Having watched the Greek debt crisis rattle global investors European Union leaders, the International Monetary Fund and, crucially, the European Central Bank on Sunday unveiled a €720 billion ($936 Billion) emergency rescue package to help stabilize markets and prevent the break-up of the euro.
The deal includes funds totalling €500 billion from the EU and another €220 billion from the IMF.
The real news, though, is the ECB’s decision to agree to buy euro-zone government bonds to help support fractured markets, abandoning its resistance to full-scale asset purchases.
At the ECB meeting in Lisbon last Thursday the central bank said it had not even considered such measures.
In a statement the central bank said it took the “nuclear option” because it had been assured by governments that they would meet strict budget targets and step up consolidation efforts.
IMF boss Dominic Strauss-Kahn said the stabilization fund would be used on a country-by-country basis.
The ECB is refusing to put a number on how much it is willing to spend on government debt indicating the central bank has very deep pockets.
With the Federal Reserve reopening its currency swap lines with several central banks, EU Monetary Affairs Commissioner Olli Rehn had some credibility when he told a news conference that package of measures "proves we shall defend the euro whatever it takes." After a run on the debt of the PIIGS caused huge volatility across the world, the big question is whether this move overnight will draw a line under the European debt crisis.
Will it Work?
The rescue package is designed to ensure there is enough money and confidence in the global financial system to stave off a 2008-style credit crunch.
Hans Redeker, the global head of foreign exchange strategy at BNP Paribas in London, told CNBC that while the plan could offer some short-term relief for the euro this is a very desperate measure.
“There are inflationary risks from the ECB move that could hit euro once the relief rally has ebbed away,” Redeker said.
The plan, which was revealed as Asian markets opened after a weekend of talks, was 95 percent French and a complete turnaround from the position being championed by Angela Merkel, he said.
Talk of speculative attacks on the single currency by politicians is "nonsense," according to Redeker, who said the real problem has been other central banks cutting back on purchases of the euro and euro-denominated debt.
Investors should watch how other central banks react to the plan over the coming days, he said. BNP is predicting the euro will hit parity with the dollar within 12 months.
Hardly a ringing endorsement from BNP but will the "wolf pack," as the Swedish Finance Minister described those speculating against the euro and euro zone government debt, be at bay.
Mark O'Sullivan, a director at Currencies Direct, backs Redeker’s view that the plan will offer short-term relief and says the plan does nothing to resolve the key problem of productivity in southern European states which he believes need to rise by 20 to 25 percent.
O’Sullivan said he sees similarities with the collapse of Lehman Brothers in 2008 and believes the rescue package was needed after investors across the world decided to stop buying much of Europe’s debt.
This had led to the prospect of a liquidity crisis that had to be dealt with, according to O’Sullivan.
James Stewart, from the research team at North Square Blue Oak, told CNBC that after it became clear that the Greek crisis was seeping into the corporate debt market action was needed but something should have been done far earlier.
“There is a degree of reassurance after the ECB and Fed Swap action," Stewart said.
"At least for the short term more has been done that expected. Unfortunately this should have been done months ago. I am unsure whether the size of the package is big enough and question whether having delayed so long if this can now work.”