Paulson: U.S. housing credit risks contained

TOKYO (Reuters) - U.S. Treasury Secretary Henry Paulson said on Tuesday that a weakened housing market will not have a major impact on the U.S. financial sector, which he described as quite healthy.

In a roundtable session with reporters during a visit to Tokyo, Paulson said the housing downturn had had some impact on certain types of mortgages but he did not see it as a major problem.

"Some of the credit issues are there, but they're largely contained," Paulson said.

The U.S. Treasury chief was on the first leg of a three-country trip that will also take him to South Korea and China before he returns to Washington on Thursday.

He described global economic conditions as very healthy and played down recent drops in global equity prices.

"The global economy is more than sound," Paulson said. "It's as strong in the last couple of years as I've seen in a lifetime.

"All the economies are growing, inflation is low, and liquidity is high," he said.

Global equity markets have been roiled over the past week and a half by several factors, including the Chinese stock market's sharp drop last week and a comment by former Federal Reserve Chairman Alan Greenspan that a recession was possible.

Another factor cited in recent market declines was a reversal of support from a long-running phenomenon known as the carry trade, which involves using Japanese yen to invest in global equities and other higher-yielding assets.

Asked whether an unwinding of such trades was a concern, Paulson said he had no comment on yen carry trade.

Paulson described the Japanese economy as being on "a very good trajectory" but said it was very important for Japan to continue with economic reforms.

He said Japanese financial institutions were offering a wider variety of investment options so that savers were less dependent on low-yielding bank savings, and he said that was a promising development.

Paulson was also asked whether there would soon be an unfreezing of North Korean accounts held in Banco Delta Asia, the Macau bank that the U.S. Treasury identified as a "primary money laundering concern" in 2005, calling the bank a "willing pawn" in aiding illicit North Korean activities.

"We've had a lot of bilateral sessions with the North Koreans, and I believe it'll be resolved in an appropriate way," Paulson said.

"No one who runs a respectable bank wants to be unwittingly duped into financing illegal activity. We are going to continue to be vigilant."