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PARIS (MNI) – With eurozone HICP at a record high and inflation
risks on the horizon as far as the eye can see, the European Central
Bank’s Governing Council is stiffening its resolve as the defender of
price stability, even at a time of great uncertainty about economic
growth, well-informed monetary sources have told Market News
International.

The ECB is still piloting the monetary aircraft in a thick fog as
inflation rises well above the bank’s comfort level and ongoing market
turmoil, accompanied by a sharp slowdown or recession in the United
States, clouds the view, these sources said.

But the thinking in Eurosystem monetary circles appears to have
shifted recently, as oil continues its steady rise and workers in
Germany win bigger-than-usual pay increases.

In recent months, as unabated turbulence roiled markets and the
U.S. economy slipped towards the abyss, many eurozone monetary
policy-makers saw price risks as an obstacle to cutting rates. Now, the
ascending view is that a lack of clarity over how sharply growth will
slow is what’s keeping the ECB from putting up rates.

“Nobody talks about an interest rate cut anymore,” said one source.
“It’s a wait-and-see policy, as it has been for awhile, but the bias has
moved.”

That is not to say the ECB has formally returned to a tightening
bias. But there is an awareness that unless inflation behaves, the next
move could very conceivably be a rate hike — in contrast to market
expectations, albeit receding ones, for a cut.

“With inflation running at 3.6%, the ECB could be forced to tighten
monetary policy,” said one senior Eurosystem official. “This will depend
on whether inflationary pressures from oil and food price hikes create a
second round of increases in wages and consumer products.”

Another official put it more bluntly: “The fact is that if the
money markets can be stabilized, then rate hikes would have to be put
back on the agenda,” he said.

But such a move, if it comes at all, may still be a long way off.

The official who observed that “the bias has moved” also said,
“It’s difficult to see rates going up at the moment, with the financial
sector still weak and the U.S. maybe in recession. Higher rates here
will make it worse for financial institutions. They are still
leveraged.”

He also noted that “there is already some tightening effect in the
markets,” given the strong euro and the rise in three- and six-month
rates, which are now well above 4.8% — more than 80 basis points north
of the ECB’s main policy rate.

The senior Eurosystem source made it clear that while perceptions
may have hardened with regard to inflation, no imminent action by the
ECB is likely because the economic picture is just too cloudy for now.

“The markets should not expect monetary policy changes during the
coming months, despite market and political pressures,” he said. “We are
in no position to make a medium-term assessment, since we are not fully
aware of the banking sector’s exposure to the financial market crisis.”

Therefore, policy is still finely balanced for now between two
conflicting pressures, he said. “The one is an interest rate increase
and the other is a rate cut. As a result, the Council has decided to
freeze any action and continue to inject the market with liquidity.”

Nonetheless, the more hawkish comments by MNI’s sources —
including that senior official — jibe with recent public remarks by
some members of the ECB Governing Council, who have resurrected the idea
of hiking rates in the face of what they see as an extremely worrisome
inflation picture.

In a newspaper interview published today, Luxembourg Central Bank
Governor Yves Mersch said the ECB staff would probably revise upward its
inflation forecasts for 2008 and 2009. Asked if this implied the ECB
would have to hike interest rates, he said the question was “entirely
justified.”

Bundesbank President Axel Weber, expressing great alarm about
inflation developments, said Monday that the ECB must “decide whether
the current level of interest rates ensures the fulfillment of our
mission.” And Bank of Greece Governor Nicholas Garganas pointedly noted
on Friday that he had not ruled out a rate hike.

The only way the ECB can reconcile higher interest rates *and* pacify the hyperleveraged, debt-glutted Club Med, would be by swapping quality debt, Bernanke-style, for the banks’ asset-backed garbage, and subsidizing the Club Med/ Ireland banking sector commensurate with the size of those countries’ gargantuan trade deficits.

Italy will be the one to watch. We will soon see whether the fulcrum of Berlusconi’s coalition, Umberto Bossi’s anti-euro Lega Nord, can be bought off or not.

But at least the ECB is trying.

On another note, Bernanke is said to be heavily influenced by the work of Athanasios Orphanides, the chairman of the Bank of Cyprus, whose philosophy can be summarized as, “When there’s a recession, cut interest rates until interest-rate expectations begin to become unmoored.” By every indicator, including the laggardly consumer surveys, inflation expectations have become significantly unmoored. If there is any time for Bernanke to stun Wall St. and the commodities markets with a 25 basis-point rate hike, it would be on April 29-30. (Not that I think Bernanke will.)

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It’s almost as if the ECB wants Italy to quit the euro.

BERLIN (Reuters) – Wage and fiscal policy in the euro zone could buoy inflation and the European Central Bank may need to act, ECB Governing Council member Axel Weber said in a newspaper interview released on Saturday.

“I am concerned that, with regard to the conduct of wage and fiscal policy, the recent temporary heightened inflation rate could be consolidated for longer than is necessary above the tolerance level of the Eurosystem,” Weber said.

“Should indications of this increase, we must react with interest rate policy,” he added in an interview with Germany’s Welt am Sonntag. “We are therefore observing the current wage agreements and finance policy decisions very closely.”

The ECB has kept interest rates at 4 percent for the last 10 months while the U.S. Federal Reserve, the Bank of England and the Bank of Canada have cut their benchmark rates in the face of accelerating inflation and uncertainty about the impact of a global credit crisis on the world economy.

Another ECB Governing Council member, Austria’s Klaus Liebscher, told Reuters on Friday that no room exists to cut euro zone interest rates and rate rises could not be ruled out.

Weber told Welt am Sonntag: “Our primary goal is price stability.”

Surging energy and food prices pushed euro zone inflation to a new high of 3.6 percent in March, well above the ECB’s target of just below 2 percent.

“We must make sure that inflation expectations remain stable, and that the higher prices now do not lead to higher wages and salaries. Because that would inevitably start off a wage-price spiral,” Weber said.

Cultural attitudes towards default — and its stepchild, inflation — are deep-seated. Whenever the liquidity party runs out, currency unions in the past have erupted over differing attitudes towards debt. I believe the eurozone will see such a rupture.

Fundamentally Italy has too much debt, and too high a proportion of old people. France’s problems aren’t quite as acute, but Sarkozy has been agitating in the same direction.

In Europe, the only meaningful difference that I can tell between left and right lies in euro attitudes. Internationalist “leftists” are pro-euro, and nationalist/subsidiarist “rightists” despise it.

Most of Europe is now under nationalist control. Spain and Ireland are still ruled by “leftist” (pro-euro) parties, and their attitudes are viable only because Spain’s banks, and probably Ireland’s as well, are able to swap their mortgage-backed garbage for government bonds en masse.

ECB aid to Spanish banks matches Rock rescue

By Ambrose Evans-Pritchard, International Business Editor

Spanish banks are issuing mortgage securities and asset-backed bonds on a massive scale to park at the European Central Bank, using them as collateral to raise money at favourable rates from the official credit window in Frankfurt.

The rating agency Moody’s said lenders had issued a record €53bn (£39bn) in the fourth quarter, yet almost none of the securities have actually been placed on the open market. Most have been sent directly to the ECB for use in “repo” operations.

Eurozone CPI is not abating, despite a slowdown across much of the region, because the ECB is inflating via a mechanism separate from interest rates. As such, most eurozone economies are experiencing the early stages of stagflation, despite “high” nominal interest rates.

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Silvio Berlusconi’s election victory, a landslide by Italian standards, has major ramifications for the euro, warns Ambrose Evans-Pritchard:

Silvio Berlusconi’s return to power in Italy is a nightmare come true for the European Central Bank, opening the way for a Rome-Paris axis with the political muscle to force a change in monetary policy.

The billionaire politician has pledged an alliance with France’s Nicolas Sarkozy aimed at humbling the bank and asserting the primacy of elected leaders over interest rates and the currency.

“A very strong euro is hurting Italy’s economy. I will discuss intervening with the ECB with Sarkozy,” he said.

The threat brought a sharp retort yesterday from the ECB’s German governor and chief economist Jurgen Stark. “I would recommend to political leaders in Europe, newly elected and re-elected, to read the European law on the ECB,” he said.

Mr Berlusconi – who is setting up a temporary office in Naples to tackle the city’s long-running rubbish crisis – inherits an economy trapped in near slump conditions. The country has lost 40pc in unit labour cost competitiveness against Germany since 1995, largely due to anaemic productivity gains and an inflationary wage-bargaining culture. Yet it cannot use the old method of devaluation to claw back parity.

The International Monetary Fund forecasts growth of just 0.3pc in both 2008 and 2009, levels that are certain to cause a renewed rise in the country’s national debt. Italian car sales plunged 18.8pc in March, and the Alpine lender Credito Valtellinese has just become the first European bank in living memory to miss a redemption on a callable bond – raising concerns of deeper troubles brewing in Italy’s financial system.

Mr Sarkozy has repeatedly attacked the ECB’s tight money policies, blaming it for causing the euro to surge 27pc in two years to a record $1.59 against the dollar. He says the ECB risks bankrupting Airbus and driving much of Europe’s industry off-shore. Until now he has lacked the allies needed to impose his will.

“Politics is everything in EMU, and the re-election of Berlusconi represents a big shift in the political balance of power,” said Bernard Connolly, global strategist at Banque AIG. “Spain will probably join France and Italy before too long, so you will have three of the big four eurozone countries in the same camp.

They can set ‘broad guidelines’ for the ECB. It is a total misperception that the ECB should not be subject to political influence.”

Article 111 of the Nice Treaty gives politicians power to set a fixed exchange rate for the euro (by unanimous vote), or to shape the exchange rate (by qualified majority vote). This power gives EU ministers an indirect means to force the ECB to cut interest rates. The treaty article has never been invoked but it hovers in EU affairs like Banquo’s Ghost.

Mr Berlusconi does not share the EU-loyalities of the outgoing government. Ex-premier Romano Prodi was once the president of the European Commission, the public face of the euro. His finance minster Tommaso Padoa-Schioppa was a founder of Europe’s monetary union.

The last time Mr Berlusconi was in power, two ministers from his coalition partner ‘La Lega Nord’ called for a return to the lira to escape the constraints of the euro system. While he did not endorse the comments, he appeared to relish their effect on his enemies in Brussels and Frankfurt.

Berlusconi’s ally, Lega Nord (Northern League), gained about 8.6 points out of about 46 percent, meaning that they have approximately 20 percent of the votes in Berlusconi’s coalition, and hold the balance of power. Lega Nord is vociferously anti-euro.

I have said for months that the euro is incapable of absorbing global savings, and exporting its manufacturing base, to the extent that the United States has.

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via Bloomberg:

Dollar Bottom Proves Elusive as G-7 Meets, Bearish Bets Double

By Bo Nielsen

April 7 (Bloomberg) — Optimism for a dollar rebound that pervaded the currency market at the start of the year is fading.

Futures traders doubled bets against the greenback in the past two months, data from the Commodity Futures Trading Commission in Washington show. Citigroup Inc., Deutsche Bank AG and Royal Bank of Scotland Group Plc, which handle almost 40 percent of global foreign exchange trading, say the currency may slump to $1.65 per euro by October, from $1.57 on April 4.

While the dollar rose April 1 when UBS AG and Lehman Brothers Holdings Inc. said they’re raising $19 billion to shore up their capital, it retreated for the rest of the week after Federal Reserve Chairman Ben S. Bernanke acknowledged for the first time that a recession is possible. Officials of the Group of Seven nations meet this week in Washington, and are unlikely to agree on a plan to boost the currency because rising exports may be the only blessing of a weak currency in a weakening economy.

“The dollar will continue to move lower in the next couple of months until the U.S. economy improves markedly,” said Adam Boyton, senior currency strategist in New York at Deutsche Bank.

The Dollar Index, which measures the currency against six of its main counterparts, tumbled the past two months after trading little changed between October and mid-February. It’s down 6.2 percent in 2008, after dropping 8.3 percent in each of the past two years.

Futures traders have grown more bearish, as three Fed interest rate cuts in 2008 totaling 2 percentage points reduced demand for U.S. deposits. They amassed a net total of 246,101 futures contracts betting on a dollar decline versus eight other currencies, up from 126,342 on Jan. 22, CFTC data show.

Relative Rates

Dollar-denominated deposits hold little appeal after the Fed lowered its target rate for overnight loans between banks to 2.25 percent. That’s the second-lowest among the G-7 after Japan’s 0.5 percent. The European Central Bank will keep its rate at 4 percent at its April 10 meeting, a Bloomberg survey shows.

“We are close to a tipping point where, I mean, the willingness to hold dollars is definitely impaired,” billionaire George Soros, 77, said in an interview in New York on April 3. His bet against the British pound in 1992 helped drive the U.K. out of Europe’s system of linked exchange rates.

Foreign private investors sold a net $37.6 billion of U.S. stocks and bonds in the six months ended Jan. 31, the most recent Treasury Department data show. The last time sales exceeded purchases over a six-month period was April 1996.

Two-year Treasuries yield 1.65 percentage points less than similar-maturity German bunds. As recently as October they were the same. Over the past decade, the U.S. notes yielded an average of 0.51 percentage point more than bunds.

Dollar Reprieve

The U.S. currency received a reprieve last week. The dollar rose 0.4 percent against the euro and 2.2 percent to 101.47 yen as the recapitalization plans by UBS and Lehman Brothers boosted investor confidence in financial institutions shaken by $232 billion of losses and writedowns from the freeze in capital markets.

“The dollar is bottoming out,” said Benedikt Germanier, a currency analyst in Stamford, Connecticut, at UBS, the second- biggest currency trader after Deutsche Bank. It may rise to $1.45 per euro by June, he said.

The median of 41 estimates in a Bloomberg News survey is for the dollar to appreciate to $1.51 per euro by Sept. 30 and to $1.48 at year-end as the U.S. economy recovers and Europe slows.

Cutting Estimates

“The U.S. economy is deteriorating so fast that it’s hard to believe economies outside of the U.S. won’t get affected,” said Tom Fitzpatrick, global head of currency strategy at Citigroup in New York. “As the slowdown in the U.S. reverberates to Europe, the ECB can’t be sitting this one out. They have to cut,’‘ which may limit dollar losses, he said.

Analysts have predicted a rebound before only to be proven wrong. At the start of 2008, they expected the dollar to gain to $1.48 per euro by June and reach 110 yen, according to Bloomberg surveys. They now see it at $1.55 to the euro and 98 yen.

And even though the dollar rallied last week, it declined April 4 as the Labor Department said payrolls fell for a third straight month in March.

Citigroup predicts it will depreciate to $1.65 per euro next quarter, compared with an earlier forecast of $1.51. Deutsche Bank’s Boyton and Adrian Schmidt, a senior currency strategist at Edinburgh-based RBS, say it may reach that level by July.

Exports Rise

“It now appears likely that real gross domestic product will not grow much, if at all, over the first half of 2008 and could even contract slightly,” Bernanke said in testimony to Congress’s Joint Economic Committee on April 2. The central bank chairman also predicted the U.S. will recover in the second half.

U.S. growth likely declined to a 0.2 percent annual pace last quarter, the weakest since 2002, according to the median forecast of 85 economists in a Bloomberg survey.

Deutsche Bank revised its six-month euro forecast to $1.55 in March, from $1.41 in February. RBS, the fourth-biggest currency trader, sees it at $1.57 on June 30, compared with an earlier estimate of $1.47.

The weakening dollar is making American goods cheaper abroad, giving U.S. officials less incentive to halt the currency’s depreciation. Exports rose 1.6 percent in January to a record, according to the Commerce Department.

G-7 Meets

Foreign sales contributed 1.02 percentage points to gross domestic product in the fourth quarter, compared with 0.85 percent the previous year, government data show. Without the improvement in trade, the economy would have contracted at a 0.4 percent annual pace, the first decline since the last recession in 2001, instead of expanding 0.6 percent.

The G-7 — the U.S., Japan, Germany, the U.K., France, Italy and Canada — hasn’t intervened in currency markets since supporting the euro in 2000. They are unlikely to buy or sell currencies to prop up the dollar after meeting April 11, according to Deutsche Bank, Citigroup and Bank of America Corp. in Charlotte, North Carolina.

In a statement following their Feb. 9 session in Tokyo, the group said “excess volatility and disorderly movements in exchange rates are undesirable.” The dollar has fallen 8 percent against the euro since then.

“For verbal intervention or actual intervention to work you need some substantive policy behind it and the last thing you will see right now is a monetary tightening by the Fed,” said Robert Sinche, head of global currency strategy at Bank of America. He expects the dollar may fall past $1.60 per euro this quarter.

It’s hard to see what could arrest the USD’s decline, besides grudging ECB rate cuts (in the face of strong inflationary headwinds).

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Foreign banks flee Spanish property debt

By Ambrose Evans-Pritchard in Madrid

Last Updated: 1:28am BST 05/04/2008

International banks are scrambling to sell their holdings of Spanish mortgage debt at a steep discount, fearing that the country may be sliding into the worst economic downturn in its modern history.

A blizzard of grim data has soured the mood, capped yesterday by a plunge in PMI purchasing managers’ index to an all-time low of 40.9. Car sales fell 28pc in March, and even Madrid’s legendary tapas bars seem to have lost their late-night sparkle.

Inmobiliaria Colonial – once the country’s biggest property group –is in emergency talks with banks after Dubai’s Investment Corporation pulled out of a rescue deal.

Developer Martinsa Fadesa is struggling to restructure €5bn of debt to stave off insolvency.

Traders says the market price for Spanish mortgage securities has begun to slide abruptly, replicating the pattern seen in the US last year. Large French and German funds and insurers appear to be liquidating assets in a pre-emptive move, afraid being caught yet again in a violent downturn.

Ismael Clemente, head of Deutsche Bank’s property arm RREEF in Spain, told a panel of experts in Madrid that foreign banks were now dumping Spansih mortgaged debt at a 40pc discount.

Mikel Echavarren, director of the property consultancy Irea, said Spain’s housing market was far weaker than the official statistics suggest, warning that prices could fall 20pc to 25pc.

“All kinds of ploys have been used to disguise the true extent of the price falls, which we think are 5pc to 7pc already. Buyers have totally abandoned the market. We’ve had a wave of negative sales as people pull out of commitments already made,” he said.

“We have a very worrying situation. The developers simply cannot refinance their debts. We need to cut interest rates by 2pc, which is obviously not going to happen,” he said, adding that the crash could be sharper than the property crisis in the early 1990s.

Santiago Baena, head of Spain’s estate agents lobby API, said the downturn had already forced 40,000 agents to close their doors, laying off 120,000 staff.

The Bank of Spain said default rates would rise but insisted that the Spanish banking system remains in good health, without much exposure to the US subprime debacle. The loan-to-value ratio on mortgages was kept to 70pc – although a report in Germany’s Die Welt newspaper today alleges that false pricing was often used to circumvent the rule.

The authorities said that a crisis comparable to the early 1990s (when bad debts reached 13.1pc) would erode the capital base of the banking system by 63pc, a manageable level. The developers owe €290bn to the banks and lenders, known as “cajas”.

The government is preparing a €20bn spending blitz on high speed railways and other mega-projects to cushion the downturn. Spain’s trump card is a budget surplus of 2pc of GDP last year, leaving in ample scope for fiscal stimulus – in sharp contrast to Italy, France, and Britain.

The root cause of the crisis is in a sense Europe’s monetary union. The euro effect halved Spain’s interest rates almost overnight. Rates then fell below Spain’s inflation rate for several years, fuelling an explosive credit boom. The country’s current account deficit has reached 10pc of GDP, the highest of any major economy.

The process has now kicked into reverse. Mortgage rates – priced off three-month Euribor – have nearly doubled since late 2005.

David Owen, Europe economists at Dresdner Kleinwort, said Spain was waking up to the reality that there will be no quick-fix. “They are no longer arguing about whether there will be a recession, but about how deep it will be,” he said.

“Spain is no longer able to set monetary policy for its own needs. It could face zero-growth for five years,” he said.

ABC newspaper reported that the Bank of Spain rushed its Financial Stability Report into print two months early in order to refute “tendentious” claims in the British media that Spain’s banks had become reliant on emergency funding from the ECB after the capital markets seized up.

The banks have been issuing mortgage bonds on a large scale to use a collateral at the ECB’s lending window, raising concerns that they are becoming dependent on taxpayer funding. The Bank of Spain said they had borrowed €44bn from the ECB, insisting that this was “fully consistent” with EU rules.

The ECB said its latest €25bn auction of six-month funding this week was heavily over-subscribed, with €103bn of bids from 177 banks at rates as high as 4.88 pc. It did not reveal how much of the bidding came from Spain.

Deutsche Bank expects house prices to fall 8pc this year as the market struggles to clear a glut of unsold homes. Construction peaked in 2006 when last year when 740,000 new housing units were built – more than in Germany and Britain combined.

Standard & Poor’s said Spain risked a “major collapse” in construction after a 40pc fall in housing permits. Building has accounted on a fifth of all jobs created in Spain since 2000. It said the country faced a “major and likely painful adjstment”.

Did Evans-Pritchard write this at a tapas bar? I just corrected about 15 blatant typos. Anyway …

The over-leveraged European countries (and the euro by extension) are the countries to watch.

The US has flooded its banking system with enough paper to put off problems for a while. I think John Mauldin is exactly right in his assessment, that the Fed will turn a blind eye to banks’ technical insolvency as they rebuild their balance sheets and write off their debts over the next five or so years.

Europe, however, is a different matter. The ECB was taking on lots of garbage debt, especially from Spain, but perhaps there’s a limit to what Trichet is willing to do for Spain’s banking sector.

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Fannie, Freddie Surplus Capital Requirement Is Eased (Update3)
By James Tyson

March 19 (Bloomberg) — Regulators for Fannie Mae and Freddie Mac cut the companies’ surplus capital requirement in an effort to expand their combined $1.5 trillion in mortgage investments and revive the U.S. home-loan market.

The requirement was lowered to 20 percent from 30 percent, the Office of Federal Housing Enterprise Oversight said in a news release today. The government-chartered companies, the largest sources of money for home loans, also agreed to raise a “significant” amount of new capital, Ofheo said.

The initiative may immediately pump $200 billion into the mortgage-backed securities market, Ofheo Director James Lockhart said at news conference in Washington today. Combined with a lifting of portfolio caps on March 1 and the companies’ existing capabilities, this should allow Fannie Mae and Freddie Mac to buy or guarantee about $2 trillion in mortgages a year, Ofheo said.

This will “go a long way to stabilizing panicky markets,” Howard Shapiro, an analyst at Fox-Pitt Kelton Cochran Caronia Waller, wrote in a report to clients yesterday.

Fannie Mae and Freddie Mac led the Standard & Poor’s 500 stock index higher today, and U.S. Treasuries pared gains amid reduced concerns that credit market losses will deepen. Fannie Mae rose $2.98, or 11 percent, to $31.20 as of 10:24 a.m. in New York Stock Exchange composite trading. Freddie Mac was up $2.18, or 8 percent, to $28.20, after rising the most ever yesterday.

Housing Slump

The worst housing slump since the Great Depression is being exacerbated by the limited ability of Americans to get mortgages or refinance loans amid tightened standards at money-losing banks. Issuance of non-agency mortgage bonds fell 33 percent last year to $707 billion, according to newsletter Inside MBS & ABS.

“Our hope is that it will help restart the housing engine that powers our economy,” Fannie Mae Chief Executive Officer Daniel Mudd said at a news conference in Washington today with Freddie Mac CEO Richard Syron and Ofheo Director James Lockhart. “This is what the GSE’s were put in place for, to deal with situations like this and we will deliver,” Mudd said.

Created by Congress to boost homeownership, Fannie Mae and Freddie Mac profit by holding mortgages and mortgage bonds as investments and by charging a fee to guarantee and package loans as securities. They own or guarantee at least 40 percent of the $11.5 trillion in U.S. residential-mortgage debt outstanding.

$53 Billion

Fannie Mae and Freddie Mac have said they were limited in how much assistance they could offer amid regulatory constraints and rising losses. Fannie Mae, the largest source of money for home loans, posted a record $3.55 billion fourth-quarter loss as rising foreclosures sent credit costs soaring. Freddie Mac reported a record $2.45 billion net loss for the period.

The 30 percent surplus capital constraint most recently tied up as much as $53 billion at the two companies combined — based on core capital on Dec. 31 — that could have been invested in the mortgage market.

Yields on Fannie Mae’s five-year debt over five-year U.S. Treasuries fell 2 basis points to 88.5 basis points at 9:45 a.m. in New York, down from 115 basis points on March 14, the lowest since Feb. 29, according to data complied by Bloomberg. The difference in yields on the Bloomberg index for Fannie Mae’s current-coupon, 30-year fixed-rate mortgage bonds and 10-year government notes fell about 17 basis points, to 168 basis points, matching a three-week low on March 17.

Raising Capital

The companies didn’t say today how or when they would raise the additional capital.

Fannie Mae in December raised $7 billion in a preferred stock sale and cut its dividend by 30 percent, while Freddie Mac in November sold $6 billion in preferred stock and halved its dividend to bolster cash reserves amid mounting credit losses and asset writedowns stemming from the housing market collapse.

“It’s critical for them to have additional capital,” Lockhart said at the new conference. “These companies are safe and sound and we’re going to ensure by our everyday oversight that they continue to be safe and sound,” Lockhart said.

Credit-default swaps tied to Fannie Mae’s senior bonds dropped 8 basis points to 50 basis points, according to broker Phoenix Partners Group in New York, suggesting a decline in perceived risk. Freddie Mac fell 7 basis points to 51.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company’s ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

Profit Potential

The capital surcharge is one of the last remaining restrictions imposed on the companies after $11.3 billion of accounting misstatements. The Bush administration, trying to stem the crisis, has gradually eased constraints on Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac. Ofheo lifted a ceiling on the companies’ mortgage assets and raised a limit on the loans they buy to $729,750 from $417,000 in some counties.

Lawmakers including Senate Banking Committee Chairman Christopher Dodd and Senator Charles Schumer have called on Ofheo this year to relax the excess capital requirement.

“These are extraordinarily difficult times for the markets, and targeted, immediate action is necessary,” Schumer, a New York Democrat, said yesterday in a statement. “A nickel-and-dime approach to freeing the GSEs to become more active in the market will not suffice.”

Translation: Despite the objections of James Lockhart — that rare jewel of competent integrity within the Bush Administration — Fannie and Freddie can lever up from about 2.33-1 to 4-1. Once again, the only thing worse than the Bush Administration’s “domestic policy” is the idiocy spouted by the representatives of the “reality-based community.”

Fannie and Freddie own or guarantee over $4.5 trillion in mortgage-backed securities. I don’t know too much about Fannie and Freddie, but how can you not be bankrupt if you are at least 3x levered long in US mortgages over the past year, and dig deeper with each dip in the mortgage market?

And no, I have no clue why gold cratered $75/oz. The dollar is still pretty close ($1.57/EUR) to its historic lows; interest rates haven’t gone down by much; etc.

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CURRENCIES

  VALUE CHANGE % CHANGE
EUR-USD 1.5105 0.0130 0.87
USD-JPY 106.4700 -0.8100 -0.76
GBP-USD 1.9903 0.0032 0.16

COMMODITY FUTURES

  VALUE CHANGE % CHANGE
Oil 100.68 -0.20 -0.20
Gold 958.40 9.50 1.00

Fannie Mae, Freddie Portfolio Limits to Be Lifted, Ofheo Says
By Jody Shenn

Feb. 27 (Bloomberg) — Fannie Mae and Freddie Mac, the two largest providers of money for U.S. home loans, will have restrictions on the sizes of their portfolios removed.

The limits, imposed after accounting errors at the government-chartered companies, will be lifted on March 1, according to a statement sent by e-mail today from the Office of Federal Housing Enterprise Oversight.

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