Global markets surged in relief yesterday at the €720bn (£616bn) eurozone stabilisation package put together to allay fears of contagion from the Greek sovereign debt crisis.
The euro rebounded from Friday's 14-month low against the dollar, and also strengthened against the yen by more than it had done in 18 months. Sterling also rose, gaining 1.3 per cent against the dollar in early trading, although it fell against the euro.
The eurozone rescue agreed by finance ministers, central bankers and officials from the International Monetary Fund (IMF) includes guarantees and bilateral loans. The measures announced early yesterday overshadowed the continuing uncertainty about Britain's political situation.
In London, the FTSE 100 rocketed by 5.2 per cent – led by the banks – and added £67.5bn in value. Similarly, Germany's DAX index jumped by 4.6 per cent, despite the defeat of Chancellor Angela Merkel's coalition in a key regional election at the weekend.
The ripples quickly spread worldwide, pushing up the Nikkei in Tokyo, the Hang Seng in Hong Kong and the Dow Jones Industrial Average in New York. But the biggest gains were in the countries most exposed to the debt crisis. The Greek stock market shot up by 10 per cent, the Portuguese index by 9 per cent and the Spanish Ibex 35 by a massive 11.5 per cent.
Meanwhile, bond markets started to normalise after last week's gyrations. US Treasuries and German 10-year bonds fell as investors turned back to riskier assets. Greek 10-year bond yields fell by 499 basis points and two-year yields fell by a record 1,327 basis points as panic about the restructuring deal receded. Greek credit default swap (CDS) spreads – which price in the risk of default – dropped by more than 350 basis points.
Last week, eurozone states and the IMF approved a €110bn bailout package to rescue Greece from spiralling debts. But the measures failed to allay investor fears of the crisis spreading to other highly indebted states. The euro continued to tumble, stock markets lost $3.6trillion and bond yields in Spain and Portugal soared.
Politicians across Europe yesterday stressed the impact of the latest package. Chancellor Merkel described the move as proof that "Europe can act together to defend our common currency against attacks". Jose Manuel Barroso, president of the European Commission, added: "We have stated that we will do whatever is necessary to defend the stability of the euro. Today we have done just that."
Commentators welcomed the scale of the response. But concerns remain about how to force through unpopular austerity measures in highly indebted countries, and also how to cope with wage and productivity gaps between members over the longer term.
"Currency unions without full political union will always be prone to strains and these strains will be deeper, the more divergent the economies are," said Howard Archer, the chief UK and European economist at IHS Global Insight.
"If the eurozone is to survive over the long term, these divergences must be addressed or, at the very least, the eurozone will be liable to haemorrhage members."
EU finance minsters will meet again tomorrow for the second phase of the eurozone overhaul as they seek to push through reforms to the way the single currency is managed. On the same day, the European Commission will present planned changes to the stability and growth pact, attempting to it into an effective mechanism to guarantee the future stability of the euro.
How the rescue package breaks down
*After 11 hours of talks at the weekend, eurozone finance ministers, central bankers and officials from the International Monetary Fund (IMF) agreed a €720bn (£616bn) package of measures to restore confidence in the euro, which has been battered by Greece's spiralling debts and fears about contagion to other highly indebted eurozone states such as Spain and Portugal.
*At the centre of the scheme are €440bn of loan guarantees and bilateral loans, to be administered through a special-purpose vehicle known as the European Financial Stabilisation Mechanism.
*The plans also include a €60bn expansion of the existing balance of payments facility used to bail out Latvia, Hungary and Romania in 2008. The scheme is designed to support member states experiencing difficulties "caused by exceptional circumstances beyond their control", according to Spain's Finance Minister, Elena Salgado.
*A further €220bn will also be made available by the IMF and states drawing on any part of the scheme will be subject to IMF conditions.
*The European Central Bank (ECB) has also committed to buy up European sovereign bonds as a way to "to ensure depth and liquidity in those market segments which are dysfunctional". All purchases will be "sterilised" – that is, balanced by sales of other securities to offset the the risk of inflation.
*Alistair Darling, the Chancellor of the Exchequer, has agreed that Britain will participate in the expanded balace of payments facility but only with a legal guarantee that the UK will not become liable for eurozone debts. Britain will also play no part in the €440bn loan guarantee scheme.
*The eurozone stability package comes on top of the €110bn bailout for Greece agreed by eurozone economies and the IMF last week.