Asia, Europe Stocks Drop on Credit Woes

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An investor reacts as she looks at the stock price monitor at a private security company Tuesday...

An investor reacts as she looks at the stock price monitor at a private security company Tuesday July 15, 2008, in Shanghai, China. China's shares fell Wednesday, led by real estate and financial stocks as worries about the U.S. financial sector triggered an Asia-wide decline. The benchmark Shanghai Composite Index fell 3.43 percent to close at 2779.45.

(AP Photo)

Asian and European stock markets fell sharply Tuesday as investor confidence in the U.S. financial system eroded further despite a government-backed plan to help beleaguered mortgage financiers Fannie Mae and Freddie Mac.

Financials were hit particularly hard as investors worried that trouble in the U.S. markets would spill over into Asia and Europe.

By afternoon in Europe, Britain's FTSE 100 had fallen 2.55 percent to 5,165.20, Germany's DAX lost 2.60 percent at 6,039.20, and France's CAC-40 retreated 2.18 percent to 4,052.28.

Fears of yet more bank losses in Europe weighed on stocks. Several major banks have written off billions and had to raise more capital.

"We have got results coming out later in the week and there are worries there are going to be more write-downs," said Lawrence Peterman, investment director at Eden Financial in London.

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Official figures showing inflation in Britain hit a higher-than-expected 3.8 percent in June, up from 3.3 percent in May, was also having an effect, Peterman said.

In Asia, every major index suffered declines, with Hong Kong's Hang Seng Index dropping more than 3.8 percent and Taiwan's benchmark losing over 4.5 percent. In Tokyo, the Nikkei 225 index dropped nearly 2 percent to close at 12,754.56.

Japanese traders were rattled by a local business newspaper report that the country's top three banks hold a combined 4.7 trillion yen ($44 billion) in Fannie Mae and Freddie Mac debt. Another newspaper report unnerved Taiwan's market with news that at least two leading financial institutions have invested in the mortgage giants, and the country's central bank may also have purchased their bonds.

In China, rumors were circulating that the Chinese government had also invested in Fannie and Freddie bonds.

The two government-chartered companies received a boost Sunday when the U.S. central bank and Treasury Department promised to step in with short-term funding and other aid should mortgage losses mount. Together, the companies hold or back about half the outstanding mortgages in the United States.