Sovereign default risk ranks highly in Towers Watson risk register

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Depression, sovereign default and hyperinflation are the top three risks right now, according to research by Towers Watson.

A disappointing economic recovery in the past two years has left the developed world facing the likelihood of further economic shocks.

Towers Watson used a subjective scoring system to rank the top fifteen extreme risks. They reflect recent economic and political developments in the eurozone.

Sovereign default risk has risen four places from last year to “high impact” status. The end of the euro currency was also listed as a possibility.

Resource scarcity ranks as 11th and refers to the increasing demand for resources through population growth and rising living standards. China and India are expected to drive the demand curve upwards.

When the fear of running out of resources increases it could lead to price spikes in these markets and increased price volatility, the Tower Watson analysts expect.

“The global economic environment continues to be characterised by significant imbalances and consequently is not in good shape to withstand any further major shocks,” commented Tower Watson’s Tim Hodgson.

Top 15 extreme risks

1. Depression: Debt-deflation trap, falling growth and incomes

2. Sovereign default: Default by a major developed country on its debt

3. Hyperinflation: Extremely high inflation

4. Banking crisis: Balance sheets can’t absorb another shock

5. Currency crisis: Extreme movement between floating rates

6. Climate change: Diversion of capital to mitigation uses

7. Political crisis: Rise in power of extremists groups

8. Insurance crisis: Insolvency within insurance sector

9. Protectionism: Reversal of movement towards free trade

10. Euro break-up: At least one member leaves the euro

11. Resource scarcity: Peak “stuff”

12. Major war: A major global conflict

13. End of fiat money: Return to a gold standard

14. Infrastructure failure: (Temporary) interruption of grid/networks

15. Killer pandemic: Contagious disease with very high mortality