13 Oct 2008

Markets rally as countries move to bail out banks

10:08 pm on 13 October 2008

Governments across the world moved on Monday to shore up confidence in the global banking system with a slew of bank bailouts worth hundreds of billions of dollars.

Stocks markets reacted positively, with European shares opening up more than 5% in early trading, following solid gains in Asia and the Pacific.

The British government announced it would inject up to Stg37 billion of new capital into major banks Royal Bank of Scotland (RBS), Lloyds TSB and HBOS.

The announcement means taxpayers will end up owning about 60% of RBS and about 40% of the merged Lloyds TSB and HBOS.

The British banks will try to sell shares to existing investors, but the government will buy any shares not taken up.

Barclays has announced plans to raise Stg6.5 billion without government help.

European central banks said they would lend out as much US dollar liquidity as commercial banks need for in a further joint bid to tame money market tensions.

In a joint announcement with the US Federal Reserve, the European Central Bank, the Bank of England and the Swiss National Bank said they would meet all bids from commercial banks at a fixed interest rate.

The New Zealand Government said it would guarantee all deposits for two years in banks, credit unions and finance companies that opt into the scheme. A similar guarantee in Australia would last for three years.

Meanwhile, Indonesia upped its guarantee to 2 billion rupiah ($US203,000) while India pledged more liquidity to help financial markets.

The moves followed a weekend of crisis talks in the United States and Europe in which governments pledged to support the financial system, which has moved to the brink of collapse as it suffers from both steep losses in the credit market and a lack of trust in lending that has frozen the flow of capital.

The US government said it was working on ways to buy stakes in struggling banks - an about face for a country that has prided itself on its free markets and lack of state intervention.

Markets rally

As trading began again on Monday following the worst weekly losses ever on many exchanges, markets took some comfort from the global scramble to protect the world's banks.

The pan-European FTSEurofirst was up 4.6%, while Asian shares outside of Japan were up 5%. The Nikkei in Tokyo, which lost 24% of its value last week, was closed for a public holiday on Monday.

In Australia, the benchmark index rose more than 5% by the close as investors gained confidence from the government's emergency plan to protect the nation's banking system.

However, New Zealand's market was down almost 1% at the close of trade.

Eurozone plan

A European plan was confirmed after a Paris summit of the 15 eurozone leaders on Sunday, at the end of a weekend of crisis talks between finance ministers of the main economic nations - the G7 - and the International Monetary Fund.

Under the eurozone plan, members pledged to guarantee loans between banks until the end of 2009 and said they would put money into them by buying preference shares.

French President Nicolas Sarkozy - whose country currently holds the rotating presidency of the EU - said the group was taking unprecedented steps.

Governments in Germany, France, Italy and elsewhere are due to present their individual plans on Monday, within the agreed eurozone framework, Mr Sarkozy said.

Poor at risk, says World Bank

The head of the World Bank, Robert Zoellick, warned that the global crisis could hit developing countries even harder.

"The poorest and most vulnerable groups risk the most serious - and in some cases permanent - damage," he said.

The World Bank has agreed to help developing countries strengthen their economies and bolster their financial systems.

Developing countries are watching the unfolding financial crisis with a deep sense of unease, which is shared by Mr Zoellick.

He says 100 million people have already been driven into poverty this year, and that number will grow and aid flows must be maintained. Some developing country officials are concerned the crisis will lead to aid cuts.

The International Monetary Fund, which has $US250 billion available to lend, says there has been an incredible increase in the number of countries asking for help in the past two weeks, the BBC reports.