In approving a nearly $1 trillion rescue package, European leaders have buoyed markets and stopped the Greek debt crisis from spreading to other European Union members, at least in the very short term.
And that could be key to helping the European Union through its growing financial crisis.
Investors certainly were enthusiastic. Stock markets rebounded in dramatic fashion Monday, with major European stock indexes rising from 5.2 percent to 9.3 percent, Tokyo's Nikkei index climbing 1.6 percent, and the Dow Jones Industrial Average up 3.9 percent. All three major US indexes climbed into positive territory for the year after last week's selloff.
Why are markets so relieved?
The bailout package is huge: At $957 billion, it exceeds the $700 billion Troubled Asset Relief Program enacted by the US in 2008 that helped reassure markets that the government would stand behind big faltering banks. Besides loan guarantees from the EU, the package includes up to $250 billion from the International Monetary Fund and, for the first time, direct purchases of government debt by the EU's central bank.
Another key component is timing: While the backstop of loan guarantees and debt-purchases does nothing to solve the long-term debt problems of Greece and other highly indebted members of the EU, it does buy time for politicians to begin paring debt and for markets to adjust to the possibility that they won't be able to.
By delaying default, European leaders hope to avoid more surprises like Greece's acknowledgement early this year that its deficit was far worse than advertised.
"If you look at the worst contagion episodes, surprise is an important part," says Carmen Reinhart, an economist at the University of Maryland who has studied the history of sovereign defaults. The goal of government action "is reducing the chance that we have one of those meltdown scenarios."
Argentina's steep economic problems in 1999 rattled world markets, she points out. But by the time the nation actually defaulted on some of its external debt in 2002, markets had priced in that vulnerability.
If, as expected, the global economy has begun a slow recovery, the delay in defaults that the EU is trying engineer may also give highly indebted governments a little more breathing room to make the difficult budget cuts that lie ahead.