A $1 trillion global emergency rescue package to stabilize the euro reversed the slide in world financial markets on Monday but left longer-term questions about whether Europe's weakest economies can manage their debt.
The plan, hammered out by European Union finance ministers, central bankers and the International Monetary Fund in weekend negotiations, was the biggest since G20 leaders threw money at the global economy following the collapse of Lehman Brothers in 2008.
We have closed ranks to save the euro, French Finance Minister Christine Lagarde told Europe 1 radio after the 11-hour meeting in Brussels ended in the early hours of Monday as Asian markets opened.
The shock and awe scale of the package of standby funds, loan guarantees, liquidity measures and central bank bond purchases surprised financial analysts and the euro rose some 2 percent, while stocks in Europe and Asia firmed.
The FTSEurofirst 300 index of top European shares surged by 3 percent in early trading, after falling 8.9 percent last week to a seven-month low on Friday. The Asian rally was more modest compared to last week's losses.
In a move sought by anxious European banks, the European Central Bank will buy euro zone government bonds in a reversal of its long-standing reluctance to use what many economists call the nuclear option under market pressure.
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.
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.
Group of Seven and Group of 20 finance ministers offered their backing of the measures.
However skeptics questioned whether the euro zone could hold together over the long term and underpin 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 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
Financial markets had punished euro zone members with big budget deficits such as Portugal, Spain and Ireland, threatening to plunge them into Greece's plight, in turn roiling global markets.
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 it will buy euro zone government bonds to help support fractured markets, abandoning resistance to full-scale asset purchases just days after ECB President Jean-Claude Trichet said the idea had not even been discussed.
It said in a statement the step by many economists, was justified because of government promises to meet strict budget targets and step up consolidation efforts.
The euro currency, which last week sank to a 14-month low against the dollar, rose to $1.2950 on the ECB decision to buy debt. It was changing hands at $1.2975 at 0730 GMT.
Gold, considered a safe haven investment, fell as much as 1.5 percent after touching near record highs last week. Stocks rose across the board -- Japan's Nikkei was up 2 percent -- and U.S. S&P futures jumped 2.7 percent.
The ECB said 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 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 Reuters bureaus worldwide; Writing by Paul Taylor and Paul Tait; Editing by Angus MacSwan)