‘Currency carry trade could spark next global crisis’

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GENEVA: A top UN economist warned yesterday that so called carry trades, a form of speculation on the currency markets could sink the global economy back into crisis.“If you asked me what is the most serious problem in the world now, I would say it’s carry trade,” said Heiner Flassbeck, chief economist at the UN Conference on Trade and Development.

Carry trade involves borrowing in a currency that levies low interest rates, to invest in another which yields higher interest rates.

The investor makes a profit from the difference in interest rates.

With currencies across the developed world, such as the US dollar and the Japanese yen all levying low interest rates at the moment, carry traders are borrowing these currencies and investing in those of emerging economies, such as India, which is paying higher interest rates.

“This dramatically destabilises economies, because capital goes from low interest rate countries which are low inflation countries or deflation countries to high inflation countries and appreciates the currency higher,” said Flassbeck at a press conference in Geneva.

“That is clearly a destabilising effect for global trade and has always been a danger of collapse of this trade later,” he added.

“It has two big dangers, destabilising and having the potential to bringing the world back into a financial crisis again,” he warned.

The dangers of carry trade was raised by China’s deputy central bank chief in January. During the World Economic Forum in Davos, Zhu Min had warned that carry trade was a ‘real risk this year for the economy.’

Flassbeck also called on governments to take firm action to stop the markets from speculating on the euro, which is under pressure as investors bet that the currency would be weakened by the Greek crisis and other indebted eurozone states.

“I very much hope that the international community is able to stop that speculation at a certain point of time because that would clearly contradict all the attempts to balance or to reduce the imbalances that we have in the global trading system,” he said.

He pointed out that driving down the euro would also hurt economies such as the United States, which could see its strategy of raising exports thwarted if the dollar were to appreciate sharply. — AFP