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Stock markets soared yesterday after governments committed trillions of dollars in an unprecedented attempt to prevent the collapse of the international financial system.
World shares made their biggest one-day advance for 19 years as countries across four continents detailed the extraordinary lengths to which they will go to bail out stricken banks.
France, Spain, Italy, Germany, Austria, Finland, Sweden, Australia, New Zealand, Indonesia, India, South Korea, Japan and Qatar all took measures to guarantee deposits or improve bank liquidity.
In America Hank Paulson, the Treasury Secretary, moved to implement British-style plans for the Administration to take a stake in ailing US banks. President Bush is expected to unveil firm plans today to use $250 billion of taxpayer funds to seize stakes in nine of America’s biggest banks as part of a move to stabilise the country’s banking system.
The co-ordinated international moves sparked the biggest single-day rally since the rebound after the Black Monday crash of October 1987. On Wall Street, the Dow Jones rose 936 points, or 11 per cent, its biggest one-day point gain and the biggest percentage rise since 1933. In London, the FTSE 100 closed up more than 8 per cent, its second-biggest daily percentage rise.
European markets also surged on relief, with the CAC 40 in Paris jumping 11 per cent, along with the Dax 30 in Frankfurt, which also rose 11 per cent. The groundswell of optimism had started overnight in the Far East, where the Hang Seng index in Hong Kong shot up by 10 per cent.
After meeting Silvio Berlusconi, the Italian Prime Minister, President Bush said: “These are tough times for our economies, yet we can be confident that we can work our way through these challenges and America will continue to work closely with the other nations to co-ordinate our response to this global financial crisis.”
It was the first day that traders could react to news that the UK Treasury had taken unprecedented steps to stabilise the British banking system by assuming a majority stake in Royal Bank of Scotland, while committing an overall £37 billion to it, HBOS and Lloyds TSB.
A few hours later, France, Germany, Spain, the Netherlands and Austria committed $1.8 trillion (£1,000 billion) to guarantee bank loans and take stakes in lenders to try to halt the meltdown of the financial infrastructure.
The US Federal Reserve, the European Central Bank, the Bank of England and the Swiss National Bank also said that they would lend commercial banks unlimited dollar liquidity funds to ease clogged interbank lending rates.
Paul Krugman, of Princeton University, who won the Nobel Prize for Economics yesterday, said: “I’m slightly less terrified today than I was on Friday. We’re going to have a recession and perhaps a prolonged one, but perhaps not a collapse.”
In Britain, the banking crisis claimed its most senior victims after Gordon Brown outlined how he was using £37 billion of taxpayers’ money to nationalise the Royal Bank of Scotland (RBS), HBOS and Lloyds TSB. Despite the rescue package, shares in the three banks fell sharply.
Four top bankers announced that they would quit. Three of them — Sir Fred Goodwin, chief executive of RBS, Andy Hornby, the HBOS chief, and Lord Stevenson of Coddenham, the HBOS chairman — will between them forgo bonuses of £3 million.
Mr Brown’s announcement means that the Government will became the country’s biggest mortgage provider. The Treasury now controls 45 per cent of the mortgage market, sparking concerns it might try to manipulate the housing market for political advantage.
The Prime Minister said that the newly nationalised banks had agreed to restore lending to 2007 levels. The claim set alarm bells ringing that banks were being directed to return to the record lending levels before the credit crunch began to bite. The Council of Mortgage Lenders said that such a move would be reckless.
Alistair Darling, the Chancellor, said later that there was no question of ministers telling banks how much to lend. “We do not want a return to the irresponsible problems and difficulties that we have had in the past,” he said. But the reference to 2007 lending levels raised concerns. Vince Cable, Lib Dem Treasury spokesman, said there would be a temptation for the Government to pump credit into the housing market, which would be a “disastrous misuse of taxpayers’ money.”
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The market should have been left to go into meltdown and punished those who had lent and borrowed beyond what they could afford. There is no law that asset values have to rise and injecting liquidity will only encourage further bad fiscal habits. What a shambles.
Neil Johnson, Singapore, Singapore
Credit has been one of the engines of growth the world economy of 100 years.. live within means Udo.. what are you on about 2-7% of the pop had over leveraged loans....the bankers and the ratings agencies lost the plot. Then there was a systemic contraction... nothing about means better analysis.
Francis, London,
Things do look a lot better today. However, one swallow does not make a summer.
Let us have some sensible rules from now on. If you want to purchase an item on H.P. you must put a deposit of 33%.
If you wish to purchase a house, you must put a deposit of 25%. Maximum loan 3.5 x salary.
Barbara, Hereford, U.K.
I just find it difficult to believe that, while the country is facing record levels of debt and penury, GB is smiling, laughing and "cracking jokes"!
Statesmanlike?
Hardly!
Let us not forget however, that GB now has more control over the country than TB ever did.
Martyn taylor, Swindon, England (wot's left of it!)
James, London, 'accuses' investors of buying when they feel they can make a gain and selling when they think they won't. Um, OK James.... How exactly did you think investing worked? I pity the performance of your portfolio, if you only buy when a crash is guaranteed to follow!
johnny, london,
Niall Orr, well done some sense at last. As a PM I do not like Brown BUT how in heavens name can you blame Brown for a plan devised in the USA and sold to stupid bankers around the world? This hate Brown no matter what is just plain stupid and shows a lack of understanding of the situation.
Lloyd, London,
Dead cat and dead rat. RBS are not allowed to pay dividends until the money the govt put in the preference shares has been paid back. That'll put current and, maybe more importantly, potential future shareholders off buying their shares. How that helps the markets I don't know.
Karen, Bristol,
R. of London suggest banning shorting altogether - Short sellers led the market down, they are getting punishment enough as they are forced to buy back in this huge rise. This is the market's own and effective form of regulation.
Jean, Brussels, Belgium
Brown's global posturing doesn't disguise the fact that 10 years of his economic stewardship have left us with a wartime level of national debt. As a result the £ is tanking, and despite the massive fall-back in the price of oil and other commodities, our petrol, food and power costs will stay high
Martin, London,
Iceland denied turning to the IMF with regards to a loan; Barclays denies it needs the subsidizing money the govt offers and so on and so forth. Everyone denies having asked for help. Things are still very fragile I take it.
Karen, Bristol,
It is nonsense to suggest returning to last year's lending levels will return us to the same bubble that has just burst.
We are about to enter a long period where people will not trust the financial system to anything like the same extent they did. Confidence has collapsed.
tony, sheffield, UK
Andy of Doncaster, best hope it is not a dead cat bounce, as nearly everyone has a stake in the cat, directly or indirectly. For once I think GB is doing the right thing, but more can be done, like banning shorting altogether as shorters are probably going to target commodities companies next.
R, London,
Anthony in birmingham,
better to spend taxpayers money on stablising our fragile economy than letting our entire financial sector collapse. Furthermore, this problem clearly goes way beyond any single party or country.. stop using this as an excuse to blame labor all the time.
jack, Lincoln,
Is this a dead kangaroo bounce rather than a dead cat bounce?
Nathan, Sydney, Australia
Gordon Brown is striving to restore confidence back in to the UK economy - and is doing a good job considering. People need to get behind him rather than blaming him - it's not his fault, it's a global crisis! Is there a better alternative plan or Prime Minister to revive the financial system?
Niall Orr, Sydney, Australia
Bruce, they've been throwing nothing but the kictchen sink for the past 100 years; hence the escalation amounting to throwing the entire bathroom range at John Lewis in their general direction.
Alex, London,
They thought the dead cat bounced in 1929 too. Nothing will change until we all learn to live within the means of this planet and the people on it
Udo, Melbourne, Australia
oh well, the old systems play themselves out. greed and selfishness get rewarded, the rich get off. i hope next time i go into overdraft the government capitalises my account. investors are the biggest cowards, they run when there are problems and now come running back when its a bit safer; pathetic
James, London, UK
So now they've thrown the kitchen sink at the markets: what's in reserve when the next shock come along (as it most assuredly will.)
Bruce Robertson, Brighton, UK
If GB believes that it is OK to try and boost his popularity by spending hundreds of billions of taxpayers pounds he is badly mistaken. Resuming 2007 debt levels will only make things worse...it was that what caused the problem in the first place. Is he trying to bankrupt the country?
Anthony Lester, Brum,
How high can a dead cat bounce?
Andy, Doncaster,
Good, this is what was what was required, however, lest us not forget the party that caused the Mutany. Also remember that now as we, the UK, create more of 'promise to pay the bearer', we may see further mutineers. God Speed!
Mark, London, UK