EU bank plan hopes help European stocks higher

[October 05, 2011]  LONDON (AP) -- Stocks in Europe recouped some recent losses on Wednesday on hopes that European policymakers were thrashing out a plan to shore up the banking sector, which has been damaged by fears of a Greek debt default.

In an interview with the Financial Times, European Commissioner Olli Rehn hinted at a possible bank recapitalization plan. The comments started a stock market rally when they first emerged, late Tuesday on Wall Street. With an hour to go, sentiment turned around massively -- from being nearly 2 percent lower, the Standard & Poor's 500 index ended up over 2 percent higher.

The upbeat finish on Wall Street failed to give Asian stocks much of a fillip but European markets rose strongly, despite a three-notch downgrade of Italy's sovereign debt to A2 by the Moody's credit rating agency and another day of widespread strikes in Greece, the epicenter of Europe's debt woes.

"The jump in risk appetite was driven by media reports that EU officials are examining plans for coordinated recapitalization of European banks," said Adam Cole, an analyst at RBC Capital Markets.

Germany's DAX was 2.9 percent higher at 5,372 while the CAC-40 in France rose 2.8 percent to 2,930. The FTSE 100 index of leading British shares was 2 percent higher at 5,045.

The euro was also shored up by reports of a recapitalization plan, trading 0.2 percent higher at $1.3352.

However, investors will be careful not to get too carried away. After all, sentiment has fluctuated wildly between despair and hope over the 21 months or so that Europe has been mired in its debt crisis.

"Every time this suggestion was made, critical comment came forth from European politicians, telling us that banks were adequately capitalized," said Louise Cooper, markets analyst at BGC Partners. "All this does is teach us not to believe what we are told by the political class."

For now though, investors are giving EU policymakers the benefit of the doubt, especially as the International Monetary Fund has also backed calls for more money to be put into the banks.

Franco-Belgian bank Dexia is in the spotlight once again Wednesday amid mounting expectations that it will be broken up somehow, possibly as soon as Thursday.

Dexia has been at the forefront of investor concerns over its exposure to potentially bad debt from Europe's most indebted countries. With the markets bracing for a Greek debt default soon, investors are concerned about what bonds Europe's banks are holding, and banks themselves have become reluctant to lend to one another.

At one point Tuesday the bank's share price plunged nearly 40 percent, prompting France and Belgium to launch crisis-management initiatives designed to prevent a complete rout. It finished over 20 percent lower on Tuesday.

Hopes that some sort of salvage operation will be mounted in the coming days has helped the stock rebound around 7 percent in early trading Wednesday.

In Asia, the mood was less benign, with Japan's Nikkei index closing 0.9 percent lower at 8,382.98 and Korea's Kospi index ending 2.3 percent down at 1,666.52.

Stock markets in Hong Kong and mainland China were closed for a holiday.

The more buoyant tone in European stock markets helped oil prices rebound too. Benchmark oil for November delivery rose $1.70 to $77.37 a barrel on the New York Mercantile Exchange.

[Associated Press; By PAN PYLAS]

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