A $1 trillion global emergency package to stabilize the euro unleashed a spectacular rally in European stocks and bonds on Monday but analysts said EU leaders had only bought time to tackle deep-seated fiscal problems.
The shock and awe rescue plan -- the biggest since G20 leaders threw money at the global economy following the collapse of Lehman Brothers in 2008 -- triggered the biggest one-day rise in European shares in 17 months after panic selling last week.
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 as much as 3 percent after weeks of draining confidence and financial shares were among the biggest gainers, along with the bonds of Portugal, Ireland, Greece and Spain, pejoratively nicknamed the PIGS by traders.
For the first time in six months of a deepening debt crisis that began in Greece, European leaders appeared to have got ahead of the curve with decisive action, analysts said.
The euro zone is certainly regaining confidence, European Commission President Jose Manuel Barroso told reporters hours after EU finance ministers clinched agreement early on Monday as Asian markets opened.
This morning's agreement will ensure that any attempt to weaken the stability of the euro will fail, Barroso said.
But the deal left many 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 among EU finance ministers, central bankers and the IMF, with euro zone central banks buying government bonds in the open market.
ECB President Jean-Claude Trichet denied that the bank had acted under pressure from euro zone leaders, whom he met at a summit on Friday as interbank lending showed signs of freezing in an ominous throwback to the 2008 Lehman crisis. Only the day before, Trichet had denied the bank had even discussed buying government bonds.
We are fiercely and totally independent. This decision is the decision of the Governing Council and not the result of any kind of pressure of any sort, Trichet said in Basel on Monday.
The FTSEurofirst 300 index of top European shares surged by 6.4 percent by 1315 GMT (9:15 a.m. EDT), after falling 8.9 percent last week to a seven-month low on Friday.
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.
The deal won global endorsement from the Group of Eight and G20 major economies. Chinese Premier Wen Jiabao said Beijing would support actions to help Greece overcome its sovereign debt crisis, state media reported.
Germany and the Netherlands, sticklers for budget discipline, insisted the rescue programme was linked to the same kind of draconian austerity measures already imposed on Greece.
German Chancellor Angela Merkel, who for months resisted pressure to aid Athens over 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 plan only 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.
Dutch Finance Minister Jan Kees de Jager told parliament in a letter that Spain and Portugal had made a commitment to cut their budgets substantially in 2010 and 2011 as a condition for the safety net. Spain said it had no intention of drawing on the funds.
Britain, which is not in the euro and has a caretaker government following an inconclusive 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 ECB 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.
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.
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.
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 behaviours of financial 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.
(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; Editing by Angus MacSwan)