GLOBAL MARKETS-Shares hit as banking crisis bites in Europe
Reuters* MSCI world equity index down 1.9 percent at 305.48
* B&B, Fortis bailouts shove European shares, euro lower
* TARP overshadowed as investors fret on banking contagion
By Veronica Brown
LONDON, Sept 29 (Reuters) - European shares fell heavily onMonday as fallout from the credit crisis hit the region'sbanking sector, forcing partial nationalisation of two banks andleaving investors to ponder the impact of a U.S. bailout plan.
The euro and sterling fell in the wake of share pricessliding, while safe-haven government bond prices rose.
Money markets remained frozen with banks refusing to lend toone another for all but the shortest periods, prompting theEuropean Central Bank to offer additional funds.
The hard-fought U.S. proposal to establish a $700 billionfund to buy illiquid securities will be sent for a Congressionalvote later on Monday after days of tense negotiations andcompromises.
But European worries threatened to overshadow the proposalafter the Belgian, Dutch and Luxembourg governments were forcedto rescue financial firm Fortis over the weekend to prevent adomino-like spread of failure.
In addition, the UK government said that lender Bradford &Bingley's branch network will be sold to Spanish bank Santander and the remainder of the group would be nationalised.
"The nationalisations have an incredibly negative readacross for the sector," said Mark Sartori, head of Europeansales trading at Fox-Pitt, Kelton.
"The contagion is spreading to mainland Europe andeveryone's asking: who's next?" he added.
By 0830 GMT, MSCI main world equity index fell 1.9 percent,a 1-1/2 week low. The FTSEurofirst 300 Index was down 2.7percent at 1073.97, while a measure of banking stocks tanked 5percent to 267.76.
European shares followed a lead set in Asia overnight withJapan's Nikkei share average posting a 1.3 percent decline,erasing earlier gains.
The December U.S. S&P 500 future was down 2 percent,reversing initial gains on news the plan was set for a vote inthe House of Representatives.
EURO FEELS THE HEAT
Currency markets also felt the pinch of banking sectorcontagion, with the euro falling more 2 percent to a 10-day lowof $1.4310. A fall of 2.1 percent or more would be thebiggest 1-day fall since Jan 2001, while a fall of 2.3 percentor more would be the biggest since its launch in 1999.
In addition, sterling dropped almost 2 percent to $1.8085.
"The crisis has taken on a more international complexionwith B&B and Fortis ... There is a worry whether there is theability or the willingness within Europe for a U.S.-styleresponse," Calyon senior currency strategist Daragh Maher said.
The dollar was well-bid elsewhere on hopes of smoothlegislative passing of the $700 billion proposal, rising 1.3percent versus the Swiss franc. The high-yielding Australian andNew Zealand dollars fell 1.7 and 1.3 percent respectively.
December Bund futures were 88 ticks higher at 114.68.Two-year bond yields fell to their lowest since mid-April, while10-year yields were just under 16 basis points lower at 4.155percent.
Two-year swap spreads, indicating the strains in the market,rose as high as 120 basis points from 113 bps late on Friday.
In early London trade on Monday the interbank cost ofborrowing dollars for three months was indicated as high as 5.27percent, the highest this year, according to Reuters data.
The closely-watched TED spread, or the difference betweenthese market-based dollar rates and three-month U.S. governmentborrowing rates, fluctuated in a wide range of around 280 to 440basis points.
SAFETY VS RISK
Washington's bailout package, though unpopular with thepublic and viewed sceptically by some analysts, is the biggesteffort yet by the U.S. government to ease the worst globalfinancial crisis since the Great Depression.
Yet it alone has not been enough to reverse a powerful moveby global investors to purge their portfolios of risk.
"The package will improve liquidity in the system. But Idon't think lenders are going to go out carte blanche andprovide new capital to the market in an aggressive way," saidLeigh Gardner, head of equities distribution for ABN AMRO inAustralia. (Additional reporting by Kevin Plumberg in Hong Kong, JessicaMortimer and Joanne Frearson in London) (Editing by Stephen Nisbet)