European stocks rebound on EU plan to overhaul banks

European stocks rebound on EU plan to overhaul banks

London: European shares rebounded on Wednesday after news that EU nations are assembling plans to recapitalize banks to avoid contagion from the eurozone crisis.

In early morning trade, London’s FTSE 100 index of top shares won 1.68% to 5,027.72 points, shedding some initial gains amid investor scepticism over the reported plan and after a huge rating downgrade for Italy.

In Frankfurt, the DAX gained 1.57% to 5,298.33 points and in Paris the CAC 40 added 2.16% to 2,911.59 points.

Milan meanwhile increased by 1.27% despite a stinging three-notch downgrade by Moody’s, which cited Italy’s increasing gloomy prospects for growth and financing of long-term debt.

“An impressive bounce higher this morning on talk that EU finance ministers are reported to be talking about bank recapitalizations is a welcome development," said CMC Markets analyst Michael Hewson.

“But unless it is followed up by some significant action it is likely to soon give way to downside pressure once more.

“The rally higher does suggest that the buying interest is there and it is policymakers disjointed and uncoordinated policy responses that is keeping investors on the sidelines."

European markets had plunged Tuesday on concerns the eurozone crisis could snare more banks after Franco-Belgian lender Dexia sought help amid worries over its liquidity and its heavy exposure to debt-plagued Greece.

Shares in Dexia, which had plunged 22% on Tuesday, rose 4.07% to stand at €1.049 on Wednesday, losing some initial gains.

“The hopes that finance ministers are finally examining ways to recapitalize euro area banks is certainly the main driver this morning," Daiwa economist Chris Scicluna told AFP.

“Such action is critical in light of events at Dexia, in order to avoid contagion of funding and solvency concerns to other European banks, the risks of which appear yet greater still in light of the Italian triple-notch downgrade by Moody’s.

“So markets this morning are buoyed by Olli Rehn’s suggestion that there is now a ‘sense of urgency’ among ministers to tackle the issue."

EU nations are building a “co-ordinated" plan to recapitalize banks to avoid contagion from the debt crisis which has forced the dismantling of Dexia, the European Commission said.

“There is an increasingly shared view that we need a concerted, co-ordinated approach in Europe while many of the elements are done in the member states", the EU’s Economic Affairs Commissioner Olli Rehn told the Financial Times.

“There is a sense of urgency among ministers and we need to move on," he added.

“Capital positions of European banks must be reinforced to provide additional safety margins and thus reduce uncertainty", Rehn said in comments published on the British newspaper’s website.

The news came after the French and Belgian governments stepped in on Tuesday to guarantee the financing of Dexia, which is to be broken up.

Asian shares were mixed in earlier trade on Wednesday as a Wall Street rally was offset by lingering fears that Greece’s debt crisis will become contagious.

The euro, meanwhile, came under pressure on Wednesday after Italy’s large downgrade, which has stoked worries over eurozone debt and the impact of a possible Greek default on the global economy.

The European single currency fell to $1.3312 in early morning London trade from $1.3338 in New York late Tuesday.

“We have been repeatedly disappointed by the sluggish, grudging and piecemeal approach of euro area policymakers to dealing with the crisis," added Daiwa economist Scicluna.

“And so, sadly, I fear that Rehn’s words will fail to matched by sufficiently ambitious deeds and markets will prove to be disappointed once again."