Brace yourself: Political-market risks in 2009

January 5, 2009

prestonkeat– Preston Keat is director of research at Eurasia Group, a global political risk consultancy, and author of the forthcoming book “The Fat Tail: The Power of Political Knowledge for Strategic Investors” (with Ian Bremmer). Any views expressed are his own. For the related story, click here.

There are a number of macro risks that will continue to grab headlines in 2009, including the conflicts in Afghanistan and Iraq, cross-border tensions and state instability in Pakistan, and Iran’s 
ongoing quest to develop advanced nuclear technologies.

These risks are real, and will not be resolved easily or quickly. But there are two other general groups of political risks that could be defining both for investors and policy makers: first, the prospect of a number of interrelated market risks in developed and emerging Europe, and second, the challenges faced by the United States regarding multilateral leadership (particularly in the area of financial regulatory reform).

Political risks have historically mattered much more in emerging markets, but political risk in the developed, industrial democracies is rising more quickly than anyone would have predicted a year ago.


Political-market risk in emerging Europe is significantly higher now than any time in the past decade. Russia and Ukraine, and even recent star “emerging Europe” performers such as Turkey, Hungary, and Romania face serious vulnerabilities in the coming 
year. In addition, western financial institutions based in countries
 like Germany, Italy and Austria are particularly vulnerable to a credit 
crisis in Eastern Europe, where they have large loan exposures. Russia’s growing anti-westernism, its state intervention in strategic
 economic sectors, and its assertive posture regarding Georgia have been widely discussed, and will remain concerns in

This also plays into one of the most problematic country risk 
stories right now: Ukraine. Its steel-centric economy is in free
 fall due to dramatically reduced global demand, many of its companies
 have large foreign debt financing needs that they will struggle to meet, 
 and its domestic politics are gridlocked and bordering on 

Add serious ongoing tensions with Russia to the list, and 
the situation looks bad from almost every angle. The year has
 already started badly, with Gazprom cutting gas supplies 
to Ukraine, and the
 standoff highlights the growing animosity between Moscow and Kiev.

The global financial and credit crises, combined with recession in
 Western Europe, have exposed several other countries in emerging Europe 
to serious financial market risks. In Hungary, the IMF and the 
EU needed to step in with a dramatic aid package in order to head off a potential currency and bond market collapse. And in Romania, there are
 growing concerns about a real estate bubble, rapidly declining economic
 growth, and the evaporation of repatriation cash flows from Romanians 
living in Italy and Spain.

Both the Hungary and Romania stories highlight the increasing 
interconnectedness of political and market risk in the EU. The newer
 member states can no longer be considered in relative isolation from the
 core, Western European countries.

The most notable example is the 
exposure of Western banks to credit risk in Eastern Europe. In recent
 years western banks have made substantial home mortgage, consumer, and
 business loans to eastern Europeans that were denominated in western 
currencies. The borrowers were
 exposed to local currency risks that the often did not fully understand

 Austria, and Germany had the largest exposures. Now these western
 governments may need to step in to assist with the solution. In fact, if
 the EU and European Central Bank had not intervened in dramatic fashion 
in Hungary, a number of western-European banks and pension funds would
 have been in very serious trouble. The problem is that this may only be 
the beginning of a crisis that could involve dozens of countries in both 
the East and the West.

The U.S. and Multilateralism

In the past several years the dynamics of “multilateralism” have evolved 
fairly dramatically. Two central developments this year:

1.  A number of
 additional players such as India, China, and Brazil are actively
 seeking to play a larger role in multilateral negotiations and 

2.  The U.S. is in the process of a presidential 
leadership transition, with an expectation that the new administration
 will address these issues differently than its predecessor.

This new environment presents both challenges and opportunities. A 
larger number of “key” players at the table means that policy 
coordination could be much more difficult – a classic collective action
 problem. At the same time, engaging newer, emerging-market countries may 
make sustainable “breakthrough” outcomes more plausible, as these 
countries will be central to tackling complex issues such as climate 
change and global trade.

Prior to September of 2008, the central challenges of 
multilateral cooperation were in areas such as energy/climate change, 
 trade, and security. Then the global financial and credit crisis offered 
an almost perfect experiment. How would the world’s leading 
countries, along with those who aspired to positions of greater 
leadership (e.g. China, India, Brazil) manage this systemic crisis?

When it comes to a new financial regulatory architecture, the U.S. is 
likely to find support for its agenda in the UK and China, who will
 share the its general aversion to giving meaningful regulatory authority 
to multilateral institutions such as the IMF. As long as these three key
 players can agree on general principles for market regulation, power 
will remain in the hands of national governments rather than any
 multilateral organization.

But this 
is where a key, lurking political risk comes into play – can the U.S.
 actually take the lead in developing a coherent approach to new 
regulation of capital markets?

Congress will probably feel that it needs to act in a dramatic
 fashion and enact new legislation. The Treasury and the Federal Reserve 
will also have serious, and potentially conflicting agendas. So even if
 the multilateral dimension looks manageable, the domestic and
 bureaucratic politics of new regulation present a substantial new risk.


We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see

The more the global crisis evolves the more complex it becomes, and this creates a risk that few people are commenting on. I am talking about the skills needed to manage global economies out of the crisis. I have a real fear that these skills do not exist

Posted by anton kleinschmidt | Report as abusive

I agree with most of the points the author has raised. There is lot of strength built into the currency market of developed countries because of perceived stability. As the story unravels, their currencies could get weaker as well.

Posted by Ajay H | Report as abusive

Instead of trying to “manage global economies”, why don’t you suggest that the governments and privately owned Central Banks (such as FED) should get their hands out of free market functioning. Nobody can manage a country’s economy, let alone the whole world, although we all know that some want to very much.

A very interesting overview of some of the complexities that have, and will emerge. I agree with Anton, whilst the points made are valid, we simply lack a cohesive leadership framework (not model) that equips next generation leaders – whether corporate or poltical – to lead the next generation of globalization in many meaningful manner. With so many failed leaders, with so many impaired countries, and with so many distressed companies, which attributes, what framework will be required in the future? What will be required of leaders to ‘sit at an expanded table?” May I suggest that as much as this entire global crisis has been billed as first a financial one, then an economic one, it is now clearly becoming a leadership one. Who will lead in the future, and by what means?

Posted by mike bushore | Report as abusive

[...] Brace yourself: Political-market risks in 2009 (Reuters): There are a number of macro risks that will continue to grab headlines in 2009, including the conflicts in Afghanistan and Iraq, cross-border tensions and state instability in Pakistan, and Iran’s 
ongoing quest to develop advanced nuclear technologies. [...]

The leadership is here and is what it is and will become. As Popeye said, “I yam what I yam.” Olive Oil approved. As Roosevelt High School (Teddy and not FDR) inSeattle has as its motto, “You are to be what you are now becoming.” This motto was formulated in the early 1920s and has worked for each generation since. Your leaders are here right now and are working diligently. we do not need Anderson Cooper or any other talking head to tell us whom these leaders are. They are you and/or your neighbors and colleagues.

Is this analysis? Not more than a brief description of current situation and its further extrapolation for 2009. The same is related to Eurasia’s “Top 10 risks of 2009” – just a description and interpretation of current situation. As to the facts, it seems like authors of the have never been to those countries they mentioned in the report, and the whole report is mostly based on the newspaper articles and the common view about particular countries that is far from the reality. It is a peaty but today many names have significantly devaluated: starting from rating agencies and auditors and to the consulters etc.

Looking for emerging new thinkers that will bring new ideas needed today, but not just descriptions called analysis and forecasts…

Posted by johnsilver | Report as abusive

Dear Mr. Keat, would you kindly consider introducing “RISK BAROMETER” complimenting your entries and showing vigor of dynamics, as well as permiting the reader better comparative assesments…

Posted by Dr. Asatiani J. | Report as abusive

With regards to multilarism, I am not sure that the UK will oppose an enhanced role of the IMF (Do you remember Mr brown touring the Gulf a few months ago asking for more funds to be given to the IMF?). I believe that China will have to take the lead together with the US. China and US are increasingly interconnected (China buying US Treasuries increasingly issued by the US to revitalize its economy and in exchange Chinese exports can restart). It might well be that as a result of the crisis the US will finally decide to drop containement of China and engage fully in order to take the global economy out of the crisis.

Posted by Max Castelli | Report as abusive

I agree with “johnsilver” who wondered whether this is an analysis or a brief description of the current situation and an extrapolation to 2009.

Many of us, I am sure, have been asking ourselves why there are no more genuine thinkers in our era? Is it the schools, the Universities, the super facilities that life is amply providing us, resulting in a real cerebral lay back? Perhaps a combination of the above.

Moreover, I think that provocative questions are not being asked today, particularly in anglo-saxon societies, as the person who asks might be considered “politically incorrect”. What is this business with “p.c.” and “non p.c.”? I think that societies need not be prudish to avoid asking questions. I think youth should not consider themselves castrated to avoid asking questions. Make no mistake: questions will be asked and answered. And, at the end, let me ask: what is politically correct and who considers it to be correct or not?

As tons of ink will be shed to answer this question, let me try to be provocative and to watch possible reactions of your readers, lest we see someone being a true and genuine thinker:

I wonder what the author has to say about the Palestinians, who have been throwing rockets against Israelis for years now. When they were throwing rockets, or, strapped with bombs, were killing innocent kids right in the middle of a shopping mall, I did not hear any torrential arguments against killing innocent civilians. Why? But because they were Israelis.

Now that the Israeli armed forces are doing their duty to stop those murderers in Gaza, the whole world is up in arms against Israel. Why such hatred against one country? Why such double standards? Either we’ve all gone mad, or we are all blind.

What would the author say about the possibility to transfer the battleground from Gaza and West Bank to London or New York?

Posted by Rabbi Nini-us | Report as abusive

I think the piece would have been more powerful if it paid more attention to the inevitable link between politics and economics, and offered prescriptions for how a new ‘financial regulatory architecture’ might be achieved.

For example, breaking the WWII-era mold of having an American at the helm of the World Bank, a European as the head of the IMF, and the victors of WWII as the only permanent members of the UN Security Council might send a message to the developing world that they have more say in their own destiny, and that of others.

Clearly, an economic crisis of this magnitude requires ‘out of the box’ thinking. Throwing conventional solutions at an unconventional problem isn’t going to help us get out of this mess we’re in, nor will it assist in reducing political risk.

Surely, part of the answer is engagement with the Chindia’s of the world, which would offer them a greater incentive to be part of the solution…

Posted by Daniel Wagner | Report as abusive

Ugh. I want to support the comments of johnsilver and the rabbi. The media has done an abysmal job of informing the public, before the fact, and their coverage has been incredibly lopsided. Why in the world do we hear so little about South & Central America, Africa, Southeast Asia, and so much about the Middle East. A day doesn’t go by without two discussions on NPR featuring someone (an expert or a victim) from Iran, Iraq or Palestine. Is there no life in New Zealand, Australia, Argentina, Vietnam, Chad… It’s beyond belief!
How can a world view of economic leadership be contemplated? How… because a journalist wrote about it.

Posted by Howard Perry | Report as abusive

Some good points about where direction should come from in the next stage of this downturn.
Lets have an open mind about the framework and be thankful that the international economy and political will is diverse enough to absorb multiple ideas. Ultimately some political and economic choices are going to have to be made, some will join the new framework and some will resist due to a lack of political or economic capacity, often due to a lack of public/ market confidence. Lets put some greater emphasis on the quality of an economy (strong institutions and productivity of intelligence), rather than pure economic growth.

Posted by monavale | Report as abusive