Sunday, January 28, 2007

Mixed signals from snowy Davos

The gathering of top corporate and political figures and economists in the Swiss Alps has raised concern that several years of strong global economic growth and surging liquidity have seen hedge funds and other investors take on ever-larger positions in credit derivatives and other instruments.

European Central Bank President Jean-Claude Trichet, speaking in a panel discussion on the global outlook, warned that credit spreads and risk premiums on numerous financial products appear too low, a phenomenon that "calls for attention" and possible an "orderly re-evaluation of risks."

This seems to be a phenomenon of the good times. Hedge funds and even some investors who are risk averse in leaner economic periods are emboldened to take brazen risks when the going is good for longer periods. Hence national and global financial institutions must remain alert for any unsavoury behaviour which may cause financial hardships to communities.

Economists can sound the alarm and do their best for what they are paid -worrying. But corporate heavyweights must play their part to avert the temptation of people like Nick Leeson whose speculative trading lost £1.3 billion and brought down Britain's oldest merchant bank Barrings.

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