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pencilvanian
1000+ Penny Miser Member
USA
2209 Posts |
 Posted - 08/27/2008 : 20:03:10
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Asia Is About to Give U.S. a Kick in the Fannie:
William Pesek
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Commentary by William Pesek
The great stampede out of dollar assets that many analysts predicted hasn't happened. Demand for U.S. debt has been quite resilient amid a sliding dollar and a widening credit crisis. Even problems at Fannie Mae and Freddie Mac haven't yet precipitated a massive capital exodus.
The operative word is ``yet.'' The almost $10 billion drop in central-bank holdings of agency debt this month doesn't necessarily mean the flight is afoot. Yet Asia is anxiously awaiting news of how the U.S. handles troubles at government- sponsored mortgage-finance companies.
China, for example, holds $376 billion of long-term U.S. agency debt and, according to James McCormack, head of Asian sovereign ratings at Fitch Ratings Ltd. in Hong Kong, most of it is in Fannie and Freddie assets.
..........If the U.S. government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic,'' Yu Yongding, a former adviser to China's central bank, said last week. ``If it is not the end of the world, it is the end of the current international financial system.''
Even if Fannie and Freddie are bailed out, recent events mark the end of the U.S.'s financing arrangement as we know it. It's a reality for which the U.S. should now plan.
..............China alone will be a prickly customer to deal with. A conservative estimate would put China's U.S. agency holdings at 10 percent of its gross domestic product.
Say the U.S. opted not to repay investors on time and in full. How would China's 1.3 billion people, awash in post- Olympics confidence, respond to the wealthy U.S. leaving China with big losses? If the tables were turned, you can just imagine the public outcry for the U.S. to stop lending to China.
.........Those arguing the U.S. will hold its ground in these turbulent times ignore how dependent the U.S. is on Asia's money. It's often said that the U.S. built a large, productive economy over the years, and Asia holds the mortgage.
........The U.S. current-account deficit was $176.4 billion in the first quarter, compared with the average shortfall of $100 billion since 1993. That isn't the product of the U.S. supporting global growth; it's about Asia's money helping the U.S. live perilously beyond its means.
Fractured System
If Wall Street's woes worsen, Asia will need those reserves to ward off speculators. Even so, the dollar's gyrations over the last year will make Asians wary.
.........All the talk from Obama or McCain about a strong America ignores how the U.S. is losing some economic-policy autonomy. Any move by Treasury Secretary Henry Paulson to restructure U.S. agency debt now has foreign-policy consequences and will need to be looked at through that prism.
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Fannie, Freddie & Asia
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