2010:The Year for Sovereign Default?

The WEF (World Economic Forum) has labeled 2010 as the year for potential sovereign default.

Their latest report has shown that the risk of deteriorating government finances could push economies into full-fledged debt crises.

Major world economies have responded to the steep downturn created by 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 WEF think tank, in its annual Global Risks report ahead of its meeting in Davos, Switzerland, said unsustainable debt levels ranked among the top three risks for the year ahead, alongside underinvestment in infrastructure and chronic diseases driving up health costs and reducing economic growth.

Already fragile economies, particularly in the developed world, are at risk of “overextending unsustainable levels of debt”, potentially leading to full-blown crises with inevitable social and political consequences, not least higher unemployment, it said in the report released on Thursday.

“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.

“Debt levels have risen from 78 percent (in 2007, before the crisis) to 118 percent of GDP in the G20 ... this is something that could really create much more of a crisis than in the past, and we are already in a vulnerable situation.”

Worries over Dubai, Ukraine and Greece have spilled over into global markets in the last month, and all three look set to remain under pressure, with the threat also high for the economies of “irrational exuberance” -- the United States and the United Kingdom.

The WEF report said both these major economies were faced with “tough choices” in the months ahead as they seek to time a “gradual and credible withdrawal of fiscal stimulus so that the recovery is sustained but not so late that fiscal deficits cause fear of sovereign debt deterioration”.

Other major risks highlighted by the report include underinvestment in infrastructure, which could hurt food and energy security. The World Bank puts global infrastructure investment needs at $35 trillion over the next 20 years.

Chronic disease -- from heart disease to strokes -- is another threat looming, as the cost of treating patients rises, driven by demographic changes and dietary shifts.

The WEF warned the problem was key for both developed and developing nations, particularly as governments seek to reduce the burden of health care and aid funding shrinks.

Let us hope even if there are sovereign defaults, they could be contained creatively by the world community.