European Markets Edge Slightly Higher in Nervous, Volatile Trade

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07 October 2008

European markets are reacting nervously again as the banking crisis continues to worry many. For VOA, Tom Rivers reports from London.

While financial jitters were felt right across Europe Tuesday, European stocks generally posted moderate gains on hopes that central banks will cut interest rates soon.

Also improving the mood slightly, a decision by European Union finance ministers to guarantee bank deposits up to $68,000.

But for the second day in a row, banking stocks in particular faced a rough ride.

In Britain, the Royal Bank of Scotland shed around 40 percent of its value at one stage. At issue were questions over the institution's liquidity and solvency.

Britain is typical of European countries facing a tough financial storm. Mark Saunders, the chief U.K. economist at Citigroup says the effects of the problem will take time to resolve and it will require a multiple approach.

"Getting out of this is going to be a mix of pain in the financial sector but also a lot of pain in the real economy," he said. "That is why the measures to get us out, it is not just any one single thing. It a mix of public sector recapitalization of the banks, emergency liquidity support for the banks and lower interest rates for the economy."

In Iceland, the board of directors of Landsbanki, the country's second largest bank, has been dismissed and the institution placed into receivership. The country is also negotiating a $5.4 billion loan from Russia to shore up the nation's finances as it faces a severe financial crisis.

John Danielson from the London School of Economics says the country is facing the toughest financial strains seen in generations.

"Iceland is clearly facing the worst depression since the Great Depression and things are absolutely catastrophic in Iceland," he said. "With the failures due partly on the banking system, it more due to the fact that consumers and companies borrowed in foreign currencies to finance car loans and houses. When the currency drops 50 percent, people are finding themselves 50, 60, 70 percent in negative equity."

Elsewhere, Russia announced an aid package for its own banks amounting to $36.4 billion of new credit. The move has come after Russian stocks suffered their worst pounding ever in trading on Monday.