European Bailout Includes Loan Promise From U.S. Fed

The shock-and-awe bailout that European leaders banged out over the weekend has calmed panicky markets, at least for now.

It includes not only a huge pile of cash, but also intervention by Europe's central bank, along with a promise of loans from the U.S. Fed.

Here are the key details:

The EU will create a 500 billion euro loan fund. The IMF will kick in another 250 billion. The money — which is over and above the 110 billion euros already promised to Greece — won't be loaned out right away, but will be available for countries that run into trouble.

There's a bit of accounting gimmickry involved. But the bottom line is that, more than ever before, the better-off euro-zone nations are putting themselves on the hook for countries that are struggling. Germany alone could lend more than 120 billion euros through the fund, the WSJ notes.

The EU statement also said that Portugal and Spain — widely seen as the next in line for bailouts — have promised to make additional budget cuts this year and next, but didn't lay out specifics.

The European Central Bank said it will start buying government and corporate bonds.

Last week, people were comparing Greece to Lehman Brothers, suggesting that a Greek default could have ripple effects around Europe, similar to the effects that nearly crashed the financial system after Lehman went bust in '08. Those worries prompted lots of investors to sell bonds of EU nations perceived as weaker, as well as European banks and other companies that could be hurt by sovereign defaults.

In order to balance out its purchases of bonds, the ECB will sell other bonds it already owns.

In the U.S., the Federal Reserve said it's re-starting a program in which it lends dollars to the ECB, in exchange for euros. That, in turn, allows the ECB to lend dollars to European banks. Last week, European banks grew less willing to lend dollars to each other, part of broader worries about the European banking sector, Bloomberg notes.

During the financial crisis of '08 and '09, the Fed made $500 billion available to other central banks through this program, the WSJ says.

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