European central banks began buying euro zone government bonds under a $1 trillion global emergency rescue package agreed on Monday, sending the euro and European stocks and bonds surging on relieved markets.
The shock and awe plan -- the biggest since G20 leaders threw money at the global economy following the collapse of Lehman Brothers in 2008 -- triggered a global stock market rally after panic selling last week.
But it left longer-term questions about whether Europe's weakest economies can manage their debt and how the European Union can develop more coherent economic and fiscal policies to underpin the single currency.
The European Central Bank immediately began implementing its part of a deal hammered out by EU finance ministers, central bankers and the IMF in marathon weekend negotiations.
The package of standby funds and loan guarantees that could be tapped by euro zone governments shut out of credit markets, plus central bank liquidity measures and bond purchases to steady markets surprised financial analysts by its sheer scale.
The euro rose by more than 3 percent to above $1.30 and the FTSEurofirst 300 index of top European shares surged by 5.6 percent by 5 a.m. ET, after falling 8.9 percent last week to a seven-month low on Friday.
The euro zone is certainly regaining confidence, European Commission President Jose Manuel Barroso told reporters, hours after an 11-hour meeting of EU finance ministers ended in the early hours of Monday as Asian markets opened.
Risk premiums on peripheral euro zone sovereign bonds plummeted, as did the price of insuring them against default on the volatile credit default swap market, while German bund futures tumbled by a two full percentage points as investors sold safe-haven debt.
The EU has taken a decisive action to stamp out the speculative attack against the euro and this should be sufficient to bring some calm into the market, said Klaus Wiener, head of research at Generali Investments.
German Chancellor Angela Merkel, who for months resisted pressure to aid Greece with a debt crisis that eventually sent market tremors around the world, said the measures were necessary to guarantee the future of the euro.
This package serves to strengthen and protect our common currency, she told reporters in Berlin. We are protecting people's money in Germany.
Merkel consented to the massive rescue plan after her center-right coalition lost a regional election on Sunday and U.S. President Barack Obama and French President Nicolas Sarkozy telephoned her to ensure Europe would take the necessary steps to support the euro and keep global liquidity flowing.
A German government spokesman stressed the EU was not turning into a fiscal transfer union and it was possible that not all member states would take part in bilateral aid.
Britain, which is not in the euro and has a caretaker government following an indecisive general election last week, said it would not participate in the rescue or loan guarantees.
In concerted action, the U.S. Federal Reserve reopened currency swap lines with several central banks to try to assure markets of dollar liquidity and the European Central Bank said it would buy government debt to steady investor nerves.
That decision, urgently sought by anxious European banks, reversed a long-standing reluctance to use what many economists call the nuclear option under market pressure.
Group of Seven and Group of 20 finance ministers offered public backing of the measures.
However skeptics questioned whether the euro zone could hold together over the long term and buttress a fragile currency union with stronger political and fiscal instruments.
By establishing a 750 billion euro fund to bailout Greece and aid other struggling governments, Germany and other strong European states are chasing a dream -- a single European currency and broader European unity -- that may have no place in reality, said University of Maryland professor Peter Morici.
Former IMF chief economist Kenneth Rogoff told BBC radio that weak euro zone economies such as Greece and possibly Spain and Portugal would still have to restructure their debts to make them sustainable, despite vehement official denials.
The emergency measures are worth much more than any previous attempt by the 27-nation European Union or the 16-state single-currency group to calm markets.
EU Monetary Affairs Commissioner Olli Rehn told a news conference the package proves we shall defend the euro whatever it takes.
They agreement was reached after the crisis over debt-laden Greece drove sovereign debt yields and insurance on this debt to record levels, which Sweden's finance minister blamed on the wolfpack behaviors of financial markets.
Economists said the move at least bought Europe some time to calm bond markets but High Frequency Economics said in a research note the package was still too vague to understand.
ECB TO BUY BONDS
The $1 trillion package consists of 440 billion euros in guarantees from euro area states, plus 60 billion euros in a European stabilization fund that could be disbursed to help euro zone states if needed on strict austerity conditions.
EU finance ministers said the International Monetary Fund would contribute up to 250 billion euros, taking the total to 750 billion euros, or around $1 trillion.
IMF head Dominique Strauss-Kahn said any action by the global lender would be on a country-by-country basis.
The ECB said its decision to buy bonds was justified by governments' agreement to greater fiscal discipline, abandoning resistance to asset purchases just days after ECB President Jean-Claude Trichet said the idea had not even been discussed.
The scope of the purchases was yet to be determined and they would be offset by liquidity-absorbing operations so that the stance of monetary policy is unaffected, the central bank said.
The ECB last year announced a 60 billion program to buy covered bonds but this would be its first move into buying government debt.
(Additional reporting by Krista Hughes and Sven Egeter in Basel, Jeremy Gaunt, William James in London, Marcin Grajewski in Brussels, Sarah Marsh and Dave Graham in Berlin; Writing by Paul Taylor and Paul Tait; Editing by Angus MacSwan)