Stock markets bounce as governments step in

BLACK Monday turned to momentous Monday yesterday as European governments scrambled to finalise rescue packages in a bid to protect their banking sectors.

France, Germany, Spain and Austria committed €1.1 trillion to guarantee bank loans and take stakes in lenders, racing to prevent the collapse of the financial system.

Germany approved a package worth up to €500 billion while France will spend about €350bn. They will also use this cash to take stakes in banks.

Spain said it has set aside €100bn, while Austria will spend up to €85bn and Italy said it will inject as much money as needed.

The announcements, which followed a weekend of negotiations contrast with the European Union’s failure a week ago to agree on Europe-wide measures.

An agreement reached on Sunday left each country free to formulate individual plans to take into account differing legal systems and so that any eventual bank rescues aren’t held up by the need to get the approval of other EU governments.

French president Nicolas Sarkozy said no financial institution would be allowed to collapse.

He said France would offer up to €40bn to provide banks with the financing they needed via a public company in which the state would be the only shareholder.

German chancellor Angela Merkel said that the measures being taken would only work if they were accompanied by more robust regulation that will curb “market excesses”.

“The package passed by the German government will serve the financial system and ought to serve to protect the citizens and not just serve to protect the banking system,” she said.

The British government meanwhile said it would inject up to £37bn (€47bn) of taxpayers’ cash into Royal Bank of Scotland, Lloyds TSB and HBOS, equal to 2.5% of the economy.

In Iceland, the stock exchange said share trading would remain suspended until today because of continuing “unusual market conditions”.

Poland’s central bank said it will offer a “trust pact” to increase confidence and preserve liquidity in the banking system to help it function during the global financial crisis.

The package will include at least 12 instruments to stimulate the market, improve the flow of information and restore trust in the banking industry.

“What it should do is stabilise the banking system,” said Peter Hahn, a fellow at London’s Cass Business School and former managing director at Citigroup. “Will it stop us from having a recession? No, nothing is going to stop us from having a recession.”