Banks rally on rescue deal hopes

26 September 2011 Last updated at 09:49 ET

Continue reading the main story

European bank shares have risen as investors react to the latest attempts to stabilise the eurozone debt crisis.

A number of measures are being discussed according to reports from the weekend’s international meeting in Washington.

They are expected to involve a 50% write-down of Greece’s massive government debt, the BBC’s business editor Robert Peston says.

Shares in French and German banks were up as much as 10% in Monday trading.

The measures are also said to include an increase in the size of the eurozone bailout fund to 2 trillion euros (£1.7tn; $2.7tn).

European governments hope to have measures agreed in five to six weeks, in time for a meeting of the leaders of the G20 group in Cannes at the beginning of November.

But EU officials in Brussels stress that they should not be seen as “a single grand plan”, the BBC’s correspondent Chris Morris says.

Pan-Europe gains

Uncertainty over how to tackle Greece’s problems has led to some European bank shares losing half their value in recent months due to concerns about their holdings of Greek debt.

But on Monday, French banks, which are particularly exposed to Greece, rallied, with BNP Paribas and Societe Generale up 8% and Credit Agricole up 6.6%.

Germany’s big banks were also up sharply. Allianz was up 10%, Deutsche Bank 9% and Commerzbank 7%. In the UK, RBS rose 6% and Barclays 7%.

Markets in Frankfurt and Paris were up about 3% by lunchtime after falling initially. The UK’s main index, the FTSE 100, was up 1%.

However, commodity prices were lower on remaining concerns that the eurozone crisis could affect the global economy.

Philip Tyson of brokerage MF Global told the BBC that the proposed bailout fund had to be at least 2tn euros.

He said: “Markets need confidence that the fund has the firepower to deal with the likes of Italy and Spain should contagion risks spread.

“It does need to happen, but there are big question marks about the detail, and exactly how it will happen. Time is running out.”

Ben Critchley, a sales trader at spread betting group IG Index, said: “For now at least, it looks as if markets are giving some credence to a firm plan on how to tackle the debt crisis beginning to emerge.

“But if recent experience is anything to go by, this patience is unlikely to last too long if details are not forthcoming.”

Key elements

The reports about the rescue proposals emerged from the annual meeting of the IMF in the US capital last week, attended by finance ministers from the G20 group of countries.

The package is expected to involve a quadrupling – from the current projected level of 440bn euros – in the firepower of the eurozone’s main bailout fund, the European Financial Stability Facility (EFSF).

This would be done by putting in place an arrangement that would allow the European Central Bank (ECB) to lend alongside the fund, our editor says.

The EFSF would take on the main risk of lending to governments struggling to borrow from normal commercial sources – governments like Italy.

It is also thought that private investors in Greek debt are likely to have to accept a 50% reduction in what they are owed, our editor says.

Eurozone leaders agreed a plan in July, which has yet to be ratified, that provided for a reduction in Greece’s repayments to banks of about 20%.

European officials in Brussels stressed that their current focus was on getting measures, including changes to the EFSF, agreed back in July ratified by 17 national parliaments within the eurozone.

It was proving a difficult task, the BBC’s Chris Morris says, to get these less far-reaching changes passed, with Germany one of three assemblies to vote this week.

The third element of the rescue plan envisages a strengthening of big eurozone banks, which are perceived to have too little capital to absorb losses.

‘Critical days’

Commodity prices remained under pressure, pulled between relief that a eurozone deal could be nearer and worries that the global economy faces a downturn.

Continue reading the main story

Oil prices fell sharply in early trading, but recovered slightly with Brent crude 0.2% lower at $103.75 a barrel and US light, sweet crude down 0.9% at $79.10 a barrel.

The stronger dollar, which rose around 0.2% against a basket of currencies, also weighed on oil prices as it makes dollar-denominated assets more expensive.

Gold fell 2.7% to $1,606.73 an ounce, continuing recent declines from record highs. Copper, which has already fallen, was down another 4%.

Senior commodities analysts Edward Meir, at brokers MF Global, said: “These are very critical days and weeks ahead, reminiscent very much of the touch-and-go situation we were in back in 2008.

“The key difference this time around is that it is countries and not companies that are in danger of going bust.”

— ’re ’s , . : A ‘Malign Intellectual Subculture’ – George Monbiot Smears Chomsky, Herman, Peterson, Pilger And Media Lens.