(Adds Pimco fund manager comment in fourth paragraph. For more on the debt crisis, see {EXT3 }.)

By James G. Neuger and Meera Louis

May 10 (Bloomberg) -- European policy makers unveiled an unprecedented loan package worth almost $1 trillion and a program of bond purchases to stop a sovereign-debt crisis that threatened to shatter confidence in the euro. Stocks surged around the world, the euro strengthened and commodities rallied.

Jolted by last weeks slide in the currency and soaring bond yields in Portugal and Spain, European Union finance chiefs met in a 14-hour session in Brussels overnight. The 16 euro nations agreed in a statement to offer as much as 750 billion euros ($962 billion), including International Monetary Fund backing, to countries facing instability and the European Central Bank said it will buy government and private debt.

The rescue package for Europes sovereign debtors comes little more than a year after the waning of the last crisis, caused by the U.S. mortgage-market collapse, which wreaked $1.8 trillion of global credit losses and writedowns. Under U.S. and Asian pressure to stabilize markets, Europes governments bet their show of force would prevent a sovereign-debt collapse and muffle speculation the 11-year-old euro might break apart.

A very thick line has been drawn in the sand, said Andrew Bosomworth, Munich-based head of portfolio management at Pacific Investment Management Co. and a former ECB official. This is all in. What more could they have done?

A 110 billion-euro bailout package for Greece approved last week by the EU and IMF failed to reassure investors, prompting yesterdays renewed bid to bolster the euro.

How to Pay

It might temporarily calm nerves but questions will come back later on how they will pay for this package when all of them need fiscal consolidation, said Venkatraman Anantha- Nageswaran, who helps manage about $140 billion in assets as global chief investment officer at Bank Julius Baer & Co. in Singapore.

The MSCI World Index climbed 2.6 percent to 1,128 at 12:15 p.m. in Brussels. Standard & Poors 500 Index futures rallied 4.4 percent. The euro appreciated 2 percent to $1.30. Crude-oil futures gained 3.4 percent.

The message has gotten through: the euro zone will defend its money, French Finance Minister Christine Lagarde told reporters in Brussels early today after markets punished inaction last week.

ECB policy makers said they will counter severe tensions in certain markets by purchasing government and private debt, and the bank restarted a dollar-swap line with the Federal Reserve.

Overwhelming Force

This truly is overwhelming force, and should be more than sufficient to stabilize markets in the near term, prevent panic and contain the risk of contagion, Marco Annunziata, chief economist at UniCredit Group in London, said in an e-mailed note. This is Shock and Awe, Part II and in 3-D.

Treasuries tumbled on investors increased appetite for risk, with yields on benchmark 10-year U.S. notes rising to 3.57 percent from 3.43 percent at last weeks close. German bunds opened lower, sending 10-year yields up 18 basis points.

The steps came after failure to contain Greeces fiscal crisis triggered a 4.1 percent drop in the euro last week, the biggest weekly decline since the aftermath of Lehman Brothers Holdings Inc.s collapse. European stocks sank the most in 18 months, with the Stoxx Europe 600 Index tumbling 8.8 percent.

The ripple effect in the U.S., including a brief 1,000- point drop in the Dow Jones Industrial Average on May 6, prompted President Barack Obama to call German Chancellor Angela Merkel and French President Nicolas Sarkozy to urge resolute steps to prevent the crisis from cascading around the world.

Loan Package

Under the loan package, euro-area governments pledged 440 billion euros in loans or guarantees, with 60 billion euros more in loans from the EUs budget and as much as 250 billion euros from the International Monetary Fund.

They will have bought themselves a significant amount of time to do the right thing, said Barry Eichengreen, an economics professor at the University of California, Berkeley.

In a step that skirts EU rules barring direct central bank lending to governments, the ECB said it will conduct interventions to ensure depth and liquidity in markets. The purchases will be sterilized, meaning they wont increase the overall money supply in the financial system.

This sets a precedent for the rest of the life of the Central Bank and will have likely surprised even the most seasoned observers, said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London. While the ECBs intervention might attract bad press regarding its mandate and independence, we believe that this was necessary to short circuit the negative feedback loop which was getting more and more threatening for the global economy.

Central Banks Buy

Central banks in Germany, France and Italy all said they began buying government bonds today. None provided further detail.

The ECB also reactivated unlimited fixed-rate offerings of three-month loans, a key tool in the ECBs efforts to fight the credit crisis.

In Brussels, finance ministers from the 16-nation euro region -- joined by ministers from the 11 EU countries outside the euro -- raced against time to weld the contingency lending arrangements before markets opened in Asia.

Inability to craft a convincing package in time would have left deficit-plagued countries at the mercy of the wolfpack behavior of speculators, Finance Minister Anders Borg of Sweden, a non-euro member, said as the meeting began.

Budget Cuts

The new war chest would be used for countries like Portugal or Spain in case their finances buckle. Deficits are set to reach 8.5 percent of gross domestic product in Portugal and 9.8 percent in Spain this year, above the euro regions 3 percent limit. Both countries pledged significant additional budget cuts in 2010 and 2011, which will be outlined in May, an EU statement said.

The extra yield that investors demand to hold Greek, Portuguese and Spanish debt instead of benchmark German bonds fell from euro-era highs. The premium on 10-year government bonds plunged to 343 basis points from as high as 973 basis points for Greece. It fell to 201 basis points from 354 for Portugal and to 94 basis points from 173 for Spain.

Europes financial leaders sought to master the euros stiffest test since its debut in 1999 without wheelchair-bound Finance Minister Wolfgang Schaeuble of Germany, Europes largest economy, who was rushed to a hospital soon after the meeting started due to an adverse reaction to new medication. Interior Minister Thomas de Maiziere got on a last-minute flight to Brussels to take his place.

Merkels Meeting

As Merkels cabinet held a late-night meeting in Berlin on the euro rescue, her party unexpectedly lost control of Germanys most populous state in a regional election, potentially costing her a majority in the upper house of the federal parliament.

Goaded by Germany, the ministers made a fresh commitment to closer monitoring of government finances and more rigorous enforcement of the deficit-limitation rules.

The vow to push budget shortfalls below the euros 3 percent limit echoes promises that have been regularly broken ever since governments in 1999 set a three-year deadline for achieving balanced budgets. The euro regions overall deficit is forecast at 6.6 percent of gross domestic product in 2010 and 6.1 percent in 2011.

Britain, the EUs third-largest economy, wont contribute to a euro rescue fund, though it backs efforts to restore stability, Chancellor of the Exchequer Alistair Darling said.

When it comes to supporting the euro, that is for the eurogroup countries, Darling told Sky News.

--With assistance from Gabi Thesing, Gonzalo Vina, Gregory Viscusi, Tony Czuczka, Jonathan Stearns and Francine Lacqua in Brussels, Kitty Donaldson in London, Simon Kennedy in Paris, Jana Randow in Basel, Switzerland, Brian Parkin in Berlin, Hans Nichols in Hampton, Virginia and Shamim Adam in Singapore. Editors: John Fraher, James Hertling

To contact the reporters on this story: James G. Neuger in Brussels at jneuger@bloomberg.net; Meera Louis in Brussels at Mlouis1@bloomberg.net

To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net
Source:http://www.businessweek.com/news/2010-05-10/eu-crafts-962-billion-show-of-force-to-halt-crisis-update3-.html


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#Neda
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_{I contend that we are both atheists. I just believe in one fewer god than you do. When you understand why you dismiss all the other possible gods, you will understand why I dismiss yours. -- Stephen Roberts}


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Looks smart. But it is sending a message to those countries that compiled this debt. Not a good message. Get into debt and we'll bail you out.

The message that should be sent is, if you got yourself into this mess, time for you to grow up and start fixing it. Learn to control your economies. I foresee at least half these nations being bailed out of going back into this type of debt in 2 decades again.

Siege of Tobruk - One German POW said: "I cannot understand you Australians. In Poland, France, and Belgium, once the tanks got through the soldiers took it for granted that they were beaten. But you are like demons. The tanks break through and your infantry still keep fighting." Rommel wrote of seeing "a batch of some fifty or sixty Australian prisoners ... marched off close behind usimmensely big and powerful men, who without question represented an elite formation of the British Empire, a fact that was also evident in battle."


"As a Internet discussion grows longer, the probability of a comparison involving Nazis or Hitler approaches one."

They have to be bailed out, or they take us all down with them. Australia has been relatively immune so far, but only because of its mineral wealth, not its economic brilliance. The same can be said for the arab nations with their oil. Diversity is key. Australia lacks a really diverse economy(of course they are not alone here.)The USA has a diverse economy but too much debt, just like Europe.

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"Patriotism is the virtue of the vicious." Oscar Wilde.


"In this world of our in other lands, there are some people, who, in times past, have lived and fought for freedom, and seem to have grown too weary to carry on the fight. They have sold their heritage of freedom for the illusion of a living. They have yielded their democracy." Franklin D. Roosevelt

Actually no, Australia has a strong mixed economy. Resources only fill Federal Government coffers and participating workforce, which isn't the vast majority. The biggest reason which is hardly talked about is disposable income. Australians have a greater disposable income then Europeans and a culture of consumption, even in lean times.

Ask any American or European how much they get paid in retail, hospitality or related lower quartile earning work. You will find most Europeans and Americans will be paid minimum wage and have some form of bonus/commission aspect while Australians are paid about 2-3 times the base rate, with the bonus/commission aspect. This creates a large disposable income group that is under performing in the other Continents.

The culture aspect is also evident. When things go bad, spending decreases to a trickle in Europe and America, unlike here. Spending maintained itself through the crisis. That and most our industry and services maintained strong business because lack of interdependence with America or Europe (solely).

Siege of Tobruk - One German POW said: "I cannot understand you Australians. In Poland, France, and Belgium, once the tanks got through the soldiers took it for granted that they were beaten. But you are like demons. The tanks break through and your infantry still keep fighting." Rommel wrote of seeing "a batch of some fifty or sixty Australian prisoners ... marched off close behind usimmensely big and powerful men, who without question represented an elite formation of the British Empire, a fact that was also evident in battle."


"As a Internet discussion grows longer, the probability of a comparison involving Nazis or Hitler approaches one."