Govt stimulus measures are causing systemic risks to build up: analysts
By Ryan Huang, Channel NewsAsia | Posted: 26 November 2009 2101 hrs

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SINGAPORE: Experts said the massive stimulus measures put out by governments to bolster their economies are causing systemic risks to build up and that may lead to yet another crisis.

But they said there are ways to minimise the impact such as by improving risk management in the global financial system.

Risks could be building up in the global economy even as the effects of last year's financial crisis wear off.

According to experts, one of these could be the effects of the near zero-interest rate policy by the US.

Peter Elston, strategist, Aberdeen Asset Management, said: "This is causing all sorts of problems. Not the problems that we are aware of that, but problems that we will be aware of down the road. Whether its the zero interest rate policy, or this quantitative easing whether its fiscal stimulus - this massive increase in government borrowing that we're seeing - these are causing risks to build up in the system.

“But essentially, government meddling in the economy causes all sorts of risks to build up. When are we going to become aware of those, when are they going to manifest themselves, it may not be for another two to three years but certainly they are causing risks to build up."

Some experts said the US policy of keeping the cost of borrowing low to boost the economy could ironically be fuelling new asset bubbles elsewhere as investors chase higher-yield investments.

Some observers believe the next crisis will be a matter of time but said there are ways to minimise its impact.

They said lessons learnt from the previous crisis include the need for warning systems such ensuring that banks meet capital requirements and monitoring the trading of financial products.

Professor Paul Embrechts, ETH Zurich, said: “Markets should be aware of volume of certain products being traded especially if these products are off balance sheet or not traded on a specific market.

“So the ones that are sort of hidden and at huge amounts they should be aware of those.”

“An important warning is volume, if you're talking about the credit default swap market, you're talking about US$50 trillion nominal value - then you're talking something close to the world GDP.

“If you talk about US$500 trillion over the counter products, then you talk about eight times the world GDP, these are big numbers.”

For retail investors, experts recommend that they be aware of these risks and position their portfolios accordingly.

They said the best way that retail investors can protect themselves is to avoid investing in complex products and to put money in companies with simple business models and sound fundamentals. - CNA/vm