Fed's Checki Says National Reserve Funds May Pose New Risks
2007-05-31 10:27 (New York)

Checki, who heads the New York Fed's emerging markets and
international affairs division, said recent stability in global
markets ``may contain the seeds of its own undoing.'' Long-term
trends ``are inherently dangerous'' because they can ``make
people forget what different environments look like.''
``This makes reversals all the more sudden, powerful and
surprising,'' Checki said.

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(BN) Fed's Checki Says National Reserve Funds May Pose New Risks

Fed's Checki Says National Reserve Funds May Pose New Risks
2007-05-31 10:27 (New York)

By Jacob Greber
May 31 (Bloomberg) -- National governments and central banks
may pose new risks to global financial markets as they seek
greater returns on their record holdings, said New York Federal
Reserve Executive Vice President Terrence Checki.
``The growing interest in earning better returns on reserve
assets may signal reduced caution going forward,'' Checki told a
conference in Athens today. ``Capital flows from the emerging
world could play an important new role in how future episodes of
stress in the financial system originate.''
Central banks are diversifying their $5 trillion of foreign-
exchange reserves away from traditional government bonds, bank
reports show. Governments, particularly in Asia and oil-producing
regions, are also pouring funds into state-controlled investment
companies to seek greater returns. Those assets have climbed to
$2.5 trillion, according to research by Morgan Stanley analysts.
Checki, who heads the New York Fed's emerging markets and
international affairs division, said recent stability in global
markets ``may contain the seeds of its own undoing.'' Long-term
trends ``are inherently dangerous'' because they can ``make
people forget what different environments look like.''
``This makes reversals all the more sudden, powerful and
surprising,'' Checki said.
The New York Fed official's comments reflect concern among
some central bankers that low borrowing costs worldwide may spur
some investors to pay too much for assets given their risk.
Emerging-market and junk-rated bond premiums compared with
benchmark securities slid to record lows this month.

Premiums Shrink

The extra yield offered by emerging-market bonds compared
with benchmark U.S. Treasury securities dropped to a record 152.8
basis points on May 23, according to the JPMorgan Chase & Co.
EMBI+ index. The so-called spread was 158.6 basis points
yesterday.
Risk premiums on U.S. corporate bonds rated below investment
grade narrowed to 242 basis points on May 29, based on Merrill
Lynch & Co.'s high-yield index, which has tracked yield premiums
since the end of 1996. The spread is half the average of about 5
percentage points over the past five years.
Checki made the comments in front of bankers attending a
meeting of the International Institute of Finance, which today
published a report saying net direct investment in emerging
markets will rise 16 percent this year as mergers boom and demand
for commodities soars.
Deutsche Bank AG Chief Executive Officer Josef Ackermann
said there has been ``a lowering of investing standards in some
markets'' amid surging liquidity.

--With reporting by Harry Papachristou and Gabi Thesing in
Athens. Editor: Hertling (cxa)