LONDON The risk that deteriorating government finances could push economies into full-fledged debt crises tops a list of threats facing the world in 2010, according to a report by the World Economic Forum.
Major world economies have responded to the financial crisis with stimulus packages and by underwriting private debt obligations, causing deficits to balloon. This may have helped keep a worse recession at bay, but high debt has become a growing concern for financial markets.
The risk is particularly high for developed nations, as many emerging economies, not least in Latin America, have already been forced by previous shocks to put their fiscal houses in order, the WEF think tank said in its annual Global Risks report ahead of its meeting in Davos, Switzerland.
"Governments, in trying to stimulate their economies, in fighting the recession, are (building) unprecedented levels of debt and therefore there is a rising risk of sovereign defaults," said John Drzik, Chief Executive of management consultancy Oliver Wyman, which was one of the contributors to the WEF report.
He said higher unemployment levels could follow, with associated social and political risks.
The report placed unsustainable debt levels and the looming shadow of the financial crisis among the top three risks, alongside underinvestment in infrastructure -- one of the fastest rising risks -- and chronic diseases such as Alzheimer's and diabetes driving up health costs and reducing growth.
Other looming threats including the risk of asset price collapse, risks connected to Afghanistan and a potential slowdown in Chinese growth which could hit employment, fuel social unrest and hurt exports through the region and beyond.
The report, highlighting the risk developed nations could overextend "unsustainable levels of debt," said full-blown debt crises would have inevitable social and political consequences, not least higher unemployment.
"Government debt levels of 100 percent of GDP -- which is where the United States and the UK are heading -- and higher are clearly not sustainable," said Daniel Hofmann, group chief economist at Zurich Financial Services, a contributor to the report.
"There is an inherent risk that investors may take fright, they may question the sustainability of these debt levels -- the result (would be) sovereign debt crises and defaults.
"Clearly Dubai and Greece were early warnings that should be heeded," he told a press conference.
Worries over Dubai, Ukraine and Greece have spilled over into global markets , and all three look set to remain under pressure, with the threat also high for the Anglo-Saxon economies -- the United States and the United Kingdom.
The WEF report said both faced with "tough choices" in the months ahead as they seek to time a "gradual and credible withdrawal of fiscal stimulus so that the recovery is sustained but not so late that fiscal deficits cause fear of sovereign debt deterioration."
The report highlighted what it called a "governance gap" -- the gap between short-term pressures on governments and business and the need for long term decisions, not least on issues including health and pension reform and climate change.
Too little was being done to address underinvestment in infrastructure, it said, which could hurt food and energy security. The World Bank puts global infrastructure investment needs at $35 trillion for the next 20 years.
Greater life expectancy and unhealthy lifestyles would lead to a soaring financial cost from chronic disease, they said, which must be addressed by both developing and developed nations such as through prevention campaigns promoting healthier living.
"The biggest risks facing the world today maybe from slow failures or creeping risks," said the report. "because these failures at risks emerge over a long period of time, there potentially enormous impact and long-term implications can be vastly underestimated."
For the full report, click here
(Reporting by Clara Ferreira-Marques, editing by Peter Apps and Andy Bruce)