The European Central Bank has unveiled its most ambitious plan yet to halt Europe's financial crisis with a pledge to buy unlimited amounts of the government bonds of countries struggling to manage their debts.
Large-scale purchases of short-term government bonds would drive up their price and push down their interest rate, or yield, making it less expensive for countries to borrow money.
The new plan goes well beyond the ECB's earlier, limited bond-purchase programme, which was not big enough to decisively lower borrowing costs.
After the ECB plan - dubbed Outright Monetary Transactions or OMT - was announced, the yields on government bonds across Europe fell and stock markets rallied.
"This is a potential game-changer," says Jacob Kirkegaard, research fellow at the Peterson Institute for International Economics. "This is the first time the ECB has committed its balance sheet in this way. And the way it is done is politically sustainable in Europe."
But the ECB's pledge of support came with a caveat: countries that want the central bank to help with their debts must first seek emergency aid from the bailout funds managed by the 17 countries that use the euro and submit their economic policies to the scrutiny of the International Monetary Fund. That puts enormous pressure on heavily indebted countries such as Spain and Italy, which have been reluctant to seek help from their euro partners.
Christine Lagarde, Managing Director of the IMF, welcomed the ECB plan and said the organisation stood "ready to co-operate".
Analysts warned that while the ECB plan would provide short-term relief to European countries and financial markets, it does not address underlying economic weakness across the region, which could persist for years.
Still, investors cheered the move. Spain's interest rate on three-year bond was down 0.17 percentage points to 3.73 % while its 10-year bond was down 0.3 percentage points on the day at 6.12%. Meanwhile Italy's 10-year rate was down 0.1 percentage points at 5.33% and its rate for three-year bonds was down 0.06 percentage points to 3.02%.
In Europe, Germany's DAX was up 2.7% at 7,153 while the CAC-40 in France surged 2.7% to 3,497. The FTSE 100 index of leading British shares was 1.6% higher at 5,750.
The possibility of ECB intervention impresses markets because, in theory, the central bank has unlimited funds at its disposal. As the issuer of the euro currency, it can simply create new money to buy the bonds from banks. The eurozone's bailout funds could buy bonds as well, but they have concrete limits on their finances set by governments that are putting up taxpayer money - and much of that is already committed anyway to bailouts for Greece, Ireland and Portugal.