European leaders, pressured by sliding markets and doubts over their ability to act in unison, agreed on Sunday to provide a huge rescue package of nearly one trillion dollars in a sweeping effort to regain lost credibility with investors.
After more than 10 hours of talks, finance ministers from the European Union agreed on a deal that would provide $560 billion in new loans and $76 billion under an existing lending program. Elena Salgado, the Spanish finance minister, who announced the deal, also said the International Monetary Fund was prepared to give up to $321 billion separately.
Officials are hoping the size of the program – a total of $957 billion – will signal a “shock and awe” commitment that will be viewed in the same vein as the $700 billion package the United States government provided to help its own ailing financial institutions in 2008.
The leaders were making yet another attempt to stem a debt crisis that has engulfed Europe and global markets. Underscoring the urgency, President Obama spoke to the German chancellor, Angela Merkel, and the French president, Nicolas Sarkozy, on Sunday about the need for decisive action to restore investor confidence.
New political complications in two of Europe’s most important countries added to the challenge. In Germany, voter anger at the effort to save Greece cost Ms. Merkel an important regional election Sunday, undermining her leadership , and in Britain, the government remained in a state of suspended animation because of the inconclusive Parliamentary elections last week.
The package comes at a time of mounting financial unease. Riots in Greece, ever-tightening terms of credit and the unexplained free fall in the American stock market last Thursday have compounded the sense that the European Union’s inability to address its sovereign debt crisis might lead to the type of systemic collapse that followed the fall of Lehman Brothers.
What appeared to be emerging from the discussions represented a partial retreat from a system discussed earlier in the day that would have radically expanded the powers of the European Commission to raise funds.
Instead, the diplomats said, the ministers were discussing an alternative — a system that would speed up the pace at which states that use the euro currency could lend to one another, but on a bilateral and voluntary basis. The diplomats spoke on condition of anonymity because the discussions were ongoing.
The diplomats said that the I.M.F. would be expected to play some role in an overall aid package. But they said the fund’s contribution probably would remain separate to the loan guarantees offered by euro-area member states and loans managed by the European Commission.
An I.M.F. contribution of 220 billion euros would bring the total of new loan guarantees to 720 billion euros, or more than $900 billion.
While the sums being discussed are eye-catching, some bankers questioned whether they would be enough to calm the markets. One banker said that with more and more European economies coping with rising deficits that raising, guaranteeing or backing such a large number would not be an easy task — unless the European Central Bank stepped in a more forceful and specific manner. The bank has so far rebuffed calls to inject liquidity into the markets by buying back European bonds.
There were many complications in trying to forge a consensus on a new package. They included defining the role of Britain, which lies outside the euro zone and had said it would not help in propping up the euro, as well as the European Central Bank. The fractiousness underscores the frailty of a monetary union in which its richest member, Germany, is also the most opposed to a financial rescue.
“The fact that they are worried is clear,” said David Marsh, the author of the Euro, a book on the history of monetary union. “But I don’t think that there is enough commitment or economic firepower in Germany to provide the massive loan guarantees to satisfy the markets.”
Predictably, politicians blamed speculators for the market upheaval. The Swedish finance minister, Anders Borg, said immediate action was needed to tackle “herd behaviors in the markets that are really pack behaviors, wolf pack behaviors.” Mr. Borg warned that volatility in markets could “tear the weaker countries apart.”
Since it became clear that Greece would not be able to meet its financial obligations and fears spread that other indebted nations like Spain, Portugal and Ireland would have similar troubles, Europe, hampered by Germany’s opposition to a bail out, has responded with measures that have been seen as too little too late.
Even now, despite the lashing rhetoric and the Sunday night pan European meeting, there is still a feeling that Europe should be doing more — notably with regard to freeing the European Central Bank to go against its charter and print money by buying back distressed European bonds from the secondary market.
Sunday’s meetings represented an extraordinary convergence of diplomatic activity, crammed into a tight time frame. Political leaders including President Nicolas Sarkozy of France said early Saturday morning, at the end of an earlier summit meeting, that a loan mechanism intended to restore confidence should be ready by Monday morning. That effectively left the European Commission and finance ministers a single weekend to change the way the European Union operates its finances.
Ms. Merkel of Germany attended a victory parade on Red Square in Moscow on Sunday, a sign of how seriously Germans consider reconciliation with Russia. Mr. Sarkozy and the Italian prime minister, Silvio Berlusconi, opted not to attend, regarding the financial crisis as more urgent.
Mr. Sarkozy held a strategy meeting with key ministers on Sunday.
“At stake is the euro and the euro zone,” a French official said. “We need to give a clear signal to markets.” He declined to be identified because talks among the finance ministers were continuing.As a larger European rescue was being debated, the International Monetary Fund’s executive board took the expected step of approving the fund’s $38 billion loan to Greece. And as officials said that the loan would take care of Greece’s financing needs through 2012 they acknowledged that market turmoil had persisted in spite of the Greece plan.
“It’s clear from the developments of the past few days that there is broader stress in the financial markets beyond Greece,” said John P. Lipsky, the fund’s first deputy managing director.
In response to questions about aiding other troubled economies in Europe, Mr. Lipsky emphasized, “There are no program negotiations at this time with either Portugal or Spain.” NYT
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