In this issue:

European Central Bank Fear Burst of Housing Bubble

Further Dollar Weakness Could Sink Latin American Debtors

World Economic News

European Central Bank Fear Burst of Housing Bubble

In its latest monthly report, the ECB points to the rapid growth of money supply in the Eurozone which has led to the accumulation of significant "excess liquidity." The annual growth rate of the M1 money aggregate averaged 9.0% during the fourth quarter of 2004. In particular private households are piling up more debt. In December 2004, the annual growth rate of loans to households reached 7.8%, while lending for house purchase increased by an annualized rate of 10.0%. The ECB summarizes: "The very low level of interest rates is also fueling private sector demand for credit. Growth in loans to non-financial corporations has picked up further in recent months. Moreover, demand for loans for house purchase has continued to be robust, contributing to strong house price dynamics in several parts of the euro area. The combination of ample liquidity and strong credit growth could, in some parts of the euro area, become a source of unsustainable price increases in property markets." Of particular concern in the Eurozone, which excludes Britain, are the housing markets in Spain and France.

On Feb. 9, ECB chief economist Otmar Issing was interviewed by the German financial daily Boersenzeitung. One of the main issues was the threat to the European economies posed by the bursting of real estate bubbles. Issing was asked whether the ECB shouldn't increase its interest rate to stop these bubbles from growing. Issing responded, that the ECB of course could prick speculative bubbles. But the required sharp increase of interest rates would at the same time cause "severe damage" to the real economies.

Further Dollar Weakness Could Sink Latin American Debtors

That is the evaluation of the British rating agency Fitch in a report published the second week of February. As a consequence of the "new economy" crash on stock markets, and historically low yields on government bonds, investors in recent years have channelled vast amounts of liquidity into every available high-yield (and at the same time high-risk) market. One of these areas is emerging market debt, that is bonds issued by governments in the developing sector.

In its report, Fitch develops a scenario which it describes as the biggest threat to emerging market debt prices in the coming months. The scenario starts with another sudden decline in the U.S. dollar. This would trigger an unexpectedly sharp rise in U.S. interest rates. Investors then would demand even much higher returns on risky debt. This, says Fitch, could then fuel turbulences in emerging market bond prices, which last year rallied strongly. While most of the Asian debtors seem to be shielded from such turbulences by their large currency reserves, the situation is quite different in Latin American countries. Fitch names Ecuador, Uruguay, Brazil, and Colombia as those countries that would suffer most from a steep rise in U.S. interest rates.