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The United States unveiled a plan to soak up the sickly assets that have constricted the world's financial system, triggering a 7 percent stock market rally on Monday with help from an unexpected surge in existing home sales. Skip related content
China helped the positive sentiment by promising to keep buying U.S. government debt 10 days after expressing concern over its exposure to Treasuries.
"Investing in American Treasuries, as an important part of our foreign exchange reserve management, will continue," said Hu Xiaolian, a vice governor of the People's Bank of China.
But China also proposed a sweeping overhaul of the monetary system, saying an IMF accounting unit could replace the dollar over time as the world's main reserve currency.
The U.S. Treasury said it would start with $75 billion (51 billion pounds) to $100 billion to create public-private investment funds that could be leveraged up to $500 billion or even $1 trillion to buy distressed debt.
The plan addressed concerns expressed by the International Monetary Fund, which said the world was in a dire economic crisis and that no recovery was possible until the financial sector was cleaned up.
By bringing in private investors, the government hopes finally to establish prices for the assets that have languished on banks' books and constricted the flow of credit. Officials also are trying not to scare off investors by avoiding the executive pay restrictions that have been attached to other bailout measures.
Two of the largest U.S. money managers -- BlackRock and PIMCO -- expressed interest in joining the toxic asset scheme.
"From PIMCO's perspective, we are intrigued by the potential double-digit returns as well as the opportunity to share them with not only clients but the American taxpayer," Bill Gross, manager of the world's largest bond fund, told Reuters.
Treasury Secretary Timothy Geithner had sent markets plunging on February 10 when he released a minimal outline of the public-private plan.
This one departs from previous bailouts by extending the risk beyond the U.S. taxpayer and may relieve some of the pressure on Geithner, who has been criticized for his handling of the crisis and for big bonuses paid out by financial firms that have received billions of public dollars.
STOCKS RISE
Geithner's job seems safe -- at least for now. He had been receiving solid and repeated statements of support from his boss, President Barack Obama, even before the markets endorsed his plan with a 497-point rise by the Dow.
The S&P 500 rose 7 percent, led by banking shares as Citigroup ended 19.5 percent higher and Bank of America closed up 26 percent. Japanese and European shares closed more than 3 percent higher.
Oil rose above $54 a barrel, the highest level in nearly three months. Prices rose in part on a strike at Petrobras plan to buy rival Petro-Canada to create Canada's biggest oil company.
Sales of previously owned U.S. homes beat market expectations for a fall and rose 5.1 percent in February, the fastest pace in nearly six years. That provided a rare sign of optimism during a 15-month-long recession that was fuelled by a deteriorating housing market.
Still, there were reminders that recession was enduring.
The World Trade Organisation said trade volumes would fall 9 percent this year, the strongest contraction since World War Two and much steeper than the 2.8 percent fall forecast by the International Monetary Fund in January.
Commerzbank sharply cut its forecast for the German economy, saying it now expected a contraction of 6 percent to 7 percent in 2009, easily the gloomiest outlook of any leading bank or think tank.
A Japanese government survey of business sentiment produced the weakest figures in its five-year history and was followed by data showing Japanese land prices fell in 2008 for the first time in three years.
Moody's Investor Service dropped General Electric's top-tier credit rating two notches to "Aa2", deeper than rival Standard & Poor's one-notch downgrade of the biggest U.S. conglomerate 11 days ago. Moody's said its outlook on GE was now stable.
(Reporting by Reuters bureaux worldwide; Editing by Kenneth Barry)
