The US Government's bailout of Fannie Mae and Freddie Mac will offer no quick fix for the ailing British mortgage market.

American stock markets surged after the rescue of the giant mortgage companies, with the Dow Jones industrial average up 129 points at midday at 11,350.

In Britain, despite a malfunctioning stock exchange, shares in banks, fund managers and housebuilders rocketed. Barclays was the biggest climber among banks on the FTSE 100, rising 12 per cent to 355p a share, while Cattles led the FTSE 250, climbing 13.6 per cent to 125p.

The cost of interbank borrowing was stubbornly unchanged. The London Interbank Offered Rate (Libor) for three-month sterling moved by less than a basis point to 5.05688 per cent.

Experts were split over whether the decision by Henry Paulson, the US Treasury Secretary, to take control of Fannie and Freddie would offer salvation for Britain's homeowners. Angela Knight, chief executive of the British Bankers' Association, said that there would be no sudden impact from the bailout of the two huge enterprises - the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) - but insisted that stabilising the American housing market would have a knock-on benefit for Britain.

“Stabilising the market will give everyone the ability to value assets with a greater degree of knowledge,” she said.

In theory, a better understanding of the value of the structured credit assets that they hold should help banks to feel more comfortable about lending to each other and will enable them to increase their mortgage offerings, giving the housing market a boost.

Sunday's rescue will also help companies that have direct investments in the American lenders. Analysts at Sanford Bernstein, the stockbroker, calculated that European financial companies hold $100 million (£57 million) or less of shares and preferred shares in Fannie and Freddie. This means that they will take only a small hit from the fall in the lenders' stock.

However, they hold at least $72 billion of Fannie Mae and Freddie Mac debt and mortgage-backed securities - and this figure could be much higher, as banks including Deutsche Bank, Credit Suisse and UBS do not reveal the size of their holdings.

The spread on Fannie Mae and Freddie Mac debts against US Treasury bonds narrowed by 20 basis points during yesterday and is likely to improve further. This means that banks, which marked down the value of these assets in the first half, will be able to mark them back up in the second half. As a result, writedowns in the latter half of 2008 could be less than expected.

Ray Boulger, the senior technical manager at John Charcol, the mortgage broker, said that this benefit to the banks' balance sheets would allow them to hold less risk-weighted capital and should free cash for lending.

However, Bruno Paulson, senior research analyst at Sanford Bernstein, said that the US bailout would not eradicate fundamental economic issues that are hitting Britain's housing market. “It does nothing for the self-made problems of the UK economy, and thus the UK banks,” Mr Paulson said. “House prices are likely to continue their fast fall from bubble levels and the potential knock-on effects on consumption could aggravate the UK slowdown and the associated bank loan losses.”

Jonathan Loynes, chief European economist at Capital Economics, the research house, said that the mere fact that Fannie Mae and Freddie Mac got so close to financial meltdown was likely to damage sentiment in the longer term. One US regulator concentrated entirely on the two lenders, yet they were able to rack up $14 billion in losses. “If they can run into problems, presumably other large lenders can do so as well,” Mr Loynes said. “This begs the question: 'What else is out there?'”

Laurence Mutkin, head of European rates strategy at Morgan Stanley, told investors not to expect a dramatic impact on interbank lending. “In money markets, the issues remain what they have been; banks rebuilding their balance sheets,” he said.

In Britain, a number of banks and building societies dropped the cost of their fixed-rate mortgages yesterday, but this was thanks to last week's fall in the value of gilts. HSBC cut its two-year fix to 5.97 per cent, from 6.43 per cent, with a £799 fee.

Market reaction

4.32% Rise in the Hang Seng index, up 860.99 to 20,794.27

3.92% Rise in FTSE 100, up 205.6 to 5,446.3

3.38% Rise in the Nikkei 225, up 412.23 to 12,624.46

2.59% Rise in the Dow Jones industrial average, up 289.80 to 11,510.70

2.2% Rise in the Dax, up 136.30 to 6,263.74

Source: Market figures

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