World markets surge on bank sector bailouts by governments

AFTER A week of turmoil, equity markets rebounded with a bang yesterday, as governments in Europe, the US and Asia moved to support their banking sectors, leading to market rallies across the world and record gains in Europe, although the Irish market was once again dragged down by financial stocks.

The Dow Jones Stoxx 600, the French CAC 40 and the German DAX all reported their biggest gains on record yesterday, advancing by 9.9 per cent, 11 per cent and 11 per cent respectively.

Bank stocks were particularly strong, with both Deutsche Bank and ING finishing the day up 12 per cent, after European leaders said they would guarantee new bank debt in a €1.7 billion co-ordinated bailout.

In Britain, the FTSE 100 closed up 8.3 per cent, as commodity stocks rebounded strongly following rises in metal and oil prices, although the government's efforts to recapitalise the banking sector led to significant declines in financial stocks.

The British treasury announced its plan to make investments in Royal Bank of Scotland (RBS) and, upon completion of its merger, to HBOS and Lloyds TSB of some £37 billion (€47.1 billion).

In exchange for the bailout, the banks will cede majority control to the government, give prime minister Gordon Brown seats on their boards, the right to fix dividends, and power to set executives' pay. This agreement saw bank stocks fall, with RBS dropping 15 per cent to 60.7 pence, and HBOS falling back by 31 per cent to 85.8 pence. Lloyds TSB lost 20 per cent to finish at £1.51.

The recapitalisation of British banks also saw Irish bank stocks fall. Although the European Commission's approval of the €400 billion bank guarantee on Sunday evening saw the Irish market open strongly yesterday morning, with all of the major bank stocks posting early gains, the two largest banks, Allied Irish Bank and Bank of Ireland, both fell back sharply later in the day.

AIB closed the day down 80 cent, or 18.8 per cent, at €3.44, while Bank of Ireland declined by 35 cent, or 14 per cent, to €2.15, amid fears that the banks may need to be recapitalised.

If the Irish Government adopts a similar strategy to Britain's near-nationalisation of its banks, investors fear it would lead to a significant dilution in the banks' shareholdings, which caused a sell-off in the stocks yesterday. Nevertheless, the Iseq still closed up on the day, adding 71.22 points, or 2.5 per cent, to finish at 2,942.47.

In the US, troubled former investment bank Morgan Stanley jumped as much as 66 per cent, after Japan's Mitsubishi UFJ Financial Group confirmed its $9 billion investment, while a strong rally in morning trading saw the S&P 500 climb by 6.7 per cent to 959.07, and the Dow Jones Industrial Average briefly top 9,000.

Elsewhere, the MSCI Asia Pacific closed up 7.4 per cent, while the MSCI World Index was up by 6.8 per cent by 12.22.

- (Additional reporting Bloomberg)