European markets buoyed by British bank bailout

European markets buoyed by British bank bailout
Monday January 19, 6:24 am ET
By Pan Pylas, AP Business Writer
European markets buoyed by latest British bank bailout; US markets closed for holiday


LONDON (AP) -- European stock markets rallied Monday as investors digested the details of the British government's second bailout of its banking sector in just over three months as it attempts to kick-start lending in the economy.
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Europe's gains followed earlier rises in Asia as investor confidence was buoyed by the prospect of Barack Obama's inauguration as U.S. President on Tuesday. Wall Street will be closed later for the Martin Luther King national holiday.

In Europe, Germany's DAX rose 72.05 points, or 1.7 percent, at 4,438.33, while France's CAC-40 was up 48.50 points, or 1.6 percent, to 3,065.25.

Most attention was on the FTSE 100 index of leading British shares, which was up 82.82 points, or 2 percent, at 4,229.88, after the British government said it would be creating a scheme to insure bank loans in the hope that the banks will start lending again.

"The markets have received some reassurance that that governments are beginning to get to grips with the banking difficulties but having said that there are considerable nerves in the background," said Keith Bowman, an equities analyst at stockbrokers Hargreaves Lansdown in London.

The new plan would require banks to identify their riskiest assets and allow them to pay a fee to insure them with the government in return for lending more money. By offering to insure bank loans, the government is exposing taxpayers to billions of pounds of potential losses.

In addition, the government has given the Bank of England the green light to, in effect, start printing money by buying whatever bank assets it considers to be necessary.

As part of the package of measures, the government said it will be increasing its stake in cash-strapped Royal Bank of Scotland PLC to 70 percent from 58 percent by converting preference shares into ordinary shares.

News of the government's growing stake in RBS came after the bank said it could post a full-year loss of as much as 28 billion pounds ($41.3 billion), which would be the biggest loss ever by a U.K. corporation.

RBS shares slid 25 percent on the news that it is closer to be being fully nationalized and on the revelation of the losses.

Barclays PLC fared much better though and was up nearly 8 percent.

On Friday, Barclays shares sank by a quarter in frenzied last-minute trading on fears that it would need massive government assistance to shore up its finances. However, in a statement late Friday, Barclays insisted its full year results, to be announced next month, would prove the pessimists wrong.

Barclays opted not to take government cash during last October's 37 billion pound bailout ($55 billion) of the banks and instead raised 7 billion pounds from private investors in the Middle East.

The problems potentially facing the British banks were stoked last week by Citigroup Inc.'s announcement that it will split its operations in two, separating its traditional banking business from the company's riskier assets, as it posted a massive $8.3 billion fourth quarter loss. Bank of America Corp. also revealed a $2.4 billion quarterly loss and had to tap the U.S. government for a cash injection of $20 billion in exchange for stock.

Stock markets around the world had started 2009 on a relatively strong footing, glad to have put the previous year behind them and hopeful that the incoming Obama administration would be able to limit the length and depth of the recession in the U.S. with its massive stimulus plan.

Those hopes of a turnaround in the world economy by the middle of this year have evaporated as investors grappled with increasingly grim economic and corporate data from across the world.

"Renewed concerns surrounding the state of the U.S. banking sector and the global recession have brought the rally in global equities to an abrupt end," said Andrew Pankiw, analyst at Henderson Global Investors.

Earlier, most Asian stock markets following a rally on Friday on Wall Street.

Japan's Nikkei 225 stock average edged up 26.70 points, or 0.3 percent, to 8,256.85, South Korea's Kospi gained 1.4 percent to 1,150.65 and Hong Kong's Hang Seng recovered early losses to rise 0.6 percent to 13,339.99.

Shanghai's benchmark rose 1.7 percent and markets in Australia and Singapore also gained. Thailand and Malaysia retreated.

Wall Street will be closed Monday for the Martin Luther King Day national holiday, and the focus will be on Barack Obama's inauguration as President when trading resumes Tuesday.

On Friday, the Dow Jones industrials rose 68.73 points, or 0.8 percent, to 8,312 and the S&P500 gained 9.9 points, or 1.2 percent, to 858.50.

Oil prices continued to languish with light sweet crude for February delivery down 66 cents at $35.85 a barrel in electronic trading on the New York Mercantile exchange.

The dollar was down 0.1 percent to 90.64 yen while the euro fell 0.1 percent to $1.3269.

AP Business Writer Stephen Wright in Bangkok contributed to this report.