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Emerging Risks Blog
Looking back at 2017, looking forward to 2018


Patrick Kelliher

I have been meaning for some time to post a blog on how the risks I called last year matched up with reality. I appreciate it’s a bit late in the day but I would cite work commitments and the fact that events continue to develop. As that old Chinese curse goes, we live in interesting times.

Speaking of China, the first risk I called out was a trade war between China and the US [1]. Thankfully this has not come to fruition, partly because the US needed Chinese help to put pressure on North Korea, but this is still a live issue. There have been American grumbles about sanctions busting by Chinese companies, while attempts to cut Chinese companies with ties to North Korea off from the US dominated global financial systems were only rebuffed by China applying similar pressure to US firms with operations in China. It may be that we are in a “phoney war” phase just now but this could get hot.

As it is, US trade relations with the EU are going through a rocky patch, with the Trump administration proposing tariffs on steel and aluminium imports and with the EU threatening retaliation against iconic US exports such as Levis and Harley Davidsons. This is part of a wider trend of the US applying a muscular approach to trade with other countries. The most egregious example of protectionism for me were the tariffs applied to Bombardier C-class aircraft by the US at the behest of Boeing. Boeing is not even producing any equivalent aircraft, merely trying to clip the wings of a potential rival. Thankfully the tariffs were eventually dropped, but it is an ugly reminder of the chaos trade disputes can cause. Even if trade disputes don’t erupt across the Pacific, they could erupt elsewhere, threatening the current upturn in global economic growth.

The second risk I called was of Grexit, with Greece not strictly leaving the Euro but defaulting by issuing IOUs denominated in Euros [2]. Again, this did not come to pass with a critical re-financing over the summer managed through with the usual grumbles from all concerned. Greece does seem to be turning a corner, but the pain inflicted on Greece by the Troika will not be readily forgotten, not just by Greeks but also many of the left in Europe who challenge the agenda of austerity. The EU has lost a lot of credibility in their minds, and in the longer term this could corrode support for the whole EU project.

As it is the UK is walking away from the EU project, and the third risk I called was Brexit and how this could pan out [3]. My thinking at the time was that while the UK had ruled out single market membership, they would probably consider membership of the customs union like Turkey, which would preserve tariff free access for goods (but not services) but with no freedom of movement. I did call out the possibility that Brexiteers like Liam Fox could torpedo even this reasonable compromise in their desire to be able to do trade deals with whomever they want, which a customs union would preclude, but it seems like I underestimated their resolve.

I also underestimated how woeful a politician Theresa May is. When she called the election in April, I wasn’t convinced the Tories would triumph as many were predicting – I thought they would make limited gains with Labour fighting a successful rear-guard action challenging austerity, and with the LibDems gaining from their anti-Brexit stance [4]. I also thought the UKIP vote would hold up better than it did, which just goes to show how duff some of my predictions are, but I don’t think anybody could have predicted the “car crash” which was Theresa May’s election campaign [5].

The resulting electoral reverse left May reliant on DUP support, further undermining peace in Northern Ireland, while leaving her beholden to Brexiteers such as Boris Johnson and Jacob Rees Mogg. They have rejected the obvious compromise of a customs union – minimising trade disruption while avoiding freedom of movement – in favour of the sirens’ song of global trade deals.

I think the UK will be able to agree deals with the US and others, but whether they will be any good is another matter. The US for one will not do the UK any favours – this was shown when they reacted to UK lobbying against tariffs on Bombardier (which employs thousands in the DUP’s heartlands) by increasing these further. I wouldn’t be surprised if the UK had to accept a humiliating deal which opens the door to US chlorinated chicken and hormone treated beef among other things in return for very modest concessions.

Aside from the dogmatic pursuit of global trade deals at the expense of trade with the EU, the other concern I have with the government being held to ransom by Brexiteers is their potential to de-rail the transition period and possibly lead to a “cliff edge” Brexit on March 29th 2019, causing economic and wider chaos. I am also nervous that some in the European Commission would not be averse to a disastrous Brexit if only to deter other countries from following suit. One would hope that there are enough sensible people in both the UK government and the EU to ensure this doesn’t happen, but history tells us that governments frequently mis-judge situations with catastrophic results – one only has to consider how European powers sleepwalked into World War I.

Unfortunately, Brexit and US trade wars are not the only geo-political risks that we need to consider in 2018. While Grexit may have faded as a threat, the success of the anti-establishment Five Star Movement in Italy’s election on 4th March could cause fresh headaches with the EU, on top of those already faced with Poland and Hungary.

There are also tensions within EU countries. Things in Catalonian have settled recently but the reality is that a higher proportion of the Catalonian electorate voted for independence in the disputed referendum last October than the proportion of the UK electorate who voted for Brexit [6]. The separatists’ views won’t have been changed by the thuggery of the Guardia Civil. Further turmoil in Catalonia seems inevitable, and a break up of Spain, while still remote, cannot be ruled out. Similarly, Scoxit is still a possibility, as is the break-up of Belgium.

Further afield, the threat of a catastrophic war in Korea cannot be ruled out, while the US and China could also clash in the South China Sea. Further west, Russian and US proxies have recently clashed in Syria while Turkey is fighting US-backed Kurds. Israel looks like it could be drawn into the Syrian conflict, if only because it fears Iran’s Shi’ite arc of influence through Iraq, those parts of Syrian held by Assad and Hezbollah in Lebanon. A further Israeli bombardment of Gaza also seems imminent. Libya is still a mess while across the Atlantic, Venezuela’s economic collapse could degenerate into civil war.

Even if physical war does not break out, we could see conflict in cyber space. Already, there are suspicions that the NotPetya ransomware attack was in fact a cyber-attack on the Ukraine; while fingers have been pointed at North Korea over the disruptive WannaCry ransomware attack. The careless implementation of the internet of things without proper security has given hackers, state sponsored or otherwise, the ability to launch distributed denial of service (DDOS) attacks of 1.5TB per second or more [7]. Even if not direct targets, firms can become victims of collateral damage – NotPetya cost Maersk and Merck US$300m each [8].

I must admit I was born before the Suez, Berlin and Cuban missile crises; I was too young to remember the oil shocks of the 1970s; and have only a hazy recollection of the Cold War tensions of the early 1980s. My working life started just before the fall of the Berlin Wall, and while I have witnessed 9/11 and the disastrous invasion of Iraq, I don’t think I have ever come across a period so fraught in terms of geo-political risk as the one we are in now.

Worse, it is not clear to me that markets are reflecting this risk. Notwithstanding the recent spike in volatility, VIX reached a record low in Q4 2017 [9], while spreads are benign. Maybe like European powers in 1914, markets are sleep-walking into an unprecedented period of turmoil…

Notes and Links





[5] If I sound bitter, it’s because I lost £200 on various bets based on my analysis, with the Conservatives to win 330-360 seats; Labour 200-240; LibDems 30-40; and UKIP maintaining their vote share above 10% (from 12.5% in 2015). I think the first two would have been on the cards if May hadn’t made such a hames of things, though the latter pair probably explain why Paddy Power love me so much….

[6] While the figures come from the Generalitat and can be disputed, it seems that 92% of a turnout of 43% of the electorate voted for independence or 39.6% of the electorate, which excludes up to 770,000 or 14.5% of the electorate denied the opportunity to vote due to police action (see,_2017); by contrast while the EU referendum attracted a higher proportion of the electorate with a 72% turnout, only 52% voted to leave i.e. 37.4% of the electorate (

[7] See

[8] For more details on cyber-crime and information security risks, see my recent presentation on this to the Network of Consulting Actuaries at

[9] See


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