SINGAPORE/LONDON Asian and European bank shares soared on Monday after the U.S. government took control of mortgage finance firms Fannie Mae FNM.N and Freddie Mac FRE.N in a bid to revive confidence in banks and the housing market.
The plan makes it more explicit that debt issued by Fannie and Freddie will be backed by the U.S. government. It curbed worries that banks and other financial firms around the world face more big losses on their exposure to their bonds and other risky assets, analysts said.
It also sent a broader message that the housing market will be supported, lifting confidence across the sector.
"This is as clear a signal as anything that the U.S. government intends to stand behind the U.S. housing market and government money is being made available to support the housing market," said Simon Maughan, analyst at MF Global in London.
"It doesn't change the immediate outlook for jobs or any of the macroeconomic fears that people have, but it's a potentially significant cash injection directly into the housing market, which is the number one source of the credit crunch."
The DJ Stox European bank index .SX7P soared 7.7 percent to 304 points by 0800 GMT, led by rallies of over 10 percent by UBS UBSN.VX, Royal Bank of Scotland (RBS.L), Barclays (BARC.L) and Credit Agricole (CAGR.PA).
Asian banks had set the rally in motion. Japan's largest banks rose more than 10 percent and MSCI's index of Asia-Pacific banks outside of Japan jumped 5 percent, its biggest one day move since March.
The U.S. bailout plan is set to leave shareholders in Fannie and Freddie last in line for any claims, but that is of little concern to investors in Asian and European banks.
"There is hardly any equity exposure of Asian bank ex-Japan in Freddie and Fannie," said Todd Dunivant, head of regional banks research with HSBC in Hong Kong.
"But investors were concerned about the mark-to-market losses in debt and MBS (mortgage-backed securities)."
Financial firms have posted over $500 billion in credit losses and write-downs since credit markets seized up a year ago and their holdings of complex debt instruments tied to mortgages plummeted in value.
Japan's industry leader Mitsubishi UFJ Financial (8306.T) rose 12 percent while No. 2 lender, Mizuho Financial (8411.T), and third-ranked Sumitomo Mitsui Financial (8316.T) both climbed 11 percent.
The European rally was across the board. Dexia (DEXI.BR) was the strongest European stock with a 14 percent surge, and big names HSBC (HSBA.L), Santander (SAN.MC), Unicredit CRDI.MC and BNP Paribas (BNPP.PA) all rose over 5 percent.
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The U.S. government's action, prompted by worries over the mortgage firms' shrinking capital, was the latest in a series of emergency steps taken by U.S. officials to prop up the wobbly housing sector and quell what is now a year-long crisis in credit markets that has helped push many economies toward recession.
In Hong Kong, Bank of China (3988.HK), which has been tipped to have the greatest exposure to Freddie and Fannie debt among the Chinese lenders, rose 4.6 percent. China's third largest lender cut its debt and MBS holdings in the beleaguered U.S. home financers to under $13 billion by end-August from $17.3 billion at the half year mark.
Korea's Kookmin Bank 060000.KS jumped 8 percent, Woori Finance 053000.KS surged 13 percent and Shinhan Financial Group rose 8 percent.
"Banks with higher portion of riskier assets are making the most gains. Woori Finance Holdings, which is said to hold more Fannie and Freddie-linked bonds than other banks, is jumping," said Park Jung-hyun, an analyst at Hanwha Securities.
Policymakers welcomed the move. In Australia, Reserve Bank of Australia Governor Glenn Stevens said the U.S. action was necessary to reassure shaky markets.
Credit spreads on Europe's banks tightened sharply, reflecting the reduced risk for counterparties, analysts said.
But Masanobu Takahashi, chief strategist at Ichiyoshi Securities in Tokyo, cautioned it was too early to predict a full recovery for bank shares, which are still down 20 percent in Japan and 30 percent elsewhere the region so far this year.
"It's just that bleeding from (the) U.S. front has been stemmed, and it does not mean the overall economy will turn upward," he said. "We cannot expect that unless the governments take up measures that have impact on the economy."
(Reporting by Parvathy Ullatil in HONG KONG, Taiga Uranaka, Aiko Hiayshi and Masayuki Kitano in TOKYO, Mette Fraende in SYDNEY, Park Jung-youn in SEOUL, Faith Hung in TAIPEI, Jon Hopkins and Jane Baird in LONDON, Jesus Aguado in MADRID; Editing by Jean Yoon/Andrew Callus)