E.U. Details $957 Billion Rescue Package
By JAMES KANTER and LANDON THOMAS Jr.
Published: May 9, 2010
Virginia Mayo/Associated Press
Olli Rehn, left, the European commissioner for economic affairs, and Elena Salgado, the Spanish finance minister.
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In an extraordinary session that lasted into the early morning hours, finance ministers from the European Unionagreed 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 bloc that had been criticized for acting tentatively, and without unity, 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 establishment of instruments known as swap lines. The swaps are intended to ease pressure on European banks and money markets; in essence the Fed will be printing dollars and exchanging them for euros to provide more liquidity.
The actions by the United States represented a significant concern that the European crisis could spill over and hinder the American recovery.
In addition, the European Central Bank announced after the deal was completed that it would intervene in the government and corporate bond markets, also to provide liquidity.
Stock markets in the Asia-Pacific region rose early on Monday. The leading indexes in Japan and South Korea both rallied about 1.3 percent soon after the deal was confirmed, recouping some of the losses they had suffered last week. The Hang Seng index in Hong Kong, gained 1.3 percent soon after the open. In Australia, the benchmark S&P/ASX 200 climbed 2.1 percent.
The markets in Singapore and mainland China also opened higher.
New political complications in two of Europe’s most important countries added to the challenge faced by the finance ministers as they met to find a solution. 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.
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 ofLehman 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 emerged 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 — had in committing huge sums to a central authority. Having a body like the European Commission oversee the economic management of the bloc was seen by some countries as a clash with national sovereignty.
In a statement following their meeting, the ministers emphasized 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 over the long term. 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.
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