US treasury to use taxpayers’ money to buy bad debts from financial institutions.
Tony Morris, a currency and markets strategist with ANZ bank in Australia, told Al Jazeera that the US bail-out plan has sparked a recovery across Asian bourses.
“The way the markets are viewing this is that it is very welcome in that they are trying to address the core problem here, the valuation of the underlying assets in the US housing sectors,” he said.
“However, there are a lot of question marks still over this and I think that it is a cautiously optimistic response thus far.
“Some of the stock markets have come off recent highs and [the US] congress is yet to approve this, so I think we’ll be watching headlines for the next few days.”
Last week’s turmoil on the financial markets triggered warnings that the global financial system was teetering on the brink of collapse as a result of the year-old subprime mortgage crisis.
Over the weekend, the US treasury unveiled details of its rescue plan, asking congress for authority to spend $700bn to buy up a mountain of bad mortgage-related assets from financial institutions.
Henry Paulson, the US treasury secretary, urged congress to act quickly and said he was “aggressively” pushing for other countries to come up with their own bail-outs for financial institutions.
It is the US’s largest ever interventionist package and will see the US national debt limit raised to $11.3 trillion.
If it is approved, Paulson’s decisions will not be reviewable by any court, leading some critics of the plan to say this effectively makes the treasury boss a dictator of US financial markets.
Paulson defended his actions, which he acknowledged would cost the US tax-payer billions of dollars, during an interview with the NBC programme ‘Meet the Press’ on Sunday.
“This is not something that we wanted to do. This was something that was very necessary,” he said.
“We did this to protect the taxpayer.”
Chinese banking stocks saw strong gains on Monday in the wake of government moves to support the market, including an announcement that it would buy shares in major state-owned banks.
Shares in China’s biggest lender, the Industrial & Commercial Bank of China Ltd (ICBC) were up 2.5 per cent in Hong Kong trading.
|Paulson acknowledged the US bail-out would cost tax-payers billions [AFP]|
In Tokyo, shares in Japanese banking giant Sumitomo Mitsui jumped 5.5 per cent in early trade on Monday on hopes that the US bail-out would boost the fortunes of banks pummelled by risky subprime mortgages.
In a further stabilising measure as the trading week began, the Bank of Japan (BoJ) said it had injected another 1.5 trillion yen ($14bn) into money markets to help stabilise the international financial system.
The money comes on top of 11 trillion yen injected into the system by the BoJ last week.
In Australia, a newly imposed ban on so-called short-selling of shares – mirroring measures imposed in the US and the UK – helped lift the S&P/ASX 200 index by 3.7 per cent.
Short-selling is when traders effectively bet on the falling price of shares for profit and has been blamed, at least in part, for helping to fuel last week’s turmoil.
The BoJ is one of six major central banks that pledged last week to join a co-ordinated action plan to ensure a flow of liquidity after the collapse of US investment giant Lehman Brothers.
Meanwhile, the US Federal Reserve agreed late on Sunday to allow investment banks Goldman Sachs and Morgan Stanley to become bank holding companies, giving them easier access to credit and help them survive the financial crisis.
The announcement completes an overhaul of the structure of the banking industry, which had been broken up in the 1930s into commercial and investment banks under rules to restore confidence in the Great Depression.
Goldman and Morgan Stanley had been the last two independent Wall Street banks, but had been under intense pressure to find merger partners in the face of financial market storm on fears of further collapses in the sector.
The decision places the investment banks under supervision by bank regulators and opens a wider range of credit to the two firms.