The accounting for the bailout of Fannie Mae and Freddie Mac is just starting, with nervous global investors now pricing US Government debt (supposedly the safest in the world) with a higher default risk than the sovereign debt of countries like Norway, Germany, the Netherlands, Finland, Australia France and Sweden.

Traders say the increased risk (which seems absurd) was reflected in the cost of insuring against US debt, which rose to $US17,500 for every $10 million of debt, yet nobody picked the irony of pricing the insurance cover in the currency of the country that could default. Wouldn’t the US dollar be worth a lot less if that happened?

This rise in credit insurance came despite the two main rating groups, Standard & Poor’s and Moody’s, both saying the bailout of Fannie and Freddie wouldn’t affect America’s triple A credit rating. The rise in this form of insurance followed the news that the US Congressional Budget Office, which is a non-partisan part of the US parliament, will now treat Fannie and Freddie as being part of the US Government’s books.

But that will not include the huge debt holdings, just the operations of the pair. Peter Orszag, CBO director, said: “It is the CBO view that Fannie Mae and Freddie Mac should be directly incorporated into the federal budget.”

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The Bush administration was surprised by the move, which has consequences for the size of the Federal deficit, which has ballooned to a huge $US407 billion for the US financial year ended September 30, from $USA161 billion last year. That’s an increase of more than 150%.

With the 2009 deficit already forecast at $US482 billion, the slowdown in tax receipts for the government and the impact of Fannie and Freddie will push that figure to well over half a trillion dollars.

The two mortgage companies have between them $US5.4 trillion in liabilities, equal to the entire publicly traded debt of the US, alongside mortgage-related assets of about equal value. These will now all be accounted for by the CBO, though public accounting rules that mean that there will not be be a $US5.4 trillion rise in reported government debt.

Orszag told CNNMoney that from next January, his office will be incorporating the activities of Fannie and Freddie in its baseline for the federal budget. The CBO will work with Congressional budget committees to work out just how transactions by both companies should be accounted for. The operations of the two will have a significant impact on the deficit which is under pressure from a 15% slowdown in company taxes this year.

“The degree of control exercised by the federal government is so strong that the best treatment is to incorporate [the agencies] into the federal budget,” Orszag said.

He said that to allay one concern that many taxpayers have expressed, the roughly $5 trillion in loans that Fannie and Freddie own or back would not be added wholesale to the debt held by the public.

The treatment of that debt and the two mortgage giants will be vital to the health of US government finances. The rising deficit and now the potential $US200 billion in funding for the two mortgage companies to keep them in business and financing the housing sector until at least the end of 2009 worries investors in the US and around the world.

The finances of the US Government are under the sort of pressure rarely seen before. Senator John McCain claims he will cut taxes and cut spending and wants to privatise Fannie and Freddie. To do all that he will have to be a magician. Fannie and Freddie are going to be part of a revenue-short US Government for years to come.

The only way they can be sold is with a Government guarantee of their debt, plus a huge capital injection, which is how we got to the present debacle in the first place. Fannie and Freddie were sold off or started outside the Government up to 40 years ago and the only way investors will take the debt is if it had a defacto Government guarantee. That’s why they ended up being called Government Sponsored Enterprises.