There is a “strong risk” that the world could face a $1tn asset bubble crash, according to the World Economic Forum.
In its 2009 Global Risk Report, the forum warns that there is a 20 per cent risk that the world faces a collapse in asset prices due to the “continuing uncertainty about the resilience of the global economy and the effectiveness of fiscal and monetary responses, governance and regulation”.
The forum says there is also a risk of another fiscal crisis, although this is less likely than the strain on asset prices which tops its list of concerns.
The report comes from projections from the WEF’s global risk network and global agenda councils alongside experts from Citi, Swiss Re and Zurich Financial Services. It notes that many countries are at risk of amounting unsustainable levels of debt, which, in turn, will exert strong upward pressure on real interest rates.
WEF chief business officer Robert Greenhill says: “Governments, in the US and the UK in particular, are now faced with a set of tough choices. The most pressing is how to time a gradual and credible withdrawal of fiscal stimulus so that the recovery is sustained but not so late that fiscal deficits cause fears of sovereign debt deterioration.
“Governments need to develop sound exit strategies and communicate them clearly to reassure investors and taxpayers. Unsustainable debt levels could lead to full-fledged sovereign debt crises.”
The report also warns that another future risk for the developed world is an impending pension crisis.
It says some systems, like those in Scandinavia, are effective, but none has solved the problem of how to sustain an aging population.
It says: “The fiscal burden of pensions and health spending was already becoming untenable before the crisis. The costs of social safety nets will have to be better shared among the population and the expectations of people in terms of health and pensions will have to be realigned.
“This may require politicians to implement unpopular decisions at a time when voters are suffering from the hardship of high unemployment caused by the global recession.”