Euro Help, happyDow $1 Trillion Bailout

Daily Herald (Arlington Heights, IL), May 11, 2010 | Go to article overview

Euro Help, happyDow $1 Trillion Bailout


Byline: Aoife White Associated Press

BRUSSELS -- A bold $1 trillion rescue by the European Union halted the slide of the euro Monday and sent markets soaring worldwide in a gambit that may ultimately be seen as the moment Europe truly became a union.

The sweeping cash injection was greeted with euphoria on Wall Street, where stocks rocketed to their biggest gain in more than a year.

The Dow Jones industrial average rose about 405 points to its biggest advance since March 2009. Broader U.S. indexes outpaced the Dow's 3.9 percent rise. Gains in several European markets topped 9 percent.

Still, the package did not resolve the basic dysfunction at the heart of Europe's monetary union: Governments can still spend recklessly and saddle their partners with the bill.

The approval of a "shock and awe"-level rescue package followed weeks of indecision that hammered the euro and sent world markets plunging on fears Europe's debt contagion could spread well beyond Greece, where the crisis began several months ago.

"For once the scope of actions unveiled dwarfed previous leaks and speculation. This is shock and awe Part II and in 3-D," said Marco Annunziata, the chief economist at UniCredit Group.

"Europe has unequivocally said, 'We will defend the euro's integrity,'" said Oliver Pursche, executive vice president at Gary Goldberg Financial Services in Suffern, N.Y.

After frantic talks lasting into the early hours of Monday, European officials agreed the 16 euro nations would put up $572 billion in new loans and $78 billion under an existing lending program. The International Monetary Fund will pump in another $325 billion, for a total package of nearly $1 trillion.

The European Commission is to raise the money in capital markets, using guarantees from member governments, and lend it to crisis-stricken countries so they can pay their bills.

Many questions were left unanswered, such as how the money would be dispensed and on what terms.

Still, the move supplied the decisiveness -- and the big headline -- the markets had been craving. The Dow Jones industrial average's rise to finish at 10,785 recouped two-thirds of last week's losses. At its peak Monday, the Dow was up nearly 455 points.

The Standard & Poor's 500 index rose 48.85, or 4.4 percent, to 1,159.73. The Nasdaq composite index rose 109.03, or 4.8 percent, to 2,374.67. The euro bounced back from 14-month lows around $1.25 on Friday to over $1.30 on Monday, reversing the ominous slides and sense of panic from last week.

The crisis had raised fears of a panic like the one after the collapse of U.S. investment bank Lehman Brothers in 2008 and prompted nervous banks to cut back on lending to businesses and hammered stock markets.

A weaker euro and financial and economic disaster in Europe would hurt U.S. exports, and the U.S. Federal Reserve pitched in by agreeing to make dollars available to the European Central Bank in exchange for euros. The ECB will then loan those dollars at fixed rates to banks in Europe; the interest eventually goes to the Fed when it swaps the euros back for dollars at the same exchange rate as the original transaction.

European banks need dollars to lend to companies across the continent. European companies with operations in the U.S. pay their employees in dollars and buy raw materials with the U.S. currency. Also, oil and other commodities are priced in dollars around the world.

But because of the debt crisis, private banks in the U.S. have been leery of making loans to banks in Europe. Hence the need for the currency swaps between the central banks.

Analysts warned, however, the emergency bailout fund would do nothing to reverse Europe's soaring public debt -- and could even worsen it.

"The last thing you give a drunk is another drink," said Jeremy Batstone-Carr of Charles Stanley stockbrokers. …

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