Massive government spending to support financial institutions isthreatening "precarious fiscal positions" in the United States andother countries, according to the 2009 Global Risks Report by WorldEconomic Forum.

The analysis, published in cooperation with Swiss Re, Citigroup,MMC (Marsh & McLennan Companies), the Wharton School RiskCenter and Zurich Financial Services, said the warning ongovernment spending also applies to the United Kingdom, France,Italy, Spain and Australia.

It is dangerous to address immediate economic concerns withoutremedying the root causes of the problem, or sowing the seeds ofnew ones whose impact will not be immediate but may be stronglyfelt at a later date, the report warned.

It noted that the United States is currently running a deficitequivalent of 4.6 percent of its gross domestic product (GDP).

Coupled with this, should China suffer a slowdown in growth to 6percent or below this year, the effect would significantly damagethe weakening global economy, World Economic Forum predicted.

While global equity values have seen a rapid fall of more than50 percent on average, the report cautioned there could be morepain to come.

It said the vicious circle between declining asset values,write-downs, pressure on the capital position of financialinstitutions and continued deleveraging continues to revolve.

Selling equities on a massive scale means that markets areflooded with more assets than they can absorb, triggering furtherprice falls which need to be marked to market, and in turnrequiring further capital charges, WEF explained.

In addition to economic risks the report said that health risksincluding chronic and infectious diseases, as well as the ongoingrisk of a major pandemic, continue to dominate.

Wars and terrorism, it said, continue to mar the lives ofmillions with effects that reach well beyond costs to populationsthey touch directly.

John Drzik, chief executive officer of Oliver Wyman, an MMCoperating company, said, "There are many lessons we can all learnfrom the present financial crisis. High among them is the need toembed better risk governance. As the report makes clear, there areseveral measures both government and corporate leaders can take toensure they ask the right questions, understand their riskexposures more fully and improve ways of mitigating them."

According to the WEF, the financial crisis has exposed the lackof coordination among policy-makers, regulators andsupervisors.

The report acknowledges the need for better governance globallybut warns against a knee-jerk overreaction which would increasetransaction and compliance costs and ultimately prove ineffectivein the face of the next crisis.

Daniel M. Hofmann, Zurich Financial Services' Group chiefeconomist, said, "In 2008, financial and economic risksmaterialized considerably. However, the global economy is still notin the clear yet as it continues to be prone to substantialvolatility."

One of the biggest risks, he said, is that short-term crisisfighting may induce businesses and governments to lose thelong-term perspective on risk.

In addition to the immediate risks stemming from the financialcrisis, the report also cautions against ignoring interconnectedrisks related to natural resources. As world leaders focus on wateravailability, the report shows that water is critical to generatingenergy, with 50 percent of the cost associated with water supplyrelated to energy.

It also warns of potential rising tensions between developed anddeveloping countries with respect to climate change policy.

Raj Singh, Swiss Re chief risk officer, said, "The poorestnations will suffer most from climate change because they lack theinfrastructure and institutional framework to cope. Unfortunately,these are also the countries that are worst affected byweather-related disasters. The private sector can help them adaptto changing weather conditions with risk-transfer solutions such asthe weather insurance program we are running in Malawi with theWorld Bank."

The report, however, concludes on a positive note, stating that2009 could prove to be an opportune moment to strengthen globalgovernance and build the political will to restore global financialstability and focus on the longer-term challenges of managingscarce resources and climate change.

As summarized by Howard Kunreuther, Co-Director of the WhartonRisk Management and Decision Processes Center and Co-Chair of theForum's Global Agenda Council on Mitigation of Natural Disasters:"If business leaders and decision-makers can overcome thebehavioral biases toward immediate, short-term solutions and switchto longer-term thinking, then they will have made significantprogress in adopting an attitude suited to the mitigation ofincreasingly complex and interlinked global risks."

Klaus Schwab, executive chairman of the Geneva,Switzerland-based WEF, said in a preface to the report that"mitigation of global risks will only be possible once confidencein global governance institutions is restored, starting by ensuringthat they are adapted to today's challenges and revising theirmandate and powers accordingly."

"They must be able to function in a proactive and coordinatedfashion, fostering cooperation across all regions, industries andstakeholder groups."