Fannie, Freddie troubles send rates higher

Fannie Mae and Freddie Mac are in the business of buying mortgageloan portfolios from financial institu¬tions. They then hold the portfolios to resell to other investors or sell mort¬gage guarantees.

Fannie Mae has US$720 billion (Bt24 trillion) worth of mortgageloan assets, with debt of $795 billion and $2.1 trillion in mortgageguar¬antee liabilities. However, its core cap¬ital is only $45 billion. Freddie Mac, on the other hand, has $710 billion worth of mortgageloan assets, with debt of $740 billion and $1.4 trillion in mortgageguarantee liabilities. Its core capital is $38 billion.

Given the importance and size of these institutions, they are simply too big to let "go under". As a result, the US treasury secre¬tary is feverish¬ly working on a rescue package. However, mar¬ket players around the world now know the stark reality of the crisis in the US property market: it is far deep¬er and much worse than originally thought.

On one side, problems in the US property market and a credit crisis have put the brakes on the US econ¬omy and slowed it down, driving up unemployment and hitting consumer confidence. On the other side, the world economy has been hardhit by skyrocket¬ing oil and food prices. We are now facing two painful symp¬toms of the crisis: recession and ris¬ing |inflation. Consequently, as expected, the US, European and Thai central banks have all raised their benchmark inter¬est rates, in order to control inflation. However, these central banks will likely to find it more difficult to make their next move. We believe the gov¬ernors of each institution will have to give top priority to stability, but any rate rise will have to be gradual so as not to push economies into recession.

On the currency front, the US dol¬lar lost ground against the Euro while firmly holding its value against the Japanese Yen. We expect that the US dollar will continue to lose value against major currencies due to con¬tinuing property market problems in the US and the credit crunch.

On the domestic front, the US dol¬lar is holding steady against the baht. Policymakers in Thailand have a dif¬ferent view than that of the US Federal Reserve on how to implement eco¬nomic policy. The Bank of Thailand has shown it wants to focus on com¬bating inflation, while the govern¬ment wants to introduce more eco¬nomicstimulus packages.

Policy issues aside, local banks are now bidding for deposits at higher rates and with promotions. We believe interest rates in Thailand are on an upward trend.