Markets cheer as Europe bails out banks

October 13 06:05:02 AM, Yahoo News

Screens showing the stock price index are displayed at the Korea Exchange in Seoul October 13, 2008. (Lee Jae-Won/Reuters)

Reuters - Stock markets rejoiced after governments worldwide launched multibillion-dollar bailouts on Monday to shore up banks, and Britain called for a new Bretton Woods agreement to reshape the world financial system.

Major Wall Street stock indexes were up more than 5 percent in early trade, clawing back some of the major losses last week, when the Dow fell 18 percent. The MSCI world equity index was up 5 percent after tumbling 20 percent last week to a five-year low.

Britain, Germany, France, Italy and other European governments announced rescue packages totaling hundreds of billions of dollars that were designed to combat the global financial crisis, in which the credit markets have seized up at a time when major economies appear headed toward recession.

The moves calmed markets and the new Nobel laureate for economics, Princeton University economist Paul Krugman.

"I'm slightly less terrified today than I was on Friday," Krugman said. "We're going to have a recession and perhaps a prolonged one but perhaps not a collapse."

British Prime Minister Gordon Brown called on world leaders to create a new "financial architecture" to reflect the global reach of economics and banking, in much the same way that the current international economic system was set up at a conference in Bretton Woods, New Hampshire, in 1944.

"Only by global action can we fully restore the confidence that is needed and build the international financial order," said Brown, a leader who has yet to win a popular mandate but whose global profile has risen amid the crisis.

Britain's bank plan called for 37 billion pounds ($64 billion) of taxpayers' cash to bail out three major banks in a move that would likely make the government their main shareholder.

While Germany's cabinet approved a rescue plan worth up to 500 billion euros ($680 billion) and France announced the government guarantees totaling some 360 billion euros, European central banks said they would lend out as much U.S. dollar liquidity as commercial banks needed in a further bid to tame money market tensions.

The United States began releasing long-awaited details of its $700 billion rescue plan -- which has evolved from a primary goal of buying distressed debt to taking an ownership position in banks in order to get them lending again.

Wall Street focused on investment bank Morgan Stanley, which steadied itself after reaching a financing deal with Mitsubishi UFJ Financial Group Inc (MUFG), possibly with U.S. government support.

Morgan shares plunged 58 percent in the last week on doubts over the deal and were up 47 percent in early trade on Monday.

Japan said on Monday it was considering whether to guarantee all bank deposits, while the central bank said it might join further global efforts to boost dollar funding to strained money markets.

In a joint announcement with the U.S. Federal Reserve, the European Central Bank, the Bank of England and the Swiss National Bank said they would meet all bids from commercial banks at a fixed interest rate. Money market rates eased in response.

Australia and New Zealand earlier guaranteed all bank deposits and Indonesia increased its guarantee to 2 billion trupiah ($203,000), while India pledged more liquidity to help financial markets.

The moves followed a weekend of crisis talks in the United States and Europe in which governments pledged to support the financial system, which has moved to the brink of collapse because of steep losses in the credit market and a lack of trust in lending that has frozen the flow of capital.

The need for bailouts has become particularly clear-cut against a background of a global economic slowdown, with many countries facing recession.

"We are arguably now near the end point in terms of the extremely violent sell-off in equities and widening in spreads," said Sean Maloney, a bond strategist at Nomura.

Money markets -- the heart of the credit crisis -- eased but remained tight. Three-month dollar Libor fell to 4.75250 percent from 4.81875 percent on Friday.

Banks deposited a record 155 billion euros overnight at the European Central Bank, rather than lend to each other.

Authorities have been trying to avoid a repeat of the decision to allow Lehman Brothers to go bust.

The Federal Reserve gave its approval on Sunday to the takeover of Wachovia Corp by Wells Fargo & Co.

(Reporting by Reuters bureaus around the world; editing by Steve Orlofsky)

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