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.
What is more, punishing levels of public debt built up in the wake of 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 global dangers comes two weeks ahead of the World Economic Forum's (WEF) annual meeting in the Swiss ski resort of Davos, which brings together high-level politicians, central bankers and business leaders.
Governments in the developed world have responded to the financial crisis with stimulus packages that have led to a spike in debt levels — an acute worry to investors.
The debt crisis 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. The issue isn't going away.
Since last January, the eurozone's debt crisis has spread to Ireland, which has also been bailed out, and now threatens to engulf Portugal and possibly Spain — the eurozone's fourth largest economy.
Investors are shunning such peripheral eurozone sovereigns because of worries over their ability to repay debts and fears of writedowns for bondholders.
The fragile state of the world economy will dominate talk in Davos, where there will also be a greater focus than ever 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 emerging economies attract massive capital inflows.
And in an increasingly interconnected world, weaknesses in the global economy can easily lead to rapid contagion, increasing the need for global cooperation among governments, the WEF said.
FEED THE WORLD
Other looming 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.
More failed or failing states are also fuelling booming illegal economic activity across the globe, playing into the hands of organized crime and undermining the rule of law.
The total value of worldwide illicit trade in 2009 was estimated at $1.3 billion and growing, the WEF said.
© 2022 Thomson/Reuters. All rights reserved.