EU Turns to 'Nuclear Option' to Halt Euro Speculation

May 10, 2010 — -- The European Union package to bailout Greece, passed just over a week ago, proved to be insufficient. So to ward off what many thought would be a black Monday on the global markets, European Union finance ministers worked late into the night on Sunday night before coming up with a €750 billion package to prop up the euro and forestall further speculative attacks against the currency.

On Monday morning, the emergency measure seemed to be having the desired effect, with the euro trading above $1.30 -- up from the 14-month low of $1.2523 it hit late last week. Asian and European stock markets were up and the difference between yields on Greek 10-year bonds and the German benchmark, which had skyrocketed to above 10 percentage points last week, was down to below five percentage points on Monday.

"The euro zone is certainly regaining confidence," European Commission President Jose Manuel Barroso said on Monday. "Our fundamentals are certainly good."

Still, with many of the details of the plan not yet widely known, a number of analysts remained unwilling to pronounce the end of the euro crisis. "It buys time. We don't know if it will be enough," Song Seng Wun, an economist with CIMB-GK Research in Singapore, told the Associated Press. "They're trying to give the impression that they're still united. They've bought some breathing space but that's all."

It could turn out to be expensive breathing space. The package is worth a total of €750 billion (close to $1 trillion), with €440 billion in guarantees coming from members of the euro zone and a further €60 billion coming from the European Union. The International Monetary Fund is expected to contribute €250 billion to the fund as well.

"The IMF will play its part, in the interests of the international community, in addressing the current challenges," said IMF head Dominique Strauss-Kahn.

In addition, the US Federal Reserve has agreed to reopen currency swap lines first established in 2008 to combat the global financial crisis. The plan supplies European central banks with dollars and is intended to ease fears of a dollar shortage as investors get rid of risky assets and move back toward the US dollar.

Of potentially greater significance, however, was the European Central Bank decision to begin buying government bonds issued by euro zone members, abandoning long-held resistance to such a move. The move, dubbed the "nuclear option" by some analysts, is aimed at helping out troubled states should they run into problems refinancing their debts.

Spain and Portugal, the two countries which, in addition to Greece, were seen as the most likely next victims of eroding investor confidence, have agreed to push through additional austerity packages and will be presenting them to European Union finance ministers next week.