Ted Butler tells silver investors to learn from the copper manipulation blowup

Section:

ECB Sees Risk of Disruptive Unwinding
of Imbalances, Severe Pressure on Dollar

By Steve Whitehouse
AFX News
Tuesday, May 31, 2005
http://www.forbes.com/markets/feeds/afx/2005/05/31/afx2066670.html

FRANKFURT -- Global current account imbalances pose a threat to
financial market stability, the European Central Bank said.

"Large and growing financial imbalances continue to pose medium-term
risks for the stability of foreign exchange and other financial
markets," the ECB said in its latest Financial Stability Review.

It said a disorderly correction of the large US current account
deficit and surpluses in Asia remains possible, particularly as the
imbalances could increase further.

"The risk of a disruptive unwinding of global imbalances remains,
especially because these imbalances could widen further," it said.

It said the US' propensity to import out of income and expectations
that US economic growth will exceed that of the rest of the world in
the coming year both point to a further widening of global
imbalances.

Asian central banks have so far been willing to continue financing
the US deficit, but if they lose their appetite for US assets, this
could trigger a disorderly correction, it said.

"Such concerns could increase the likelihood of a disorderly
rebalancing, involving a capital account adjustment and/or the
possibility of severe downward pressure on the US dollar, coupled
with significant upward pressure on long-term interest rates," it
said.

The ECB reiterated that global imbalances, high and volatile oil
prices, and weak private consumption also represent a risk to the
euro zone growth outlook.

It also said that an underestimation of risk has pushed the prices of
bonds and some other assets "beyond their intrinsic value."

This perception that financial market risks are low has increased
investors' willingness to hold risky assets and led to a "hunt for
yield" over the past two years, it said.

This has recently spread from bonds to other asset markets, including
small and mid-cap stock markets, and fuelled the growth of hedge
funds, it said.

But a correction of these price rises is possible in the period
ahead, the ECB said.

"A reappraisal of risk -- involving adverse market dynamics in the
euro area as well -- cannot be excluded in the coming period," it
said.

It said the banking sector is particularly vulnerable to a rise in
bond yields.

"Some euro-area financial institutions, including banks, would likely
endure losses -- at least in the short term -- from any upturn in
long-term interest rates," it said.

Banks would be vulnerable to such disturbances because provisioning
levels have declined, it said.

And while banking profitability has improved overall, there may still
be pockets of fragility in the euro zone banking sector, it said.

Anemic domestic demand may have left small and medium-sized firms
vulnerable to adverse disturbances, it said.

In particular, the surge in oil prices seen over the past six months
could test the robustness of smaller companies' finances, if it
lasts, the ECB said.

Household financing problems could also be a risk in those countries
where real estate prices have risen beyond their intrinsic value,
where debt is high and where mortgages are primarily at floating
rates, it said.

But, overall, reasonable interest rate swings would be unlikely to
hit household finances so hard as to significantly increase credit
risks, not least because many mortgages are set at fixed rates, it
said.

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