Markets mustn't ignore geopolitical risk

Allister Heath
FOR most investors, consumers and employees around the world, the only public policy debate that really matters is how to deal with the recession &ndash; understandably so, given the devastation it has already wreaked. In Britain, we are also seeking to rescue democracy from corrupt politicians. Yet while there is plenty to worry about at home, we shouldn&rsquo;t forget&nbsp; about increasingly pressing geopolitical problems abroad.<br /><br />Far from diminishing in intensity, they are getting ever-closer to boiling over, a danger which the world markets are as woefully under-prepared as they were for the credit crunch. Yesterday was a perfect example of this: an impotent Barack Obama was forced to condemn North Korea&rsquo;s latest nuclear test, while Iran rejected point blank Western proposals to freeze its own nuclear programme. Yet we merely shrug, as if none of this were of any concern.<br /><br />It feels just like 2006 did for the world economy: at the time, many bankers still thought we would be fine because their econometric models were &ldquo;95 per cent confident&rdquo; that the credit markets were safe, and what more could anybody possibly want? Only a &ldquo;black swan&rdquo; event could derail the system, they argued &ndash; and as everybody knew, swans are always white. And in any case, why worry about extreme events? Our foreign policy establishment is making a similar mistake &ndash; and the markets, taking their cue from the &ldquo;experts&rsquo;&rdquo; excessive calm, are yet again failing to price adequate levels of risk into their forecasts.<br /><br />The North Korean test, the second ever carried out by the totalitarian nation, was 20 times more powerful than its first in 2006. America and the West&rsquo;s containment policy has completely failed. The ball is now in China&rsquo;s court, which is hardly reassuring; unless something is done to stop the crazed regime in Pyongyang, the least bad outcome will be an arms race involving Japan, South Korea, China and possibly even Taiwan.<br /><br />A few hours later, it was Iran&rsquo;s President Mahmoud Ahmadinejad&rsquo;s turn to crack the whip: he rejected a Western proposal to &ldquo;freeze&rdquo; its nuclear work in return for no new sanctions and ruled out talks. This was another blow to Obama&rsquo;s diplomatic strategy and comes just days before Iran&rsquo;s 12 June election. Iran&rsquo;s Shahab-3 missile, based on the North Korean Nodong missile, has a range of 2,000 km, which would put Israel and American bases in the Gulf within reach. Iran last week test-fired another missile -- Sejil 2 &ndash; which it says has a similar range.<br /><br />Meanwhile, the regime continues to tighten its grip on the public: access to Facebook has been cut off and human rights abuses continue apace. To pick just one: Iran&rsquo;s 300,000-strong Baha&rsquo;i religious minority is facing fresh persecution, as&nbsp; Human Rights Watch highlights. Seven Baha&rsquo;i leaders were jailed a year ago; they are being held without access to lawyers and with no trial in sight, on trumped-up charges of spying for Israel, &ldquo;insulting religious sanctities,&rdquo; spreading propaganda and &ldquo;corruption on Earth&rdquo;, an offense punishable by death.<br /><br />The latest moves from North Korea and Iran highlight some of the many geopolitical flashpoints threatening the liberal international trading order. There is a real risk of real trouble&nbsp; &ndash; and this time markets shouldn&rsquo;t need complex debates about probability theory to sit up and pay attention.<br />