EUROPEAN stock markets rose strongly yesterday - boosted by a strong opening on Wall Street and earlier gains in Asia - thanks to hopes that widespread government efforts to shore up the world's battered financial system will break the logjam in credit markets.
Markets have responded positively to a raft of measures announced in Europe yesterday and United States plans to join Britain and other countries in buying ownership stakes in troubled banks to get lending markets restarted and help keep the wider economy moving.
Wall Street snapped back from last week's devastating losses. All the major indexes rose well over 6 percent, and the Dow Jones industrials gained nearly 600 points.
The Dow pushed Europe's markets. At the close, Germany's DAX was 518.14 points, or 11.4 percent, higher at 5,062.45, while France's CAC-40 was up 355.01 points, or 11.2 percent, at 3,531.50.
Britain's FTSE 100 was 324.84 points, or 8.3 percent, higher at 4,256.90, despite some hefty falls in the banks that have accepted government help. The strong showing follows sharp falls in stock indexes worldwide last week, and as interbank interest rates remain abnormally high.
"The events in the financial markets last week were cataclysmic and prompted the unprecedented action by governments," said Neil Mackinnon, chief economist at ECU Group. "The markets have responded positively but there is still a risk of a one-day wonder and tomorrow we'll come down to earth with a bump."
The latest coordinated move emerged before European trading began when top central banks, including the US Federal Reserve and the European Central Bank, unveiled new measures to thaw frozen credit markets and bolster funding to banks. They joined the Bank of England and the Swiss National Bank in saying they would provide unlimited US-dollar funds to financial institutions. The Bank of Japan said it was considering similar measures.
The central banks' action came after leaders of the 15 countries using the euro said on Sunday they would guarantee new bank debt until the end of 2009, allow governments to help banks by buying preferred shares, and vowed to rescue important failing banks through emergency recapitalization.
The German government has since put together a rescue package worth as much as 500 billion euros (US$671 billion) to shore up the country's financial system, while France will provide up to 360 billion euros to help banks stay afloat through the financial crisis.
In Britain, which doesn't use the euro, the government confirmed yesterday that it was injecting 37 billion pounds (US$63 billion) into three leading banks - Royal Bank of Scotland, Lloyds TSB and HBOS - in return for equity stakes. Taxpayers will own about 60 percent of RBS and 40 percent of the merged Lloyds TSB and HBOS. The merger was renegotiated yesterday too, so the amount of Lloyds TSB shares that HBOS shareholders will receive will be lower.
The key is whether moves can ease conditions in the credit markets. Despite the coordinated interest-rate reductions announced last Wednesday, and massive liquidity boosts, the rates at which banks lend to each other continued to rise.
The London interbank offered rate, or Libor, for three-month dollar loans fell 0.07 percent to 4.75 percent, while the similar rate in euros, or Euribor, dipped only 0.063 to 5.318 percent. The rate remains well above the euro zone's benchmark rate of 3.75 percent set by the ECB, meaning the credit freeze is far from over. Usually Euribor is much closer to the ECB rate.
In the US, the Bush administration said yesterday it was moving quickly to implement its US$700-billion rescue program, including consulting with private law firms on how to buy ownership shares in banks. The actions by Europe and the US are having a positive impact all around the world, with Brazil's Ibovespa stock index up 7.7 percent just after opening.
Earlier Asian markets set the tone for the day with Hong Kong's Hang Seng Index, which tumbled more than 7 percent last Friday, soaring 1,515.29 points, or 10.24 percent, to finish at 16,312.16. Australian and Singapore indices jumped more than 5 percent, while South Korean and Chinese mainland benchmarks added about 3.7 percent.
Elsewhere in Asia, Indonesia's key index, down sharply in early trade, gained 0.9 percent after the lifting of a trading suspension, imposed last Wednesday amid a freefall in share prices. The upswing followed government measures to free up liquidity.
In Japan, where the Nikkei 225 dropped nearly 10 percent last Friday to end its worst week on record, trading was closed for a public holiday.
Oil prices rose, with light, sweet crude for November delivery up US$2.87 at US$80.57.
The euro was steady above US$1.36, having rallied strongly during the day, while the US dollar recovered back above 100 yen.