Global shares rise as EU agrees to protect European banks

Wednesday, 05 October 2011 09:12

The European Union emerged last night from a key meeting in Luxembourg with finance ministers agreeing to examine ways of co-ordinating the recapitalisation of European banks.

Stocks on Wall Street rose by four per cent in the last hour of trading on the news.

European finance ministers reached consensus that the eurozone’s banks need support to bolster their levels of capital. This followed another volatile day’s trading in European markets with the FTSE 100 ending the day at 4,933, down by 2.6 per cent.

However, in the opening skirmishes on the European stock markets this morning, the FTSE 100, German Dax and French Cac indexes were all up by more than one per cent, sensing that European finance leaders have finally decided to take concerted co-ordinated action to protect the banks.

The meeting in Luxembourg saw European leaders agree that between them not enough had been done to convince financial markets that European banks can survive the current debt crisis.

The problem surrounding many major European banks is that they hold billions of euro’s worth of sovereign bonds belonging to struggling eurozone countries that are falling in value.

What emerged from the meeting was a consensus that the balance sheets of major European banks need to be strengthened as a matter of urgency with extra safety margins to provide more security and reduce uncertainty over whether there could be a run on some European banks.

No details have emerged over how the banks might be recapitalised or how this would be co-ordinated. One idea is to set a new higher capital requirement level for banks or to re-activate support mechanisms put in place during the financial crisis of 2008.

Wolfgang Schauble, the German finance minister said that all eurozone members would present individual plans for shoring up their banks at the next meeting of finance ministers at the end of this month.

Meanwhile, Dexia a lender from Belgium will need to be bailed-out by the French and Belgian governments, a move that has sparked fears that a new banking crisis is on the horizon. Dexia holds €3.5 billion worth of Greek bonds and €15 billion worth of Italian bonds.

In a further development in the eurozone this morning, it has emerged that credit ratings agency, Moody’s has cut its rating for Italy from Aa2 to A2, citing “market sentiment” as the reason. This will heap further pressure on the Italian government and push up future borrowing costs.

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