By Ron Doyle
Kevin Carmichael in his article on monetary policy in the Globe and Mail’s Report on Business of Friday, January 15, 2010, refers to the high levels of worldwide government debt, resulting from huge stimulus packages, as the biggest threat to global recovery. The article refers to the World Economic Forum Global Risk Report 2010, in which the London based group raises concerns over the high degree of interconnectedness between all areas of risk and warns that unless we address these risks they may cause the next crisis.
In tackling the recession many major economies poured billions of dollars into stimulus packages, resulting in huge budget deficits supported by very high debt levels. The question in Canada, and in many other countries, is how are we going to bring the budgets back into surplus in order to pay down the debt? The next crisis could be caused by a major economy defaulting on a debt payment causing credit to tighten and rates to increase. The continuing high unemployment could also cause world economies to slip back into recession. Governments will be unable to respond due to their already high levels of debt.
What risks are increased if governments are forced to control their deficits?
- They may be forced to introduce foreign exchange controls, limiting the outflow of hard currencies.
- They may be unable to finance projects and have to cancel them.
- They may frustrate contracts by cancelling import permits.
- They may not be able to refinance debt and therefore, be forced to default on amounts owed under existing contracts.
- They may force local banks to be more rigorous in seeking problems with the documentation on Letter of Credit transactions.
- Governments may find that they have been too generous in issuing natural resource licenses and cancel or not renew them, or even more drastic, nationalize the investment.
- Governments may have to cancel contracts, then may not allow the re-export of equipment brought in to complete contracts.
These are just some of the political risks that increase as governments get in over their heads. All these risks can and do impact the financial capability of buyers in affected countries to pay their foreign creditors on time. As the Global Risk Report states, there is a high degree of interconnectedness among various risks.
FORTUNATELY, ICBA brokers can arrange political and credit risk insurance policies that cover most of these risks, but the onus is on the company working in foreign markets to identify the risks prior to signing the contract and determine how many risks can be avoided, transferred to another party or accepted. Accepting risk is tolerable as long as the risks are identified, and the decision to accept certain risks is taken after knowing the options around the issue.
(Ron Doyle is a founder of Millennium CreditRisk Management – credit and political risk insurance specialists – www.mcm.ca. ICBA is the world’s largest team of independently-owned, specialist trade credit insurance brokerages. Partners combine local service with global coordination to provide credit and political risk insurance solutions for multinational companies.)