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The U.S. Treasury faces historic financing demands from a weakening economy and the added costs of a $700 billion Wall Street rescue program, the department's top domestic finance official said today.

“This year's financing needs will be unprecedented,'' said Anthony Ryan, the Treasury's acting undersecretary for domestic finance, at a Securities Industry and Financial Markets Association conference in New York, where he was a last-minute substitute for Treasury Secretary Henry Paulson.

Ryan's borrowing outlook comes after Treasury officials spent much of the past month publicly praising the rescue plan's virtues. The Treasury needs to sell debt to raise money for the new initiatives and also cope with a weaker economy, two factors analysts say may push the country's budget deficit to more than $1 trillion for the current fiscal year.

Ryan also said the U.S. government now “effectively guarantees'' debt issued by mortgage companies Fannie Mae and Freddie Mac, which were placed into conservatorship on Sept. 7. The preferred stock agreement included in the federal takeover means the U.S. now backs “both existing and to be issued'' debt from the two companies.

“The U.S. government stands behind these enterprises, their debt and the mortgage-backed securities they guarantee,'' Ryan said. The agencies have almost $6 trillion in outstanding debt and mortgage securities.

Fannie, Freddie Debt

Yields above Treasuries on Fannie Mae and Freddie Mac's debt and mortgage securities remained wider today after the speech. The spread on Fannie's 5-year debt rose about 0.01 percentage point to 1.53 percentage points at 11:15 a.m. in New York, according to data compiled by Bloomberg.

Ryan said U.S. equity and credit markets remain under “considerable strain'' and face ongoing challenges, he said. That said, Federal Reserve efforts to backstop commercial paper are “helping'' to stabilize markets, he said.

The Treasury will begin distributing $125 billion in capital injections to nine big banks “starting today,'' Ryan said. He reiterated that the Treasury's equity purchase program is aimed at healthy banks and has safeguards to protect taxpayer interests.

To raise the necessary funding for the bailout and other programs, the Treasury is looking at selling more long-term debt and possibly bringing back three-year note sales at the Nov. 5 refunding, Ryan said. The Treasury also is raising money to address “many different policy objectives'' and reduce bond market disruptions and will try to keep its borrowing patterns as regular as possible, he said 1 hour cash loans.

`Predictable' Borrowing

“We firmly believe that investors value greatly and pay a premium for Treasury's predictable actions,'' Ryan said. “To the very best of our ability, we intend to stay the course.''

Ryan said the Bush administration's July projection of a $482 billion deficit doesn't include new programs launched to attack the credit crisis. The bank rescue program, a separate mortgage-backed securities program, the Fannie-Freddie takeover and a student loan program all need funding, Ryan said. Also, the Treasury is borrowing money on behalf of the Federal Reserve and the Federal Deposit Insurance Corp., he said.

“The potential for deterioration in economic conditions given the contraction in credit also may affect budget conditions this year,'' Ryan said.

Analysts say the 2009 budget deficit could more than double the White House projections. In fiscal year 2008, which ended Sept. 30, the deficit was a record $455 billion.

$1.95 Trillion

“The budget deficit for fiscal year 2009 might reach $1 trillion if Congress passes another stimulus package this winter,'' said Lou Crandall, chief economist of Wrightson ICAP, in a research note. “And that's just the beginning of the bad news — financing needs arising from off-budget items might be nearly as large as the on-budget deficit.''

Crandall estimates 2009's total borrowing needs at $1.95 trillion. He says Treasury could raise this money with an “aggressive but sustainable'' increase in regular borrowing, accompanied by one-time auctions as needed to meet one-off funding needs.

In response to a question after the speech, Ryan declined to comment on the dollar, which today rose to an 18-month high against the euro. The U.S. currency's gains could hurt exports, which has been one of the few bright spots of the weakening economy.

“We don't have too many rules at the Treasury department, but one of the important rules is that only one person speaks on the dollar at the Treasury and he unfortunately couldn't join you here today,'' Ryan said.

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