Rates on Hold in Europe, UK; Dexia Collapse Sets the Stage

Nichole Harper
06 Oct, 2011
New York City

European markets struggled at the opening but gained in the afternoon. European Central Bank left its key rate at 1.5% and the Bank of England expanded its bond buying program. Banks gained on the talks of recapitalization plan and Dexia SA may face unwinding sooner than expected.

[R]3:10 PM Frankfurt – European markets struggled at the opening but gained in the afternoon. European Central Bank left its key rate at 1.5% and the Bank of England expanded its bond buying program. Banks gained on the talks of recapitalization plan.[/R]

European markets scaled higher for the second day after talks of bank recapitalization gained momentum. European leaders are struggling to arrange the financing to offer recapitalization to banks and conduct an orderly default of Greek bonds.

Investors are increasingly worried that the sudden collapse of the Belgium based Dexia SA may mark the beginning of the deepening financial crisis.

However, banks in France were on the rise after a news report in Le Figaro suggested that the government agency is working on a plan to recapitalize at least two large banks.

Separately, after the meeting between German Chancellor Angela Merkel and the European Commission President Jose Manuel Barroso, both leaders pledged to work together to support the bank recapitalization plan.

Barroso also said that the commission is proposing a coordinated action to recapitalize banks. This was the first direct and concrete public statement that offered the clue to the inner workings of the various agencies in Europe.

CAC 40 index surged 2% or 59.41 to 3,033.31 and DAX index added 89.30 or 1.6% to 5,562.36. The indexes in Spain added 1%, in Milan, Zurich and Athens gained 1.5% and in UK soared 1.7%.

The euro held steady but traded near its 9-month low after the European Central Bank left its key lending rate on hold at 1.5%. The markets were also pleased after the ECB offered more support to provide additional liquidity.

The euro traded as low as $1.326.

The Bank of England left its key rate on hold at 0.5% and expanded its bond buying program by 75 billion pounds to 275 billion pounds.

The surprise action to expand the program bolstered stock indexes in London trading. Of the economists surveyed by Ticker.com only 5 of the 20 economists had expected the bond buying program to increase its purchases.

German Economy Ministry said industrial orders in August declined 1.4% on the drop of 3.2% in domestic orders. The July orders were revised to a drop of 2.8% from the earlier estimate of 2.6% decline.

Domestic orders for consumer goods declined 4% and for capital goods dropped 3.8%.

Earlier in the day, DIW economic research institute also lowered its economic assessment for the current and the next year for Germany.

The institute cut its growth estimate for 2011 to 2.8% and for 2012 to 1%.

Italian businesses are facing higher cost of funding according to the director-general of Italy’s business chamber Confindustria.

Giampaolo Galli told at a conference of bankers that the spreads between the rates offered to business customers and euribor rates have increased in the recent months.

Spain’s Economy Minister Elena Salgado said today that Spain will meet its 6% deficit to GDP target in the current year and will not need additional austerity measures.

Stock Movers

Credit Agricole SA increased 1.6% to €5.25, BNP Paribas SA gained 5.4% to €31.08 and Societe Generale added 1.5% to €19.90.

Deutsche Bank decreased 0.9% to €26.29 and Intesa Sanpaolo SpA gained 2% to €1.20.

Dexia dropped 15% to 87 cents after media reports suggested that the company may sell its Luxembourg unit.

PSA Peugeot Citroen SA increased 4.7% to €16.67 and Volkswagen AG rose 2.1% to €90.55. BMW AG increased 1.3% to €48.02 and Daimler AG added 2 cents to €32.62.

Sanofi SA added 0.6% to €49 and Bayer AG gained 0.4% to €40.24.

Hochtief AG increased 5% to €47.50 and Vinci SA gained 1.8% to €32.47.