By Peter Apps, Political Risk Correspondent
LONDON, (Reuters) – Not so long ago, political risk  was mostly regarded as a hazard in emerging but not developed  markets, except perhaps for trading in oil and other commodities  sourced from perceived “dangerous” places.

But since the crash of 2008, political news has fast become  a key driver in developed markets. Investors in the world’s most  advanced economies are having to adapt.

“Political risk everywhere”, proclaimed the title of a  Goldman Sachs research note this month.

“In G7 economies, people used to think you could just  concentrate on the numbers,” said Commerzbank head of emerging  markets research Michael Ganske. “Now that has changed. You just  can’t ignore the politics.”

Ganske says his colleagues covering mainstream economies now  increasingly ask his team for their insight on Western Europe.

The euro zone debt debacle, China’s face-off with the United  States over currency and trade, and London-based BP’s <BP.L>  disastrous oil spill are all examples of political risk to  assets in developed countries.

The global financial crisis boosted the market impact of  politics in several ways.

It created short-term dependence on government stimulus that  in turn focused market attention on sovereign risk, highlighted  global imbalances and the rise of emerging powers, particularly  China, and fuelled populism and unrest worldwide.

Whether fringe euro zone countries such as Greece and Spain  default depends on how far they can reduce spending and continue  to access international markets.

That leaves investors asking two questions: can governments  push through required cuts despite domestic resistance, and will  core Eurozone states, particularly Germany, underwrite the debt  if necessary? Neither have easy answers.

“The European spike is going to be with us for a few years  yet,” said Ian Bremmer, president of political risk consultancy  Eurasia Group. “The austerity required is long-term and requires  a level of coordination that rises above the institutional  weaknesses of the euro zone.”

Euro zone research notes are now dominated by talk of  Spanish union negotiations, German local elections and the  viability of ruling coalitions — all issues financial analysts  covering the region largely ignored until recently.

QUICKER THAN EVER

Political events in countries of particular investor focus,  such as a violent demonstration in Greece in May that killed  three people, can affect markets worldwide. The sheer  uncertainty is undermining the euro <EUR=>.

At the same time, markets are intruding into the region’s  politics more than ever before. Few politicians believe voters  would reward them for a bond market crash.

How to address non-euro zone member Britain’s record deficit  and placate bond markets dominated a May election campaign, set  the timetable for the coalition negotiations, cemented an  improbable centre-right coalition and has driven budget cuts.

“There is a heightened sense that markets will move on news  more quickly than ever,” said Jeffrey Garten, professor of  international trade, finance and business at Yale School of  Management. “This, of course, is a trend that accelerates  itself, as everyone anticipates what everyone else is doing.”

The rise of political risk is not confined to Europe. For  investors focused on the global economy, U.S.-China tension  particularly over Beijing’s currency peg has long been key.

China’s decision to allow greater currency flexibility  helped feed a global market rally earlier this week and was  officially welcomed by the United States, but President Barack  Obama is under growing domestic pressure to take a tougher line.

With mid-term elections looming in November and the economy  still subdued, U.S. politics is taking a more populist tone.  That is seen fuelling more aggressive action against banks and  particularly BP for the duration of the oil spill crisis.

Bank shares have been buffeted by political events since  before 2008, with investors looking at how much government  support is available and how harsh regulatory and punitive  measures might be.

BP’s Gulf Coast experience — together with mining tax hikes  in Canada and Australia — remind investors in extractive  industries that developed countries can be just as tough to deal  with as emerging nations for foreign firms.

Indeed, some analysts argue political risk is in some ways  less deceptive in emerging markets.

QUESTIONING ENTIRE STRUCTURE?

“All countries are risky,” said Ashmore head of research  Jerome Booth in a research note. “Emerging markets are those  where this risk is priced in. Developed countries are where  investors do not perceive their own risk.”

Any suggestion of emerging markets were truly decoupled from  developed ones was shattered after the Lehman failure. Emerging  stocks lost more heavily than their mainstream counterparts —  although they also bounced back faster.

But Commerzbank’s Ganske says investors have become more  discriminating. A decade ago, this year’s violence in Kyrgyzstan  might have prompted a rise in risk aversion across the region.

Instead, while it slashed the stockmarket value of several  small western mining companies exposed there, there was little  knock-on effect on Kazakhstan or other Central Asian states.

Compared to many emerging economies, Greek debt now costs  much more to insure in the credit default swaps market, its  credit rating is lower and bond yields higher.

“Until last year, investors would have classed Polish debt  in one risk category and Greek debt in another because it was  euro zone,” said Ganske. “But now, they are looking at the real  underlying credit risk.”

Some analysts suggest the new focus on developed world  politics might only last a couple of years before markets  refocus their attention and governments go back to sustainable  spending. Others suggest it could be much longer.

“My sense is that we have not been through this since the  1974 oil embargo, when the world really seems to be in the  process of unprecedented economic change and western governments  were helpless,” said Yale’s Garten. “For the most part, the  period since World War II has been pretty steady until now.  Sure, there were crises but no one was really questioning the  entire political structure. Now they are.”