Image: A trader checks screens on London stock market
Alastair Grant  /  AP
A trader checks screens for movements on the U.K. stock market shortly after it opened for business in London Monday.
updated 10/13/2008 12:54:24 PM ET 2008-10-13T16:54:24

European stock markets soared Monday, boosted by a strong performance on Wall Street and earlier gains in Asia thanks to hopes that widespread government rescue efforts will shore up the world’s battered financial system.

Markets have responded positively to a raft of measures already announced in Europe on Monday — committing some euro1.7 trillion ($2.3 trillion) that might not all need to be spent — and to expectations that the U.S. government will join Britain and other countries in buying ownership stakes in troubled banks to get lending markets restarted and help keep the wider economy moving.

At the close, Germany’s DAX was 518.14 points, or 11.4 percent, higher at 5,062.45, while France’s CAC-40 was up 355.01 points, or 11.2 percent, at 3,531.50.

Britain’s FTSE 100 was 324.84 points, or 8.3 percent, higher at 4,256.90, despite some hefty falls in the banks that have accepted government help. The strong showing follows sharp falls in stock indexes worldwide last week, and as interbank interest rates remain abnormally high.

Despite Monday’s sharp share price gains, investors remain skeptical that the stock markets are out of the woods, especially as it will take time to see if the banking measures outlined Monday actually work and the global recession takes root.

“I’m not convinced yet. It’s a bit of a waiting game,” said David Jones, chief markets strategist at IG Index.

The latest coordinated move emerged before European trading began when top central banks — including the U.S. Federal Reserve and the European Central Bank — unveiled new measures to thaw frozen credit markets and bolster funding to banks. They joined the Bank of England and the Swiss National Bank in saying they would provide unlimited U.S. dollar funds to financial institutions. The Bank of Japan said it was considering similar measures.

The banks’ action came after leaders of the 15 countries using the euro said Sunday they would guarantee new bank debt until the end of 2009, allow governments to help banks by buying preferred shares, and vowed to rescue important failing banks through emergency recapitalizion.

The German government has since put together a rescue package worth as much as euro500 billion ($671 billion) to shore up the country’s financial system, while France’s will provide up to euro360 billion ($491 billion) to help banks stay afloat through the financial crisis.

In Britain, which doesn’t use the euro, the government confirmed Monday that it is injecting a total of 37 billion pounds ($63 billion) into three leading banks — Royal Bank of Scotland PLC, Lloyds TSB PLC and HBOS PLC — in return for equity stakes. Taxpayers will own about 60 percent of RBS and 40 percent of the merged Lloyds TSB and HBOS. The merger has been renegotiated Monday too, so the amount of Lloyds TSB shares that HBOS shareholders will receive is lower.

The key is whether the flurry of activity can actually ease conditions in the credit markets. Despite the coordinated interest rate reductions announced last Wednesday, and massive liquidity boosts, the rates at which banks lend to each other continued to rise. That means banks were afraid to lend to each other, and raises the chance that they and other businesses won’t get the credit they need to operate.

The London interbank offered rate, or Libor, for three-month dollar loans fell 0.07 percent to 4.75 percent, while the similar rate in euros, or Euribor, dipped only 0.063 to 5.318 percent. The rate remains well above the euro zone’s benchmark rate of 3.75 percent set by the ECB, meaning the credit freeze is far over. Usually Euribor is much closer to the ECB rate.

“There’s been nothing dramatic but there are some modest improvements in rates and spreads,” said Neil Mackinnon, chief economist at ECU Group.

In the U.S., the Bush administration said Monday it is moving quickly to implement its own $700 billion rescue program, including consulting with private law firms on how to buy ownership shares in banks to help thaw frozen lending and get the economy moving again.

The actions by Europe and the U.S. are having a positive impact all round the world, with Latin American stocks up sharply. Brazil’s Ibovespa stock index was up 7.9 percent.

Earlier Asian markets set the tone for the day with Hong Kong’s Hang Seng Index, which tumbled more than 7 percent Friday, soared 1,515.29 points, or 10.24 percent, to finish at 16,312.16. Australian and Singapore indices jumped more than 5 percent, while South Korean and Chinese benchmarks added around 3.7 percent.

Elsewhere in Asia, Indonesia’s key index, down sharply in early trade, gained 0.9 percent after the lifting of a trading suspension, imposed last Wednesday amid a freefall in share prices. The upswing followed government measures to free up liquidity, including easing regulations for share buybacks and corporate financial reserve limits.

In Japan, where the Nikkei 225 tanked nearly 10 percent Friday to close out its worst week in history, trading was closed for a public holiday.

Oil prices rose, with light, sweet crude for November delivery up $2.88 at $80.587. The contract fell Friday $8.89 to $77.70, the lowest price since Sept. 10, 2007.

The euro was trading up on the day at $1.3544, while the U.S. dollar recovered back above 100 yen.

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