Thursday, April 21, 2011

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Fear of emerging economies: easy credit

By David Wessel

housing prices are rising rapidly in Australia, Canada, China, Hong Kong, Israel, Singapore, South Africa and Sweden.

housing prices are stable, or falling-in the United Kingdom, Germany, France, Ireland, Italy and the United States.

Welcome to the global economy with two speeds.

When most observers speak of a "two-speed economy" are contrasting the mature, slow-growing or advanced (U.S., Europe, Japan, etc.) with developing economies and emerging rapidly expanding (China, India, Brazil, etc.). Philip Suttle, the Institute of Finance International, an organization that brings together bankers, calls it "a world of two and six."

In mature economies, growth and inflation are about 2%, in emerging markets are both in about 6%. When something deviates from that path, Suttle said, makes something else again.

But there is another way of dividing the world: some economies had a major banking crisis. Some do not. And those who did not have this crisis are those in which it is raising the price of housing. Slow growth in mature economies is leading them to maintain low interest rates and credit terms, easy. Like them (up to now) dominate global financial markets, this means that the global credit is easy, too easy for emerging markets where the inflation in wages, prices and asset prices is a reason for concern.

"In countries where the financial system was seriously damaged during the global crisis, house prices have risen rapidly," says Stanley Fischer, governor of the Bank of Israel. "That's because when interest rates are cut interest rates a lot to deal with the crisis, mortgage rates also fell rapidly, and people responded by taking borrow to buy houses, and thus pushed up its price. "

low rates in the U.S. and other economies hit hard by the financial crisis are having the same effect. Its banks are not yet willing or able to deliver quickly. In the U.S., for example, the latest S & P / Case-Shiller residential prices in 20 cities is 3.1% below the levels of the same period last year, and those in turn, were 29% below the peak of 2006. The most recent Federal Reserve survey showed little evidence that banks are abandoning the most severe conditions of mortgage loans imposed during the worst of the recession.

But elsewhere, particularly in countries that are being flooded with money fleeing the extremely low interest rates in the U.S., Europe and Japan, the banks are lending, people are buying and house prices are climbing. This is not just a phenomenon of emerging markets.

In Canada, for example, only commercial banks were shaken by the crisis but the Bank of Canada has kept its main rate by 1% to boost economic growth. The result: The house prices in February rose almost 9% year on year, says the Association Canadian Real Estate. The concern in Canada and elsewhere is that what goes up, it could fall and amply illustrates the story about the economic damage that occurs when home prices sink.

In Israel, the banks avoided the worst of the crisis: they had invested heavily in poor quality U.S. mortgages. But Israel was not immune to external shocks, so its central bank cut interest rates to 0.5% in 2009. That made mortgages were cheap. During the past year, house prices rose 16.3%.

"The continued price increases could threaten the stability and in this regard could lead to the creation of a bubble, "says the Bank of Israel. Top rates will make mortgages more expensive and that is what has been seeking Fischer, who recently raised the benchmark rate to 3% central bank.

But like many of his colleagues elsewhere, Fischer knows that one effect of rising interest rates is a more expensive currency. And that strikes at Israel's vibrant export sector. So you're looking for alternatives more concentrated in the prices of houses: the Bank of Israel has imposed rules intended to increase the cost of mortgages. So far, mortgages have been hit by over 800,000 shekels (about U.S. $ 235,000) in payments Initial below 40%, but there are signs that the Bank of Israel is going to stop there.

Major countries had a housing bubble that burst, causing the biggest financial crisis in half a century. To avoid a depression, flooded the world with credit. And that credit threatens to create new housing bubbles in other countries. Nobody ever said that globalization was easy.

Source: WSJ

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