Bailout hopes boost shares

Stock markets around the world roared back today on rising hopes that the $700 billion US bank bail-out was close to agreement.

The FTSE-100 and Dow Jones Index in New York both rose sharply after Democrat party leaders said a deal "is basically done".

Earlier President Bush had warned of a new era of depression if the rescue of the American banking system did not go through within days.

In a sombre televised address, Mr Bush said "our entire economy is in danger".

But as presidential candidates John McCain and Barack Obama met Mr Bush at the White House for emergency talks, there were signs a consensus had been reached.

Pennsylvania Democrat congressman Paul Kanjorski said details of the deal were being thrashed out.

Under the proposal the US taxpayer would remove hundreds of billions of dollars of "toxic" mortgage debt from the balance sheets of banks, enabling them to start lending to each other again.

Gordon Brown, who was in New York for a UN development summit, said he "supports and welcomes" the $700 billion US plan, but also said longer term reform of the world's financial system was needed. News of the possible breakthrough boosted morale in the City and on Wall Street.

By mid-afternoon the FTSE-100 was up 88.36 points to 5183.93 with bank shares setting the pace, while the Dow was up 202 at 11027.2.

The US deal overshadowed gloomier economic news in Britain with high street lender HSBC setting higher interest rates for first-time buyers and Bradford & Bingley announcing 300 job losses in Hertfordshire.

The HSBC move, which is expected to be followed by other major lenders, adds 0.3 per cent to the cost of fixed rate mortgages. But it only applies to borrowers who have a deposit of less than 25 per cent. Buyers seen as less risky are getting a cut of 0.2 per cent on their rate.

The US deal was thrashed out by Treasury Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke after five days of unprecedented-turmoil that included the collapse-of investment bank Lehman Brothers, the rescue-takeovers of fellow Wall Street giant Merrill Lynch and, in Britain, of Halifax banking group HBOS, and the nationalisation of insurance giant AIG. Its disclosure-last Friday led initially to euphoria on the markets but this was quickly swept away when it emerged that many US politicians were unhappy about saddling the taxpayer with a vast burden of debt. There were also objections to the bankers who made bad loans being let off the hook by a government rescue.

But a massive lobbying campaign by the Bush administration appears to have paved the way for agreement in outline by the end of this week, with detailed legislation being passed early next week.

White House officials have yielded to a key demand by congressional leaders, agreeing to include widely supported limits on pay packages for executives whose companies benefit. Major elements were still being worked out, including how to phase in the mammoth cost of the package and a plan to let the US government take an ownership stake in troubled companies as part of the rescue.

Charles Schumer, the influential New York Democrat who chairs the Joint Economic Committee in Congress, said: "The idea of a rescue plan has gotten a public airing. Now it's time for both sides to roll up their sleeves, get together in a room and thrash this out once and for all."

In his address, President Bush said banks were holding on to money rather than lending it, and risking losses, with the result that "major sectors of America's financial system are at risk of shutting down".

He admitted: "This is an extraordinary period for America's economy." Mr Bush blamed the "irresponsible actions" of bankers for the worst financial crisis since the Thirties.

The President said he understood why ordinary people did not want "to pay the cost of the excesses on Wall Street" and promised that "failed executives" would not "receive a windfall from your tax dollars".