Thursday, April 3, 2014

Nouriel Roubini | The changing face of Global Risk

 As during the global financial crisis, investors seem unable to estimate, price, and hedge tail risks properly
by Nouriel Roubini

The world’s economic, financial and geopolitical risks are shifting. Some risks now have a lower probability—even if they are not fully extinguished. Others are becoming more likely and important.
A year or two ago, six main risks stood at centre stage:
l A euro-zone breakup (including a Greek exit and loss of access to capital markets for Italy and/or Spain).
l A fiscal crisis in the US (owing to further political fights over the debt ceiling and another government shutdown).
l A public-debt crisis in Japan (as the combination of recession, deflation, and high deficits drove up the debt/gross domestic product or GDP ratio).
l Deflation in many advanced economies.
l War between Israel and Iran over alleged Iranian nuclear proliferation.
l A wider breakdown of regional order in the Middle East.
These risks have now been reduced. Thanks to European Central Bank President Mario Draghi’s “whatever it takes” speech, new financial facilities to stabilize distressed sovereign debtors, and the beginning of a banking union, the euro zone is no longer on the verge of collapse. In the US, President Barack Obama and Congressional Republicans have for now agreed on a truce to avoid the threat of another government shutdown over the need to raise the debt ceiling.
In Japan, the first two “arrows” of Prime Minister Shinzo Abe’s economic strategy—monetary easing and fiscal expansion—have boosted growth and stopped deflation. Now the third arrow of “Abenomics”—structural reforms—together with the start of long-term fiscal consolidation, could lead to debt stabilization (though the economic impact of the coming consumption-tax hike is uncertain).
Similarly, the risk of deflation worldwide has been contained via exotic and unconventional monetary policies. And the risk of a war between Israel and Iran has been reduced by the interim agreement on Iran’s nuclear programme concluded last November.
Though many Middle East countries remain highly unstable, none of them is systemically important in financial terms, and no conflict so far has seriously shocked global oil and gas supplies. More important, as the risks of recent years have receded, six other risks have been growing.
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Nouriel Roubini is an American professor of Economics at New York University`s Stern School of Business and chairman of RGE Roubini Global Economics
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