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Last Updated: Jul 14th, 2008 - 16:08:31 |
LONDON (Reuters) - A U.S. government plan to rescue mortgage agencies Fannie Mae and Freddie Mac was welcomed by one of the world's biggest holders of dollar assets on Monday but fears remained about the state of the global financial system.
Japan said it hoped that a plan unveiled on Sunday by the U.S. Treasury and the Federal Reserve would support the troubled government-sponsored mortgage financiers, but a senior minister said that world markets were on the brink of crisis.
The central bank of Singapore, another major dollar-asset holder, issued a similar warning about risks to financial markets and institutions.
The U.S. Treasury and Fed called late on Sunday for measures to lend money and buy equity if necessary in Freddie Mac and Fannie Mae, which are government-sponsored enterprises (GSE) owned by shareholders.
Fannie and Freddie own or guarantee $5 trillion of debt (2.5 trillion pounds), close to half the value of all U.S. mortgages. Foreign central banks, mostly in Asia, hold $979 billion of the bonds and mortgage-backed bonds sold by the agencies.
"We hope the move will have a positive impact on the world economy," Japanese Vice Finance Minister Kazu Sugimoto told a news conference in Tokyo.
The hope was peppered with caution, however. Japan's financial services minister, was quoted as telling a meeting of economic ministers that the world's financial markets were "on the verge of a crisis".
The Monetary Authority of Singapore, meanwhile, was blunt.
"Significant challenges and downside risks in the international financial markets remain and financial institutions and investors should stay vigilant," the central bank said.
FREE-FALL
The rescue plan was timed to soothe market nerves. Freddie and Fannie shares plummeted more than 40 percent last week on fears they were under capitalised.
Freddie also is to sell $3 billion of three- and six-month bills on Monday in a test of market appetite for agency securities.
"(Their) continued strength is important to maintaining confidence and stability in our financial system and our financial markets. Therefore, we must take steps to address the current situation as we move to a stronger regulatory structure," U.S. Treasury Secretary Henry Paulson said in a statement.
Beyond the short term, however, a collapse of one of the agencies could unleash massive turmoil in the world's battered financial markets and inflict a deep recession on the United States that could chill growth everywhere.
Allowing a failure is considered inconceivable by many investors because of the massive role played by the GSEs in the financial system.
"It's not just that they are too big to fail, it's that they are too important to fail," said Ramon Maronilla, portfolio manager at State Street Global Advisors, the $2 trillion money management unit of State Street Corp.
Many financial markets did react positively to the plan. European shares where sharply higher, with the FTSEurofirst 300 up more than 1.5 percent and Wall Street looking set for similar gains at its open.
The dollar was also up across the board, gaining more than half a percent against a basket of six major currencies.
"While this is positive, if they hadn't done it things would be a lot worse," said Sharada Selvanathan, a currency strategist at BNP Paribas in Hong Kong.
"At the end of the day, the holders of agency debt are significantly in overseas hands and foreign central banks. They had to do this because confidence could weaken further, and that would be very, very bad for the dollar," she said.
Many investors were also keen to hang onto or buy Fannie and Freddie debt.
Russia's central bank, which holds about $100 billion worth, said on Saturday it saw no problem holding the paper.
Bill Gross, who manages the $130 billion Pimco Total Return Fund, also said he expected regulatory changes for Fannie and Freddie that could make their bonds "look more like Treasuries in terms of yield and credit quality, as will the mortgages that bear their name".
Both Freddie and Fannie said they were adequately capitalised but welcomed government support.
The Treasury said it would temporarily raise its line of credit to the two mortgage financiers, as well as purchase equity in them, a step never taken before, if needed.
The Fed said Fannie and Freddie could have access to its emergency cash. It held out a similar lifeline to investment banks after organising a takeover of ailing investment bank Bear Stearns in March as it moved to calm markets roiled by the worst housing slump since the Great Depression 80 years ago.
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