June 17, 2014 / 11:56 AM / 4 years ago

UPDATE 1-Cheap money, push for returns creating risk, says Bank of Spain

(Adds details, quotes throughout)

By Paul Day

MADRID, June 17 (Reuters) - The Bank of Spain warned that global easing of monetary policy coupled with a push for returns had become risky as investors chased profit, suggesting some were paying too little attention to assets’ underlying value.

He said Spain - whose bonds were spurned during the euro debt crisis but are now being snapped up by investors seeking higher returns - must keep trying to prune its budget deficit and hold down its debts.

“Some valuations (in financial markets) are at record highs in a context of a search for returns by investors, which is playing a predominant role over other considerations based in the fundamental value of the assets,” Linde told the lower house of parliament.

“This international monetary and financial market situation has risks, in that it is susceptible to sharp changes due to expectations of the removal of monetary stimulus.”

Spanish short-term debt yields fell to record lows on Tuesday as investors searched for some returns after the European Central Bank cut its reference interest rates in early June.

Spain has sold nearly 60 percent of its 2014 debt target as investors rush to buy the Treasury’s paper which, just two years ago, saw yields hit unsustainable highs on concerns over the euro zone and that the government couldn’t control its expenses.

Linde said Spain must continue efforts to cut the deficit even as the economy returned to growth and noted that tax reform proposals must improve efficiency without putting budget balancing measures at risk.

“Pending fiscal consolidation efforts are still significant ... the culmination of the fiscal consolidation process must continue to be a priority for Spain’s economic policy,” Linde said.

He said the ECB’s monetary policy has helped the euro zone’s economy to recover, with Spain registering growth for the first time in over two years in the second half of 2013.


But the recovery was still in its early stages, Linde said.

“The effects of the crisis, in terms of unemployment and indebtedness, have been great and their absorption will take time,” he said.

“Improvements in competitiveness and the reduction of private debt must continue. And they must do so in an environment of low euro zone inflation and a very strong euro, which makes it more difficult.”

Spain has passed a slew of economic reforms and austerity measures since the economic downturn began six years ago, but is still struggling with 25.9 percent unemployment and one of the highest public deficits in the euro zone.

Details of the proposed tax reform, which is expected to cut income and corporate taxes in an effort to further stimulate the economic recovery, will be announced on Friday, Economy Minister Luis de Guindos confirmed on Tuesday. (Additional reporting By Jesus Aguado, Editing by Sonya Dowsett/Ruth Pitchford)

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