Global Financial Crisis Risks Move From Credit To Politics As Japan's Prime Minister Resigns

The causes of the global financial crisis of 2008 were almost entirely flaws in the credit system based on leverage, exotic financial instruments, and a sharp drop in American housing prices. Just as that cycle has begun to end,  and GDP in major nations has begun to recover, another potentially damaging set of risks has emerged and they are almost entirely political. That trend was confirmed today as Japanese Prime Minister Yukio Hatoyama resigned.

The cycle of social and political problems began in Greece. The trouble first presented itself as the result of years of budget deficits, growing entitlements, and a weak tax base. It has evolved into a war of wills between the central government and powerful unions and public sector workers who refuse to accept austerity measures. That refusal could cause the refinancing of Greek debt to collapse as the nation’s GDP recovery is undermined by strikes. The situation in Spain, also hoping to throttle back deficits and a growing national debt, parallels Greece’s. Spain does not face the immediate solvency problem that Greece does, but Spain’s 20% unemployment and system of entitlements could be well-enough rooted that the government cannot dislodge them before the nation faces its own problems raising money in the capital markets.

Even Germany, the most healthy economy in Europe, faces the possible end to the ruling coalition of Angela Merkel as her ally, the nation’s president , Horst Koehler, resigned over inappropriate comments about deployment of the German military in Afghanistan.

The global equities market will also be roiled by the confrontation between Israel and forces in the Middle East and Turkey over the Jewish state’s attack on a convoy of ships bringing aid to Gaza. The tensions are likely to increase as the UN takes up the matter and Israel is criticized by countries around the world. Israel is not likely to change its stance on what it believes is a national security issue. The history of wars between Israel and its neighbors is long and repetitive, and the weapons that each side are now more destructive than they were a decade ago.

The problems on the Korean peninsula could also erupt into a local war. Kim Jonn-il, the head of North Korea, is ill and widely viewed as unstable. His nation is low on food and other essentials. He has a number of incentives for waging war on South Korea and relative few to preserve the peace. It is not entirely clear what China would do if a war erupts, but it is clear that Korean and Japanese commerce could be greatly disrupted

The ECB recently said that the greatest threat to financial recovery in Europe is the resolve that the region’s nations have to plan and  institute austerity programs. The likelihood of that happening is relatively small. The political and social forces arrayed against it are too strong. But, Europe’s problems, that are financially dangerous are not acute. They may play out over months or even years. Other “hot spots” in the world may not be contained at all.

Douglas A. McIntyre