Subprime saga packs a global punch

As the subprime saga has unfolded in recent months, it has packed a powerful – and somewhat unexpected – ­globalisation punch.

For while subprime loans are rooted in the heart of the US, the credit risk from mortgage-backed securities based on such loans has been scattered all over the world – and losses have ­consequently cropped up in institutions ranging from Australia to Norway.

Now, however, the globalisation issue is moving to the so-called "agency" sector of the mortgage market – or mortgage securities underwritten by Fannie Mae and Freddie Mac.

In recent years, this type of agency debt has been scattered even more widely around the world than subprime-linked instruments. That was because these securities were traditionally considered to be ultra-safe – and as such were heavily purchased by risk-averse groups in places such as Asia. As a result, the recent sharp swings in the debt prices of Fannie and Freddie are being closely watched by portfolio managers around the world.

While many of the investors who own agency debt do not need to mark this to market – meaning that they can ignore many short-term market swings – there is growing debate about the future of these groups.

"This [issue] is relevant for Asia which owns a huge amount of Fannie and Freddie debt," says Christopher Wood, an economist at CLSA, a Hong Kong-based brokerage house. "Before the credit crisis is over [we] expect the federal mortgage agencies to be formally nationalised?.?.?.?The explicit commitment will be demanded by the market to forestall a full-scale panic."

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