WASHINGTON — Government actions in China and Europe on Monday raised hopes that the ongoing turmoil in the global banking sector may soon ease and that that will help lift a factor that has be weighing heavily against U.S. economic growth.
The Chinese government announced Monday that it would buy additional shares of that nation's four biggest banks in order to boost a sagging stock market and restore confidence. Meanwhile, tiny Belgium nationalized the domestic operations of the bank Dexia, beginning the process of selling off its business units.
In normal times, those actions would be seen as negatives, confirmations of how bad things are in the banking sector. But on Monday they were taken as positives, signs that after months of dithering government were finally moving to resolve long-standing problems.
Stock markets rose around the world, with the Dow Jones Industrial Average in the United States jumping 330.06 points or 2.97 percent, to 11,433.18, S&P 500 roared forward by 39.43 points, or 3.41 percent, to 1,194.89, and the tech-heavy NASDAQ finished up 86.70 points, or 3.50 percent, to 2,566.05.
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The euro jumped by more than 2 percent against the U.S. dollar, a sign investors were less skittish about its stability.
"I think it's really a question of whether the markets are sensing — perhaps prematurely — that politicians are starting to realize how bad this potentially could get," said Nigel Gault, chief U.S. economist for forecaster IHS Global Insight. "They're hoping that there is more action to come to get ahead of this crisis. All the way through, the politicians have been behind. The market seems eager for good news."
Another rallying point was the summit between German Chancellor Angela Merkel and French President Nicolas Sarkozy on Sunday that ended with promises of action but few details. Financial markets across the globe nonetheless cheered the slightest whiff of what smelled like action.
Although China continues growing at a blazing pace, its stock market touched a 30-month low last week amid concerns that a global slowdown will hurt the Asian power. To reverse that sentiment, the Xinhua news agency reported, the government will take bigger but unspecified stakes in the four largest banks: Industrial and Commercial Bank of China; China Construction Bank; Bank of China; and Agricultural Bank of China.
In Europe, Merkel and Sarkozy are expected to finalize a plan by month's end to both recapitalize struggling European banks and create a mechanism by which members of the European Union move swiftly to deeper economic integration.
The White House said Monday that President Barack Obama had separate calls Monday with Sarkozy and British Prime Minister David Cameron to discuss European economic developments. In an interview published Monday in the Financial Times, Cameron urged EU leaders to take a "big bazooka" approach to tackling the widening debt crisis and criticized the EU's incremental approach to date.
"Time is short, the situation is precarious," Cameron warned.
The European Union is a vast common market with shared monetary policy and currency, the euro. Yet member nations retain responsibility for their own taxation and spending policies. This accounts for the wide gulf between successful economies such as Germany and basket cases such as Greece.
Under the new plan being worked out by Merkel and Sarkozy, there'd be common fiscal policies so that countries can't rack up future debts that are settled by those who played by the rules. The challenge to this approach, however, is that in the past, few countries have wanted to hand over to EU-wide bureaucrats their individual powers to tax and spend.
"To say things and to put it into practice is really different. There is a lot of treaty changes required," said Gault, who said he was skeptical of promises, including those to support struggling banks. "Let's see the details, and judge whether it is practically possible. It's going to cost a lot of money. Where that going to come from, because everyone knows that the present (stabilization) fund is inadequate."
Even if Europe gets its act together, there'll still be pain on this side of the Atlantic. Italy and Spain are already believed to be in recession, and together they account for a quarter of the euro-zone's economic activity. Ongoing financial turmoil, higher lending rates and tightened bank lending could combine to toss the entire EU into recession by year's end, warned Alan Levenson, chief economist for investment giant T. Rowe Price in Baltimore.
"The impact on the U.S. economy will flow through several channels. Most directly, U.S. firms that export to, or have operations in Europe will see lower revenues," Levenson said in a research note Monday. "More broadly, and perhaps with greater consequence, heightened market volatility and political uncertainty will likely encourage increased caution among businesses and households."
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