News & Current Affairs

September 19, 2008

Shares surge on US bail-out plan

Shares surge on US bail-out plan

Wall Street shares have rebounded sharply after a proposed US government plan to buy billions of dollars of US banks’ bad mortgage-related loans.

The Dow Jones index jumped 3.8% in early trading, while London’s FTSE 100 index was up 8.6%. In Paris, the Cac 40 was 7.6% higher.

US Treasury Secretary Henry Paulson said the bad debts were “clogging up” the financial system.

He said more details of the rescue package would be announced next week.

“To restore confidence in our markets and our financial institutions, so they can fuel continued growth and prosperity, we must address the underlying problem,” Mr Paulson said.

Financial stocks have gained the most from the rise in confidence on the markets. In London, the Royal Bank of Scotland and HBOS rose as much as 50%.

Moves to restrict short-selling in the US and UK also helped to boost financial shares.

Short-selling occurs when a trader borrows shares from another to sell them with the hope of buying them back at a lower price, thereby profiting from the difference. It has been blamed for the recent sharp falls in some banking shares.

Crisis of confidence

The proposed US government rescue plan comes at the end of a week of almost unprecedented turmoil on world financial markets:

  • Central banks around the world have pumped billions of dollars of extra funding into money markets on Thursday and Friday to ease the liquidity crisis
  • The US Treasury also said it would guarantee US money market funds – mutual funds that typically invest in low-risk credit such as government bonds and are often used by pension funds – up to a value $50bn to further restore confidence
  • Stock markets in Russia have been suspended for the second time on Friday at the end of a week of wild swings and stop-go trading
  • The US financial regulator the Securities and Exchange Commission banned short-selling in the stock of 799 financial companies until 2 October
  • The move followed similar moves by the UK’s City watchdog on Thursday
  • Nervous traders turned on the last independent US Wall Street giants Morgan Stanley and Goldman Sachs on Thursday sending their shares lower
  • There are rumours that Morgan Stanley is looking for a partner. Reports have cited talks with US bank Wachovia and the possibility that China Investment Corp – China’s sovereign wealth fund – could buy a major stake

Dramatic measures

News of a US bail-out emerged after a meeting with Congress members late on Thursday, when Mr Paulson announced plans to introduce new laws to buy hundreds of billions of dollars of bad debt from banks.

There will be serious long-term damage to the ability of the US to export its way of doing business to the rest of the world.
Robert Peston,
BBC Business Editor

This, he said, was at the heart of the almost unprecedented malfunction of the banking system, which has caused havoc in world stock markets this week.

“We talked about a comprehensive approach that will require legislation to deal with illiquid assets on financial institutions’ balance sheets,” he said.

Mr Paulson and Federal Reserve Chairman Ben Bernanke are expected to thrash out the details of the plan over the weekend.

It is thought options under consideration include establishing a government agency that would buy bad loans to allow troubled Wall Street banks to clear their balance sheets.

Reports said Mr Paulson was looking into setting up something akin to the Resolution Trust Corp (RTC), which was formed after savings and loans banks collapsed in the 1980s.

The RTC took over most of the smaller banks in the US at a cost of $400bn – about $1 trillion (£550bn) in today’s money – and then tried to sell off their assets.

The cost of such a bailout would probably be higher this time, with bad mortgage debt believed to be around $2 trillion.

Some analysts welcomed the news.

“It’s a relief, it allows for an orderly workout for the impaired assets and it will help the banking sector get back to business,” said Hans Kunnen of Colonial First State Fund Managers in Australia.

Howard Wheeldon, senior strategist at London-based BGC Partners, also welcomed the market rally after a “torrid week”.

But he added: “We still face many problems not least the threat of recession because of the fallout of the banking crisis.

And he cautioned against central banks flooding the financial system with too much liquidity.

“In a way we are now paying the price for the liquidity-boosting measures taken after the September 11 atrocities. We can’t afford to have a short-term fix and then in three or four years have an even bigger bubble explode,” he warned.

BBC Business Editor Robert Peston said that the taxpayer funded bail-out “represents a massive humiliation for Wall Street” and will severely dent the ability of the US to export its way of doing business to the rest of the world.

But an even bigger risk could be a loss of confidence in the American government’s balance sheet, he said.

“This could ultimately undermine the dollar, push up inflation even more and raise the cost of servicing debt for the US authorities,” our correspondent explained.

Market moves

The UK’s FTSE 100 index of largest shares added 8.6% with banking stocks among the biggest gainers.

Halifax owner HBOS, which was forced into the arms of rival Lloyds TSB after its shares slumped this week, traded up 30.5%.

France’s Cac 40 and Germany’s Dax indexes joined in the rally, up 7.5% and 5.1% in afternoon trade.

Earlier, Japan’s Nikkei jumped 3.8%, while the Shanghai Composite recovered from 22-month lows to close up 9.5% and Hong Kong’s Hang Seng soared almost 10%.

Graph of FTSE 100 this week
Advertisements

September 5, 2008

Easyjet’s passenger numbers rise

Easyjet’s passenger numbers rise

easyjet plane

Eayjet’s passenger traffic is up despite difficult market conditions

Easyjet has said that the number of passengers it flew in August this year rose 24% on the same month last year.

Europe’s second-largest budget airline said it transported some 4.6 million passengers in August 2008, compared to 3.7 million in August 2007.

Aer Lingus also saw an increase, flying 8.8% more passengers this August than in August 2007.

On a rolling 12-month basis to August 2008, Easyjet increased passenger numbers by 16.6%.

The number of seats filled also increased to 91.3% from 87.4% last August.

At Aer Lingus the load factor was 80.5% in August, a slight dip on 81.7% a year ago.

Easyjet shares were down 2% at 1005 BST, while Aer Lingus shares were down 0.9%.

Industry turbulence

The figures for Easyjet and Aer Lingus are relatively strong compared with those released on Friday by Scandinavian airline SAS.

SAS, which is partly owned by the governments of Denmark, Sweden and Norway, said traffic for August measured in revenue passenger kilometres, fell 0.7% and demand was weakening further.

Airlines worldwide have been effected by the economic deceleration and several airlines, including business airlines Silverjet, Maxjet and Eon and budget airline Zoom, have folded.

According to the International Air Transport Association (IATA), global airlines will post losses in the region of $5.2bn (£2.96bn) this year and $4.1bn in 2009.

Create a free website or blog at WordPress.com.