TOPWRAP 5-European c.banks buy bonds-stocks, euro surge

* Deal includes 500 bln euros from euro area, 250 bln IMF

* Package echoes measures that followed Lehman Bros collapse

* ECB starts buying government debt, sets dollar swaps

* Euro up 3 pct, European shares, bonds surge; bunds fall

(updates with ECB buying bonds, European markets, Barroso)

By Julien Toyer and Ilona Wissenbach

BRUSSELS, May 10 (BestGrowthStock) – 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 (.FTEU3: ) 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. [ID:nLDE6490SQ] [ID:nLDE6490LY]

“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.
[ID:nLDE6490EN]
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Euro zone crisis in graphics: http://r.reuters.com/fyw72j
Rescue package and EU debt http://link.reuters.com/nam43k
Bank exposure to Greece,Portugal http://r.reuters.com/fac32k
For other stories on the euro zone crisis [EU/LOOK]
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CONCERTED ACTION

German Chancellor Angela Merkel, who for months resisted
pressure to aid Greece with a debt crisis that eventually sent
market tremors around the world, said the measures were
necessary to guarantee the future of the euro.

“This package serves to strengthen and protect our common
currency,” she told reporters in Berlin. “We are protecting
people’s money in Germany.” [ID:nBAT005434]

Merkel consented to the massive rescue plan after her
centre-right coalition lost a regional election on Sunday and
U.S. President Barack Obama and French President Nicolas Sarkozy
telephoned her to ensure Europe would take the necessary steps
to support the euro and keep global liquidity flowing.

A German government spokesman stressed the EU was not
turning into a “fiscal transfer union” and it was possible that
not all member states would take part in bilateral aid.

Britain, which is not in the euro and has a caretaker
government following an indecisive general election last week,
said it would not participate in the rescue or loan guarantees.

In concerted action, the U.S. Federal Reserve reopened
currency swap lines with several central banks to try to assure
markets of dollar liquidity and the European Central Bank said
it would buy government debt to steady investor nerves.

That decision, urgently sought by anxious European banks,
reversed a long-standing reluctance to use what many economists
call the “nuclear option” under market pressure.

Group of Seven and Group of 20 finance ministers offered
public backing of the measures.

However sceptics questioned whether the euro zone could hold
together over the long term and buttress a fragile currency
union with stronger political and fiscal instruments.

“By establishing a 750 billion euro fund to bailout Greece
and aid other struggling governments, Germany and other strong
European states are chasing a dream — a single European
currency and broader European unity — that may have no place in
reality,” said University of Maryland professor Peter Morici.

Former IMF chief economist Kenneth Rogoff told BBC radio
that weak euro zone economies such as Greece and possibly Spain
and Portugal would still have to restructure their debts to make
them sustainable, despite vehement official denials.

The emergency measures are worth much more than any previous
attempt by the 27-nation European Union or the 16-state
single-currency group to calm markets.

EU Monetary Affairs Commissioner Olli Rehn told a news
conference the package “proves we shall defend the euro whatever
it takes”.

They agreement was reached after the crisis over debt-laden
Greece drove sovereign debt yields and insurance on this debt to
record levels, which Sweden’s finance minister blamed on the
“wolfpack behaviours” of financial markets.

Economists said the move at least bought Europe some time to
calm bond markets but High Frequency Economics said in a
research note the package was “still too vague to understand”.

ECB TO BUY BONDS

The $1 trillion package consists of 440 billion euros in
guarantees from euro area states, plus 60 billion euros in a
European stabilisation fund that could be disbursed to help euro
zone states if needed on strict austerity conditions.

EU finance ministers said the International Monetary Fund
would contribute up to 250 billion euros, taking the total to
750 billion euros, or around $1 trillion.

IMF head Dominique Strauss-Kahn said any action by the
global lender would be on a country-by-country basis.

The ECB said its decision to buy bonds was justified by
governments’ agreement to greater fiscal discipline, abandoning
resistance to asset purchases just days after ECB President
Jean-Claude Trichet said the idea had not even been discussed.

The scope of the purchases was yet to be determined and they
would be offset by liquidity-absorbing operations so that the
stance of monetary policy is unaffected, the central bank said.

The ECB last year announced a 60 billion programme to buy
covered bonds but this would be its first move into buying
government debt.

Stock Research

($1=.7453 Euro)
(Additional reporting by Krista Hughes and Sven Egeter in
Basel, Jeremy Gaunt, William James in London, Marcin Grajewski
in Brussels, Sarah Marsh and Dave Graham in Berlin; Writing by
Paul Taylor and Paul Tait; Editing by Angus MacSwan)

TOPWRAP 5-European c.banks buy bonds-stocks, euro surge