Global economy faces 'chaos' - World Economic Forum

06.24.07, 7:41 AM ET

SINGAPORE (XFN-ASIA) - The international community faces a real risk of 'economic chaos' arising from major imbalances in the global financial system, the World Economic Forum on East Asia was told Sunday.

Complacency has set in after years of uninterrupted global growth and there is no evidence to suggest a self-correcting mechanism is in place to avert a major shock to the global financial system, delegates to the two-day forum were told.

Tharman Shanmugaratnam, Singapore's Second Minister for Finance, warned the financial contagion will hit when it is least expected and bring about a 'vicious' aftermath.

'You can't predict when it's going to come. You can't predict the scale but there's a feeling that when it comes, it's going to be a pretty large impact and going to be very difficult to manage,' said Shanmugaratnam, 10 years after a financial crisis shook the region's economies.

Thailand's Minister of Finance Chalongphob Sussangkarn said that 'unfortunately we cannot see any self-correcting mechanism' when looking at the global economic imbalance.

'So we are moving basically in a situation where there's no real correcting mechanism and hoping that one day the market will perform a correction,' Chalongphob said

'But as we all know it's like when you stretch an elastic band. If you let the market correct the mechanism then eventually it will snap and this will bring about a huge amount of economic chaos in the world.'

The global imbalances traditionally refer to the twin US budget and current account deficits, the accumulation of huge foreign currency reserves by Asian central banks and divergent growth rates in the world's major economies.

Part of the problem stems from Asia, which holds the vast majority of the world's foreign reserves at about 2.7 trln usd, and the region has to do something about it, the Thai finance minister said.

'It seems like East Asia is simply accumulating these deficits from the United States and the more they accumulate, the more they want to protect, to make sure the value of the US dollar does not decline because otherwise all the central banks will have a problem,' Chalongphob said.

'So I think this is where East Asia does have a major role to play in shaping the direction of the global financial system, as the region which holds most of the world's official reserves,' he said.

Shanmugaratnam said the global community must brace for 'the unknown unknowns that come along every few years, and it could be a pretty vicious unknown unknown with an unwinding that's unpredictable in global financial markets.'

Bubbles in the property and equity markets are evidence suggesting that a financial shock could come, said Shanmugaratnam.

'There's a high degree of complacency coming out of a very long period of a low interest rate environment and a low volatility environment, but seasoned observers, those who have been around long enough, know that a shock is very likely to come at some point.

'You really can't tell how this unwinding is going to play out, but it could be substantial and I think emerging markets have to brace themselves, have to put in place the shock absorbers to deal with this sort of event.'