Stocks jump on European pledge to help banks

Stocks rose sharply in the United States and Europe Monday after French and German leaders promised to strengthen European banks.

The Dow Jones industrial average was up 270 points or 2.5 per cent at mid-afternoon.

German Chancellor Angela Merkel and French President Nicolas Sarkozy said they would finalise a "comprehensive response" to the debt crisis by the end of the month, including a plan to make sure that banks have adequate capital.

"The more we can put our arms around the problem with a little more detail, the better, and time frames usually help," said Michael Sansoterra, a portfolio manager at Silvant Capital Management in Atlanta.

European stock markets rose and the euro strengthened against the dollar on the latest indication that European leaders were making progress on containing the region's debt crisis. Germany's DAX rose 3 per cent and France's CAC-40 rose two per cent.

Investors were also relieved that troubled Franco-Belgian bank Dexia would be partially nationalised. Dexia needed rescue because it owns large amounts of government bonds of indebted countries like Greece and Italy.

European banks have become more reluctant to lend to each other, putting overextended banks like Dexia in danger. That prompted the European Central Bank last week to offer unlimited one-year loans to the banks through 2013 to help give them access to credit.

Investors have been worried that a default by Greece could cause the value of Greek bonds held by those banks to plunge, hurting their balance sheets. US banks could also be affected if Greece goes through a messy default, since they own Greek bonds and also have close ties to European banks.