By Natsuko Waki
DAVOS, Switzerland, Jan 25 (Reuters) - A renewed slide in stock and oil prices and fresh upheaval in currencies and bonds will set a bleak backdrop for the world's business and political leaders gathering in the Swiss resort of Davos this week.
More than 40 heads of state and government, about 35 finance ministers and central bankers and other corporate leaders attending the World Economic Forum will try to forge a consensus on how to fix the worst financial crisis in 80 years.
The annual event is the largest gathering of key policymakers outside the Group of seven or G20. However, U.S. President Barack Obama and his pick for treasury secretary -- yet to be confirmed -- are missing from the participants list.
This leaves political leaders from Britain, Germany, Japan, Russia and China to tackle a crisis that originally broke out in the United States nearly 1-1/2 year ago.
"The banking system is still in intensive care, the economic background is of collapsing demand and economic activity is shelving away in a very abrupt fashion," said Philip Saunders, head of investment strategy at Investec.
"There is an unprecedented need for international cooperation because we have a global problem... If Davos highlights that and encourages international corporation that would be a constructive outcome."
After a brief respite in December, world stocks are on the skids again as fresh signs of troubles emerge in banks.
The benchmark MSCI world equity index is already down more than 10 percent since the start of the year after slumping 44 percent last year -- its worst performance in 20 years.
The euro, dollar and sterling are all falling sharply against the low-yielding yen and investors are rushing to safer government bonds, driving yields of many to record lows.
However, concerns that governments will have to borrow more to finance their economic support packages and worries over fiscal balance have driven the cost of insuring sovereign debt against default to record highs.
The five-year credit default swap (CDS) for Britain hit record highs around 150 basis points last week, while those for the United States, Germany and many other European countries are also at all-time peaks.
As a result, according to CDS prices, debt issued by sovereign lenders is now considered riskier than that of financial firms -- suggesting risk has been transferred from the private to the public sector.
The spread between the 10-year sovereign CDS basket and the iTraxx senior financials index -- 25 major banks, insurers and reinsurers in Europe -- has fallen to -22 basis points from around +120 bps in September, according to data from Morgan Stanley.
UGLY CONTEST
With a wide range of markets on the decline, picking what to invest in is no longer a beauty contest -- asset managers are left with making the best of a bad bunch.
This is especially true in the foreign exchange market, where currencies are feeling the impact of a race to zero interest rates among central banks and deteriorating fiscal balances as global growth slows.
Recent moves have been dramatic. The dollar fell as low as 87.11 yen last week, its lowest since July 1995. Sterling had fallen as low as $1.3502, its weakest since September 1985.
Japan and the United States already have interest rates near zero while central banks in Britain and Canada are set to cut interest rates to 0.5 percent this year.
"One way to navigate in this tricky environment could be to try to identify those currencies best suited to withstand both an anticipated sharp decline in global demand and lack of credit," Swedish bank SEB said in a note to clients.
"Based on persistent tight credit markets, we still expect a premium for holding currencies less dependent on foreign financing. However, the deteriorating outlook for global growth may ensure that this group becomes even smaller."
In addition to the yen, SEB said the dollar could outperform others, even with Washington's huge budget deficit, as more countries follow the United States in boosting fiscal spending, making relative comparisons less problematic for the U.S. currency.
In Britain, aggressive rate cuts and the formal arrival of a recession are knocking sterling lower, with the British currency losing more than 8.5 percent against the dollar last week.
Wary of trade competition via currency depreciation, France complained about a sterling's fall. The issue could also be raised at a meeting of Group of seven finance chiefs, taking place just a fortnight after the economic forum.
"(The forum) at the ski slopes of Davos should prove a warm-up exercise for sterling chatter, FX speculation and verbal and intervention, leading to the Feb 14 G7 meeting in Rome," said Ashraf Laidi, chief market strategist at CMC Markets.
(Editing by Patrick Graham)