By Mary Jordan and Craig Whitlock
Washington Post Foreign Service
Tuesday, October 14, 2008
LONDON, Oct. 13 -- Stock markets worldwide surged Monday as governments outlined bank rescue plans that in Europe alone amounted to more than $2 trillion.
The Hong Kong stock market's main index shot up 10 percent, while Mumbai's gained 7 percent. In London, the rise was 8 percent; the gains in Paris and Frankfurt, Germany, both topped 11 percent.
The Dow Jones industrial average, following this exuberant lead, rose more than 11 percent.
Investor confidence was buoyed Monday by unprecedented coordination among officials in London, Paris, Berlin, Madrid and other cities, who on Monday announced new bank guarantees and emergency measures.
The Bank of England, the European Central Bank and the Swiss National Bank took joint action to thaw frozen money markets by offering unlimited short-term dollar loans at fixed rates.
The British government said it was becoming a major shareholder in two banks, the Royal Bank of Scotland and the bank to be created by the merger of Lloyds and HBOS. In exchange, the British government said, it would insist on restrictions on executive pay and guarantees that the banks increase lending to home buyers and businesses.
The partial nationalization of the British banks is part of a broad strategy to provide at least 400 billion pounds, or nearly $690 billion at current exchange rates, in capital and loan guarantees to jump-start bank lending.
"For savers, for small businesses and for homeowners, we must in an uncertain and unstable world be the rock of stability on which the British people can depend," said Prime Minister Gordon Brown.
The prime minister said the government's intention was to be "not a permanent investor in U.K. banks." The plan, he said, "over time, is to dispose of all the investments it is making as part of this scheme in an orderly way."
"In extraordinary times, with financial markets ceasing to work, the government cannot just leave people on their own to be buffeted about," Brown said.
"The markets had to pick up," said Rajesh Jain, vice president of SMC Global Securities, an Indian brokerage firm. "It's been overbeaten the whole of last week . . . All the confidence-boosting measures seem to have worked."
In Paris, French President Nicolas Sarkozy announced that the government would set aside nearly $450 billion to guarantee loans among banks and $56 billion more to serve as capital injections for banks at risk of collapse.
He said the country's banks would have to pay commissions to the government on whatever they receive.
As markets fell last week, there was criticism that European governments were not coordinating their efforts and the ad hoc approach was failing. "The time of each one for itself is fortunately over," Sarkozy said Monday.
In Germany, Europe's biggest economy, the government announced a $680 billion rescue package. The bulk of the money will be used to guarantee loans to private banks in a special fund that will expire at the end of 2009.
In addition, the German government will spend about $110 billion to make direct capital investments in private banks, a move the government had steadfastly refused to take until now.
Officials said they were forced to reconsider after Britain announced a similar package and other European governments indicated they would follow suit. "We are taking drastic action, no question about it," German Chancellor Angela Merkel said.
Lawmakers said they don't have a clear idea of how much the plan will cost taxpayers in the end. They are hoping that they will be able to resell their investment stakes at a profit if share prices rebound and that the loan guarantees will not be invoked.
"Germany's economy has not faced a challenge on this scale since the reunification of East and West Germany in 1990," Steffen Kampeter, a legislator with Merkel's Christian Democratic party, told reporters.
German officials said they would probably impose a tight salary cap for executives at banks that turn to the government for help. "Managers should not receive more than 500,000 euros per year," or about $680,000, said Finance Minister Peer Steinbrueck. "And no bonuses. And no severance deals. And no dividends."
Karen Croxson, an economist at Oxford University in Britain, predicted that in the days ahead, there will be major efforts to change the way bank executives are paid. She said a key factor contributing to the global economic crisis was that bank executives' pay and actions were linked to "short-term success," not long-term stability.
[Japan's stock markets were closed Monday for a holiday. In early tradng Tuesday, exuberant buying replaced last week's panic selling. After its worst week on record, the benchmark Nikkei average surged to its biggest gain in 18 years, soaring as much as 13 percent by midday.
Banks and car companies, many of which had lost more than a quarter of their value last week, rebounded strongly. Toyota was up more than 14 percent. The Bank of Japan pledged Tuesday to provide as much liquidity to banks as needed to stabilize markets.]
In Latin America, the strong optimism found in so many other markets prevailed Monday. Brazil's market rose 15 percent, and Mexico's was up 11 percent. As in Europe, governments helped with special measures to ease the financial crunch.
Saudi Arabia's main index rose 9 percent, and Dubai's was up 11 percent Monday.
Correspondents Blaine Harden in Tokyo, Rama Lakshmi in New Delhi and Edward Cody in Paris contributed to this report. Whitlock reported from Berlin.