"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.
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 US 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 US 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 US prime property market.
…
Hiroshi Watanabe, Japan's chief regulator, rattled the markets yesterday when he urged Japanese banks and life insurance companies to treat US 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 US 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."
Ambrose Evans-Pritchard, "US faces global funding crisis, warns Merrill Lynch", Daily Telegraph (15 July 2008).
Ambrose Evans-Pritchard is the international business editor of the Daily Telegraph.
There is no doubt but that we are in grave financial trouble and it will take some time to work our way out of it. In my view, it is the current strategy to nationalize partially or totally the nation's quasi-private housing lenders is unwise and could very well place an enormous burden on the taxpayer and cause bond rating agencies to wonder about the sanity of our financial policymakers. The policy response to all our difficulties, financial and otherwise, seems to be to "nationalize" every problem in one form or another. If they do not throw money at the problem, the advocate ever great regulation and control, and the usually recommend both.
This can become very expensive, and at some point even the Fed's printing presses will reach the limit of their capacity. More importantly, our chief bond salesman, Treasury Secretary Henry Paulson, will run out of friends to sell bonds to. Hence, it is likely that the Treasury is going to have an increasingly difficult time selling its bills, notes and bonds. As they do, interest rates are going to rise and they may rise substantially.
But, contrary to Evans-Pritchard, the world is not coming to an end (yet). The Arabs, the Russians and the Asians are not going to bring down the international financial system by refusing to buy any Treasury paper. They are too smart to commit financial suicide by destroying the value of the bonds they already hold, and anyway, what else are they going to do with all those dollars they are accumulating?
What they will do is cut back on their purchases and will insist on a higher interest rate. They will also try and use their willingness to finance our Federal budget deficit as influence in any diplomatic negotiations we may have with them. That is the danger, not an full-scale attempt to bring this country to its knees.
We put ourselves in this dangerous position by refusing for decades to deal with our accumulating balance of payments and national budget deficits. We continue to ignore the looming Social Security and Medicare deficits that dwarf our present imbalances. I must say, if I saw Hank Paulson coming my way hawking his bonds, I wouldn't just ask for a higher interest rate, I'd run away fast.
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