EU rescue package triggers rally in global markets

Global stock markets soared Monday as investors enthusiastically embraced a $1 trillion rescue package from the European Union and International Monetary Fund to stem the burgeoning crisis among Europe’s heavily indebted nations.

The Dow Jones Industrial Average jumped nearly 450 points in the first 10 minutes of trading in New York as worries about the threat to the global economy quickly subsided and bargain hunters moved in to snap up stocks trampled by last week’s market rout.

The blue-chip index ended up 405 points, or 3.9 percent, at 10,785, its biggest point increase in nearly a year. Other major U.S. indexes posted even larger gains, while battered stock indexes in Europe surged from 5 percent in London to nearly 15 percent in Madrid.

“This is shock and awe,” said Marco Annunziata, chief economist of Unicredit Group in London, noting that the loan package is more than enough to accommodate the estimated $500 billion in borrowing needs of struggling countries such as Spain, Portugal and Ireland, and possibly Italy.

After balking at coming up with a $146 billion package for Greece, EU ministers acted with unprecedented and unexpected speed as the market crisis widened last week.

The size of the package is “stunning,” said Mr. Annunziata, with about two-thirds of the loan guarantees and financing coming from the EU and about a third from the IMF, giving the debt-stricken nations a period of years to carry out steep cuts in their budget deficits without having to contend with raids by market speculators characterized by some European finance ministers as a “pack of wolves.”

“This truly is overwhelming force, and should be more than sufficient to stabilize markets in the near term, prevent panic and contain the risk of contagion,” Mr. Annunziata said.

In an about-face, the European Central Bank on Monday, after saying it wouldn’t do so on Thursday, pledged to start buying bonds from Greece, Spain and other countries whose borrowing costs had skyrocketed to double-digit levels. The yields on Greek, Spanish and Portuguese bonds plummeted in response Monday.

While the move by the central bank to help directly finance European budget deficits may raise questions in the long term about its independence, Mr. Annunziata said, for the time being it has helped to arrest “the single biggest threat to global financial stability” and was rewarded with Monday’s worldwide stock rally.

The Federal Reserve and other global central banks contributed to the effort by re-establishing emergency liquidity programs to swap dollars for euros that had been abandoned earlier this year when markets seemed calmer.

In the U.S., the Securities and Exchange Commission and the Commodity Futures Trading Commission continued to probe the cause of a frenzied 20-minute drop of nearly 10 percent in the Dow and other major stock indexes on Thursday.

After meeting with the leaders of six major exchanges, they announced a partial remedy that will require all the exchanges to impose the same “circuit-breaker” rules on individual stocks that are hit by an avalanche of sell orders.

During Thursday’s panicky session, the New York Stock Exchange and Nasdaq halted trading on stocks like Accenture, but they continued to be sold on other electronic exchanges, contributing to a free fall in their prices.

Joe Saluzzi, an analyst at Themis Trading, blamed the market breakdown on an influx of high-frequency traders at top investment banks and private investment funds in recent years, who on any given day account for more than half of stock-market activity.

Those traders, and their hair-trigger computer-driven trades, aim to make profits off of tiny moves in stock prices over mere nanoseconds, but their strategies led them into the massive sell-off that took down the whole market on Thursday, he said.

“Market participants were tripping over themselves to exit a market that was in free fall,” Mr. Saluzzi said, suggesting that a return to a uniform circuit-breaker system would go a long way to prevent such chaos.

“Not so long ago, if our markets experienced severe stress, human wisdom would intervene,” he said. “Reasons for the stress would be ascertained, trading in affected stocks would be slowed or halted, stabilizing bids would be initiated as needed, and severe volatility would be dealt with in a calm and reasoned manner.”

But under a new system inaugurated by the SEC several years ago, ostensibly to make the market more efficient, “the human specialist model has been replaced by an automated market maker model,” he said.

Now, the market “caters to masters of expensive technology whose only concern is to squeeze out every last picosecond and fractional cent before they move on,” he said.

Whatever the reasons for Thursday’s market chaos, Jay Bryson, a global economist at Wells Fargo Securities, said the timely and “decisive” action by European leaders “will likely bring the crisis to an end, at least for now.”

He compared their giant, three-pronged program to the $700 billion bank bailout fund enacted by Congress after Lehman Brothers’ failure in September 2008 triggered the global financial crisis — now much maligned and unpopular in Congress.

Most of the bank bailout funds were never spent, and most of what was doled out was quickly returned by major banks, Mr. Bryson noted. European leaders “are essentially taking a page out of this playbook,” he said.

“By providing a backstop facility, leaders hope to convince investors to continue financing governments that are facing liquidity problems. Not a euro cent of the backstop has been spent yet, and leaders hope that not a cent will ever be spent.”

But the program could run into trouble, he said, should fractious EU nations actually have to make good on their financing pledges. In most countries, disbursement would require parliamentary approval, where it could run into political obstacles like those that delayed the Greek package for months.

Moreover, a court challenge questioning the constitutionality of the package seems certain in Germany, which in helping to design the European monetary system had hoped to specifically avoid such bailouts of weaker member states.

German Chancellor Angela Merkel already has paid a political price for the Greek rescue as her party lost in regional elections last week. As the largest European economy, Germany nevertheless is expected to make the biggest contribution to the loan program.