After a frantic weekend of negotiations in Brussels, the Eurozone's 16 finance ministers unveiled a package that pledges to guarantee the debt of any of the countries that use the euro. The unprecedented measures include: €440bn in loans or guarantees from Eurozone countries, €60bn from the European Union's Budget and up to €250bn from the International Monetary Fund.
The news helped buoy Britain's blue-chip index more than 4.4pc by mid-morning, with France's CAC 40 Index and Germany's Dax matching it. The biggest relief and strongest rallies came in Portugal and Spain, the two countries in the cross-hair of investors fears over European debt. The beleaguered euro surged more than two cents against the dollar to head back above $1.30.
"This is Shock and Awe, Part II and in 3-D," said Marco Annunziata, chief economist at Italian bank UniCredit Group. "This is truly overwhelming force, and should be more than sufficient to stabilise markets in the near term, prevent panic and contain the risk of contagion."
Germany, France and the rest of the euro countries have been forced into these unprecedented steps because of fears that the debt crisis that engulfed Greece will spread to other indebted nations, such as Portugal, Spain and Italy. The real fear was that the debt crisis could cripple Europe's banks - large owners of Eurozone debt - and plunge the global economy into another recession.
"There has been a poker game going on between the markets and the EU," said Gary Jenkins, the head of credit strategy at stockbroker Evolution. "This is probably reaching a climax as the EU has just gone 'all in' ".
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The struggles of the European economy has been forefront among the worries of Mervyn King, the Bank of England governor, so far this year. Europe is Britain's largest trading partner.
"The announcement should be good for markets at least in the short term," said Oscar Pulido, an investor at fund manager BlackRock. "Last week the markets were very uncertain as to whether there was going to be any aid package provided to Greeve and some of the other Southern European Countries."
While the mood in markets was one of relief, investors cautioned that the most heavily indebted European countries will need to deliver on plans to cut their deficits. Spain and Portugal said yesterday that each have committed to "take significant additional consolidation measures in 2010 and 2011."
"The significance of these measures should not be underestimated," said analysts at Credit Agricole. "However, the problem is that the 'package' may amount to a 'get out of jail free card' for European governments.
"In order to have a lasting impact on confidence there needs to be proof of budget consolidation and increasing structural reforms."