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Global risks in 2013: China, India, the euro zone and US debt

It's a risky world. Here's what will cause war, strife and economic turmoil in 2013.

At the front of the line is Spain. The rescue of its banking sector has not brought political relief for Spain’s conservative government, which has repeatedly requested looser terms and tried to avoid a larger, more stringent bailout of the state’s coffers.

But in Spain, Italy and even France, governments that lose the ability to refinance debt at palatable rates may find themselves pushed to the wall earlier than we expect, if the fallout from a Greek exit is not properly managed. Germany, meanwhile, has so far managed to keep a lid on anger among its voters about transfers to bail out euro zone partners; with elections scheduled there in the third quarter, this firewall, too, may be fraying.

So be wary of a Greek exit in 2013, an upsurge in bond spreads and then a calming of markets after German and European Central Bank half-measures: all leading to a showdown over Spain in 2014.

4. America's deficit disorder

The re-election of Barack Obama and a gentle watering down of the GoP House raised prospects for a compromise deal on US current account deficits. In the end, the deal proved just another round of can-kicking, though this time the can only traveled two months down the road. Another showdown — this one over the so-called “debt ceiling” — will play out before spring.

The downgrade of America’s AAA credit rating by S&P in 2011 suggested that Washington cannot continue its charmed relationship with bond markets indefinitely. But enough Republicans harbor an ideological allergy to tax hikes and believe that bond markets have no conceivable alternative to Treasuries that they would be willing to force America into default.

If so, America’s day of reckoning on fiscal matters will move forward rapidly as interest rates soar and foreign creditors demand action.

Would this be enough of a shock to untangle American policymaking? In the longer term none of the chess moves on deficits matters much. Structural reform of social entitlements, military spending and tax policy are needed to change the trajectory that now has American national debt topping 100 percent of GDP by 2020.

Some of the constituencies involved will dig in fiercely: the elderly regarding Medicare and Social Security pensions, homeowners and banks regarded the deductibility of mortgage interest, the rich and the non-profit sector regarding tax breaks for charitable deductions. But these issues will determine much about the recovery of the US post-2008 as a dynamic, job creating economy — and as the holder of the global reserve currency. If Obama chooses to kick these cans into the yard of the next administration, global markets may punish the United States before the cans stop rolling.

5. Sahel in a handbasket?

The popular rising that chased Libyan dictator Muammar Gaddafi from power freed Libyans to sort out their own affairs but had unintended consequences reverberating throughout neighboring countries. In early 2012, Tuareg rebels took control of northern Mali after a coup dislodged its government. Ultimately, the Tuareg movement was chased away by hardened fighters armed with weapons taken from Libya's vast stockpiles, who claim allegiance (if not actual links) with Al Qaeda.

Subsequent intelligence reports suggest a mixture of groups — including Al Qaeda in the Islamic Maghreb (AQIM) and Nigeria's Boko Haram — have congregated in northern Mali and forayed into Niger, Burkina Faso, Benin and northern Ghana. Particularly worrisome is the Boko Haram activity, since that group has already stepped up attacks inside Nigeria, making some parts of the country no-go zones for Nigerian Christians. The country suffered its worst ever year of violence in 2012.

Nigeria’s President Jonathan Goodluck in December requested US government aid in battling the group the government once downplayed. While direct US intervention is neither wanted nor likely, America's AFRICOM has been increasingly active, along with French and Algerian intelligence agencies. Both are playing a leading role helping ECOWAS prepare for an intervention to reclaim northern Mali. A second coup in Mali in early December muddies waters for ECOWAS there as intervention plans await final approval from United Nations Security Council.

In Nigeria and several other countries in the region, the insurgencies fueled by ethnic and religious groups and armed by traffickers tapping Libyan and many other sources of weaponry, could pose a threat to governments across the Sahel. Niger, Chad, and of course Mali, all have felt the sting of these uprisings, but the regional response has been too weak to counter the trend.

http://www.globalpost.com/dispatch/news/business/political-risk/130110/global-risks-2013-china-india-euro-zone-debt