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World forum warns of $1 trillion asset crash

There is a “strong risk” that the world faces a $1 trillion 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”.

While less likely, the forum says there is also a risk of another fiscal crisis but puts the strain on asset prices top of its concerns.

The report comes from projections from the Forum’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 overextending unsustainable levels of debt, which, in turn, will exert strong upwards pressures 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 against countries ignoring future energy shortages as well as not doing enough to forestall chronic diseases. But it says another future risk for the developed world is that of the impending pensions crisis.

The report says that while some systems, like those in Scandinavia, are effective, none have yet answered how to fund 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.”

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