ECB warns investors' gamble for profit could backfire

Wed May 28, 2014 11:04am EDT
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By John O'Donnell

FRANKFURT (Reuters) - The European Central Bank has warned that investors' pursuit of higher profits could be creating new price bubbles, sounding the alarm as financial markets chase quick gains.

In a strongly worded message that underscored concerns in Frankfurt about the downside to runaway market enthusiasm, the ECB cautioned that the dash for higher returns could suddenly unravel, sending the investor herd charging in the opposite direction.

"I don't have any advice for investors but they should be aware of these risks and try to protect themselves," ECB Vice-President Vitor Constancio told Reuters on Wednesday, adding that the crisis in Ukraine, for example, could spoil the mood.

"Ukraine ... could derail the situation and put a cloud on European assets," he said. "Banks should be prepared."

With the financial crisis and any fear of a break-up of the euro all but forgotten, governments in debt-strapped countries from Italy to Ireland are finding it ever easier and cheaper to borrow.

European stock markets have seen stellar gains with those in Germany hitting record highs. Even Greece, which defaulted on a large swathe of its national debt just over two years ago, has started borrowing from investors again.

But in a closely watched biannual report that takes the pulse of the financial system, the ECB flagged concerns about governments' debts, which are at record high levels throughout the 18-country euro zone.

It warned that they could become unmanageable as economic reforms stall and growth stays low.   Continued...

The headquarters of the European Central Bank (ECB) are pictured in Frankfurt June 6, 2013.    REUTERS/Ralph Orlowski