By Jason Szep
BANGKOK, April 29 Predicting the next step in Thailand's political crisis requires some bravery after seven weeks of street protests, deadly clashes, a department store blockade and grenade attacks, with few signs of compromise.
Attitudes have hardened on both sides since troops and protesters clashed in Bangkok on April 10, killing 25 people and wounding more than 800 during a chaotic army crackdown that has intensified a five-year political crisis.
Following are scenarios about what could happen next with tens of thousands of the red-shirted supporters of ousted former prime minister Thaksin Shinawatra still on the streets.
RED SHIRT PROTESTERS PROVOKE FURTHER VIOLENT CLASHES
High casualties and the possibility of a failed military operation could be enough to force Prime Minister Abhisit Vejjajiva to step down, setting in motion a snap election -- the ultimate demand of the red shirts.
With that in mind, the protesters are likely to keep trying to provoke the military or spark a clash with rival pro-government protesters, drawing upon shadowy militants led by retired generals whose presence among the red shirts has added a dangerous element to their bid for elections.
Some protesters are believed to be armed with assault rifles and M-79 grenades, both of which were used at an April 10 clash with the army that killed 25 people. The government accuses them of leading the grenade attacks on April 22 that killed one person and wounded 88 in Bangkok's business district. Army sources say they think this group has stockpiled weapons at the protest site.
The army chief has repeatedly ruled out a crackdown on the shopping area, given the risk of high civilian casualties, but if provoked, the military may have no choice.
MARKET REACTION: Thai assets already price in a relatively high degree of political risk but are considered vulnerable if the red shirts appear to be getting the upper hand in clashes.
This means Thai stocks .SETI, which jumped 15 percent from mid-February to April 9 on a $1.8 billion wave of foreign buying, are likely to remain volatile with significant unrest triggering knee-jerk price falls followed by tentative buying by bargain hunters tapping one of Asia's cheapest markets.
The baht THB=, which has lost 0.1 percent in the past month, is taking its lead from stocks and would likely test initial support at around 32.50 if the government appears to be losing control. Government bonds have been gaining on flight to quality with the five-year yields likely to test seven-month lows in the event of significant unrest.
STALEMATE, HEIGHTENED TENSIONS, PRESSURE FOR TALKS
With neither side willing to make major concessions, the crisis will grind on in a prolonged stalemate that rattles nerves in the capital city of 15 million people, but fails to bring either side closer to their goals.
The red shirts want immediate dissolution of parliament, which would require elections within 90 days. Prime Minister Abhisit Vejjajiva has offered to call elections in December, a year early, and refuses to negotiate in the face of threats.
Both sides want to be in power in September for two crucial events -- a reshuffle of the country's powerful military and police forces, and the passing of the national budget.
The military builds up its presence around the protesters' 3 sq-km (1.2 sq-mile) fortified encampment in central Bangkok, threatening a crackdown -- a mostly psychological scare tactic that might help them gain an advantage in talks.
As the impasse deepens, and Bangkok grows increasingly tense, public pressure for talks reaches a point neither side can avoid. Talks, however, fail to produce a substantive agreement and stalemate continues with thousands of red shirts remaining in the city's shopping district until a violent confrontation.
MARKET REACTION: Stalemate could be good for Thai markets. A lull in the violence could refocus investors on Thailand's growth story which, despite the political unrest, remains promising. The central bank raised its 2010 economic growth forecast on Thursday to 4.3-5.8 percent, supported by strong exports.
April has been a volatile month for Thai stocks, but that's mostly due to sudden slides in the wake of deadly incidents such as fighting on April 10 that killed 25 people and sparked a 3.6 percent drop in the benchmark index to a four-week low.
Over April, the SET index .SETI is down 4.9 percent, compared with a 0.3 percent rise in Asia's markets outside of Japan .MIAPJ0000PUS. But over the past three months, the SET is up 8.7 percent, outperforming the 7.0 percent rise in Asia's markets outside of Japan and reflecting fundamental optimism over Thailand's export-oriented economy.
MILITARY BUILDUP, PROTEST DWINDLES, ARMY CRACKS DOWN
The military steadily builds up its presence on the outskirts of the shopping district occupied by the protesters since April 3. Slowly, protest numbers dwindle, as red shirts become increasingly concerned over a crackdown.
The army repeatedly warns women and children to leave, establishes a perimeter and evacuates nearby buildings. It offers as many red shirts as possible a way out. Once the military determines that those remaining in the shopping district are of a hardcore element, they move in just before dawn.
Clashes ensue, causing many casualties. Militants within the ranks of the protesters wage a fierce fight which could spill into neighbouring upscale residential districts.
The military eventually surrounds the site in huge numbers. Many protesters agree to leave, others are chased away by troops. The government swiftly announces it has taken control.
Protest leaders vow to regroup. After a flurry of phone calls and text messages, and "red shirt" radio issuing a call to mass at another site, within days thousands begin a new demonstration elsewhere. Red shirts in rural provinces seize control of city halls and other government institutions.
MARKET IMPACT: Heavy fighting with high casualties would likely trigger a knee-jerk plunge in stock prices that would also hurt the baht and send investors scurrying into the relative safety of government bonds, pushing yields down and likely delaying any chance of a long-awaited interest rate rise in June.
Any indication the government had taken the advantage, however, would be seen as an opportunity to buy on the belief the worst is over. Much depends on whether the red shirts regroup, and how much violence or control they exert in the provinces.