Global markets recover, but worst may not be over

Global stock markets were quite volatile this week, and the bias remained negative, as investors continued to be skeptical of the series of measures taken to shore up the banking system and unclog the credit markets. Sure, the money market rates did improve from last week, but still remained much above the levels just before the Lehman Brothers' bankruptcy filing. Also, the logjam in credit markets put several large scale M&A deals in jeopardy. On the whole though, this week was much better after last week's carnage, which was one of the worst ever for the global equity markets.

Britain led the way this week's government initiatives to lift troubled banks out of a deep hole, unlock the credit markets and stop the bloodletting in stocks. The UK unveiled a plan partially to nationalise some of its biggest banks. £20bn (US$35bn) of public money will be injected into Royal Bank of Scotland and £17bn into HBOS and Lloyds TSB (which have announced a merger) in return for substantial stakes - around 60% in RBS and 40% in Lloyds TSB-HBOS.

The US followed suit by providing US$250bn for bank recapitalisation; half of which will go to nine banks, including Bank of America, JPMorgan Chase, Citigroup, Goldman Sachs and Morgan Stanley. In return, the government will get non-voting preference shares that pay a 5% dividend, rising to 9% after five years. In a sign of growing tensions among policymakers, Sheila Bair, head of the US Federal Deposit Insurance Corporation, criticised the $700bn rescue package for banks for not doing more to help homeowners avoid foreclosure.

Germany said it would guarantee bank debt to the tune of €400bn (US$540bn) and supply an extra €100bn to stabilise financial markets; France unveiled a €360bn package of measures, including €40bn of capital funding for banks; and the Netherlands guaranteed €200bn in interbank lending. Austria, Italy, Spain and others also produced proposals.

UBS also got a bail-out. The Swiss government took a 9% stake in the bank and created a fund that allows UBS to offload US$60bn in toxic assets. Credit Suisse said that it won't follow compatriot UBS in transferring bad assets to a mostly Swiss National Bank-funded entity. However, it increased its Tier 1 capital base to 13.7% from 10.4% by raising 10 billion Swiss francs of new capital from major investors, including a subsidiary of the Qatar Investment Authority.

The Bank of Japan held an emergency meeting and decided to loosen up companies’ access to cash. Hong Kong provided a blanket guarantee on all bank deposits. And Australia introduced a stimulus bill to boost the economy, including funding for first-time homebuyers. South Korea's policy makers held an emergency summit, seeking steps to restore confidence after shares plunged to a three-year low and the won declined by the most since the 1997 Asian crisis.

The United Arab Emirates (UAE) pledged an extra US$19bn for its banks. Qatar said it would take stakes of up to 20% in banks so that they could continue to fund regional infrastructure projects. Some questioned whether the Gulf states’ sovereign-wealth funds still had an appetite to invest abroad, a lifeline to many earlier in the credit crunch.

Concerted efforts by governments around the world to unfreeze the short-term credit markets started to bear some fruit. The cost of borrowing dollars in London for three months was headed for a weekly decline, the first one since July, after central banks injected billions of dollars into money markets and governments guaranteed loans. Money-market rates jumped after Lehman Brothers went bankrupt on Sept. 15.

The dollar rate will drop about 10 basis points to 4.4% on Friday. It was 4.82% a week ago. Global money market rates fell this week after central banks joined forces to offer lenders an unlimited supply of dollars and the ECB did the same with euros. Still, lending costs among banks remain near record highs relative to the Federal Reserve's benchmark rate of 1.5%.

Meanwhile, European leaders called for an overhaul of the global financial system to avert another major crisis. Europe demanded a global summit to discuss the creation of a new form of capitalism, based on moral values, and the effective regulation and supervision of all corners of the financial world, including hedge funds and rating agencies.

The proposed global summit has been described as the starting point for a new "Bretton Woods", the 1944 meeting of Western leaders that led to the foundation of the World Bank and the IMF. It would probably happen in November or December. Britain’s prime minister, Gordon Brown, said the world needs more transparency, integrity and systems of global governance. He wants to see cross-border colleges of national supervisors to assume oversight of the 30 largest financial institutions in the world, by the end of the year, and to see the IMF become an early warning system for problems looming in the world economy.