Fighting the Financial Crisis Stocks Surge As EU Nations Unveil Bailout Packages
European stock markets soared on Monday as Germany, France and other euro zone countries presented their rescue plans to guarantee bank debt and inject capital into the financial sector. But some analysts warn the stock market volatility may not be over.
Like other European leaders, Germany's Angela Merkel is having to dig deep into her treasury coffers to make up to 500 billion available for her country's financial crisis rescue plan.
Stock markets across Europe soared on Monday as a wave of relief washed over trading floors following Sunday's pledges by European leaders to commit government funds in massive bailout packages.
The German government unveiled a 500 billion ($679 billion) rescue plan to shore up the banking system after Sunday's emergency summit of euro zones nations at which leaders agreed to guarantee new bank debt and inject capital to unfreeze money markets and restore confidence in the financial system.
The German Finance Ministry said Berlin's plan includes a 400 billion financial market stabilization fund to guarantee loans and 80 billion to recapitalize the banking sector through the government taking stakes in banks.
An additional sum of 20 billion is also being set aside as a provision to cover losses, according to a statement from the Finance Ministry.
"We're taking rigorous action to ensure that what we have experienced doesn't get repeated," Chancellor Angela Merkel told a news conference.
France and other euro zone countries announced similar bailout plans to halt the crisis which plunged world markets into turmoil last week.
European Stocks Up Six Percent
European shares leapt 7.87 percent by late afternoon, with banking stocks leading the gains.
"The hope in the markets is that political leaders have finally grasped the nettle with substantial and coherent rescue plans now being formulated and rolled into place," said Keith Bowman, Equity Analyst at Hargreaves Lansdown Stockbrokers in London, according to the Reuters news agency.
While some analysts said markets appeared to have bottomed out, others weren't so sure and pointed out that during the 1987 stock market crash, markets would stage brief recoveries before plumbing new depths.
German finance professor Wolfgang Gerke said investors shouldn't panic if stock markets continue to move erratically in the next few days, and that the government bailout packages would help overcome bottlenecks in the credit markets.
"We can now assume there will be no credit crunch," he said.
Economic growth would slow sharply in the wake of the crisis, said Gerke. "But we have often gone through such troughs -- we'll master this one as well," he said.
In a joint statement of euro zone on Sunday, leaders of the 15 nations had pledged to help or directly subscribe to debt-raising by banks for periods of up to five years. This should take the pressure off the blocked interbank money market and also off ailing bank balance sheets.
The European leaders broadly agreed to follow a plan launched by British Prime Minister Gordon Brown last week to buy up big stakes in troubled banks, and to guarantee interbank lending.
The Paris meeting was hastily arranged by French President Nicolas Sarkozy after a financial summit by the Group of Seven leading industrial nations in Washington that promised to do whatever was needed to unfreeze credit markets. Britain's Brown also attended the meeting, but was not involved in formal decision-making because his country has not adopted the euro currency.
In the last few weeks money markets have ground to a halt because banks have been refusing to lend each other money, and the system has been drip-fed by cash injections from the world's central banks.
Germany's Biggest Financial Rescue Package Since WWII
The German blue-chip index DAX surged more than five percent within minutes of opening on Monday, with banking stocks among the top performers, and other markets in Europe showed similar gains.
"Everyone is hoping that this step will help financial markets for more than a few minutes," one trader on the German stock exchange said. A coordinated interest rate cut by the world's leading central banks last Wednesday had failed to halt the stock market slide.
In Berlin, the German government abandoned its plan to balance the federal budget by 2011 as it finalized the details of the biggest financial rescue package since World War II.
The director of the International Monetary Fund, Dominique Strauss-Kahn, praised the decision of the Paris emergency summit to counter the crisis with a joint strategy to stabilize financial markets.
But American billionaire investor George Soros accused the governments of the United States and Europe of having reacted too slowly. He also said US Treasury Secretary Henry Paulson had stuck too rigidly to "market fundamentalist ideology" and should not have allowed the collapse of Lehman Brothers bank.
"That's what actually kind of unleashed the current phase of meltdown," he said.
Meanwhile the British government forged ahead with its widely praised rescue plan which inspired the pan-European agreement forged on Sunday.
Britain bailed out three major banks with £37 billion (47 billion) on Monday and attached a series of conditions to the bailout including a commitment by the banks to lend to homeowners and small business at 2007 levels, limits on executive pay, and a government say on new board appointments.
cro -- with wire reports