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ECB creating ‘dangerous’ bubbles: German think tank

The policy actions announced by the European Central Bank last week received major criticism on Tuesday, with the head of influential German think tank ZEW detailing his concerns about surging asset prices which he says are creating dangerous bubbles.

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Clemens Fuest, from the Mannheim-based organization best known for its widely-watched economic sentiment index - told German business daily Handelsblatt that the euro zone region could be at a "turning point."

"I've got a bad feeling about this...I am concerned by the danger that the ECB is producing new bubbles with its policy of cheap money," he told the newspaper.

"We have all the ingredients of a bubble: The prices of real estate and stock markets continue to rise, and on the bond markets, yields are falling despite high risks."

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With inflation at 0.5 percent in the euro zone, unemployment at 11.7 percent and bank lending failing to trickle down to the wider economy, the ECB delivered one of its most comprehensive packages to date last week.

The interest rate and deposit rates have been cut, preparations are beginning to purchase asset-backed securities, new cheap loans will also be made to banks and it is to cease "sterilizing" its past purchases of sovereign bonds.

Fuest told Handelsblatt he now believes that there is a 95 percent probability that a quantitative easing program - under which government bonds are purchased - will be launched further down the road as last week's stimulus measures will be deemed as insufficient.

This asset purchase program, he said, would potentially be the tipping point and lead stock markets and other asset classes into dangerous territory. The purchase of government bonds would only be acceptable if the ECB explicitly claimed senior status relative to private bondholders, he said, and were exempt from any writedown in case of an asset's devaluation.

"To overcome the crisis, governments in Europe must act, the ECB alone cannot cope," he added, implying that governments need to continue with structural reforms to stimulate their own economies.

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Officials from Germany, the economic powerhouse of the euro zone, have been the most vocal critics of ultra-easy monetary policy in the run-up to the ECB's latest measures. Asset purchases and the cheap liquidity the bank provides are seen by many as having the capability of stoking inflation, especially in Germany where consumer price growth is currently higher than in most other countries in the region.

Jens Weidmann, the president of Germany's Bundesbank and a Governing Council member of the ECB, was believed by analysts to be at one time the main pillar of this German opposition to ultra-loose monetary policy. However Weidmann has sounded increasingly dovish over recent weeks at a time when German consumer prices have also seen falling growth.

On Tuesday, he said that the package of measures last week indicated just how little room the ECB has to cut rates in order to deal with the inflation outlook. Speaking to German newspaper Boersen-Zeitung, and quoted by Reuters, he also said that the central bank was he entering "new ground."

"That we took unconventional measures is both down to the fact that we have almost used up the room to cut rates, and that we wanted to ensure that our expansive monetary policy also came through to the real economy," he said.


Contact Europe: Economy

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