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Global risk watch

The macroeconomic imbalances nexus Risk description and impacts This cluster of three economic risks — global imbalances and currency volatility, fiscal crises and Global risk watch price collapse — is characterized by both internal imbalances within countries and external imbalances between countries.

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Internal imbalances are produced by many factors, including government policies and private sector behavior and are influenced by the stage of economic development. Fiscal imbalances in advanced economies have widened because of government profligacy.

They were exacerbated by the impact of the financial crisis. First, many governments were forced to set aside large packages to bailout failing banks and stabilize the financial system.

Second, and more importantly, many governments provided large fiscal stimuli to mitigate the recessionary impact of the crisis. The combination of bailout and stimulus packages resulted in burgeoning deficits and expanding debt-to-GDP ratios, particularly in advanced economies. Achieving fiscal consolidation while avoiding hampering the fragile recovery is a short-term challenge.

However in the long-term, a key fiscal challenge will be financing the unfunded liabilities of current and future generations see discussion Global risk watch and Risk to Watch Demographic Challenges. Related to this point, external imbalances between countries are also of concern.

At the heart of global imbalances is a mismatch between saving and investment. Deficit countries do not save enough relative to their investments, and surplus countries do not invest enough given their high savings.

In principle, external imbalances are not bad. Capital will tend to flow to the most profitable use; in a globalized system, that includes cross-border capital flows.

As long as the recipients of such flows put them to productive use i. These imbalances lead to two primary risks. First, they lead to slow growth, increasing accumulation of debt and fiscal pressures create risks of sovereign defaults in certain advanced economies which could also affect banking systems worldwide and vice-versa.

Second, such weakness creates the risk of excessive capital flows to emerging markets, increasing the bubble risk and potentially leading to asset price collapse.

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While global imbalances will continue to imply a net flow of capital from surplus to deficit countries, these risks arise when increases in gross flows of capital from advanced to emerging economies are not matched by the commensurate ability of economies to absorb such flows productively.

Figure 1 shows how these risks are linked graphically, and provides a non-exhaustive list of the direct and indirect impacts of these risks to stakeholders. These risks link strongly to other global risks. For example, fiscal pressures in advanced economies will accelerate the ongoing power shift towards Asia, increasing the risk of geopolitical tensions.

All three risks could also exacerbate global governance failures as countries resort to zero-sum calculations and short-term, populist solutions. Major trends And uncertainties As Figure 2 shows, global imbalances increased significantly between and While the financial crisis acted to reduce these somewhat from recent highs, the IMF and others expect them to increase again in the future.

Running sustained and large current account deficits requires capital inflows on the part of deficit countries. This implies an increase in public debt when accompanied by fiscal deficits.

Figure 3 shows the long-run trends for government debt for G7 economies, including recent increases. There is a high degree of risk and uncertainty regarding how much debt can be borne by the public sector, particularly in advanced economies, before the debt burden seriously impacts economic growth through increasing borrowing costs, politically unacceptable amortization payments, and the subsequent need for fiscal austerity.

Based on a sample of 44 countries over a period of years Kenneth Rogoff and Carmen Reinhart have found that there are distinct debt-to-GDP thresholds where debt growth becomes non-linear.

Depending on which measures of debt are used, US public debt is either fast approaching or even just past this threshold, while many European countries are well beyond it.

Further, if current spending and income trends continue, IMF analysis indicates that net government debt for G7 economies could rapidly increase to unprecedented levels.

A more accurate measure of fiscal outlook is to factor in future liabilities not counted as current debt by calculating the net present value NPV of all future obligations relative to the NPV of all future income streams. While there are large uncertainties in these calculations, such analysis suggests that the impact of uncounted future liabilities is very large, and that the impact of age-related liabilities will dwarf short-term issues such as the cost of fiscal stimulus.

Given the magnitude of uncovered future liabilities, the IMF and Bank of International Settlements analysis implies that without significant adjustments in the medium-term, almost all advanced economies face serious threats to fiscal solvency in the long-run.

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Experts argued that there is a distinct risk that politicians will not be able to muster the necessary will to prevent severe financial market turbulences and, ultimately, protect their countries against default.

In light of the pressures of such fiscal and macroeconomic imbalances, discussions with experts highlighted three non-exclusive and negative scenarios whereby this cluster of risks produces severe challenges to the global financial and economic systems and beyond.

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In the first scenario, a combination of recessionary pressures and lack of market confidence in the short-term and unfunded social obligations in the long-term could drive both fiscal and banking crises in selected advanced economies.

In some countries, crises in public finances will mean a fall in value of government bonds, taking with them the value of assets invested by financial institutions.

For countries with a higher proportion of private lending, as the threat of sovereign default rises, capital will flee banks that are seen to ultimately be reliant on public rescues.Most of Nepal’s Maoist ex-guerrillas have transitioned into peaceful democratic politics. However ahead of general elections, conflicts have been reported.

Leaders from across the political, economic, environmental and risk sectors will gather in Bermuda for the first Ocean Risk Summit. The event will present high-level speakers providing expert data, analysis and innovative tools to help participants identify potential exposures to ocean risk and prepare to tackle its broad-ranging consequences.

'This newsletter is translated from the Japanese edition distributed on April 25th Center for Risk Management Strategy at Deloitte Touche Tohmatsu LLC. Now in its 12th edition, The Global Risks Report completes more than a decade of highlighting the most significant long-term risks worldwide, drawing on the perspectives of experts and global .

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