National Bailouts A Global Risk, Says World Economic Forum

Massive government spending to support financial institutions is threatening "precarious fiscal positions" in the United States and other countries, according to the 2009 Global Risks Report by World Economic Forum.

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

It is dangerous to address immediate economic concerns without remedying the root causes of the problem, or sowing the seeds of new ones whose impact will not be immediate but may be strongly felt at a later date, the report warned.

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

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

While global equity values have seen a rapid fall of more than 50 percent on average, the report cautioned there could be more pain to come.

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

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

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

Wars and terrorism, it said, continue to mar the lives of millions with effects that reach well beyond costs to populations they touch directly.

John Drzik, chief executive officer of Oliver Wyman, an MMC operating company, said, "There are many lessons we can all learn from the present financial crisis. High among them is the need to embed better risk governance. As the report makes clear, there are several measures both government and corporate leaders can take to ensure they ask the right questions, understand their risk exposures more fully and improve ways of mitigating them."

According to the WEF, the financial crisis has exposed the lack of coordination among policy-makers, regulators and supervisors.

The report acknowledges the need for better governance globally but warns against a knee-jerk overreaction which would increase transaction and compliance costs and ultimately prove ineffective in the face of the next crisis.

Daniel M. Hofmann, Zurich Financial Services' Group chief economist, said, "In 2008, financial and economic risks materialized considerably. However, the global economy is still not in the clear yet as it continues to be prone to substantial volatility."

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

In addition to the immediate risks stemming from the financial crisis, the report also cautions against ignoring interconnected risks related to natural resources. As world leaders focus on water availability, the report shows that water is critical to generating energy, with 50 percent of the cost associated with water supply related to energy.

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

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

The report, however, concludes on a positive note, stating that 2009 could prove to be an opportune moment to strengthen global governance and build the political will to restore global financial stability and focus on the longer-term challenges of managing scarce resources and climate change.

As summarized by Howard Kunreuther, Co-Director of the Wharton Risk Management and Decision Processes Center and Co-Chair of the Forum's Global Agenda Council on Mitigation of Natural Disasters: "If business leaders and decision-makers can overcome the behavioral biases toward immediate, short-term solutions and switch to longer-term thinking, then they will have made significant progress in adopting an attitude suited to the mitigation of increasingly 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 confidence in global governance institutions is restored, starting by ensuring that they are adapted to today's challenges and revising their mandate and powers accordingly."

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