Freddie Mac chief warns of recession

Saskia Scholtes, David Wighton and Stacy-Marie Ishmael
Financial Times
Friday September 28, 2007

The US economy faces a 40 to 45 per cent risk of recession induced by the housing market downturn, the chief executive of Freddie Mac warned on Thursday as data showed sales of new homes hit a seven-year low in August.

Richard Syron, chief executive of the government-sponsored mortgage company, said the credit squeeze had left some parts of the US housing market “literally frozen”. This was a “substantial depressive to the overall economy”. He forecast the Federal Reserve would make another “material” cut in interest rates.

Mr Syron also predicted that Congress would bring some relief to the troubled US mortgage industry by lifting restraints on the operations of Freddie Mac and its sister mortgage company, Fannie Mae.

He said the $417,000 ceiling on the size of home loans they can buy was likely to be raised to help support the US mortgage market.

His comments came as data showed sales of new US homes plunging 8.3 per cent in August amid rising borrowing costs and tighter lending standards that have restricted the availability of mortgage credit.

KB Home, one of America’s biggest housebuilders, also warned that the housing market was likely to worsen next year as it posted a loss in its third quarter.

Thursday’s weak housing data from the Commerce Department show the number of unsold new homes fell only 1 per cent to 529,000 on the month, about 140,000 above levels in a healthy housing market. Median new home prices were down 7.5 per cent year-on-year to $225,700, the biggest fall since 1970.

? Separately, Freddie Mac has agreed to pay $50m to settle Securities and Exchange Commission charges that it concealed wide swings in earnings from 1998 to 2002.

EU's Almunia says worried by dollar's fall

Jon Boyle
Reuters
Friday September 28, 2007

European Union Monetary Affairs Commissioner Joaquin Almunia said he was concerned by the dollar's fall and urged the United States to match its stated support for a strong dollar with action.

"It's true that the fall in value of the dollar worries us," Almunia said in an interview with the Le Figaro newspaper published on Friday.

U.S. Treasury Secretary Henry Paulson said on September 21 that a strong U.S. dollar was in American interests but Almunia told the paper: "From now on, we want a bit of coherence between speeches and actions."

The European Union had warned about the risks of excessive currency instability for the past four years but euro zone economies were not responsible for the situation, he said.

Unlike those of the United States and China, our current account is balanced. If it is a question of making us Europeans pay for the consequences of these imbalances, one cannot expect us to remain passive," he said.

Almunia said he had discussed the yuan with the Chinese authorities but that country's foreign exchange rate was still not flexible enough.

The dollar remained under pressure near record lows against the euro and a basket of currencies on Friday. The euro hit an all-time high of $1.4190 on electronic trading platform EBS and was trading at around $1.4165 at 0705 GMT.

Almunia told Le Figaro that while the strong euro was hurting some European exporters, the single currency's strength protected the euro zone from the impact of high oil prices.

ONE VOICE

French President Nicolas Sarkozy has waged a noisy campaign against the rise of the euro, blaming it for sluggish French growth and saying it was hurting exporters.

He has called on the European Central Bank to focus on boosting growth and jobs rather than just fighting inflation, a criticism roundly rejected by ECB President Jean-Claude Trichet and largely shunned by other EU leaders.

"It is obvious that if we want to be heard by the European Central Bank, we must speak with one voice and in a disciplined way," Almunia said.

"There are reasons for France to be worried by the rise in the euro but one should not forget the other factors which explain the imbalances in the French trade balance," he said.

The EU commissioner said he would wait for French Economy Minister Christine Lagarde to present the French 2008 budget to an October Ecofin meeting before commenting on whether Paris was doing enough to reduce its budget deficit.

Almunia said at this stage he saw no reason to doubt France's willingness to respect its obligations, although he said Paris and Rome were creating difficulties in the euro zone because of the state of their public finances.

"I will continue to act so that Paris respects the undertakings made in Berlin last April," he said, referring to a pledge by the previous conservative government to reach a balanced budget by 2010. Sarkozy has said France will do so if growth allows, otherwise the budget will be balanced in 2012.

The European Commission would continue to monitor the situation, Almunia said, but added: "At this stage I do not expect recourse to any particular instrument.

"If in the future, we were faced with a situation that justified it, we will not hesitate to use the range of measures provided for in the treaty, like early warnings or the start of excessive deficit procedures.

"I would have no problem with that."

On markets turmoil, Almunia said he expected minimal impact on the European economy in 2007 and, while he expected the recovery to continue next year, risks had increased.