Governments around the globe launched a multi-pronged attack on the finance crisis on Monday, with markets enjoying record one-day rises as Europe approved more than a trillion dollars in loans.
After a relentless downward spiral in the last few weeks, stock exchanges lapped up rescue packages unveiled throughout Europe and news that the United States is gearing up to buy stakes in banks as part of its own $700-billion bailout plan.
The package announced by Germany alone included €400-billion in loan guarantees and €80-billion in fresh capital, while France said it would guarantee up to €320-billion of lending between banks.
And in Washington, US President George Bush also vowed to pursue “responsible, decisive action to restore credit and stability and return to vigorous growth” as he met visiting Italian Prime Minister Silvio Berlusconi.
Stock markets, which had largely failed to rally after the US announced its bailout plan last month, soared amid the string of announcements, which included details from Britain on its part-nationalisation of several leading banks.
Meanwhile, Neel Kashkari, the US Treasury’s point man on the massive bailout, said Washington was ready to buy equity in a “broad array” of financial institutions in a further bid to restore confidence.
“As with the other programmes, the equity purchase programme will be voluntary and designed with attractive terms to encourage participation from healthy institutions,” he added.
Announcing details of the German package, Chancellor Angela Merkel said the measures being taken would only work if they were accompanied by improved international regulation that would end “market excesses”.
“Today’s [Monday] measures are the first element of a new financial market charter … but it can only be worthy of the name if it is followed by a second element, namely a change in international rules,” she said after her Cabinet approved the package.
French President Nicolas Sarkozy, who hosted a weekend summit for leaders of the 15-nation single currency eurozone, announced a €360-billion rescue plan to pump capital into banks and underwrite loans between them.
France would guarantee up to €320-billion of interbank loans taken out until December 2009, and set aside up to €40-billion to recapitalise French banks, Sarkozy said.
“Money is not circulating anymore. We have to create the conditions to get it moving again,” he said. “The greatest danger is not to take risks, it is to do nothing.”
In Spain, Prime Minister Jose Luis Rodriguez Zapatero announced that a maximum €100-billion would be set aside to cover similar loans, while Italy Finance Minister Giulio Tremonti said his government would spend “as much as necessary” to support the country’s banks.
Emergency summit
Leaders from the 15 eurozone nations agreed the outline of the measures at the emergency summit in Paris on Sunday.
In addition to setting up funds to buy into banks, the model foresees money being set aside to guarantee interbank lending and free up credit markets that have been left reeling by the US subprime mortgage crisis.
European stock markets, which last week plunged by more than a fifth in their worst period since the 1929 crash, enjoyed dramatic bounces.
The London FTSE 100 index of leading shares jumped 8,26% to close at 4 256,90, while in Paris the CAC 40 rose 11,18% — its largest ever one-day gain — to 3 531,50. The Frankfurt Dax soared 11,40% to 5 062,45.
US markets surged higher in late morning trade, with the Dow gaining more than 6%.
US economist Paul Krugman, who was awarded the Nobel Economics Prize on Monday, said he was “extremely terrified” by the crisis but his fears had been at least slightly allayed.
“I’m happier about it now than I was five days ago,” said the Princeton University professor and New York Times columnist, a fierce critic of Bush’s economic policy.
Asian stocks also posted heavy gains after a week of big losses, with Hong Kong up more than 10%. Tokyo, Asia’s largest stock market, was shut for a public holiday after slumping 24% last week.
Markets across the globe have been in a state of panic since the middle of last month when the venerable Wall Street investment bank, Lehman Brothers, filed for bankruptcy protection after the US government refused to bail it out.
Banks and other financial institutions across the world have been hit by bad debts stemming from the granting of so-called subprime loans to house-buyers in the United States who subsequently defaulted. — AFP