‘Fatal spiral’ of fiscal crises threatens global economy in 2014

Fiscal crises triggered by ballooning debt levels in advanced economies pose the biggest threat to the global economy in 2014, a report by the World Economic Forum has warned.

Ahead of next week’s WEF annual meeting in Davos, Switzerland, the forum’s annual assessment of global dangers said high levels of debt in advanced economies, including Japan and America, could lead to an investor backlash.

This would create a “vicious cycle” of ballooning interest payments, rising debt piles and investor doubt that would force interest rates up further.

“This can rapidly turn into a fatal spiral, in which fears that a country will default on its debt become a self-fulfilling prophecy,” it said, ultimately forcing governments to undertake “painful fiscal adjustments” in order to get debt levels back under control.

“Advanced economies remain in danger of fiscal crises. Given the US’s official public debt of more than 100pc of its GDP, and Japan’s of more than 230pc, investors may at some point conclude that these levels are unsustainable,” the report said.

“In the short run, the risks are higher for eurozone countries, which lack the option of devaluing their currencies to ease the necessary fiscal adjustment.”

The WEF report said fiscal crises had the potential to quickly turn into financial crises, as a lot of government debt tended to be held by domestic banks

“When the government defaults, the resulting losses on these bonds endanger banks’ solvency. In this way, a fiscal crisis can lead to financial crisis,” it said. TRUNews