EUROPEAN MARKETS enjoyed their biggest rally in more than 17 months after policy-makers unveiled an unprecedented rescue package worth €750 billion to contain the region’s sovereign-debt crisis.
The euro rose as much as 3 per cent to almost $1.31 against the US dollar after weeks that saw confidence draining from the currency, although it did shed some of its gains later in the day to finish at just under $1.28.
Jolted into action by the euro’s slide to a 14-month low last week and soaring bond yields in Portugal and Spain, the EU agreed to put in place financial assistance to countries facing instability worth €750 billion, including International Monetary Fund backing.
The ECB said it would counter “severe tensions” in certain markets by purchasing government and private debt, and restarting a dollar-swap line with the Federal Reserve.
National benchmark indices rose in all 18 western European markets except Iceland.
Ireland’s Iseq was up more than 7 per cent at one point, while Germany’s DAX gained 5.3 per cent and the UK’s FTSE 100 increased 5.2 per cent. France’s CAC 40 climbed 9.7 per cent, while Spain’s IBEX 35 jumped 14 per cent.
The Stoxx Europe 600 index soared 7.2 per cent to 254.14, the biggest gain since November 24th, 2008, as only two stocks declined. The gauge last week posted the biggest drop in 18 months as concern grew that the region’s leaders would be unable to halt the spiralling government debt crisis. The measure has fallen 6.6 per cent from its 2010 high on April 15th.
Dublin stockbroking firm NCB said the scale of the proposals seemed “adequate” to halt the deterioration in the euro zone bond markets and the euro. The measures represented a “short-term postponement of the immediate default risk” in weaker European countries. “The worry was that financial contagion would spread and harm the recovery. The EU bailout should ensure that this does not occur.”
However, it said the key to an ultimately favourable resolution was “the stringency of the austerity measures forced on these countries and actual delivery of such”.
Dermot O’Leary, economist with Goodbody Stockbrokers, said the announcements by European policy-makers were bigger than hoped for given the lethargy displayed until now, and may stabilise markets in the short-term.
“While the package is significant it does not solve fiscal imbalances within the euro area,” he warned. However the “backstops” provided by the emergency rescue plan may buy time for some countries to commit to and implement fiscal consolidation programmes.
“There is intent behind these measures, and that is helping the markets,” said Christoph Riniker, a strategist at Bank Julius Baer group in Zurich. “Last week showed that we needed measures from central banks, and we’ve almost recovered from last week’s losses. The fundamental picture still points to improvement towards the end of the year.”
(Additional reporting - Bloomberg and Reuters)
