London: The risk that parlous government finances will trigger sovereign debt defaults remains one of the biggest threats facing the world in 2011, according to the World Economic Forum (WEF).
Punishing levels of public debt built up to counter the financial crisis have reduced the capacity of countries to handle further shocks to critically low levels, according the group’s closely watched 2011 Global Risks report.
“Current fiscal policies are unsustainable in most industrialized economies. In the absence of far-reaching structural corrections, there will be a high risk of sovereign defaults,” said Daniel Hofmann, chief economist at Zurich Financial Services, who contributed to the report.
The 50-page analysis of 37 global risks precedes the World Economic Forum’s (WEF) annual meeting in two weeks’ time in the Swiss ski resort of Davos, which brings together high-level politicians, central bankers and business leaders.
“The world is probably more vulnerable to future shocks than it ever has been in the last half century,” WEF chief business officer Robert Greenhill told reporters at a briefing in London.
“The response to the financial crisis has drained national treasuries and drained household incomes, but the underlying risks still remain.”
Debt was also highlighted as a top threat in the WEF report last year, and Greece’s meltdown went on to overshadow the 2010 Davos meeting.
Since last January, the euro zone’s crisis has spread to Ireland, which has also been bailed out, and now threatens to engulf Portugal and possibly Spain—the euro zone’s fourth largest economy—as investors worry about governments’ ability to repay debts and the risk of write-downs for bondholders. There will also be a greater focus than ever in Davos on the mismatch between buoyant economic growth in emerging markets and sluggish conditions in the developed world.
Such imbalances increase the risk of protectionism and currency wars as “hot” capital surges into emerging economies.
And in an increasingly interconnected world, local weaknesses can lead to rapid contagion, increasing the need for global cooperation among governments, WEF said.
Other threats in 2011 include tightening supplies of basic resources such as food, water and energy, which John Drzik, chief executive of management consultancy Oliver Wyman, said were aggravated by lack of investment in infrastructure because of chronic fiscal deficits. Surging global food prices have already set warning lights flashing on inflation.
Food prices hit a record high last month, according to the United Nations food agency, surpassing levels in 2008 that sparked riots in countries from Egypt to Haiti.
“We’re entering a new age of commodity price volatility,” Drzik said. “It is not just a near term issue.”
Prices would stay volatile because of a rise in extreme weather events around the world, growing demand for resources and increased financial speculation, he said.
More failed or failing states are also fuelling booming illegal economic activity across the globe, playing into the hands of organised crime and undermining the rule of law.