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Euro Support Package Approved by Soaring Global Markets, but Doubts Linger

Tuesday, May 11th 2010 - 03:35 UTC
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Markets celebrated the Euro zone had activated a plan Markets celebrated the Euro zone had activated a plan

Global stock markets soared after the European Union and International Monetary Fund intervened to stop the Greek debt crisis spreading and support the weakened Euro.

Wall Street closed 4% up, after a 5% rise on the main UK and German stock markets, and a 9% surge in France. Spain’s Ibex broke all records, 14.43% and Athens, 8%. The Euro also saw initial gains against both the dollar and pound, but they were later erased. On Sunday, the European Union (EU) and International Monetary Fund (IMF) agreed a 750bn Euro loan-guarantee deal which took markets by surprise, given its magnitude.

The US Dow Jones Industrial Average index (INDEXDJX:.DJI) closed up 404 points at 10,785 in New York. In London, the FTSE 100 Index (INDEXFTSE:.FTSE) closed 264.4 points higher at 5,387, having reached 5,400 at one stage.

Banking stocks led the rally in Europe. In London, Barclays (LON:BARC) shares jumped 16.2%, while those in Royal Bank of Scotland (LON:RBS), Lloyds Banking Group and Standard Chartered climbed more than 10%.

In Paris, Societe Generale and Credit Agricole surged more than 20%, while in Frankfurt, Deutsche Bank and Commerzbank were up about 10%.

The risk premium on some Euro zone government bonds also fell sharply, as did the price of insuring them against default. For example, the interest rate on two-year Greek bonds fell immediately, from 18.1% to 4.9%.

The EU agreement also paved the way for the European Central Bank to start buying government debt, which helped to reduce bond yields.

Under the terms of the European loan-guarantee deal, the 16 members of the Euro zone will have access to 440bn euros of loan guarantees and 60bn euros of emergency European Commission funding. In addition, the International Monetary Fund (IMF) will also contribute up to 250bn euros.

The deal is designed to stop Greece's debt crisis spreading to other European countries with high budget deficits, such as Portugal and Spain.

Concerns that other countries will be engulfed in the crisis have hit the Euro and global shares in recent weeks.

BBC's economics editor Stephanie Flanders warned that there were still some important questions to be answered, especially about the special purpose vehicle being set up to oversee the 440bn Euros being provided by Euro zone countries.

She said: “We don't know much about how this special vehicle would work... But if there's any lesson of the past few months it is they [Euro zone countries] need to sort it out, fast.

”Investors are going to have plenty of questions about how the vehicle would work.”

There were also concerns among investors that the package does nothing to address the fundamental problems of high debt levels in many European countries.

Those doubts were reflected in a mixed day of trading for the euro. The single currency initially reacted positively, rising sharply against both the dollar and pound. But later trading saw those early gains slowly erase, with the Euro trading at 1.2783, and a pound buying 1.1626 euros after the European markets closed - near to its starting point on Monday.

In Asian markets the first to receive the impact of the massive Euro support fund early Monday dawn, Japan's Nikkei 225 ended 1.6% higher, Australia's S&P/ASX 200 climbed 2.3%, South Korea's Kospi advanced 1.9%, China's Shanghai Composite rose 0.5%, India's Sensex gained 1.8% and Taiwan's Taiex rose 1.3%.

In Latinamerica markets also followed the global tendency: Brazil’s Bovespa was up, 4.11%; Argentina’s Merval, 7.16%; Mexico’s IPC, 2.5% and Chile’s IPSA, 2.44%.

Categories: Economy, International.

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