Reuters | Mon May 10, 2010 | 3:49pm IST

European central banks began buying euro zone government bonds under a $1 trillion global emergency rescue package agreed on Monday, sending the euro and European stocks and bonds surging on relieved markets. The "shock and awe" plan — the biggest since G20 leaders threw money at the global economy following the collapse of Lehman Brothers in 2008 — triggered a global stock market rally after panic selling last week. But it left 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 hammered out by EU finance ministers, central bankers and the IMF in marathon weekend negotiations.

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 surprised financial analysts by its sheer scale. The euro rose by more than 3 percent to above $1.30 and the FTSEurofirst 300 index of top European shares surged by 5.6 percent by 0900 GMT, after falling 8.9 percent last week to a seven-month low on Friday. "The euro zone is certainly regaining confidence," European Commission President Jose Manuel Barroso told reporters, hours after an 11-hour meeting of EU finance ministers ended in the early hours of Monday as Asian markets opened. Risk premiums on peripheral euro zone sovereign bonds plummeted, as did the price of insuring them against default on the volatile credit default swap market, while German bund futures tumbled by a two full percentage points as investors sold safe-haven debt. "The EU has taken a decisive action to stamp out the speculative attack against the euro and this should be sufficient to bring some calm into the market," said Klaus Wiener, head of research at Generali Investments.       

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