Shares and oil prices surge after EU loan deal

Frankfurt stock exchange

Global stock markets have soared after the European Union and International Monetary Fund intervened to stop the Greek debt crisis spreading.

Wall Street closed 4% up, after a 5% rise on the main UK and German stock markets, and a 9% surge in France.

The euro also saw initial gains against both the dollar and pound, but they were later erased.

On Sunday, the EU and IMF agreed a 750bn euro ($975bn; £650bn) loan-guarantee deal.

The size of the deal took markets by surprise.

Start Quote

If we are to take this package at face value, the rules of European Monetary Union have been fundamentally re-written”

End Quote Stephanie Flanders BBC economics editor

"This truly is overwhelming force, and should be more than sufficient to stabilise markets in the near term, prevent panic and contain the risk of contagion," said Mario Annunziata at UniCredit bank.

BBC economics editor Stephanie Flanders added: "If we are to take this package at face value, the rules of European Monetary Union have been fundamentally re-written."

The US Dow Jones index closed up 404 points at 10,785 in New York. In London, the FTSE 100 closed 264.4 points higher at 5,387, having reached 5,400 at one stage.

Banking stocks led the rally in Europe. In London, shares in Barclays jumped 16.2%, while those in Royal Bank of Scotland, Lloyds Banking Group and Standard Chartered climbed more than 10%.

Euro stability

In Paris, Societe Generale and Credit Agricole surged more than 20%, while in Frankfurt, Deutsche Bank and Commerzbank were up about 10%.

The risk premium on some eurozone government bonds also fell sharply, as did the price of insuring them against default.

For example, the interest rate on two-year Greek bonds fell immediately, from 18.1% to 4.9%.

The EU agreement also paved the way for the European Central Bank to start buying government debt, which helped to reduce bond yields.

Lingering doubts

Under the terms of the European loan-guarantee deal, the 16 members of the eurozone will have access to 440bn euros of loan guarantees and 60bn euros of emergency European Commission funding.

Start Quote

Default risk has been quashed and the market reaction has been euphoric”

End Quote Jane Foley Research director, Forex.com

In addition, the International Monetary Fund (IMF) will also contribute up to 250bn euros.

The deal is designed to stop Greece's debt crisis spreading to other European countries with high budget deficits, such as Portugal and Spain.

Concerns that other countries will be engulfed in the crisis have hit the euro and global shares in recent weeks.

"Default risk has been quashed and the market reaction has been euphoric," said Jane Foley, research director at Forex.com.

But the BBC's economics editor warned that there were still some important questions to be answered, especially about the special purpose vehicle being set up to oversee the 440bn euros being provided by eurozone countries.

She said: "We don't know much about how this special vehicle would work... But if there's any lesson of the past few months it is they[eurozone countries] need to sort it out, fast.

"Investors are going to have plenty of questions about how the vehicle would work."

There were also concerns among investors that the package does nothing to address the fundamental problems of high debt levels in many European countries.

Those doubts were reflected in a mixed day of trading for the euro.

The single currency initially reacted postively, rising sharply against both the dollar and pound.

But later trading saw those early gains slowly erase, with the euro trading at $1.2783, and a pound buying 1.1626 euros after the European markets closed - near to its starting point on Monday.

UK government

The pound is still being affected by uncertainty over which parties will form the next UK government.

Pound coins Worries about a weak government hit sterling last week

It fell by a cent against the dollar to $1.48650 immediately after Prime Minister Gordon Brown's announcement that talks had begun between the Liberal Democrats and Labour.

Last week's UK general election failed to give any party a clear majority.

The main concern is that a weak government will not be able to pass measures to reduce the UK's budget deficit quickly.

The pound fell sharply against the dollar on Thursday - the day of the general election - and Friday. It also fell heavily against the euro at the end of last week.

The price of oil jumped on news of the EU deal, and the Opec oil producers' cartel said there was a chance of prices rising even further.

US light, crude oil rose by $2.30 to $77.41 a barrel, while Brent crude climbed $2.58 to $81.50 a barrel, before falling back slightly.

"I think the market will look positively at this development," the Reuters news agency reported Opec Secretary-General Abdullah al-Badri as saying.

"I assume prices would go back to normal, where it was... back up to $80-plus."

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