Europe Bailout Lifts Gloom

Stocks Surge on $955 Billion Plan, but Economists Question Long-Term Burden

By MARCUS WALKER in Berlin, CHARLES FORELLE in Brussels and DAVID GAUTHIER-VILLARS in Paris

Global financial markets roared back in response to the European Union's nearly $1 trillion plan to avert a public-debt crisis that has threatened to derail the worldwide economic recovery.

Investors' apparent short-term relief was tempered by some economists' worries that in the longer term, the agreement's pledge to bail out troubled members will saddle the euro zone with gargantuan debts.
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PM Report: Street Surges on Bailout News
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Stocks soar on "Euro-phoria." WSJ's Emma Moody and Randall Forsyth join the News Hub to discuss. WSJ's David Wessel also joins the set and asks whether Europe's bailout will be enough. Plus, Fannie Mae is asking for an additional $8.4 billion in government aid and President Barack Obama wants to tinker with America's small change.

Stocks surged in Europe and the U.S. after EU leaders agreed to a massive action to prevent Greece's financial troubles from spreading throughout the region. Assets from Portuguese and Greek bonds to oil and other commodities rose world-wide.

The euro, which has been battered in recent weeks, rose above $1.30 to the dollar before closing below $1.28. In the U.S., The Dow Jones Industrial Average logged its biggest gain in more than a year, risingrose 404.71 points, or 3.9%, to 10785.14.

European Union officials announced early Monday in Brussels a plan to support the euro zone with €500 billion that could be lent to imperiled member countries, with more available from the International Monetary Fund. The deal was the result of a marathon weekend session of European leaders—one that included lobbying calls from U.S. officials, canceled trips and a collapsed finance minister. The plan quieted concerns that European leaders weren't moving fast enough to ease fears of a spiraling financial-market panic.

But the deal drew swift criticism. On Tuesday, Federal Reserve chief Ben Bernanke is set to brief lawmakers on the Fed's weekend decision to extend dollar loans to the European Central Bank. Some U.S. lawmakers have assailed the move as a bailout for Europe.

Many economists warned Monday that Europe's radical rescue plan doesn't address the region's underlying economic weaknesses, and could undermine the euro zone's rules and institutions.

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Floor traders at stock exchanges in New York and Frankfurt, below, watch action Monday, after the announcement of the euro-zone bailout plan.
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A string of countries along the euro zone's fringe, from Greece to Portugal, still have deteriorating public finances and need painful overhauls to restore their competitiveness. Analysts warned that blanket bankruptcy protection from Germany, France and other core euro nations could even reduce pressure on profligate euro-zone governments to mend their ways.

"This step was needed to calm financial markets, and it perhaps succeeded. But it opens fundamental questions about the monetary union," said Daniel Gros, director of the Centre for European Policy Studies in Brussels. "Now that the EU has said it will save everybody in sight, there may be no way to enforce fiscal discipline."

The sweeping measures mark a historic turning point for Europe's single-currency zone. Until now, its 16 nations have shared a single currency and unified monetary policy, set by the European Central Bank, while operating separate national budget and tax regimes.

The weekend's negotiations put the bloc on a headlong course toward fiscal coordination—undoing some of the zone's founding principles, including its ban on governments bailing each other out and its aversion to the ECB buying its member countries' debt. It also raises questions, analysts say, about the credibility and independence of the ECB, which has long been shielded from political pressures.

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The uncertainty about the euro zone's future governance makes it even more unlikely that the bloc will be willing to admit new members for now, especially since many Eastern European candidates have their own debt woes. Membership in a currency union with an implicit bailout guarantee could also make joining more attractive to many EU countries.

German Chancellor Angela Merkel, bleary-eyed after marathon negotiations Sunday night, said euro-zone nations need to intensify efforts to cut budget deficits. She stressed that aid for euro-zone governments would come with strings attached, including austerity programs designed together with the IMF.

For Germany, the EU's biggest economy and paymaster, the aid package is a decisive affirmation of political and financial commitment to Europe. Yet that commitment was born out of fear that the euro could fail, rather than enthusiasm for deeper union. Ms. Merkel's challenge now is to convince Germans of a course that could wind up leaving them on the hook for other euro members' debts.

"This package serves to strengthen and protect our common currency," Ms. Merkel said Monday. "We are protecting the money of the German people."

The chancellor for months resisted pressure from France and indebted Southern European countries to bail out Greece, fearing a precedent that could undermine budget discipline throughout the euro zone and saddle German taxpayers with unpalatable burdens.

In 11-hour negotiations Sunday—after losing her parliamentary majority to a regional election and tapping a last-minute stand-in for her ailing finance—Ms. Merkel accepted a safety net for all euro members.
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The €750 billion ($955 billion) package has three elements. A government struggling to refinance its debts could first tap a €60 billion EU emergency fund. If that proved insufficient, it could borrow from a €440 billion fund financed through a special-purpose vehicle whose borrowings will be guaranteed by other euro-zone governments. Euro zone officials initially placed the IMF's pledge at €250 billion, but a fund official said Monday that number wasn't precise.

In practice the special-purpose vehicle, or SPV, will be able to lend more than €440 billion, since it allows crisis-hit countries to pledge their bonds as collateral against further loans from the ECB.

The ECB, meanwhile, began buying debt of weaker euro-zone countries in bond markets Monday, a controversial role that puts the ECB in the role of propping up wayward economies.

Just Thursday, ECB President Jean-Claude Trichet rejected European banks' pleas for the central bank to buy euro-zone government debt. Global stock markets and the euro plunged. By Friday, ECB officials say markets had turned "dysfunctional."
Europe's Debt Crisis

Take a look at events that have rattled European governments and global markets.

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Growing Apart

Take a look at the premium in percentage points that selected euro-zone governments must pay on their 10-year bonds.

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* More photos and interactive graphics

In a phone call with Ms. Merkel on Friday, U.S. President Barack Obama called on Germany to act to stem the escalating crisis in global markets, say people familiar with the matter. U.S. Treasury Secretary Timothy Geithner agitated for a more decisive euro-zone response in several conference calls with other Group of Seven finance ministers, these people said, and made specific critiques of European proposals.

On Friday evening, when euro-zone leaders gathered in Brussels to give their formal approval to aid for Greece, Mr. Trichet spoke of a worsening pan-European crisis and called for swift action, EU officials said.

As the leaders sat down to dinner, the yield on Portugal's bonds rose to more than eight percentage points over what ultra-safe Germany pays to borrow for two years—reflecting investors' growing fears of a Portuguese default. EU officials realized that Portugal's trajectory put it just a few weeks behind Greece, which rapidly lost access to capital markets in April.

Leaders agreed something big was needed over the weekend to turn around market sentiment towards the euro zone, the officials said. French President Nicolas Sarkozy, with support from most leaders present, pushed to announce a "European stabilization mechanism" that Friday night, say people familiar with the matter. Ms. Merkel insisted governments take the weekend to weigh options and present a plan before markets opened Monday, these people said.
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News Hub: Will This Bailout Be Enough?
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The great financial crisis keeps opening new acts just when it seems to be drawing to a close. WSJ's David Wessel joins the News Hub and asks whether Europe's bailout will be enough.

Meanwhile, Mr. Trichet, with support from U.S. Federal Reserve Chairman Ben Bernanke in Washington, said European governments needed to take more forceful action of their own before central banks would consider radical steps, according to people familiar with the talks.

Mr. Sarkozy, who had for weeks agitated for bolder European action, pressed for the ECB to play a role, too. Ms. Merkel retorted that the ECB was independent and couldn't take orders from national governments.

No precise agreement was reached Friday. "The euro zone is going through its worst crisis since its creation," Mr. Sarkozy told reporters after the meetings. Ms. Merkel left via a back door, avoiding the cameras.

Mr. Sarkozy canceled a Saturday trip to Moscow, where he was due to attend a parade to mark the 65th anniversary of the end of World War Two. Ms. Merkel, fearing a German no-show would upset the Russians, flew to Moscow. She called other euro-zone leaders from there.

Over the weekend, France and a majority of euro-zone members argued that the EU's executive arm, the European Commission, should borrow funds on capital markets and lend them to a stricken euro-zone nation, EU officials said.

Berlin objected, fearing Germany would end up as the backstop for the region's debt without having control over the debt issuance. It advocated country-to-country loans to a crisis-hit peer, the officials said. That would give an effective veto to Germany, which would have to supply 30% or more of rescue aid.

Several other countries, including Italy, rejected the German plan, saying they are already too indebted and might not be able to borrow enough money.

Euro-zone finance ministers were set to meet at 3 p.m. Sunday in Brussels to broker a deal. German Finance Minister Wolfgang Schäuble had barely arrived when he suffered an allergic reaction to his medication and was taken to the hospital, EU officials said.

Mr. Schäuble, wheelchair bound since he survived an assassination attempt 20 years ago, has spent much of the euro zone's spring crisis in hospital after an operation led to complications.

Ms. Merkel dispatched her former chief of staff, German Interior Minister Thomas de Maiziere, on a Luftwaffe plane to stand in for the finance minister.

Arriving around 8 p.m., Mr. de Maiziere took a tough stance against letting the EC run the bulk of the bailout funds, EU diplomats say. Ms. Merkel and key cabinet ministers met in her Berlin chancellery to keep a tight leash on the negotiations.

Other governments warned that markets were opening in Australia. Mr. de Maiziere didn't budge. Finally, Germany and France settled on creating the SPV, allowing the package to be announced before Tokyo opened.

The SPV reduced the burden of borrowing on indebted countries like Italy, while giving Germany control over aid disbursements. Several countries—including Italy—claimed credit for the breakthrough. The SPV "must be a great idea because, apparently, we all had it," said a senior French official.
—Brian Blackstone, Bob Davis and Pat McGroarty contributed to this article.

Write to Marcus Walker at marcus.walker@wsj.com, Charles Forelle at charles.forelle@wsj.com and David Gauthier-Villars at David.Gauthier-Villars@wsj.com