World stocks plunge, sharp falls in Europe

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Madrid Stock Market. Photo: EFE

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World stocks tumbled on Monday, led by sharp falls in Europe as three European banks became the latest casualties of spreading credit strife, forcing partial nationalization and overshadowing Washington's bailout plan.

The euro fell nearly 2 percent at one point while the dollar and safe-haven government bonds surged as the Belgian, Dutch and Luxembourg governments rescued financial firm Fortis over the weekend to prevent a domino-like spread of failure.

The UK government said lender Bradford & Bingley's branch network would be sold to Spanish bank Santander with the remainder of the group nationalized.

Moreover, Iceland's government bought a 75 percent stake to take control of Glitnir after the bank's funding position deteriorated in recent days, knocking the crown currency to record lows against the euro.

German lender Hypo Real Estate struck a last-minute deal with the government and a consortium of banks to resolve a refinancing squeeze.

MSCI main world equity index fell 2 percent to its weakest in more than a week. The FTSEurofirst 300 index was down 3 percent, while a measure of banking stocks lost 5.8 percent.

"The nationalizations have an incredibly negative read across the sector," said Mark Sartori, head of European sales trading at Fox-Pitt, Kelton. "The contagion is spreading to mainland Europe and everyone's asking: who's next?"

The money market remained frozen with banks refusing to lend to one another for all but the shortest periods, prompting central banks in Europe and Asia to pump in more cash.

U.S. lawmakers were due to vote later on Monday on a $700 billion toxic debt fund after more than a week of negotiations.

"One sees now, that not only American but also European banks are affected and that the crisis is after all global," said Carsten Klude, strategist at MM Warburg.

"A rescue plan worth 700 billion is simply not enough to overcome the crisis for the foreseeable future. If anything, all the real economy problems will escalate as a result in the foreseeable future."

The December U.S. S&P 500 future was down 1.6 percent, reversing initial gains on news the bailout plan was set for a vote in the House of Representatives.