Political risk center-stage in '09: Eurasia Group

NEW YORK (Reuters) - Politics will play a more direct role in driving the global economy in 2009 than at any time since World War Two, and investment decisions cannot afford to ignore political risk, the Eurasia Group consultancy said on Monday.

"Whether you're CEO of a major corporation or a portfolio investor, you can't afford to ignore the ways in which politics and political risk will drive the performances of markets this year -- and how they will determine this year's winners and losers," Eurasia Group President Ian Bremmer told Reuters.

Bremmer's "Top Risks for 2009" note for clients said the global financial crisis meant state intervention in the economy would be the key factor this year -- and because intervention would be based on national and populist agendas, there could be significant unintended negative consequences for global markets.

"It's not just emerging markets like China and Russia that are driving this trend -- countries that had already shown a tendency toward heavy state involvement in economic outcomes. Now it's the United States. It's the European Union," Bremmer said.

"Politics and politicians in both the developing and the developed world are injecting political calculation into the process of rewriting the rules of the road for financial markets and foreign investment," he said in reply to questions from Reuters.

"There's a real risk that all these politicians are going to over-regulate -- that they'll create obstacles to the free flow of capital that will weigh on foreign investment and global growth for years to come."

RISKS AND RED HERRINGS

Political risk has traditionally been a far more important factor for emerging markets than developed countries, but Bremmer said 2009's biggest risks came from the U.S. Congress.

"A combination of economic crisis and a stronger Congress means that the balance is likely to tilt considerably from where it has been over the past decade, making the rise of the U.S. Congress the world's top risk in 2009," he said.

The second most important risk would come from the deteriorating security situation in South Asia, Bremmer said.

"The locus of the world's terrorism/security risks has been moving steadily eastward over the past decade," he said.

"The security environment in India, Pakistan and Afghanistan will deteriorate significantly, and the U.S. and Europe will find themselves more directly involved in conflicts in all three states, with little benefit to show for it by the end of 2009."

Bremmer identified Iran's nuclear aspirations -- and the likelihood they will spark conflict with Israel both directly and through proxies -- as another of 2009's key issues.

"Barring direct military action, Iran will likely have the capacity to develop a nuclear bomb ... by the end of the year (probably the beginning of fourth quarter)," he said.

"There's a reasonable possibility of actual Israeli military strikes, but the prospects of a much broader set of ... regional conflicts will also be highest in this timeframe. The key takeaway is that in 2009, the Iran risk and the Israel/Palestine/Lebanon risk have become inextricably linked."

Other risks -- and red herrings -- identified by Bremmer are: