British banks lead Europe markets lower

[October 07, 2008]  LONDON (AP) -- European stocks shed early gains Tuesday as ongoing fears about the health of the banking system, particularly in Britain, offset hopes that the world's leading central banks will follow Australia's lead and cut interest rates aggressively.

Wall Street's late recovery helped European stocks recoup some of the massive losses experienced Monday but sharp falls in British banking stocks, notably Royal Bank of Scotland PLC, contributed to the turnaround.

We're getting uncertainty in the banking sector on an almost daily basis, and it's difficult to see light at the end of the tunnel," said David Jones, chief markets strategist at IG Index.

By mid-morning London time, the FTSE 100 index of leading British shares was down 23.09 points, or 0.50 percent, at 4,566.10, with RBS topping the list of fallers with a 31.3 percent, which has wiped off another 10 billion pounds ($17.4 billion) from its value. The bank's shares were down 20 percent on Monday.

In Germany, the DAX index was 19.40 points, or 0.4 percent lower, at 5,367.61, while the CAC-40 in France, which lost nearly 10 percent of its overall value Monday, was modestly higher, up 20.01 points, or 0.5 percent, at 3,731.99.

RBS was not the only British banking stock in trouble amid news reports that the chief executives of Britain's largest banks met up with British Treasury chief Alistair Darling and Bank of England governor Mervyn King Monday night to discuss the possibility of the government providing funding in exchange for stakes in the banks.

Lloyds TSB PLC, which is in the process of taking over HBOS PLC, was down 9.3 percent, while Barclays PLC, which has denied it is asking for government funding, was 8.3 percent.

The talks, which included RBS's chief Fred Goodwin and Barclays' John Varley, addressed possible government plans to inject as much as 50 billion pounds ($87 billion) in banks in order to shore up their balance sheets and restore confidence in the institutions, according to two people familiar with the situation, who requested to remain anonymous because of the confidential nature of the meeting.

However, the government did not go so far as to give details of how much or when the plan would come into effect, the sources said. That failure to provide further clarity disappointed markets and prompted a further draining away of confidence in the banking sector.

Earlier, Asian stocks were mixed though a big interest rate cut in Australia helped spur recoveries in several regional markets, sparking hopes that other central banks will lower rates to help loosen the global credit crunch.

The Reserve Bank of Australia surprised markets when it slashed its key rate a full percentage point to 6 percent -- its biggest cut since 1992. Analysts had expected a half-point cut, especially after the Australian dollar slumped by nearly 10 percent Monday.

RBA Gov. Glenn Stevens said the Australian central bank had judged that a large cut in the cash rate was needed after studying the outlook for global growth and its likely effect on Australia.

The move sent Sydney's S&P/ASX-200 index, which had opened 3.7 percent lower, up 1.7 percent to 4,618.7 and helped the Australian dollar push back up above 71.70 US cents. Other markets, including the main indexes in South Korea, Singapore and Taiwan, rebounded after the bold move and market observers said the same could happen if other central banks follow suit.

"For other central bankers watching the outcome of the RBA's actions, the initial response from the currency markets must have been encouraging," said Simon Derrick, currency strategist at Bank of New York Mellon.

"Far from punishing a currency for its lack of yield, it seems that investors are now prepared to reward a currency and local equity markets where the central bank is prepared to take robust action to support the economy," he added.

The Bank of England is now seen as almost certain to cut interest rates on Thursday, with the question now being whether it will reduce borrowing costs for half a point to 4.50 percent for the first time in seven years.

Unlike its Australian counterpart, the Bank of Japan kept its interest rates unchanged at 0.5 percent, as expected.

Japan's benchmark Nikkei 225 index erased some of its early losses to close down 3 percent at 10,155.90 -- still its lowest level in almost five years.

The euro was trading at $1.3577 from $1.3516 late Monday, while oil prices oil prices rebounded to above $90 in Europee after plunging to an 8-month low Monday on concerns a significant slowdown in global economic growth will undermine demand for crude.

[Associated Press; By PAN PYLAS]

Associated Press writers Kelly Olsen in Soeul, Jay Alabaster and Tomoko A. Hosaka in Tokyo and Tanalee Smith in Sydney, Australia and Alex Kennedy in Singapore contributed to this report.

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