The biggest economic risk in 2010

Fri, 15 Jan Pre-Open

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At the dawn of 2010 we had requested readers to make their investing resolutions for the New Year keeping some possible economic risks in mind. They were a sudden spurt in inflation, unwinding of loose monetary policies, strengthening of the US dollar and a sovereign debt default by a major world player. Incidentally, the World Economic Forum (WEF) has thrown some more light on this. In its latest report, the global economic body has zeroed in on sovereign debt default as the biggest economic threat in 2010.

WEF cites that major world economies have responded to the steep downturn created by the financial crisis with stimulus packages. This has been executed by underwriting private debt obligations, causing fiscal deficits to balloon. The stimuli may have helped keep a worse recession at bay, but high debt has become a growing concern for financial markets. Hence the risk that deteriorating government finances could push economies into full-fledged debt crises threatens global economic recovery. The WEF think tank in its annual Global Risks report has cited that unsustainable debt levels tops the three key economic risks foreseen for 2010. This is alongside underinvestment in infrastructure and chronic diseases driving up health costs and reducing economic growth. The fact that debt levels have risen from 78% of GDP (in 2007, before the crisis) to 118% of GDP in the G20 economies seems to be the gravest concern.

Infact worries over Dubai, Ukraine and Greece have now spilled over to global markets. The threat of debt default now seems to be reigning high even for the economies of "irrational exuberance" namely the US and UK.

We completely concur with the WEF’s warning that already fragile economies, particularly in the developed world are at the risk of overleveraging. Add to that the loose monetary policies in developed and emerging economies that have made excess debt more lucrative. These trends if sustained could potentially lead to full-blown crises with inevitable social and political consequences. The governments therefore could at best stop fighting unemployment and recession using the easy route. Building unprecedented levels of debt and therefore stoking the risk of sovereign defaults could only make matters worse.

Energy credits in store for India Inc.
India Inc.’s technology energy saving initiatives could soon fetch it much more than higher margins. Being the world’s fourth-largest polluter, companies in India may soon trading energy-saving credits. And here we are not referring to a paltry sum. As per Reuters, energy credit market in India is expected to touch Rs 740 bn (US$ 16 bn) in five years. As the country seeks to curb emissions that cause global warming, businesses that exceed energy efficiency targets will be awarded credits. These will be traded on power exchanges with companies that fail to meet the goals.

Having unveiled a plan aimed at saving the equivalent of 23 m metric tons of oil by 2015, the government seems to be committed to its target this time around. It is already in talks with Indian Energy Exchange and Power Exchange India, the country’s two power exchanges, to set up trading protocols. The government will reimburse as much as 50% of unpaid bank loans given to companies that seek to invest in energy efficiency projects.

An excellent initiative aimed at not just ensuring greener environment but also efficient use of limited resources, the credits could go a long way in making Indian manufacturing sector more self sufficient.