KEVIN CARMICHAEL AND HEATHER SCOFFIELD
Report On Business
September 18, 2008
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American International Group Inc.’s $85-billion (U.S.) loan from the U.S. Federal Reserve caused the cost of insuring against default on U.S. Treasuries to surge to record levels yesterday, with the market for credit default swaps on sovereign debt suggesting investors had more confidence in Austria, Finland and Sweden.
The AIG deal, reached late Tuesday, followed the commitment last week by U.S. Treasury Secretary Henry Paulson to use as much as $200-billion in taxpayers’ money to take control of mortgage giants Fannie Mae and Freddie Mac.
The shift in sentiment about the U.S.’s ability to pay its bills highlights one of the risks of the firefighter-like approach Mr. Paulson and Federal Reserve chairman Ben Bernanke have taken to the credit crisis. While the U.S. government is hardly on the verge of going broke, the rescue packages are putting further strain on a budget deficit that already was projected to widen to a record next year.
“Their ability to finance their debt has been damaged by what’s going on in their financial system,” said David Laidler, a retired economics professor at University of Western Ontario who advised the Bank of Canada during the fallout from Russia’s debt default in 1998.
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