Sovereign defaults top 2010 risk hitlist

Tue Jan 19, 2010 10:58am EST
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By Clara Ferreira-Marques and Peter Apps

LONDON (Reuters) - 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.

CREEPING RISKS   Continued...

<p>Attendees use a computer during a pause at the World Economic Forum (WEF) in Davos January 29, 2009. REUTERS/Christian Hartmann</p>