World’s stocks soar on Europe bailout
Europe’s $1-trillion rescue plan for its weakest countries sent battered financial markets rebounding dramatically worldwide Monday on hopes that the deal would avert another global economic crisis.
The massive loan package hashed out over the weekend by the European Union, and a separate aid program from the European Central Bank, reassured investors by giving Greece, Portugal and other debt-ridden eurozone nations new credit lifelines.
Major European stock markets rocketed higher, some more than 10% for the day. U.S. stocks also posted steep gains, with the Dow Jones industrial average soaring about 405 points, or nearly 4%, to 10,785.14.
“Clearly, Brussels, Berlin and Paris are hoping this will buy a lot of time -- years as opposed to weeks and months -- so weaker [countries] can get their financial houses in order,” said Razeen Sally, co-director of the European Center for International Political Economy in Brussels.
But Sally and others cautioned that governments and central banks once again are fighting a problem rooted in debt by taking on more debt, just as they did by funding the bailouts of their economies and financial systems during the credit-market meltdown of 2008 and early 2009.
That raises the question of whether the rescue plan is anything but a temporary patch.
The global economy “remains weak and highly uncertain,” Sally said. “And the biggest cloud hanging over it is the massive increase in public indebtedness on both sides of the Atlantic.”
Now, with fresh commitments to lend potentially huge sums to struggling borrowers, “it does seem like you’re just giving the addict another fix,” said Paul Kasriel, chief economist at Northern Trust Co. in Chicago.
But Kasriel and other analysts said policymakers had little choice. With last week’s plunge in global markets -- including one of the wildest trading sessions in Wall Street history -- it was clear that Europe’s government-debt woes posed a growing threat to the world’s nascent economic recovery.
Significantly, the U.S. threw its weight behind the eurozone rescue, primarily via the Federal Reserve’s decision to open new credit lines with the European Central Bank. That will enable the ECB to funnel needed dollars into the eurozone banking system.
“Last Thursday brought it home for the U.S.,” said Drew Matus, an economist at banking firm UBS, referring to the computer-driven plunge of more than 700 points in the Dow index in only a few minutes.
A few months ago the fear was that cash-strapped Greece might default on its debts. But in recent weeks, markets began to treat Portugal and Spain as pariahs too, driving up both countries’ borrowing costs in the bond market and thereby devaluing their outstanding bonds.
Late last week the talk on Wall Street was that stresses were rising in the European banking system. The eroding value of government bonds put banks worldwide at risk because financial institutions hold huge amounts of that debt.
By Friday, interest rates were rising on short-term loans between European banks, suggesting that some banks were becoming leery of lending to others -- similar to what followed the failure of brokerage Lehman Bros. in September 2008.
Lehman’s demise led to a virtual freeze-up of credit markets worldwide, plunging much of the global economy into the worst recession since the Great Depression.
The risk of a repeat of that nightmare boosted the urgency of European policymakers’ deliberations last weekend, and the need for a rescue plan that would inspire “shock and awe,” analysts said.
The goal: Convince global investors that countries facing gaping budget deficits, including Greece, Portugal and Spain, won’t blow up and take the rest of Europe down with them.
Under the as-yet vague terms of the rescue package, the 16 eurozone countries will create a separate financial entity to borrow up to $560 billion, as needed, for loans to member states. The new debt would be guaranteed by all of the countries.
Additionally, the International Monetary Fund pledged $321 billion in loans and the European Commission threw in $78 billion, bringing the aid package total to about $960 billion.
As the single largest funder of the IMF, the U.S. would presumably be on the hook for a disproportionately large sum of the commitment. Simon Johnson, a former IMF chief economist, estimated the U.S. government’s potential exposure at $10 billion to $50 billion.
Separately, the European Central Bank agreed to start buying government bonds of eurozone countries for its own account.
Some experts said Europe’s decision to basically share the debt burdens of its most fiscally challenged members was a logical approach to defusing the crisis.
“The idea is that Europe in its totality can handle the debt load,” said Carl Lantz, head of U.S. interest rate strategy at banking firm Credit Suisse. “The debt is just distributed unevenly.”
Still, there could be a backlash from taxpayers of Europe’s richer states, including Germany and France.
European leaders presented the rescue plan as crucial to protecting the viability of the 11-year-old euro currency, which has plunged in value this year.
But Sally said the troubling message is that “the euro is going to be propped up by massive bailouts -- not just for Greece but for every profligate and highly indebted eurozone member.”
In one sign that markets’ relief over the rescue plan could be short-lived, the euro currency initially soared against the dollar Monday, then pulled back sharply. It jumped from $1.273 on Friday to as high as $1.309, but retreated to $1.280 in late New York trading.
Even as the European Union stepped up to support its weakest members, credit-rating firm Moody’s Investors Service warned that it would probably be lowering its credit ratings for Greece and Portugal in the next month or so.
Many experts believe that the only long-term solution for Greece, and possibly other struggling European countries, is to forgive a portion of their debts. But that could be ruinous for banks and other creditors.
In the meantime, critics say, central banks are simply printing more money to paper over a crisis rooted in excessive consumer, business and government borrowing over the last decade, which was abetted by lax lending standards.
Longer term, there is a risk that all of the money governments and central banks are pumping into the financial system will fuel serious inflation.
For now, if the rescue plan doesn’t succeed in bolstering financial markets and the euro, it’s unclear what policymakers could do next. Global financial crises “are getting broader and deeper, and we’re upping the ante on the fix,” said Stephen Roach, chairman of Morgan Stanley Asia.
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don.lee@latimes.com
