Jolted into action by last week’s slide in the currency to the lowest in 14 months and soaring bond yields in Portugal and Spain, leaders of the 16 euro nations agreed to the financial backstop at a May 7 summit. They assigned finance chiefs to get it ready before Asian markets open later today European time.
Europe’s failure to contain Greece’s fiscal crisis triggered a 4.3 percent drop in the euro last week, the biggest weekly decline since October 2008. It prompted the U.S. and Asia to urge broader steps to prevent a global sovereign-debt crisis from pitching the world back into a recession.
European officials declined to disclose the size of the stabilization fund, to be made up of money borrowed by the EU’s central authorities with guarantees by national governments.
With the euro facing its stiffest test since its debut in 1999, the summit -- called to discuss efforts to coordinate economic policies -- turned into a crisis-management session that dragged past midnight.
The euro slid to $1.2715 from $1.3293 during the week, and is down 15 percent since late November. European stocks sank the most in 18 months, with the Stoxx Europe 600 Index tumbling 8.8 percent to 237.18.
The extra yield that investors demand to hold Greek, Portuguese and Spanish debt instead of benchmark German bonds rose to euro-era highs. The premium on 10-year government bonds jumped as high as 973 basis points for Greece, 354 basis points for Portugal and 173 basis points for Spain.
Europe came under pressure on a hastily arranged conference call of Group of Seven finance chiefs before the summit. All agreed on the need for a clear, timely and strong response,” Canadian Finance Minister Jim Flaherty, who chaired the call, told reporters in Ottawa. We hope to see a strong, early policy response in Europe.”
The political leadership of the $12 trillion economy also signed off on a 110 billion-euro ($140 billion) aid package for Greece negotiated by finance ministers last week. So far nine governments have cleared the way for funds to be sent to Athens.
Germany, the biggest contributor with as much as 22.4 billion euros over three years, fell in line with endorsements in the lower and upper houses of parliament on May 7. A group of German academics filed a lawsuit to try to halt the payout. Germany’s highest court yesterday rejected the challenge.
A day after whisking a three-year, 30 billion-euro program of deficit cuts through parliament, Greek Prime Minister George Papandreou ruled out further belt-tightening steps for the time being, saying the point of the summit was to reaffirm our confidence in our economies and our common currency and this I believe is a very important message for the global economic recovery.”