Markets surge as EU and IMF agree €750bn loan

With a single goal in mind - to head-off a pending rout when the markets opened this morning - negotiators behind a Lib Dem-Conservative pact sought last night to reassure investors they were close to an agreement to form a government and cut Britain's runaway debt.

At the same time, European central bankers and the IMF announced a new €750 billion loan package to stop the spread of the Greek debt crisis. Europeans leaders described the measure as a "shock and awe" response.

European markets reflected a positive reaction to the deal, with the FTSE-100 and Germany's DAX index rising 3.5 per cent in early trading. The euro bounced back from its recent lows to surge above $1.30. The pound also surged to $1.49, but fell to €1.14 against the euro.

While details of the UK political deal are vague - William Hague, the head of the Tory team, told the Daily Telegraph that the basis of their power-sharing deal would be rooted in economic agreement - the ECB/IMF aid package is proof that European political and economic interests are now allied in their determination to stop the decline of the euro and the credit-worthiness of debt-plagued European states.

Under pressure from the US and Asia to stabilise markets, the European governments gambled that the show of financial force would prevent a sovereign debt crisis and calm speculation that the 11-year-old euro might ultimately break apart if economic pragmatism overwhelms political will to maintain the union.

The ECB will also embark on "very significant operations", European Union Economic and Monetary Commissioner Olli Rehn told reporters in Brussels after the 11-hour meeting.

The loan package will make €440bn available from European governments, with €60bn more from the EU's budget and an additional €250bn from the IMF.

While the US has restarted a currency-swap programme to provide currency to European central banks, American investors are divided over the direction of the market after last week's turmoil - a buying opportunity or harbinger of a new bear market?

"I think there are ample warning signals here that this should be treated as more than a seasonal decline and should be seriously considered as possibly more than an overdue bull market correction," Walter Zimmermann, senior technical analyst at United-ICAP, tells the Wall Street Journal.

And analysts are quick to warn that the US itself is hardly immune to the budget deficit crises and sovereign debt woes now coursing through Europe. ·