A $1 trillion emergency package to stabilize the euro zone unleashed a spectacular rally in world stocks on Monday but the euro wiped out initial gains as worries about the region's debt problems persisted.Will Europe's version of "shock and awe" be enough to tame markets? Well, think about this way. Let's say you are a big global macro hedge fund that was actively shorting sovereign debt of southern European nations. Will you continue knowing that the ECB can squash you like a bug at any time? Highly unlikely. What's more likely is that you will move on to your next target, which might be the UK.
The 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.
Wall Street also surged as confidence returned, at least temporarily. The Dow Jones Industrial average jumped 3.9 percent and the narrower Standard & Poor's financial share index was up 5.6 percent amid relief among banks.
Yields paid on Greece's 2-year notes plunged to 8.7 percent from Friday's close of 22.4 percent as the plan reassured investors about the country's ability to service debt in the short term.
"For once the scope of the actions unveiled dwarfed previous leaks and speculation: this is shock and awe part II and in 3-D, with a much bigger budget and a more impressive array of special effects," said Marco Annunziata, chief economist at UniCredit Group in London.
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 impressed financial analysts by its sheer scale.
But senior International Monetary Fund official Marek Belka said the emergency package was "morphine" for the markets and should not be regarded as a long-term solution.
The euro rose as much as 3 percent after weeks of draining confidence but erased nearly all of its gains later to trade at $1.278 per U.S. dollar, reflecting concerns about Europe's long-term debt problems.
"Sentiment on the euro is still overwhelmingly negative and with any rally people will take the opportunity to sell the single currency," said Joe Manimbo at Travelex Global Business Payments in Washington, DC.
"There are still some questions lingering about the package, such as how fast it can get implemented. Not to mention that it adds to the debt load of overall heavily indebted European countries," he added.
Gold prices fell but less than 1 percent, as lingering uncertainty about the euro zone's debt crisis still supported the metal's safe-haven appeal.
For the first time in six months of a deepening debt crisis that began in Greece, European leaders appear 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 that involved 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 the bank had acted under pressure from euro zone leaders, whom he met at a summit on Friday evening as interbank lending began to freeze up in an ominous reminder of the 2008 Lehman crisis.
Only the day before, Trichet had said the bank was not even discussing the option of buying government bonds.
All euro zone banks bought sovereign bonds but in relatively small volumes. One European trader estimated the total purchased on Monday was less than 1 billion euros in mainly Greek, but also Italian, Spanish and Portuguese bonds.
In a rare show of open dissent, ECB governing council member Axel Weber of Germany, a leading contender to succeed Trichet, criticized the move and warned that it carried significant risks for price stability.
"Buying government bonds entails considerable stability policy risks, and thus I regard this part of the ECB council's decision critically in this exceptional situation," he told the business daily Boersen-Zeitung.
The deal won global endorsement from the Group of Eight and G20 major economies.
The White House said President Barack Obama supported the Europeans' "assertive action" to address the situation. Chinese Premier Wen Jiabao said Beijing would support actions to help Greece overcome its sovereign debt crisis.
Germany and the Netherlands, sticklers for budget discipline, insisted the rescue program 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 sent market tremors around the globe, 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.
Merkel consented to the massive plan after her center-right coalition lost a regional election on Sunday and 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 Spain and Portugal had made a commitment to cut their budgets substantially in 2010 and 2011 as a condition for the safety net. EU Monetary Affairs Commissioner Olli Rehn said both states must commit themselves to further savings this year too.
Spain said it had no intention of drawing on the funds.
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."
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.
The 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 behavior" 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 IMF would contribute up to 250 billion euros for a total of 750 billion, about $1 trillion.
As far as the euro is concerned, I'm not so sure European leaders want it to be back at 1.50 any time soon. A weaker euro stimulates European exports and will benefit tourism in Greece and other European countries. In short, a weaker euro is exactly what Europe needs at this time.
So was this a trillion dollar gamble? As I have already stated, they didn't have a choice. Speculative attacks were threatening the stability of the bank funding system. I also believe the lessons of Lehman played a pivotal role in taking these decisive measures. Letting Greece fail was simply not an option.
Finally, below, Stephen Wood, chief market strategist at Russell Investments, talks with Bloomberg's Lori Rothman about European policy makers' plan to end the region's sovereign debt crisis with an almost $1 trillion loan package, and the outlook for the U.S. economy and stocks.