Europe agrees rescue package

Global financial authorities launched an audacious package of measures in the early hours of Monday morning – including €750bn of government-backed loan guarantees and a commitment to buy European sovereign bonds – to combat rising financial market tensions triggered by worldwide fears over public finances.

As part of a co-ordinated response to the growing uncertainty sparked by the Greek debt crisis, the European Central Bank announced it would intervene in government bond markets and join the US Federal Reserve and other main central banks in reactivating extra US dollar liquidity facilities.

The emergency funding facility agreed between the European Union and the International Monetary Fund was worth as much as €750bn ($930bn, £625bn) in loan guarantees and credits to stabilise the eurozone.

The stabilisation scheme agreed by EU finance ministers and top officials after 12 hours of talks in Brussels consists of government-backed loan guarantees and bilateral loans worth up to €440bn ($568bn) provided by eurozone members; a further €60bn supported by all EU members through expansion of an existing balance of payments facility; and up to €250bn provided by the IMF.

Initial reaction to news of the package in Asia trading on Monday morning was favourable, with the euro gaining almost 2 per cent against the US dollar and 3 per cent against the yen. In Japan, the Nikkei average rose 1.3 per cent and Hong Kong’s Hang Seng advanced 1.2 per cent to 20,154.07. European markets were also expected to open strongly on Monday.

US Treasuries tumbled by the most in six weeks and German 10-year bunds fell by the biggest amount for nine months as investors sought more risky assets.

"This is shock and awe part two and in 3-D, with a much bigger budget and a more impressive array of special effects," said Marco Annunziata, chief economist at Unicredit.

The ECB's decision to buy government and private assets to ease market tensions marked a dramatic backdown by the Frankfurt-based institution. It had previously opposed measures that blurred the boundary between fiscal and monetary policy. No limits were set on the level of purchases but the ECB said the objective was to “address the malfunctioning of securities” rather than to help governments.

The purchases would be “sterilised” with the extra liquidity reabsorbed to prevent inflation risks. The ECB will also reintroduce unlimited offers of three-month and six-month liquidity.

Erik Nielsen, chief European economist at Goldman Sachs, said the outlines of the package were impressive.

“In any comparison, in terms of financing needs in southern Europe, this is a substantial amount,” he said.

The EU decided to increase by €60bn its existing balance of payments facility that it used in 2008 to help Latvia, Hungary and Romania, three non-eurozone countries. The facility would be increased to €110bn with the European Commission raising money on the markets using the EU’s €141bn-a-year budget as collateral. It would be extended to cover all 16 eurozone members. Any assistance would carry conditions set by the IMF.

The EU’s efforts were being cheered by Barack Obama, US president, who urged Angela Merkel, the German chancellor, and President Nicolas Sarkozy of France to ensure that the EU was “taking resolute steps to build confidence in markets”.

The €720bn package is in addition to the €110bn IMF and EU rescue plan approved for Greece on Friday and agreed by the IMF board on Sunday.

Alistair Darling, British chancellor of the exchequer, agreed that the UK would take part in the enlarged balance of payments facility after securing legal guarantees that it would not become liable for the debts of eurozone countries. It will not take part in the €440bn loan guarantee scheme.

The new package underlines the threat the current crisis has posed to eurozone stability. “We are seeing wolfpack behaviour in the markets, and if we don’t stop these packs, they will tear the weaker countries apart,” said Anders Borg, Sweden’s finance minister.

Loans for a stricken member will be raised through a special purpose vehicle backed by eurozone government guarantees, in response to demands from Germany. The facility will be organised on an intergovernmental basis among eurozone members, although Sweden and Poland have volunteered to take part. The facility will last three years.

The additional €60bn balance of payments facility will be available immediately but the credit guarantees will require parliamentary approval in most countries.

Christine Lagarde, French finance minister, said the response from international authorities was "consolidated, coherent and determined".