Banks lead Europe share rally after Buffett plan

By Amanda Cooper

LONDON (Reuters) - Banks drove European stocks up by more than 3 percent on Tuesday after U.S. billionaire investor Warren Buffett offered to reinsure municipal bonds held by top bond insurers, soothing some of the most recent credit concerns.

HSBC (HSBA.L) was the top positive influence on the broader market, rising 4.6 percent, while Santander (SAN.MC) gained 3.8 percent and Barclays (BARC.L) jumped 6.2 percent.

The FTSEurofirst 300 index .FTEU3 of leading European shares ended 3.4 percent higher at 1,334.2 points, just shy of the day's high of 1,334.4, with gains stoked towards the close. The ratio of advancing issues to decliners was about 14 to one by the close of trading hours.

U.S. shares were also sharply higher.

Buffett told CNBC television the offer, which he extended to bond insurers MBIA (MBI.N), Ambac (ABK.N) and FGIC, would cover $800 billion in municipal bonds.

Shares in MBIA and Ambac have fallen in the last 12 months between 80 and 90 percent, battered by concern over their exposure to the subprime crisis.

Bond insurers guarantee more than $2.4 trillion in debt and have been struggling to hold on to their top credit ratings after suffering heavy losses from backing mortgage securities that have plunged in value.

"Basically that was driving the market higher today," said Fortis Bank strategist Philippe Gijsels in Brussels.

"(Buffett) is apparently only looking to buy the good part of the business, but clearly, it is helpful and shows a number of things, firstly, there is money around to go into these markets ... and there is smart money going in."

The FTSEurofirst is still showing a loss of around 11 percent for the year to date as investor confidence in the outlook for corporate profitability has been shaken by a spreading economic slowdown.

REVERSAL OF FORTUNES

Financials, and insurers in particular, came under pressure early in the day as Monday's news of an accounting hole in the derivatives portfolio of American International Group (AIG.N) triggered renewed fears over their subprime exposure.

But virtually all components of the insurance sector had recouped those losses by the afternoon. Swiss Re (RUKN.VX) gained 3.6 percent, Munich Re (MUVGn.DE) rose 2 percent and Royal & Sun Alliance (RSA.L) gained 4.4 percent.

Shares in Credit Suisse (CSGN.VX) pared earlier losses incurred after the Swiss bank scaled back its full-year 2007 subprime writedowns, but also reported a 49 percent fall in fourth-quarter profit. Subprime writedowns in the fourth quarter were 1.26 billion francs, Credit Suisse said.

"These writedowns are towards the higher end of expectations, and importantly, there is still significant residual risk left on the balance sheet," Goldman Sachs analysts said in a research note.