The coming political risk premium

Martha Graybow, Reuters:

Political risk is becoming a growing concern for investors in the United States as the government plays a larger and more controversial role in private enterprise because of the financial crisis.

State intervention in economic affairs is always closely watched by investors for what it means for their decisions on where to allocate money, although this is usually more of a worry in emerging markets than in developed economies.

Political risk is becoming more of a U.S. issue as some investors howl over what they see as arbitrary intrusion by the government in business affairs.

They view President Obama's restructuring plan for bankrupt automaker Chrysler as an attempt to subvert the legal rights of lenders and say lenders will also be unfairly targeted if the U.S. Congress passes a bill to rewrite bankruptcy law to reduce home mortgage payments.

Investors concerned that politics could hurt them may demand a risk premium before they buy stocks or bonds or do a business deal. That could make the U.S. less competitive and money might flow elsewhere.

"There is a much larger political risk premium on investing in the United States than there has been in years," said Sean West, an analyst at Eurasia Group, a research and consulting firm that studies political risks.

"What we're seeing now in the United States is much more like what we see in emerging markets, where the government either by choice or as a result of circumstance is in a position to decide which companies or banks survive and which ones don't," he said. "These were almost unthinkable risks a year ago."

Uncertainty with the government's plans to stabilize big banks is also adding to the unease.

Peter Morici, former chief economist at the U.S. International Trade Commission, said on Thursday that "only a fool" would buy securities in a bank found to need increased capital after the release of government stress tests on their health.

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Risks in the United States include fears the dollar could dive because of the rapidly growing budget deficit and the potential for inflation because of radical moves by the Federal Reserve to flood the financial system with money.

But a bigger immediate concern, say risk experts, is that established rules governing businesses could be changed depending on the political winds.

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The fear that rules can change midstream -- and contracts investors thought were valid are no longer seen as sacred -- can drive up risk premiums, experts say.

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There is more.

She has hit on one of the real dangers to our system of finance that Obama has created. The main reason for doing the TARP deals and the bailouts was to protect the free flow of capital. Obama is undermining the flow of capital by making security agreements less secure. This will drive up the cost of borrowing and may eliminate completely in some cases. Lenders will be especially wary of financing companies with unions whose pension funds may be put ahead of them in the event the business fails.