Markets soar after US bail-out
Bank shares rally after government takeover of mortgage giants Fannie Mae and Freddie Mac.
The most likely long-term beneficiaries of the costliest US bailout ever would be holders of the Freddie and Fannie bonds, which were trading a full percentage point above US Treasuries on Friday.
On Monday, they were effectively as safe as US government debt.
China and Japan, the biggest holders of the bonds, welcomed the bailout.
“I think it will have a positive impact on the world economy as it eases worries over the US economy through more stable financial markets in the United States,” Bunmei Ibuki, Japan’s finance minister said.
Ibuki said Henry Paulson, the US treasury secretary, would explain the details of the rescue to his Group of Seven counterparts on Monday evening.
Rally
UBS and Mizuho Financial, two casualties of the year-long credit crisis, jumped 10 per cent and 11 per cent respectively, leading rallies among banks in Europe and Asia.
Japan’s Nikkei share average rose 2.9 per cent in early trade, spiking sharply from a 5-1/2-month low on Friday.
The MSCI index of Asia-Pacific stocks traded outside of Japan was up 2.7 per cent, also rebounding from the lowest since October 2006.
South Korea’s Kospi climbed 3.5 per cent after ending on Friday at the lowest since March 2007 while Australia’s S&P/ASX 200 rose 3.2 per cent.
Paul Schulte, a regional strategist with Lehman Brothers in Hong Kong, told the Reuters news agency that the US move had taken some of the risk out of the market.
“So in that sense this is good for other financial assets – you have reduced systemic default risk,” he said.
But he also warned that “longer-term we have a lot more glass to crawl over because we have arrangements with other financial institutions that need to get worked out”.
The US government on Sunday seized control of Fannie Mae and Freddie Mac, which own or guarantee half of all US mortgages, ending weeks of speculation after regulators judged the companies’ shrinking capital position left them too vulnerable.
As part of the plan, the treasury is taking an equity stake in the companies and promised to purchase mortgage-backed securities they issue and provide however much liquidity is necessary to keep them afloat – actions that could cost $200bn.
But Citigroup analysts said that the longer Washington increases its debt to essentially restructure the housing market, the more the dollar and US assets in general would be seen in a negative light.
Financial firms have posted over $500 billion in credit losses and write-downs since credit markets seized up a year ago after defaults on U.S. home loans.