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Which Will Be The Next Government To Fail? And Can A Bull Market Be Sustained In The Midst Of The Political Upheaval?

On January 26, 2009, Iceland’s government became the first in the world to step down due to the economic crisis.  Since then, three other governments have stepped down: Latvia (February 20), Czechoslovakia (March 23), and Hungary (March 27 – well, sort of: in the case of Hungary, the Prime Minister’s own party forced him to resign, hoping to keep their cabinet in place and simply replace the Prime Minister).  All of these political failures are direct casualties of citizens being upset with the handling of the economic crisis.  (The links will take you to news stories about each event).

April has hardly begun, but even when counting it for analysis purposes, thus far this year, we’re averaging one failed government a month.  Will that average continue or change in one direction or the other?  And if so, so what?  And then, a much bigger question: how many governments will it take to fail until this crisis is recognized to be social, cultural and political as well as economic in nature?  Can the U.S. sustain a bull stock market when governments are failing around the world?

Today, there are at least three governments on the edge of failing, each attributable, at least in part, to the economic crisis.  Here’s a quick status report in no particular order:

Thailand.  On April 11, a long-anticipated summit of the Association of Southeast Asian Nations was cancelled due to thousands of anti- government protesters who stormed the meeting venue, about 90 miles southeast of Bangkok.  The cancellation embarrassed Prime Minister Abhisit Vejjajiva and challenged his grip on power.  Leaders from the 10-member Association had been scheduled to meet with heads of states from China, Japan, South Korea, India, Australia and New Zealand.  At the top of the agenda: a scheduled discussion of ways to battle the region’s worst slowdown in more than a decade.  Asia’s export-dependent nations are reeling from the global recession, which has slashed demand for the region’s computer chips, cars and commodities.  Vejjajiva has pledged that he will not step down, but protests are unrelenting.  From the news and blogs I read, this turmoil is only partly attributable to the economy.  I’m of the opinion that the economic situation stirred-up what was already an unstable situation. 

At the least, if the government falls or if violence begins to characterize the protests to an increasingly greater degree, the Thailand story will creep into the news and, together with similar events, could contribute to a global sense of political instability.  If that became a popular thought, the optimism that seems to be on the rise and is so fundamental to a stronger economy could sink again.

But political uncertainty in Thailand has more consequences than its impact on the news of the world.  It is also a major strategic ally of the U.S.  Writing for the Asian Times, Shawn W. Crisp reports:  “Thailand's new willingness to confront the US on core strategic and trade issues heralds a potentially important shift from a US-dominated unipolar era to a new China-inclusive bipolar regional balance of power.” 

Georgia.  On April 11, reporters Margarita Antidze and Matt Robinson reported in their Reuters story “Fight Breaks Out During Georgia Street Protests” that the country was in the midst of its third day of protests demanding the resignation of President Mikheil Saakashvili (you might remember that name as John McLain often referred to his close relationship with him during the presidential campaign).  In the case of Georgia, the protests may be offset by citizens being so tired of all the turmoil that they’d be willing to be stable while Saakashvili enters into his new policy of “dialogue.”  That might work.  But might not.

What would turmoil in Georgia mean to the U.S.?  Paul Kennedy, who is Dilworth professor of history and director of international security studies at Yale University and the author/editor of 19 books, provides an analysis of the importance of Georgia to the U.S. in his article for The Guardian entitled “Georgia Is Important. But What It Tells Us About Global Politics Is Far More So.”  Among other observations, he believes political volatility in Eastern Europe that may test the reaction (perhaps even more significantly, lack of action) of the U.S. will set the tone of Russian-Chinese relationships going forward.  Intriguing. 

Moldova.  Protestors in Moldova last week came together spontaneously by the use of Facebook and Twitter (see “How Do You Run A Revolution In The Age Of The Internet? Ask The People Of Moldova. NO. Twitter Them”).  Primarily younger citizens protested against the legitimacy of the national elections after Communists had performed better than expected in parliamentary elections.  These protests, as those in Georgia, seem to have waned, but it might only be temporary.  The latest news is that the Georgian government has come down very hard on all would-be protestors, warning them that political protest is punishable by as much as 15 years in prison and that the laws would be strictly enforced.  How long can that continue?  Perhaps not too long, as protests are being planned despite the government warnings. 

What is the importance of Moldova to the U.S.?  The country relies on foreign aid to survive, primarily from Russia and Italy.  That aid (which accounts for one-third of the nation’s GDP) isn’t so plentiful these days as both those nations weather their own very deep recessions.  Moldova is not alone in that situation.  The world will be keenly looking to see if those nations that have propped up the nation’s economy and political stability in the past will do so now.  If not, the economy in Moldova, already poor, would get much worse, raising the prospect of more political turmoil.  But will those nations that sustain Moldova abandon only Moldova, or will they also cut support to other Eastern European nations?  And if that happens (likely) what then happens if those nations default on their debt, most of which is held by Western European banks.  That could set off a deck of cards and a crumbling of the European financial system, which would probably be met with yet more government aid.

I think it is premature to make an absolute prediction that any or all of these governments may fail and, if so, whether the worst case scenario unfolds.  But they may.  The consequences could be dramatic both in substantive terms and the mood/confidence/optimism of the world as there is more and more news about political stability.  Place your bets accordingly.