Dubai shares rise as ECB puts €529bn into Europe

The new loan will help European banks cover their own maturing debt and fund the needs of Spain and Italy this year. Ralph Orlowski / Reuters

Share prices in Dubai soared to their highest level in a year yesterday as hopes rose that a fresh injection of cash into the euro-zone economy would boost investor confidence.

The benchmark Dubai Financial Market General Index advanced 1.9 per cent to 1,730.41. Also gaining was the Abu Dhabi Securities Exchange General Index, up 0.5 per cent to 2,607.73 yesterday.

Both markets closed shortly before the European Central Bank (ECB) said it was loaning 800 banks in the euro zone €529.5 billion (Dh2.61 trillion) in cheap three-year funds. Investors hope the extra firepower will help banks survive the euro-zone crisis, while also freeing up cash to businesses.

"This is just enough to cover banks' needs," said Nick Stadtmiller, the head of fixed income research at Emirates NBD. "This provides European banks with funds to cover their own maturing debt and the funding needs of Spain and Italy this year. They will be able to do that without taking new liquidity out of the system."

The offering exceeded the amount expected by many traders and was also well above the €489bn handed out to banks during the previous operation in December.

Expectations of the cash injection gave another lift to Dubai benchmark stocks, which have already leapt to a 21 per cent gain this month on signs of a strengthening local and global economic outlook.

Most European markets also responded positively to the announcement. The Euro Stoxx 50 index of euro-zone bluechips rose 0.39 per cent in afternoon trading. The euro dropped against the US dollar.

Investors are hoping the extra cash will help to sustain a lift for equity and bond markets in the coming months.

Mr Stadtmiller said the loans may also help to benefit the Middle East, if European banks stop a pull-back in exposure to the region.

"There was evidence of a refocus on home markets by European banks last year and this may make it less urgent for them to reduce their exposure to emerging markets, and I would not make so much of a pull-back this year," he said.

Banks used much of the previous cash they tapped in December to cover maturing debt. But Mario Draghi, the ECB president, has urged banks to use the latest injection to lend to businesses and consumers to restore economic growth.

Officials also hope banks will use the money to snap up higher-yielding bonds, especially from Italy, to stop the euro-zone crisis deepening.

But economists have warned the loans will not offer a sudden solution to the euro zone's turmoil.

Even if banks had more money to invest it was unlikely they would invest in "risky government bonds", economists at Capital Economics wrote in a research note yesterday.

"Hopes that the funds will solve the fiscal crisis and breathe life into the ailing euro-zone economy are likely to be [dashed]," they wrote.

Paul Volcker, a former chairman of the US Federal Reserve and an economic adviser to the administration of the US president Barack Obama, backed the action.

"You have to use what instruments are available. Central banks have responded forcibly," he said.

"You can be concerned about and worry about future inflationary concerns [of monetary expansion] but I don't think those concerns override the need to provide for large amounts of liquidity at the moment."

* additional reporting by Gregor Stuart Hunter