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Asset bubbles could deflate global recovery: analysts

PARIS -- In a world still struggling to shake off the worst financial crisis for a generation, many economists are worrying that new asset bubbles are already threatening to derail the tepid global recovery.

Concern has been rising that investors are paying too much for securities in a search for good returns when interest rates are hovering near record lows, creating the bubble conditions for a new market crash.

The Bank of International Settlements warned at the end of last month that financial markets were running ahead of economic reality, and called for governments to stop new debt-driven overspending.

The BIS, the so-called central bank of central banks, called for policies that “lean more deliberately and persistently against financial booms and ease less aggressively and persistently during busts.”

BIS general manager Jaime Caruana said as he presented the report: “During the boom, resources were misallocated on a huge scale, and it will take time to move them to new and more productive uses.”

Bond rates for European countries hit hard by the eurozone debt crisis, such as Greece, have slumped, showing investors do not see them as a risk despite their persistently weak economic growth, while equities have bounded to unprecedented levels.

Critics argue that is the fault of central banks, which have kept their rates at record lows and pumped their economies full of liquidity first to stave off recession and then to boost growth.

U.S. share markets have posted successive new record highs over recent weeks, with the Dow Jones for the first time breaking the psychologically key 17,000 mark.

Weighed down by the political crisis in nearby Ukraine, European shares have been somewhat restrained in the last few days — although Germany's main index, Frankfurt's DAX 30, hit a record high this month.

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AFPJaime Caruana, general manager of the BIS (Bank for International Settlements), delivers a speech at a press conference during the Bank's Annual General Meeting in Basel on June 28, 2010. (AFP)

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