Markets surge on rescue pledges

US and European stocks rally as governments announce plans to shore up leading banks.

Traders on Wall Street were cheered by the stocks' rally at close of trading [AFP]
Traders on Wall Street were cheered by the stocks' rally at close of trading [AFP]

Ammar Sankari, a financial expert who works on the NYSE, told Al Jazeera: “The reason for the rally is that some investors see that stock has reached attractive levels and that now is the time to buy in.

“”It will move a little higher, but you won’t see it moving up to around 10,000 points for some time.

“We need to see practical moves and hear that banks are lending again.”

The UK’s FTSE 100 earlier index closed 4,257 points, or 8.26 per cent, higher, the German DAX was up 11.4 per cent at 5,062 and the French CAC 11.18 per cent higher, when trading ended on Monday.

‘Dead cat bounce’

But Al Jazeera’s correspondent John Terret said that the market rallies could be a “dead cat bounce” [referring to the fact that even a cat, when dead, will bounce if thrown hard enough].

The US later announced plans to buy stakes in a “broad array” of banks, Neel Kashkari, the official in charge of the country’s $700bn rescue package said.

“The equity purchase programme will be voluntary and designed with attractive terms to encourage participation from healthy institutions,” he told a meeting of the Institute of International Bankers in Washington.

The markets’ surge on both sides of the Atlantic followed co-ordinated moves over the weekend by European nations including the UK, France, Germany and Italy, to firm up banking systems at a cost of $1.7bn.

Britain’s government said it would invest up to $64bn (£37bn) of taxpayers’ money in three British banks hit hard by the global credit crisis.

Banks to benefit

The Royal Bank of Scotland (RBS), Halifax Bank of Scotland (HBOS) and Lloyds TSB are set to receive the government investment in order to boost their available capital.

Gordon Brown, the British prime minister, described the move as “unprecedented” but essential.

Europe’s rescue-package breakdown

Germany: Up to 400bn euros ($543bn) in guarantees for banks, up to 80bn euros ($109bn) to recapitalise banks and 20bn euros ($27bn) to back up the guarantees.

France: Up to 360bn euros ($489bn), including 320bn euros ($435bn) to guarantee bank refinancing and another 40bn euros ($54bn) for a government-backed agency to provide banks with extra capital.

Spain: Will guarantee up to 100bn euros ($136bn) in bank bond issuance this year after 30bn euros ($41bn) promised last week for bank capitalisation.

Austria: Up to 85bn euros ($115bn) in guarantees, and an additional 15bn euros ($20bn) in capital.

Netherlands: Will guarantee up to 200bn euros ($272bn) in inter-bank loans, on top of what it pledged for bank capitalisation last week.

Portugal: Announced on Sunday it would guarantee 20bn euros ($27bn) in inter-bank loans – nearly 12 per cent of annual economic output.

Britain: Announced on October 8, a 50bn-pound ($87bn)) plan to partly nationalise major banks and promised to guarantee a further 250bn pounds of bank loans. Up to 37bn pounds ($64bn)) to boost balance sheets at three of Britain’s largest banks unveiled on Monday.

Norway: Outside the euro zone and the EU, Norway plans to offer new government bonds worth 350bn kroner ($56bn)) to banks to help improve liquidity in the market.

“The government cannot just leave people on their own to be buffeted about,” he said.

Nicolas Sarkozy, the French president, said his government will make up to 320bn euros ($435bn) available for bank guarantees, to run until 2009.

“Nothing will be spared to prevent the crisis getting any worse,” he said.

Germany’s rescue plan proposes injecting 80bn euro ($109bn) into its banks and 400bn euros ($543bn) into loan guarantees, a finance ministry statement said.

Angela Merkel, the German chancellor, said: “We had, and still have, to deal with the excesses in the markets.

“It is the state’s job in a social-market economy to control this. The state is the guardian of order.

“With the first and second building blocks of a new financial markets’ constitution, we are clearly taking hard measures.”

Joes Luis Zapatero, Spain’s prime minister, said that the government would cover up to 100bn euros ($136bn) in inter-bank loans, but stopped short of announcing a recapitalisation scheme.

George Bush, the US president, said at the White House on Monday: “I welcome the bold and specific follow up actions by European nations.

“The United States is also acting, and we will continue to implement measures … to help banks gain access to capital, to strengthen the financial system and to unfreeze credit markets and restore confidence in the financial system.”

Markets ‘strangled’

James Henry, an economist, told Al Jazeera: “We finally have Europe achieving some consensus. The United States and Europe now seem to be in accord on injecting substantial amounts of equite into the banking system.

Gulf markets have risen after governments pledged to guarantee deposits [Reuters]

“There is still more work to do – however, it is the end of the beginning. Maybe the fever has broken.”

But Henry said that developing nations and homeowners were still facing problems.

He said that debt relief for mortgage holders was needed as well as tax breaks and the ability to withdraw funds for pensioners.

Marcus Cranny, an analyst from MF Global Spreads, told Al Jazeera that government intervention in European banks is a concerted effort to ensure their long-term health.

“Essentially [European leaders] are making sure that the banking system continues, and that lending continues,” he said.

“The most important aspect in all of this is that the banks will begin to lend to one another – [the lack of inter-bank lending] is what has been strangling the market. Once banks begin to lend to one another, we can then take a step forward.

“This is what we need to see the Americans replicate – to guarantee bank-to-bank lending. If that begins, the price at which banks borrow from one another will come down. That will make the system calmer and make it work much more fluidly.”

Gulf heat

Stock markets in oil-rich Gulf countries also rallied on Monday, after authorities in the region pledged to guarantee bank deposits for the next three years.

Dubai’s stock markets rose by 6.6 per cent, while Abu Dhabi’s increased by almost six per cent. Qatar’s stock exchange surged 7.4 per cent in early trading.

But in a sign of continuing instaibility, Iceland’s stock market remained closed, in the wake of the devastating credit crunch that has left the island on the verge of bankruptcy.

Source: Al Jazeera, News Agencies


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