European stocks up around midday but RBS plummets

Source: Reuters

Date :07/10/2008 17:11:54

European stocks drifted lower on Tuesday as mounting concerns about the health of the financial sector hit banks, with shares in Royal Bank of Scotland and HBOS plunging nearly 40 percent.

The FTSEurofirst 300 index of top European shares provisionally ended 0.2 percent lower at 1,003.07 points after witnessing its worst one-day percentage fall on record on Monday.

The benchmark is down about 33 percent so far this year.

Banking stocks remained the biggest weighted sectoral losers on the index, with Royal Bank of Scotland and HBOS hit by talk that the British government was mulling a possible bank recapitalisation plan with the country's lenders.

Commerzbank fell 14 percent, Barclays shed 17 percent and Lloyds TSB slipped 13 percent.

"Banks need measures to boost their capital, and without real measures from the authorities, it's not a few takeovers or isolated rescues that will help stop the crisis," said Sebastien Barthelemi, analyst at Louis Capital Markets.

"We need a strong move by governments. Each country has been reacting on its side, but we need something stronger to calm down markets."

Iceland's market authority, battling to stave off national bankruptcy after its banks took on massive debts in expanding overseas, on Tuesday took control of Landsbanki, the island's second-largest bank by value.

Banks have been hammered since the start of the credit crisis in mid-2007 which has prompted financial institutions to unveil massive writedowns of mortgage-related assets, forced Lehman Brothers to file for bankruptcy and triggered a flurry of government bailouts of embattled companies.

The International Monetary Fund increased its estimate of global losses from the financial meltdown to $1.4 trillion and warned that the world's economic downturn was deepening.

The U.S. Federal Reserve moved to unclog the commercial paper market, which is widely used to fund day-to-day business by companies.

European Central Bank Governing Council member Guy Quaden said an interest rate cut was no longer excluded.

"In the current circumstances, a cut of the official interest rate is no longer ruled out," he said.

Australia reacted to the crisis by cutting interest rates by 100 basis points to 6.0 percent, putting pressure on Western central banks to lower the cost of borrowing.

Volkswagen shares soared as much as 55 percent to a record high, driven by frantic short-covering. But the shares fell 1.8 by the close of the trading session.

(Additional reporting by Blaise Robinson in Paris)

(Reporting by Atul Prakash)

LONDON (Reuters)