European Central Bank (ECB) president Mario Draghi has unveiled a long-awaited programme to buy up bonds and help bring down the borrowing costs of Europe's struggling governments.
The plan envisions no set limit on the amount of bonds the ECB could buy, making the programme "a fully effective backstop" against a further worsening of the debt crisis in the 17 countries that use the euro.
The initiative, dubbed Outright Market Transactions, or OMT, goes beyond an earlier, limited bond-purchase programme that was not big enough to decisively lower borrowing costs.
Draghi emphasised that the new, unlimited programme by contrast was open-ended and had "no quantitative limits." He said it would work because it was "very very different from any programme we have had in the past. " The new programme would continue until its goal of lower borrowing costs is achieved, or a government violates the conditions attached to getting the help.
The ECB's actions came in response to a contraction in the Eurozone economy this year.
The ECB expects the Eurozone to shrink by 0.4 per cent in 2012 and grow by 0.5 per cent in 2013.
World markets remained buoyant Thursday as investors cheered the ECB's package of measures.
The euro, meanwhile, was flat at US$1.2593.
"The ECB did not disappoint in its decision to start a vast bond-purchase programme," said Marie Dimon, senior economic adviser at Ernst & Young
Bond purchases push bond prices up and interest yields down, since price and yield move in opposite directions.
Governments can then take advantage of the lower yields when they borrow. Countries must constantly borrow by selling new bonds to pay off old ones that are coming due.
If rates rise too much, it can make it impossible for the country to maintain its debt burden. That's what forced Greece, Ireland and Portugal to seek bailout loans from other Eurozone countries.
Spain and Italy are in the same difficulty now, with Spain paying more than six per cent on 10-year borrowing and Italy more than five per cent.
The fear is that they are too large to bail out, and that a failure to pay their debts could trigger financial turmoil that could break the Eurozone apart and disrupt the global economy.
Following Thursday's announcement, Spain's interest rate on its 10-year bond was down 0.3 per cent on the day at 6.09 per cent, while Italy's 10-year rate was down 0.18 per cent at 5.25 per cent.
A key feature of the OMT is that countries that want the ECB to buy their bonds must first officially ask for help from Europe's bailout funds and agree to "strict and effective" budget policy conditions.
That is to ensure they won't relax their efforts to reduce deficits once the bond purchases take the financial pressure off them.
The ECB said the International Monetary Fund - which has long experience pushing governments to stick with loan conditions - should be involved in enforcing conditions.
The ECB is prohibited from buying bonds directly from governments.
Some analysts believed the OMT programme unveiled Thursday would not solve the underlying problems in the Eurozone, however.
"Without trying to be a 'party pooper'," said Neil MacKinnon, global macro strategist at VTB Capital, "suppressed borrowing costs certainly provide relief in the short term, but do not resolve problems of solvency and debt unsustainability."
European stock markets jumped in response to Draghi's announcement. Germany's DAX gained and France's CAC-40 each rose 2.7 per cent.
The Standard & Poor's 500 index rose 24 points to 1,427 at mid-morning in New York. If the index closes above 1,419, it would be the highest close since May 2008.
The Dow Jones industrial average surged 225 points to 13,272. The Dow is now within striking distance of its closing high for the year: 13,279, reached May 1.
The Nasdaq composite jumped 53 points to 3,122.
Traders dropped US Treasury bonds, considered one of the world's safest places to stash money, and the drop in demand lifted yields. The yield on the 10-year Treasury rose to 1.66 per cent, up from 1.60 per cent late Wednesday.