Fiscal crises triggered by ballooning debt levels in advanced economies pose the biggest threat to the global economy in 2014, a report by the World Economic Forum has warned. Ahead of next week’s WEF annual meeting in Davos, Switzerland, the forum’s annual assessment of global dangers said high levels of debt in advanced economies, including Japan and America, could lead to an investor backlash. This would create a “vicious cycle” of ballooning interest payments, rising debt piles and investor doubt that would force interest rates up further. “This can rapidly turn into a fatal spiral, in which fears that a country will default on its debt become a self-fulfilling prophecy,” it said, ultimately forcing governments to undertake “painful fiscal adjustments” in order to get debt levels back under control. “Advanced economies remain in danger of fiscal crises. Given the US’s official public debt of more than 100pc of its GDP, and Japan’s of more than 230pc, investors may at some point conclude that these levels are unsustainable,” the report said. “In the short run, the risks are higher for eurozone countries, which lack the option of devaluing their currencies to ease the necessary fiscal adjustment.” The WEF report said fiscal crises had the potential to quickly turn into financial crises, as a lot of government debt tended to be held by domestic banks “When the government defaults, the resulting losses on these bonds endanger banks’ solvency. In this way, a fiscal crisis can lead to financial crisis,” it said.
“The causation can also run the other way: the government may be forced to bail out large banks at risk of default to avoid a systemic financial crisis. However, the additional debt taken on can plunge the government from an already-precarious fiscal position into a full-blown fiscal crisis.” It said finding ways to deal with these risks was vital to ensure financial stability. “Making fiscal frameworks more resilient in the future is even more important given the substantial longer-run fiscal challenges created by an ageing population,” the report said. While the forum pinpointed fiscal crises as having the most potential to damage to the global economy, it said inequality posed the biggest single risk to the world in 2014. It warned there was a “lost” generation of young people coming of age in the 2010s who lack both jobs and, in some cases, adequate skills for work, fuelling pent-up frustration. This could easily boil over into social upheaval, as seen already in a wave of protests over inequality and corruption from Thailand to Brazil. “Disgruntlement can lead to the dissolution of the fabric of society, especially if young people feel they don’t have a future,” said Jennifer Blanke, the WEF’s chief economist. “This is something that affects everybody.” The survey of more than 700 global experts identified extreme weather events as the second most likely factor to cause systemic shocks, reflecting a perceived increase in severe conditions such as America’s big freeze this winter. The Telegraph