Sovereign default climbs in list of extreme risks

Greek-crisisSovereign default has jumped from sixth to second place in a list of extreme risks monitored by financial consultancy Towers Watson, reflecting the increased likelihood of a default by Greece or another debt-prone eurozone country.

Depression is still top of the list, which is ranked according to both likelihood and impact, with hyperinflation occupying the third spot.

Towers Watson said that buying country insurance such as credit default swaps can hedge sovereign default risk. However, investors who want to insure Greek debt might wish they had done so earlier. Credit Market Analysts recently said the price of insuring $10 million (€7.2  million) of Greek debt for five years was $6.1 million in advance plus $100,000 a year.

Towers Watson published its first list of 15 extreme risks in 2009. Two risks fell off the list this time around, 'the end of capitalism' and 'excessive leverage'. They have been replaced by 'resource scarcity' and 'infrastructure failure'.

The consultancy advises its clients, which include large pension funds, to consider extreme risks when stress-testing their portfolios. It said thinking about extreme risks could also be incorporated into schemes' asset allocation decisions.

©2011 funds europe