From: [EMAIL PROTECTED]
Date: July 21, 2008 5:35:32 PM PDT
To: [EMAIL PROTECTED]
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Subject: Fwd: *U.S. Faces Global Funding Crisis, Warns Merrill Lynch*
http://www.chinadaily.com.cn/bizchina/2008-07/17/content_6854442.htm
Bank of China Ltd may own about $20 billion of debt issued by Fannie
Mae and Freddie Mac, representing two-thirds of total holdings among
the six largest Chinese banks, according to CLSA Ltd.
From: [EMAIL PROTECTED]
Sent: 7/21/2008 3:19:00 P.M. Pacific Standard Time
Subj: *U.S. Faces Global Funding Crisis, Warns Merrill Lynch*
http://www.informationclearinghouse.info/article20310.htm
*U.S. Faces Global Funding Crisis, Warns Merrill Lynch*
Last Updated: 1:07 a.m. B.S.T. 18/07/2008
The US Treasury is running out of time before foreign patience snaps,
writes Ambrose Evans-Pritchard
Merrill Lynch has warned that the United States could face a foreign
"financing crisis" within months as the full consequences of the
Fannie
Mae and Freddie Mac mortgage debacle spread through the world.
[Dollar bills -- Draining away: The U.S. may struggle to plug its
capital gap]
The country depends on Asian, Russian and Middle Eastern investors to
fund much of its $700bn (£350bn) current account deficit, leaving it
far
more vulnerable to a collapse of confidence than Japan in the early
1990s after the Nikkei bubble burst. Britain and other Anglo-Saxon
deficit states could face a similar retreat by foreign investors.
"Japan was able to cut its interest rates to zero," said Alex Patelis,
Merrill's head of international economics.
"It would be very difficult for the U.S. to do this. Foreigners will
not be willing to supply the capital. Nobody knows where the limit
lies."
Brian Bethune, chief financial economist at Global Insight, said the
U.S. Treasury had two or three days to put real money behind its
rescue
plan for Fannie and Freddie or face a dangerous crisis that could
spiral
out of control.
"This is not the time for policy-makers to underestimate, once again,
the systemic risks to the financial system and the huge damage this
would impose on the economy. Bold, aggressive action is needed, and
needed now," he said.
Mr. Bethune said the Treasury would have to inject up $20bn in fresh
capital. This in turn might draw in a further $20bn in private money.
Funds on this scale would be enough to see the two agencies through
any
scenario short of a meltdown in the U.S. prime property market.
He said concerns about "moral hazard" - stoked by hard-line
free-marketeers at the White House and vocal parts of the US media -
were holding up a solution. "We can't dither. The markets can be
brutal.
We have to break the chain of contagion before confidence is
destroyed."
Fannie and Freddie -- the world's two biggest financial institutions
--
make up almost half the $12 trillion .U.S mortgage industry. But that
understates their vital importance at this juncture. They are now
serving as lender of last resort to the housing market, providing 80pc
of all new home loans.
Roughly $1.5 trillion of Fannie and Freddie AAA-rated debt -- as
well as
other U.S. "government-sponsored enterprises" -- is now in foreign
hands. The great unknown is whether foreign patience will snap as
losses mount and the dollar slides.
Hiroshi Watanabe, Japan's chief regulator, rattled the markets
yesterday
when he urged Japanese banks and life insurance companies to treat
U.S.
agency debt with caution. The two sets of institutions hold an
estimated $56bn of these bonds. Mitsubishi UFJ holds $3bn. Nippon
Life
has $2.5bn.
But the lion's share is held by the central banks of China, Russia,
and
petro-powers. These countries could all too easily precipitate a
run on
the dollar in the current climate and bring the United States to its
knees, should they decide that it is in their strategic interest to
do so.
Mr. Patelis said it was unlikely that any would want to trigger a
fire-sale by dumping their holdings on the market. Instead, they will
probably accumulate U.S. and Anglo-Saxon debt at a slower rate. That
alone will be enough to leave deficit countries struggling to plug the
capital gap. "I don't see how the current situation can continue
beyond
six months," he said.
Merrill Lynch said foreign governments had added $241bn of U.S. agency
debt over the past year alone as their foreign reserves exploded,
accounting for a third of total financing for the U.S. current account
deficit. (They now own $985bn in all.) By most estimates, China holds
around $400bn, Russia $150bn and Saudi Arabia and other Gulf states at
least $200bn.
Global inflation is now intruding with a vengeance as well. Much of
Asia is having to raise rates aggressively, drawing capital away from
North America. This may push up yields on U.S. Treasuries and bonds,
tightening the credit screw at a time when the U.S. is already mired
in
slump.
Russia's deputy finance minister, Dmitry Pankin, said the collapse in
the share prices of Fannie and Freddie over the past week was
irrelevant
because their debt has been effectively guaranteed by the U.S.
government under the rescue package.
"We don't see a reason to change anything because the rating of the
debt
of those agencies hasn't changed," he said.
Foreign policy experts doubt that the picture is so simple. Russia is
likely to use its $530bn reserves as an implicit bargaining chip in
high-stakes diplomacy, perhaps to discourage the U.S. from extending
N.A.T.O. membership to the Ukraine and Georgia.
Vladimir Putin, now Russia's premier, has stated repeatedly that his
country is engaged in a new Cold War with the United States. It is
clear that Moscow would relish any chance to humiliate the United
States, provided the costs of doing so were not too high for Russia
itself.
China is regarded as a more reliable partner, with a greater desire
for
global stability. Treasury Secretary Hank Paulson has intimate
relations with the Chinese elite, dating from his days at Goldman
Sachs
when he visited the country over 70 times.
Brad Setser, from the U.S. Council on Foreign Relations, said the
Chinese have a stake in upholding Fannie and Freddie, not least to
ensure that their loans are "honoured on time and in full."
David Bloom, currency chief at H.S.B.C., said fears that regional
banks
could start toppling after the Fed takeover of IndyMac last week were
now the biggest threat to the dollar.
"We have a pure dollar sell-off," he said. "It's a hating competition:
at the moment the markets hate the dollar more than they hate the
euro,
even though German's Z.E.W. confidence indicator was absolutely
atrocious."
Related:
# More by Ambrose Evans Pritchard
http://www.telegraph.co.uk/money/main.jhtml;?menuId=242&menuItemId=10299&view=COLUMNIST&grid=F7&targetRule=14
# European recession looms
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/07/15/ccspain115.xml
# The credit crisis explained in black and white
http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&xml=/money/2008/03/26/bcncrisis126.xml
# British banks are still bleeding
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/07/15/cctracy115.xml
# Could gold hit $2,000?
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/07/03/bcngold103.xml
# Economic risks for China are growing
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/07/07/ccview107.xml
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