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Bank of England Cautions on Risky Investment Positions

From Volume 3, Issue Number 51 of EIR Online, Published Dec. 21, 2004

World Economic News

Bank of England Cautions on Risky Investment Positions

Risky investment positions could trigger a financial crisis, the Bank of England warned in its latest semi-annual review of "financial stability." The report emphasizes that investors have massively increased their exposure to high-yield/high-risk markets in recent months. As an example, investment in emerging-market debt is at an all-time high. Furthermore, speculative positions in commodity futures are close to a record. And global flows into hedge funds have again increased to 110 billion pounds in the first nine months of the year, compared to 70 billion pounds in the entire year of 2003. Some lenders, borrowers, and investors might have underestimated their "long-run vulnerabilities" and may have taken on "too much risk." "Unexpected economic developments could trigger the attempted simultaneous unwinding of common positions possibly leading to strains on market liquidity." On top of the housing bubble, the report points to very strong activity in the British commercial property market. Actually, half of all new corporate loans by British banks are right now going into commercial property. Finally, there is the ongoing consumer debt frenzy. The report notes that unsecured lending—such as credit card debt, store card debt, and bank overdrafts—is now growing much faster than mortgage loans. And debt write-offs have risen sharply this year in spite of unusually low interest rates.

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