Markets fluctuating after US rescue deal

THERE has been a mixed response on the world's stock markets to the US government's £143 billion rescue plan to help save its ailing banks.

Global stocks had rocketed in expectation of the massive cash injection, which will see the government receive an equity stake in nine major financial institutions, only to fall back again once the deal was finalised.

In Wall Street, the benchmark Dow Jones Industrial Average surged nearly 400 points when the market opened, but then plunged, closing down 76.62 points at 9310.99.

Asian stock markets lost ground following two days of dramatic rises amid fears government intervention would fail to prevent a worldwide recession.

A day after recording a record one-day gain, Japan's Nikkei share index was down one per cent. Shares in India, Australia and Hong Kong were also lower.

In Hong Kong the Hang Seng index slid 2.9 per cent, or 490.9 points, to 16,342 points.

At the opening of the FTSE in London this morning, the market fell by 1.4 per cent to 4332.8 points, after two days of gains.

US Treasury Secretary Hank Paulson said that the lack of confidence in the financial system was a threat to his country's economy.

He said that taking equity stakes in banks "was objectionable to most Americans, including myself."

"We regret taking these actions," Mr Paulson said. "But we must do this to restore confidence in the financial system."

The object of the US plan is to thaw the credit markets by making £143m available to banks to start them lending again.

The frozen credit markets have been at the heart of the financial crisis.

President George W Bush said the US government would now buy shares in the country's leading banks, saying the dramatic steps were "not intended to take over the free market, but to preserve it."

The move, which follows similar steps in the UK and elsewhere in Europe, will also insure most new debt issued by American banks. Frances Hudson, global strategist at Edinburgh-based Standard Life Investments, said much of the reaction on the US markets was a reaction to Mr Paulson's tone.

He said: "It could be that markets have already priced in the plan. Just look at the way the markets, especially the Dow, shot up the day before. But I do think that at least some of the reaction has to do with Paulson's tone.

"The market, which is a capitalist creature, doesn't like it when governments try to dictate. He might as well have been saying, 'Thou shalt all follow the Goldman Sachs model'."

Late on Tuesday the US announced that its budget deficit had reached £261bn, the highest-ever figure and more than three per cent of the country's gross domestic product.