Can Euro Market Crisis be avoided

RISING hopes that European leaders were preparing to tackle the euro zone's problems with a massive injection of funds into the region's banks provided a much-needed shot in the arm for global markets.


After a week of selling, the local market climbed as much as 2 per cent early in the session after a sudden recovery on Wall Street in the last hour of trade, as investors jumped on reports that Europe's finance ministers were looking at efforts to recapitalise banks.


Wall Street surged as much as 4 per cent towards the end of the trading session after the Financial Times reported European officials were examining ways of reinforcing the capital position of the region's troubled banks as a matter of urgency.





Some economists believe the European Central Bank will also cut its benchmark cash rate to 1.25 per cent from 1.5 per cent today to help spur demand across the region. This would come just three months after the ECB raised interest rates.


The focus on banks has come as euro zone governments struggle to approve a bailout fund for Greece.


Australia's benchmark S&P/ASX200 index closed up 54.4 points, or 1.4 per cent, at 3926.5 yesterday. In New York the Dow Jones ended 1.4 per cent higher. Key European markets opened more than 1.5 per cent higher last night.
With Europe's sovereign debt problems starting to evolve into a banking crisis, markets fear a rush of capital out of Europe's perilously weak banking system.


With euro zone leaders again delaying a delivery of bailout funds to Greece, worries are mounting that banks could start falling like dominoes if a chain reaction of even partial debt defaults is triggered from Athens.


The first cracks came this week when Franco-Belgian financial group Dexia called an emergency board meeting over concerns about its exposure to Greece.
Analysts said Dexia's problems stress the point that the Greek crisis is less about Greece and more about the potential for it to spark a much wider economic disaster.


The governments of France and Belgium yesterday stepped in to pledge they would guarantee Dexia's commitments. At the same time Dexia is expected to push ahead with plans to set up a "bad bank" to hold its troubled lending exposures.


"We're seeing a practical example of contagion playing out," said Jean-Pierre Lambert, an analyst at Keefe Bruyette & Woods, referring to Dexia's exposure to the debt of countries on the EU rim.


JPMorgan analyst Scott Manning said wholesale funding markets had ''effectively shut down'' because of the fear of contagion from Europe's banking problems. Australian banks are heavy users of wholesale funds, although they are cashed up given a combination of sluggish credit lending and growth in deposits.


Shares of Australian banks have been marked down in recent weeks as investors fretted over Europe.
Separately, James Gorman, the head of Wall Street bank Morgan Stanley, has moved to calm employees worried about the health of the bank saying "misinformation" is circulating through the market.


Morgan Stanley's shares have come under heavy selling recently, falling to their lowest level since December 2008, over concerns about its exposure to euro zone banks and reliance on short-term funding.




Source : http://www.smh.com.au/business/prospect-of-european-rescue-spurs-markets-20111005-1l9nv.html


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