Euphoric markets 'ignore global risk'

By Ambrose Evans-Pritchard
Last Updated: 1:58am GMT 21/11/2006


Investors have succumbed to euphoria and are ignoring the dangers posed by monetary tightening across the globe, top officials from the G20 group have warned.

Jean-Claude Trichet, the European Central Bank's chief, said markets seemed blind to the interest rate squeeze in almost all leading countries, and to the risk of another energy spike.

"There is an under-pricing of risks in general in financial markets. We don't exclude the possibility that there will be a repricing of risks," he said at a Bank for International Settlements summit in Australia. However, he still expects growth to remain "very, very dynamic" into 2007.

advertisementAustralia's treasurer said markets showed signs of a speculative top. "The last time I saw a general euphoria in the global community was in 1997, three months before the Asian crisis. Sometimes you need a crisis to get the risk priced properly," he said.

The warnings come days after the BIS said the volume of outstanding trades on the world derivatives markets had now reached $370,000bn (£195,000bn), seven times global GDP. The contracts are up 24pc in the last six months, with a near doubling in high-risk credit derivatives.

The summit statement warned that the cycle of interest rate rises was far from over as authorities seek to drain the excess liquidity fuelling asset booms.

Toshihiko Fukui, the Bank of Japan's governor, called for pre-emptive strikes to avoid the property and equity bubbles that bedevilled his country in the late 1980s. Wall Street and Europe's bourses hit records last week, while mergers this year are at an all-time high of $3,100bn.

Eugene Leouzon, Goldman Sachs' chief underwriter for Europe and Asia, said deals now going through were "borderline stupid".

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