Risk of a fiscal crisis high in 2015 – World Economic Forum

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Risk of a fiscal crisis high in 2015 – World Economic Forum

Advisers must help investors mitigate risk as there is a high risk of a fiscal crisis or the failure of a major financial mechanism or institution, the World Economic Forum Global Risks 2015 report has warned.

According to the 69-page report, Global Risks Perception Survey 2014, deflationary pressures or the bursting of an asset price bubble could still cause the failure of a major financial mechanism or institution, “especially as the shadow banking sector is less regulated yet increasingly important”, it said.

The report warned that other risks, such as water crises, interstate conflict and the failure of climate-change, have taken centre stage, running the risk of diverting attention from continuing economic reforms.

In many countries public debt levels were still “worryingly” high, it stated, so the related risks were likely to persist over many years.

The report said it was crucial to maintain the momentum of both financial and fiscal reforms to avoid another major economic crisis.

ECONOMIC GLOBAL RISKS 2015

■ Asset bubble in a major economy

■ Deflation in a major economy

■ Energy price shock to the global economy

■ Failure of a major financial mechanism or institution

■ Failure/shortfall of critical infrastructure

■ Fiscal crises in key economies

■ High structural unemployment or underemployment

■ Unmanageable inflation

The report, which surveyed 896 people between July and September 2014, asked participants to assess the likelihood and impact of the individual risks on a scale of one to seven – with one representing a risk not likely to happen or have impact, and seven a risk very likely to occur, and with massive and devastating impacts.

According to the survey, an energy price shock was number six in a list of top 10 global risks in terms of impact, while a fiscal crises was at eight.

The biggest threat to the stability of the world in the next 10 years, according to the report, comes from the risk of international conflict.

Adviser View

Gordon Bowden, director of Buckinghamshire-based Quainton Hills Financial Planning, said: “The biggest risk for advisers in 2015 is the potential break-up of the eurozone. Ironically, the bigger risk is something that is unknown, and cannot be seen coming, so, of course, you cannot put a plan in place to mitigate such a risk.

“A political occurrence in one of the countries under strain, such as voting in a party that calls for pulling out of the eurozone, could lead to this.”