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%.

Expulsions stoke US-LatAm dispute

US-Venezuelan relations are said to have hit a new low

A series of tit-for-tat expulsions has left the US without ambassadors in three Latin American countries.

Bolivia and Venezuela have expelled their US envoys, accusing Washington of trying to oust Bolivia’s government.

Meanwhile, Honduras has refused the credentials of a new US ambassador, postponing his appointment.

Washington has responded by throwing out envoys from Bolivia and Venezuela and freezing the assets of three aides to Venezuelan President Hugo Chavez.

The US regretted the actions of Venezuela and Bolivia, State Department spokesman Sean McCormack said.

“This reflects the weakness and desperation of these leaders as they face internal challenges, and an inability to communicate effectively internationally in order to build international support,” he said.

Bolivian and Venezuelan allegations – including that the US supports continuing anti-government protests in Bolivia – were false “and the leaders of those countries know it”, Mr McCormack added.

Relations between the US and Latin American opponents such as Mr Chavez had seemed to be on a holding pattern – but the situation has changed in a matter of days.

This week’s arrival in Venezuela of two Russian bomber planes taking part in a military exercise is not thought to have helped the situation.

And with more joint military exercises in the pipeline, our correspondent says it could take a while for tensions to subside.

Bolivia accusations

Freezing the assets of the three Venezuelan aides, the US Treasury accused them of “materially assisting the narcotics trafficking” of rebels in Colombia.

All three had “armed, abetted and funded the Farc, even as it terrorised and kidnapped innocents”, according to a statement from the US Treasury referring to the left-wing rebel Revolutionary Armed Forces of Colombia (Farc).

Analysts say the trio – Hugo Armando Carvajal Barrios, Henry de Jesus Rangel Silva and Ramon Rodriguez Chacin – are members of Mr Chavez’s inner circle.

Evo Morales accused the US envoy of meddling in Bolivia’s internal affairs

Mr Carvajal Barrios is a military intelligence director who has protected Farc drug shipments from seizure, claimed the US statement.

Mr Rangel Silva is another intelligence chief who had pushed for greater co-operation between Venezuela and the Farc, the US Treasury alleged.

And Mr Rodriguez Chacin, who until Monday was Venezuela’s justice minister, is Caracas’ main “weapons contact” for the Farc, the statement charged.

The flurry of diplomatic expulsions began on Thursday, when Bolivia threw out the American ambassador to La Paz, Philip Goldberg.

President Evo Morales said the US envoy had been siding with a violent opposition movement in the east of Bolivia, where groups are demanding greater autonomy and a bigger share of gas export revenues.

‘Go to hell’

US officials said the allegations were baseless, but nonetheless expelled the Bolivian ambassador to Washington in retaliation.

This prompted the Venezuelan leader to step into the fray alongside his Bolivian ally.

President Chavez gave US ambassador Patrick Duddy 72 hours to leave Caracas, telling him: “Go to hell 100 times.”

On Friday, Washington responded by giving the Venezuelan ambassador his marching orders.

Now Honduran President Manuel Zelaya has refused to accept the credentials of a new US ambassador.

“We are not breaking relations with the United States. We only are [doing this] is solidarity with Morales, who has denounced the meddling of the United States in Bolivia’s internal affairs,” Mr Zelaya said.

In a separate development, Nicaragua’s President Daniel Ortega said he supports Bolivia, but did not announce whether he would take any action against the US envoy in Managua.

A growing number of left-wing Latin American governments have backed Mr Chavez’s anti-US rhetoric.

The region has also benefited from the Venezuelan leader’s generosity with oil.

But the US is a leading trade partner and a major aid donor to Latin America, so few in the region will be happy relations have plummeted to this new low, according to our correspondent.

He says this diplomatic row is serious but will probably soon blow over, while Bolivia’s problems are only likely to get worse.

US sanctions Venezuela officials

The US Treasury move comes a day after Mr Chavez expelled the US envoy

The US Treasury has frozen the assets of two senior Venezuelan officials it accuses of aiding Colombian rebels, in an escalating diplomatic row.

The US said Hugo Armando Carvajal Barrios and Henry de Jesus Rangel Silva were “materially assisting the [Farc rebels’] narcotics trafficking”.

The move came as the US revealed plans to throw out Venezuela’s envoy, after Caracas expelled the US ambassador.

The US and Bolivia have also engaged in tit-for-tat diplomatic expulsions.

Relations between Washington and Caracas are not thought to have been helped by this week’s arrival in Venezuela of two Russian bomber planes taking part in a military exercise.

The latest row began when Bolivia threw out the US ambassador in La Paz, Philip Goldberg, accusing him of meddling in the country’s internal affairs.

President Evo Morales said the American envoy had been openly siding with an increasingly violent opposition movement in the east of the country.

US officials said the allegations were baseless, but nonetheless expelled the Bolivian ambassador to Washington in retaliation.

This prompted the Venezuelan leader, a Bolivian ally, to step into the fray.

On Thursday, President Hugo Chavez gave US ambassador Patrick Duddy 72 hours to leave Caracas, telling him: “Go to hell 100 times.”

The spat between oil-exporting Venezuela and the US is in neither side’s interest.

The US is a leading trade partner and a major aid donor to Latin America, so few in the region will be happy relations have plummeted to this new low, says our correspondent.