Markets in Australia and Japan had a solid rebound this morning on expectations that the emerging shape of the bank rescue and guarantee programs will be filled out in the best possible way in London and Europe from later today onwards.

Australia‘s market was up 5%-6% this morning as Friday’s lemmings suddenly became Monday’s bulls, courtesy of Kevin Rudd and his three year bank guarantee program. But there was a noticeable easing just before noon as the gains fell back under the 5% mark.

Japan was trading higher in the futures market, as were Standard & Poor’s 500 futures in Asia, while the MSCI Asia Pacific Index jumped a solid 4% this morning.

Despite all the talk and communiqués from meetings of various governments in Washington it seems the defined shape of the Australian support package (and New Zealand as well), plus the evolving and well-leaked shape of what the UK is about to do, and the outcome of the 15 nation eurozone summit in Paris on Sunday evening, helped change sentiment from Friday’s fear and terror.

If conditions steady and recover, there will be quite a few investors and commentators ignoring Friday’s events in their CVs and versions of events, such as the near panic and headless flight away from shares, currencies and commodities.

The Australian dollar and the euro rose strongly this morning against the US dollar” the euro had its best rise in three weeks and we were up more than 3 Us cents to just over 67.70 US cents just before noon. The currency has fallen sharply, but it hasn’t dropped to levels explored in 1986, 1977 and especially 2001.

Eurozone countries are expected to pledge hundreds of billions of euros in state guarantees for new bank debt in the next few days after agreeing on Sunday night an unprecedented bank rescue plan. But it will now be up to the UK and Europe to put some flesh on their best intensions, followed by the floundering US Government.

Of the three, the UK is well advanced, with the outline of a plan known, and a series of leaks and briefings to London media. The reports said that HBOS would be all but taken over by the government, as would Royal Bank of Scotland.

Around £39 billion looks like being injected into HBOS, RBS, Barclays and Lloyds TSB. The merger between HBOS and Lloyds TSB will be in doubt as a result of the capital injections. Under the plans RBS looks like raising up to £20 billion in fresh capital with £15 billion coming from a capital injection from the Government and existing and other investors invited to invest in the raising. RBA raised nearly $US12 billion in June and has sold around $US7 billion in assets.

If the raising is not supported by the Government, RBS will become a government subsidiary. RBA chairman, Sir Fred Goodwin, is departing, a casualty of the deal.

HBOS will be taken over. It is looking for about £12 billion and £9 billion will come from the Government.

Lloyds TSB is expected to raise a total of around £7 billion. Just how much it will receive is unclear. Barclays says it needs the same amount as Lloyds but media reports say it wants to try and raise this without resorting to Government aid, something that will upset the Government as it doesn’t want any go it alone banks to be exposed to speculation. Both banks seem to be trying to limit their call on the Government.

HSBC and Standard Chartered have not been mentioned and seem to be avoiding the UK Government scheme.

The Government’s announcement will come before the London Stock Exchange opens later today. The Government will also offer government guarantees on interbank lending. The UK has already nationalised Northern Rock and part of Bradford & Bingley

While the Poms seem well down the track, the big worry remains the eurozone countries and their ability to quickly confirm the basics of Sunday’s commitment to a help package with actual proposals.

At the hastily arranged summit the 15 eurozone governments agreed a set of measures modelled on those unveiled by the British government last week, involving bank recapitalisation, loan guarantees to unfreeze interbank lending and measures to provide extra liquidity.

However, the governments decided not to spell out there and then how much money each was prepared to allocate to the rescue plan. France, Germany, Italy and other eurozone members will make individual detailed announcements on Monday.

This column in the Financial Times sums the mixed view the City of London and some in the media have of what the UK Government is doing. But it at least recognises the public will for something to be done because the bankers and business leaders have failed.

Britain’s bank bosses and regulators probably did not have time to listen to the radio phone-ins over the weekend. If they had, they would have taken away a clear message: the public wants blood. People may not understand how the financial crisis happened, or even who was responsible. Bank customers certainly will not admit that they were even partly to blame for wolfing down the debt that was served up to them.

But that was then. If bankers were too busy to tune in, you can bet that politicians were not. They will have heard the voters’ anger.

Peter Fray

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