Markets rally on EU rescue plan

Markets were all about the European financial rescue plan on Monday. From Reuters:

A $1 trillion emergency package to stabilize the euro zone unleashed a spectacular rally in world stocks on Monday but the euro wiped out initial gains as worries about the region's debt problems persisted.

The rescue plan -- the biggest since G20 leaders threw money at the global economy following the collapse of Lehman Brothers in 2008 -- triggered the biggest one-day rise in European shares in 17 months after panic selling last week.

Wall Street also surged as confidence returned, at least temporarily. The Dow Jones Industrial average jumped 3.9 percent and the narrower Standard & Poor's financial share index was up 5.6 percent amid relief among banks.

Yields paid on Greece's 2-year notes plunged to 8.7 percent from Friday's close of 22.4 percent as the plan reassured investors about the country's ability to service debt in the short term...

The euro rose as much as 3 percent after weeks of draining confidence but erased nearly all of its gains later to trade at $1.278 per U.S. dollar, reflecting concerns about Europe's long-term debt problems...

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

EU finance ministers said the IMF would contribute up to 250 billion euros for a total of 750 billion, about $1 trillion.

An important part of the rescue plan came in the form of the ECB buying government bonds, an act not without controversy. From Bloomberg:

The central bank envisioned by the euro’s founding fathers is being eclipsed as the sovereign debt crisis forces it to help clean up the fiscal mess of governments...

The euro’s political leadership agreed to rescue countries that failed to control their deficits and a divided ECB backstopped it by purchasing government bonds after the Greek fiscal crisis sparked a selloff in Spanish and Portuguese debt...

[ECB President Jean-Claude Trichet’s] decision to sign up to a euro-region bailout mechanism may see him start his final year in office fighting suspicions that the German model of the independent central bank no longer applies. Just hours after the program was announced, Bundesbank President Axel Weber said buying bonds has “significant risks.”