Fearful of a regional economic meltdown, the European Union and International Monetary Fund approved a dramatic rescue mechanism early Monday to make nearly a trillion dollars in loans available to EU member countries in danger of going bankrupt, as worries persisted that Greece’s troubles would spread far beyond its borders.
EU finance ministers worked into the morning hours in Brussels to hash out a rescue deal before trading in Asia began in earnest Monday morning. The officials, clearly in crisis mode, hoped to forestall any major shocks that could affect international markets throughout the rest of the day.
The agreement “proves that we will defend the euro whatever it takes,” EU Monetary Affairs Commissioner Olli Rehn told the Associated Press.
Under the three-year plan, the European Commission will add $78 billion to an EU loan facility already in place, more than doubling it in value.
The 16 EU members that have adopted the euro currency will provide loan guarantees to the tune of $569 billion. Such a fund would significantly increase the degree to which many European nations assume responsibility for one another’s financial health, knitting them together in a closer economic union that might make some nations squirm.
Additionally, the IMF pledged $321 billion in loans, bringing the aid package total to about $968 billion.
The finance ministers clearly felt something dramatic was required to soothe jittery markets that have been unimpressed with the measures taken so far to contain the growing European debt crisis sparked by Greece’s woes. Doubts over Europe’s ability to stop the rot triggered a worldwide plunge in stock markets late last week, including in the U.S.
A European and IMF bailout for Athens now valued at $142 billion failed to rally investor confidence when it was unveiled May 2 after weeks of EU dithering. As markets drove up the cost of borrowing for other financially stumbling nations such as Portugal and Spain, officials were forced to act.
Spanish Finance Minister Elena Salgado told reporters before Sunday’s emergency meeting in Brussels that the EU would do “whatever is necessary” to stabilize the situation.
Her Swedish counterpart, Anders Borg, warned of economic disaster if strong steps were not taken.
“We now see herd behaviors in the market that are really pack behaviors — wolf-pack behaviors,” Borg said. “If we will not stop these packs … they will tear the weaker countries apart.”
Hours before the EU’s new rescue mechanism was announced, the IMF’s executive board in Washington approved the organization’s contribution of just under $40 billion to the Greek bailout. The IMF too hoped that moving Sunday would help stave off a bad start to trading in Asia.
In the first hour of trading Monday, Tokyo’s Nikkei stock exchange was up 0.6%.
“Today’s strong action by the IMF to support Greece will contribute to the broad international effort underway to help bring stability to the euro area and secure recovery in the global economy,” said IMF chief Dominique Strauss-Kahn in a statement.
But the new crisis package put together in Brussels did not come about easily, needing nearly half a day of nonstop negotiations among the 27 EU member countries racing to beat the trading clock.
Most controversial was the $569 billion in loan guarantees to prop up the euro by helping the Eurozone nations that use it. Besides Greece, which is in the shakiest position, Spain, Portugal, Italy and Ireland are all nursing big budget deficits or levels of public debt that many analysts warn are unsustainable.
As the largest European economy outside the Eurozone, Britain was adamant that it not be on the hook for the huge package of loan guarantees.
“We need to show again today that by acting together, we can stabilize the situation. We do not want to jeopardize the recovery that is slowly taking place, and we’ll play our part in that,” British Finance Minister Alistair Darling told the BBC on Sunday. “But when it comes to supporting the euro, obviously that’s for the euro-group countries.”
Britain has its own hulking budget deficit to rein in and is caught in an especially sensitive position because of its inconclusive election result last week. London is still without a new government, and officials are worried enough about how the markets will treat the British pound that taking on the euro’s troubles in addition is politically impossible.
Germany, as the Eurozone’s economic powerhouse, has also expressed reservations about a rescue fund for its fiscally imprudent neighbors.
Berlin initially was reluctant to bail out Athens, an unwillingness that critics say only exacerbated the crisis by sapping investor confidence in the euro. Since then, the price tag for rescuing Greece from a disastrous default has risen, and Germany has had little choice but to get on board.
On Sunday, the German delegation in Brussels was reported to be balking at a proposal to make the new loan guarantees virtually unlimited. Berlin is mindful of strong public opposition at home to bailing out countries considered wasteful and irresponsible, and Chancellor Angela Merkel’s party lost a key state election Sunday that deprived her of a majority in the upper chamber of the German parliament.
The new rescue fund is large, to be sure, but it is commensurate with the size of the potential problems facing the Eurozone. The Greek bailout alone is costing $142 billion, a figure some economists think will eventually rise; Greece’s economy, however, is only one-fifth to one-fourth the size of Spain’s.
Any bailout for Madrid probably would be far more expensive. Spanish officials have bristled at their country being compared to Greece, saying that although they are grappling with a ballooning budget deficit, Madrid’s level of public debt is much lower.
The Spanish government insists that it will not need any assistance, despite the new rescue fund out of Brussels.
“Spain is not thinking about making use of this fund,” Salgado, the finance minister, said.