Bail-out to prevent US mortgage meltdown: Economy roundup

The US Federal Treasury has moved to shore up support for the country’s two largest mortgage lenders, yesterday announcing a multi-billion dollar rescue package.

The US Federal Treasury has moved to shore up support for the country’s two largest mortgage lenders, yesterday announcing a multi-billion dollar rescue package.

US Treasury Secretary Henry Paulson said government sponsored mortgage lenders Freddie Mac and Fannie Mae will receive an extra line of credit from the Treasury and raised the prospect that the US Government could buy a stake in the companies.

The move was prompted by fears that a $US3 billion capital raising planned by Freddie Mac today would be shunned by investors.

With half of the US’s $12 trillion in mortgages on their books, Freddie Mac and Fannie Mae won’t be allowed to collapse – such an event would cripple the US economy.

But the crisis is likely to further undermine already shattered confidence on global financial markets, further lifting wholesale lending costs for banks around the world.

There are three key consequences for Australia from the deepening US woes, and their flow-on consequences for global markets.

It will continue to be expensive for Australian banks and big corporates to raise money on wholesale lending markets. Expect more non-official interest rate rises in the months ahead.

Because rates are likely to rise here, while in the US things are going from bad to worse, it is probable the Australian dollar will continue to head higher – at midday today it is trading at US96.7, after reaching a 25-year of US 97.18c in offshore trade overnight.

While we’re on the topic of high rates, data released today shows consumer, property and lease finance all slumped in May, with only commercial lending showing signs of resilience.

Personal finance fell a particularly heavy 7.8% seasonally adjusted – a tangible sign that high interest rates and expensive petrol are causing people to put their credit cards away.

And third, while the US is weak, the volatility that has plagued the Australian sharemarket since October last year is likely to continue.

There has certainly been a fair bit of bouncing around today, with the S&P/ASX200 down 0.1% on Friday’s close to 4972.9 at midday, after falling more than 30 points on opening.