Request for Bond Insurance Financial Support Helps Equity Rebound
Hoping a rescue plan for ailing bond issuers would stop a new round of credit losses, investors in the global market poured back into equities on Thursday.
Wall Street looked set to open higher and demand for bonds fell sharply as equities rebounded. The dollar weakened.
European and Asian stocks markets took their cue from overnight gains on Wall Street to rise sharply. The pan-European FTSEurofirst 300 was up 4.9 percent and Japan's benchmark Nikkei closed 2.1 percent higher.
The key driver was news that New York's insurance regulator had pressed major banks on Wednesday to put up billions of dollars to support wobbly bond insurers.
Insurers have become the latest sector to worry investors in the credit crisis. The debt they underwrite shares the top rating of many of these firms, so if the firms are downgraded because of losses, the debt rating goes down too.
This would force some investors to sell, dumping billions of dollars of municipal bonds, repackaged loans and the like onto markets, sending borrowing costs soaring and forcing more investor write-downs.
"If these (insurance) guys would fail, it would be much more catastrophic for banks' balance sheets and we would see another round of write-downs," said Edmund Shing, strategist at BNP Paribas in Paris.
Published on January 24, 2008
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