Markets have been surprisingly complacent about a rising number of geopolitical risks. But it wouldn't take much to trigger financial contagion, warns economist Noruiel Roubini.
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An "increasingly obvious paradox" has emerged in today's global financial marketplace, says Dr Roubini, who predicted the global financial crisis and affectionately known as "Dr Doom" among global markets commentators.
Despite recent throwbacks markets overall have remained surprisingly resilient in the face of a growing number of geopolitical risks, Dr Roubini writes in a Project Syndicate article.
Tensions between Ukraine and Russia are escalating and there is turmoil in the Middle East thanks to Islamic State aggression and Syria's civil war. China's territorial disputes and Hong Kong protests are among the hazards cited by Dr Roubini.
The contained nature of the conflicts and a lack of significant economic impact have been the main reasons markets have shaken off the geopolitical threats, he argues.
But what could shake markets' apparent complacency?
Dr Roubini offers three possible scenarios:
The first is a terrorist attack in Europe or the United States. Dr Roubini calls this a "plausible development" given the large number of Islamic State jihadists with US or European passports.
Alternatively, current conflicts could escalate. Dr Roubini says Russian President Vladimir Putin could well step up aggression in response to challenges at home. Meanwhile, in the Middle East, Islamic State's expansion is heading towards borders of Turkey or Jordan, countries that could be "destabilised by Syria's ongoing meltdown".
Global growth worries are another possible scenario. Dr Roubini says geopolitical tensions are more likely to trigger global contagion when a "systemic factor shaping the global economy comes into play". As an example, he cites the fears of emerging market meltdown earlier this year.
"While global markets arguably have been rationally complacent, financial contagion cannot be ruled out," Dr Roubini says.
The "blissful ignorance" of the risks that led to World War I are an example of markets' poor record at correctly pricing low-probability, high-impact events, he argues. That hasn't changed, he says.
