Germany, France and other European countries have unveiled bail-out plans to recapitalise their banks and reopen credit markets, following the British announcement of measures to nationalise parts of the UK banking system.
The world’s stock markets soared as details emerged of the co-ordinated European campaign to spend more than £1,430bn (€1,812bn, $2,420bn) on bailing out the continent’s troubled banks.
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Turmoil brings out best in Europe - Oct-13Lex: Brownian Motion in Europe - Oct-13Treasury outlines Tarp details - Oct-13In depth: Global financial crisis - Oct-13French brawn and UK brains lead way - Oct-13Europe acts to rescue banks - Oct-13London’s FTSE 100 closed up 8.3 per cent, its second biggest one-day gain on record, after the British government announced its plans to inject £37bn into three of the country’s biggest banks.
Other European stock markets followed suit as Germany, France and the Netherlands announced their plans, Italy’s cabinet passed a new decree offering more support to the financial sector, and the Spanish government approved a guarantee for issues of new bank debt. Frankfurt’s Xetra Dax closed up 11.4 per cent, while the CAC 40 in Paris rose 11.2 per cent.
Europe’s central banks promised unlimited dollar funding in co-ordinated action with the US Federal Reserve. The European Central Bank, Bank of England and Swiss National Bank said they were ready to inject as much as needed into the markets for dollar funding covering periods of seven days, a month and 84 days.
Confidence in the money markets showed signs of returning as the interbank cost of borrowing in sterling, euros and dollars fell. Three-month euro Libor posted its biggest decline this year and three-month dollar Libor had its steepest fall since March.
US stocks rallied when Wall Street opened, as details began to emerge of the plan to recapitalise US banks and other financial institutions. Neel Kashkari, the Treasury assistant secretary appointed by Hank Paulson, Treasury secretary, to run the US government’s $700bn bail-out fund, said the scheme would be “voluntary” in his first public statements since his appointment.
“The equity purchase programme will be voluntary and designed with attractive terms to encourage participation from healthy institutions.”
Mr Kashkari said Ben Bernanke, Federal Reserve chairman, would lead the oversight board for the troubled asset relief programme. That panel, which met for the first time last week, also includes Mr Paulson and the heads of the Securities and Exchange Commission, the Federal Housing Finance Agency and the Department of Housing and Urban Development.
In other moves, Australia and New Zealand announced guarantees for all bank deposits, as did the United Arab Emirates, while Saudi Arabia cut its interest rates.
The Swedish government said on Monday it would unveil steps to safeguard their financial sector in the next few days, but did not plan to inject capital into the Nordic country’s banks. Norway announced at the weekend it would offer its commercial banks up to $55.4bn in government bonds in exchange for mortgage debt and Portugal said it would make as much as €20bn available in guarantees for its banks’ financing.
Gordon Brown, the UK prime minister, defended his government’s “unprecedented but essential” £37bn injection that could leave it owning a majority stake in Royal Bank of Scotland, one of the world’s biggest banks, and more than 40 per cent of the combined Lloyds TSB and HBOS, which is set to be the country’s largest mortgage lender.
The German government endorsed measures closely modelled on the British rescue plan unveiled last week, will initially empower the finance ministry provide as much as €500bn in loan guarantees and capital to bolster the banking system.
The French government pledged €360bn to the country’s banks, including €320bn of loan guarantees and €40bn to buy stakes in French banks. The guarantees will run through to the end of 2009.
Dutch banks will be able to draw on €200bn of government guarantees for their loans to each other.
