NEW YORK—Any U.S. government takeover of mortgage finance companies Fannie Mae and Freddie Mac would not likely trigger a downgrade of the United States' "AAA" sovereign credit rating, the three major rating agencies said on Friday.
All three said they saw no immediate threat to the U.S. sovereign rating, although one agency warned that a more generalized financial sector crisis could trigger a rethink.
Nikola Swann, a credit analyst with Standard & Poor's in Toronto, said a U.S. government takeover of the two mortgage finance giants alone would not precipitate a sovereign downgrade.
"Could that one change by itself cause a downgrade or negative outlook? The answer is 'no,'" said Swann.
He noted, however, that "if there is a broader financial sector problem ... that could be more serious and could mean a more serious evaluation of the rating."
Wider financial system problems could occur in a long and deep economic recession that substantially adds to the debt burden of the U.S. federal government, Swann added.
A Moody's Investors Service analyst said that any U.S. government takeover of the mortgage companies would not be likely to affect the United States' "AAA" rating.
"We think the U.S. government has quite a manageable level of debt and it has a strong balance sheet," Steven Hess, a New York-based Moody's analyst, said in an interview. Any shock to its balance sheet from Fannie and Freddie support would be manageable, he said.
While a takeover of Fannie and Freddie does not appear likely, "it's not out of the realm of possibility," Hess added.
Another possibility would be for the U.S. government to guarantee the their debt without injecting cash, Hess said. "It would only be in the event that Fannie and Freddie couldn't come up with the funds to repay that debt that the U.S. government would be on the hook and that probably wouldn't happen in the intermediate term anyway."
Shares Plunge
A report in The New York Times on Friday said the U.S. government may take over Fannie Mae and Freddie Mac if their funding problems worsen, causing their shares to plunge.
Fannie Mae was down 22.4 percent at $10.25, off a 2008 low at $6.87, while Freddie Mac shed 10 percent to trade at $7.20, off a session low at $3.89. They topped the list of the New York Stock Exchange's biggest percentage losers in early afternoon trading.
"If there was a bailout, I expect it in the form of Fed liquidity support with capital injection, which would come from the U.S. budget, but I don't think it would be on such a scale that would cause us very big concern from the sovereign credit perspective, given where U.S. public finances are at the moment," Brian Coulton, Fitch Ratings' head of high-grade sovereign ratings, told Reuters.
Any government takeover of Fannie Mae and Freddie Mac is unlikely to put the U.S. triple-A sovereign rating at risk, Coulton said.
Swann also said S&P expected the U.S. government would support the two companies to prevent a default if necessary, but added the agency does not believe this is likely to be necessary.
One possible scenario would involve the government injecting some $20 billion or $30 billion into Fannie and Freddie, "which is not that big in the context of (government budget) deficits that are being run," Swann said.
However, some market analysts sounded more concerned about the U.S. federal government's exposure to the mortgage behemoths.
"It would have an adverse effect on U.S.'s creditworthiness if it takes on (GSE-related) debt," said Jim DeMasi, chief fixed-income strategist, Stifel Nicolaus & Co. in Baltimore.
The U.S. Treasury debt market sold off sharply on Friday, with some bond analysts citing the potential for long-term deterioration of the sovereign credit rating and concerns about sharply increased government debt issuance .
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