Page last updated at 21:38 GMT, Friday, 19 September 2008 22:38 UK

Shares surge on US bail-out plan

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US Treasury Secretary Paulson urges Congress to back his plan

The London stock market ended a week of turmoil with its biggest one-day gain after the US government unveiled a plan to bail out the financial system.

The FTSE 100 closed 8.8% up at 5311.3. Wall Street ended 3.3% higher and the French and German markets also rose.

The surge came as the US government said it planned to spend billions of dollars to mop up bad debts fuelling the global financial crisis.

But Chancellor Alistair Darling ruled out a similar plan for the UK.

"We fully support what the Americans are doing ... here in this country, our problems are different," he added. "We are helping banks as people would expect us to do."

Washington will set out further details of the US rescue plan next week.

Crisis of confidence

The proposed US government rescue plan comes at the end of a week of almost unprecedented turmoil on world financial markets:

  • Central banks around the world have pumped billions of dollars of extra funding into money markets on Thursday and Friday to ease the liquidity crisis
  • The US Treasury also said it would guarantee US money market funds - mutual funds that typically invest in low-risk credit such as government bonds and are often used by pension funds - up to a value $50bn to further restore confidence
  • Stock markets in Russia were temporarily suspended again on Friday at the end of a week of wild swings and stop-go trading
  • There are rumours that Morgan Stanley is looking for a partner

Banking boost

Financial stocks have gained the most from the rise in confidence on the markets. In London, the Royal Bank of Scotland and HBOS rose as much as 50%.

Meanwhile, in the US insurer AIG - which earlier this week received an $85bn rescue package from the US government - surged almost 60%, while banks Citigroup and Bank of America jumped 22% and 16% respectively.

Moves to restrict short-selling in the US and UK also helped to boost financial shares.

Short-selling occurs when a trader borrows shares from another to sell them with the hope of buying them back at a lower price, thereby profiting from the difference. It has been blamed for the recent sharp falls in some banking shares.

Late on Friday, Germany followed suit with a ban on short-selling in 11 finance firms in an effort to protect them from damage by speculators.

There will be serious long-term damage to the ability of the US to export its way of doing business to the rest of the world.
Robert Peston,
BBC Business Editor

News of a US bail-out emerged after a meeting with Congress members late on Thursday.

Mr Paulson announced plans to introduce new laws to buy hundreds of billions of dollars of bad debt from banks, debts he said were "clogging up" the financial system.

"To restore confidence in our markets and our financial institutions, so they can fuel continued growth and prosperity, we must address the underlying problem," he added.

Reports said Mr Paulson was looking into setting up something akin to the Resolution Trust Corp (RTC), which was formed after savings and loans banks collapsed in the 1980s.

The RTC took over most of the smaller banks in the US at a cost of $400bn - about $1 trillion (£550bn) in today's money - and then tried to sell off their assets.

The cost of such a bailout would probably be higher this time, with bad mortgage debt believed to be around $2 trillion.

Mixed reaction

Some analysts welcomed the news.

"It's a relief, it allows for an orderly workout for the impaired assets and it will help the banking sector get back to business," said Hans Kunnen of Colonial First State Fund Managers in Australia.

New York trader: 'The crisis has been painful to watch'

Howard Wheeldon, senior strategist at London-based BGC Partners, also welcomed the market rally after a "torrid week".

But he added: "We still face many problems not least the threat of recession because of the fallout of the banking crisis."

And he cautioned against central banks flooding the financial system with too much liquidity.

"In a way we are now paying the price for the liquidity-boosting measures taken after the September 11 atrocities. We can't afford to have a short-term fix and then in three or four years have an even bigger bubble explode," he warned.

BBC Business Editor Robert Peston said that the taxpayer funded bail-out "represents a massive humiliation for Wall Street" and will severely dent the ability of the US to export its way of doing business to the rest of the world.

But an even bigger risk could be a loss of confidence in the American government's balance sheet, he said.

"This could ultimately undermine the dollar, push up inflation even more and raise the cost of servicing debt for the US authorities," our business editor explained.

Market moves

The UK's FTSE 100 index of largest shares added 8.6% with banking stocks among the biggest gainers.

Halifax owner HBOS, which was forced into the arms of rival Lloyds TSB after its shares slumped this week, traded up 30.5%.

Across the Atlantic, Wall Street's Dow Jones index closed 368.8 points ahead at 11,388.4.

France's Cac 40 and Germany's Dax indexes also rallied, to close 9.27% and 5.56% higher respectively.

Earlier, Japan's Nikkei jumped 3.8%, while the Shanghai Composite recovered from 22-month lows to close up 9.5% and Hong Kong's Hang Seng soared almost 10%.

FTSE graph




MARKET DATA - 11:36 UK

FTSE 100
5429.64up
23.70 0.44%
Dax
5733.05up
19.54 0.34%
Cac 40
3784.02up
14.48 0.38%
Dow Jones
10403.79up
78.53 0.76%
Nasdaq
2273.57up
35.31 1.58%
BBC Global 30
5707.15up
20.65 0.36%
Data delayed by at least 15 minutes



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