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Emerging market instability top risk in 2013: Eurasia's Bremmer

By Steven C. Johnson and Jennifer Ablan

NEW YORK (Reuters) - Political instability in emerging markets, led by China, will be one of the biggest risks for markets in 2013, Ian Bremmer, president of political risk firm Eurasia Group, said on Monday.

"I think that emerging markets in general, the level of political instability, is underpriced for 2013," Bremmer said at a Thomson Reuters Newsmaker event in New York.

China, the world's second-largest economy, is high on the lists of worries, he said, citing ongoing tensions with Japan and uncertainty about the investment atmosphere.

"The level of uncertainty around investing in China is many magnitudes greater than it is in the United States, but no one ever says they're on the sidelines because of uncertainty in China," Bremmer said.

Since the 2008 financial crisis, large developing economies, including China, Brazil and India, have increasingly driven global growth, with some expanding by as much as 10 percent a year.

But those rates started to slow in 2012 - China was expected to have grown by less than 8 percent last year and economists expect Brazil to expand at just more than 3 percent next year.

With global growth rates likely to be suppressed for years to come, "people will have to stop fetishizing growth and pay attention to places that are more resilient," he said. "That really does not benefit China" and other emerging markets, Bremmer said.

Countries must demonstrate continued political and economic development if they are to remain attractive to global investors, Bremmer said.

"A lot of times, they don't have that," he said, citing Russia, Ukraine and Venezuela as examples. "That's a real problem."

CHINA SLOWDOWN

Nouriel Roubini, chairman of Roubini Global Economics and an economics professor at New York University's Stern School of Business, added that China was the biggest risk for the second half, when he said growth could slow to about 6 percent - not a hard landing but a slowdown that could hurt global growth.

"It's not a hard landing, but close enough," he said. "I still worry about a hard landing in China."

"My fear is the new leadership is very cautious and will carry out reforms much more slowly than necessary," Roubini said, adding that rapid stimulus spending could turn into an investment bust in the second half of 2013.

China's annual economic growth is expected to have quickened to 7.8 percent in the fourth quarter, a Reuters poll showed, after seven quarters of weaker expansion.

U.S. RISKS

But Roubini said risks in the advanced world should not be overlooked, either. "In absolute terms, the United States has significant fiscal, growth and unemployment problems," he said.

A modest increase in hiring and a steady rise in housing prices have sparked hope that the U.S. economy was gaining traction in late 2012 despite weak business confidence and falling demand from overseas. Most economists expect the world's biggest economy to grow at about 2 percent this year.

But Roubini said U.S. lawmakers' inability to strike a grand bargain that achieves reform of entitlement and spending and long-term deficit reduction could keep growth around 1.6 percent.

Both Bremmer and Roubini said they expected U.S. lawmakers to "kick the can" again when it comes to long-term fixes to the tax system, entitlement spending and deficit reduction.

Congress struck a deal to raise taxes on the wealthiest Americans on New Year's Day but put off important decisions on spending until the spring. Republicans are also threatening not to raise the government's legal borrowing limit unless the White House commits to deep spending cuts.

But Bremmer said the U.S. dollar's role as the world's safe haven and the country's economic resilience should ensure that it remains a favored destination for global investment.

(Reporting by Steven C. Johnson and Jennifer Ablan; Editing by Diane Craft and Lisa Shumaker)

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