FinancialExpat's Blog

Following in the wake of the US bailout plan for the US financial system the leaders of the 15 eurozone members pledged on Sunday to take steps to guarantee loans between banks and to inject fresh capital into their banking industry. First to act has been the German government which is preparing to endorse a bill to restore liquidity and capital into its banking and insurance sector worth up to 470 billion euro. The German bill, closely modelled on the British rescue plan announced last week, will initially empower the finance ministry to issue credit guarantees for inter-bank lending worth 400 billion euro up to December 2009. The ministry will also be allowed to draw up to 70 billion euro to inject fresh capital in the banks and insurance companies who request it.

The UK government, which is not part of the eurozone, has released details on its help for three major UK retail banks. Royal Bank of Scotland, HBOS plc and Lloyds TSB Group will receive fresh capital of 37 billion pounds (USD 64 billion) from the UK government in exchange for the government acquiring preference shares and setting conditions on matters such as executive bonuses. The UK government will also be able to appoint directors and set dividends. However, the UK government has stressed that it is not a permanent investor in UK banks and will dispose of all the investments over time in an orderly fashion once the banking sector stabilises. It is interesting to note that Northern Rock, the bank nationalised by the UK government last year, has already paid back half its 28 billion pound loan three months early. The UK government will also guarantee bank borrowing over the next six months.

Barclays, the UK's second biggest bank, plans to sell more than 6.5 billion pounds (USD 11 billion) of shares to private investors without turning to government help. HSBC, the UK's largest bank, had already announced last week that it has sufficient resources and won't participate in the UK government recapitalisation plan. Banco Santander, Spain's largest bank and owner of Abbey in the UK, has injected 1 billion pounds of fresh capital into its subsidiary, which includes Alliance & Leicester.

The Spanish government is to set aside a maximum of 100 billion euro (USD 136 billion) to guarantee inter-bank lending but the Spanish prime minister stressed that it is not needed yet as Spain's banks are solvent.

The Russian government has approved a package of measures worth USD 86 billion to assist Russian banks affected by the credit freeze. The government will make USD 50 billion available to banks to refinance foreign debt and the rest will be available as loans to the banks.

As more governments step into action to revive credit markets, experts expect money market rates to fall, after a week which saw the London inter-bank offered rate (LIBOR) reach a height of 4.82%.

Gold is still receiving attention from investors seeking an alternative from the equity markets. Gold rose 3.1% last week to USD 859 per ounce in New York. Crude oil rose from a 13-month low on news of the international governmental support for the banking system. Crude oil for November delivery rose as much as USD 3.92, or 5.1%, to USD 81.62 a barrel on the New York exchange. This still represents a 45% decrease from the record price in July.

The euro has also responded to the announcement by eurozone members. It has risen the most in three weeks against the dollar to USD 1.3657. The Australian dollar rose 5% to USD 0.6770 after the government announced it would guarantee all bank deposits for three years. The dollar declined 0.2% to 100.45 yen. Industry experts suggest that the yen may advance to 95 per dollar should Japanese investment trusts, insurance companies and pension funds start selling foreign holdings to bring money home in light of the global weakness in equities.

China's export growth rose 20% in September from a year earlier after gaining 21.1% in August, increasing the likelihood the Chinese government will step up spending to stimulate economic growth after the credit crisis has forced two interest rate cuts in a month for China. It is hoped to boost domestic demand to sustain China's fast growth in a stable fashion.