Markets applaud European debt crisis package

[March 14, 2011]  LONDON (AP) -- Markets cheered on Monday a surprisingly broad European package of measures to deal with the government debt crisis that has over the past year threatened the existence of the euro currency.

In an early Saturday announcement, eurozone leaders increased the size of the bailout fund -- the so-called European Financial Stability Facility -- and lowered the interest rates on the loans bailed-out Greece has taken out. They also revealed that the bailout fund can buy bonds directly from governments in exceptional circumstances but only if those countries agree to further austerity measures.

Investors were surprised by the level of detail announced and the bond market pressures fell Monday in the most highly indebted eurozone countries, including Portugal and Spain. In addition, the euro rose 0.2 percent and stock markets in Lisbon, Madrid and Athens rallied -- even though most global markets were down in the wake of Japan's massive earthquake.

"The deal secured by EU leaders was arguably at the higher end of both the market's and our own expectations, while most decisions were not expected to be announced so soon," said Frederik Ducrozet, eurozone economist at Credit Agricole. "One reason for this pleasant surprise might have been the renewed tensions in the peripheral bond market last week."

In the run-up to last week's meeting, there was not much confidence in the markets that the leaders would agree to anything concrete, especially as German Chancellor Angela Merkel had been sounding an increasingly strident tone.

In the event, Merkel proved somewhat more flexible than expected as she backed calls to raise the EFSF's financial firepower to euro440 billion ($606 billion) from the previous euro240 billion.

By mid-morning London time, the ten-year yield on Spanish government bonds was down 0.13 percentage point to 5.29 percent while Portugal's have dropped 0.17 percentage point to 7.43 percent. Greece's equivalent cost of borrowing was down a massive 0.32 percentage point to 12.50 percent.

Stocks also pushed higher in some countries. Greece's ASE Composite Index spiked 3.2 percent to 1,627. Spain's IBEX index was up 1.5 percent at 10,555, while Portugal's PSI 20 rose 0.8 percent to 7,958.

One place where there was little euphoria was Ireland, which saw its main stock market drop in line with others and its cost of borrowing stand little changed on the day. The reason was that Ireland, which became the second euro country to get bailed out last November, did not get a similar deal to that of Greece because the government effectively refused to increase its super-low corporate tax rate.

The EU summit on March 24-25, which was expected to be the forum for fleshing out details of the "comprehensive solution" to the debt crisis, is set to provide the finer details of the package unveiled on Friday. As such, finance ministers meeting in Brussels Monday will be discussing timing and operational issues related to the renewed euro pact.

The euro was up 0.2 percent at 1.3960, though its rally was buffered by safe-haven trading flows in the aftermath of the Japanese quake, which has left thousands dead.

[Associated Press; By PAN PYLAS]

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