasted into the early morning hours, finance ministers from the European Union agreed on a deal that would provide $560 billion in new loans and $76 billion under an existing lending program. Elena Salgado, the Spanish finance minister, who announced the deal, also said the International Monetary Fund was prepared to give up to $321 billion separately.

Officials are hoping the size of the program — a total of $957 billion — will signal a “shock and awe” commitment that will be viewed in the same vein as the $700 billion package the United States government provided to help its own ailing financial institutions in 2008. The package represented an audacious step for a union that had been criticized for acting tentatively, and without consensus, in the face of a mounting crisis.

Underscoring the urgency of the situation, President Obama spoke to the German chancellor, Angela Merkel, and the French president, Nicolas Sarkozy, on Sunday about the need for decisive action to restore investor confidence. And in a sign of the spreading anxiety, the United States Federal Reserve, along with the European Central Bank and the central banks of Canada, Britain and Switzerland, announced the re-establishment of instruments known as swap lines through January 2011. The swaps are intended to help ease pressure on the euro, whose value against the dollar has fallen as fearful investors have bought up dollars.

Stock markets in the Asia-Pacific region rose early on Monday. The leading stock indexes in Japan and South Korea were both up about 1.3 percent soon after the deal was confirmed, recouping some of the losses they had suffered last week. The markets in Singapore and mainland China also opened higher, with the market gauges there up 0.5 percent soon after the open.

New political complications in two of Europe’s most important countries added to the challenge. In Germany, voter anger at the effort to save Greece cost Ms. Merkel an important regional election Sunday, undermining her leadership, and in Britain, the government remained in a state of suspended animation because of the inconclusive Parliamentary elections last week. [Pages A4 and A8.]

The package comes at a time of mounting financial unease. Riots in Greece, ever-tightening terms of credit and the unexplained free fall in the American stock market last Thursday have compounded the sense that the European Union’s inability to address its sovereign debt crisis might lead to the type of systemic collapse that followed the fall of Lehman Brothers.

Olli Rehn, the European commissioner for monetary policy, described the arrangement as “a consolidation pact” that would be “particularly crucial for countries under speculative attacks in recent weeks.” He specifically mentioned Portugal and Spain.

Mr. Rehn said the I.M.F. would provide “half as much as the European Union” following lengthy talks with fund officials.

“We shall defend the euro whatever it takes,” Mr. Rehn said.

What appeared to be emerging from the discussions represented a partial retreat from a system discussed earlier in the day that would have radically expanded the powers of the European Commission to raise funds.

Instead the ministers came up with a system that would speed up the pace at which states that use the euro currency could lend to one another, but on a bilateral and voluntary basis.

One of the crucial decisions that ministers made was to create what they called a “special purpose vehicle” to disburse the 440 billion euros in new loans, should that support be required by member states in economic difficulties.

The use of such a financial instrument reflected the difficulties that individual European governments — and Germany’s in particular — have in committing huge sums to a central authority like the European Commission to oversee the economic management of the bloc, seen as a clash with national sovereignty.

In a statement following their meeting, the ministers underlined that the special purpose vehicle would expire after three years and that its use would be strictly dependent on “national constitutional requirements.”

Ministers said their first line of defense against financial turmoil was to offer loans of 60 billion euros to member states in need, and to use the further loans of up to 440 billion euros as a “complement” as required.

While the sums being discussed are eye-catching, some bankers questioned whether they would be enough to calm the markets. One banker said that with more and more European economies coping with rising deficits that raising, guaranteeing or backing such a large number would not be an easy task — unless the European Central Bank stepped in in a more forceful and specific manner. The bank has so far rebuffed calls to inject liquidity into the markets by buying back European bonds.

There were many complications in trying to forge a consensus on a new package. They included defining the role of Britain, which lies outside the euro zone and had said it would not help in propping up the euro, as well as the European Central Bank. The fractiousness underscores the frailty of a monetary union in which its richest member, Germany, is also the most opposed to a financial rescue.

“The fact that they are worried is clear,” said David Marsh, the author of “The Euro,” a book on the history of monetary union. “But I don’t think that there is enough commitment or economic firepower in Germany to provide the massive loan guarantees to satisfy the markets.”

Predictably, politicians blamed speculators for the market upheaval. The Swedish finance minister, Anders Borg, said immediate action was needed to tackle “herd behaviors in the markets that are really pack behaviors, wolf pack behaviors.” Mr. Borg warned that volatility in markets could “tear the weaker countries apart.”

Since it became clear that Greece would not be able to meet its financial obligations and fears spread that other indebted nations like Spain, Portugal and Ireland would have similar troubles, Europe, hampered by Germany’s opposition to a bailout, has responded with measures that have been seen as too little too late.

Even now, despite the lashing rhetoric and the Sunday night meeting, there is still a feeling that Europe should be doing more — notably with regard to freeing the European Central Bank to go against its charter and print money by buying back distressed European bonds from the secondary market.

Sunday’s meetings represented an extraordinary convergence of diplomatic activity, crammed into a tight time frame. Political leaders including Mr. Sarkozy of France said early Saturday morning, at the end of an earlier summit meeting, that a loan mechanism intended to restore confidence should be ready by Monday morning. That effectively left the European Commission and finance ministers a single weekend to change the way the European Union operates its finances.

Ms. Merkel of Germany attended a victory parade on Red Square in Moscow on Sunday, a sign of how seriously Germans consider reconciliation with Russia. Mr. Sarkozy and the Italian prime minister, Silvio Berlusconi, opted not to attend, regarding the financial crisis as more urgent.

Mr. Sarkozy held a strategy meeting with ministers on Sunday.

“At stake is the euro and the euro zone,” a French official said. “We need to give a clear signal to markets.”

Sewell Chan contributed reporting from Washington.