- Most members of the United Nations (U.N.)—including the U.S.—have advocated for President Bashar al-Assad to step down and allow for a democratically elected government to take over Syria. While the impact of outright violence between Israel and Iran on the oil market could be short-lived, I believe it could be abrupt and severe.
- Despite the flare-up in tensions last week between the German and Greek finance ministers, it is beginning to look more likely that Greece will avoid a default on its March 20 debt payment to creditors.
Yesterday, we discussed the good news coming from the U.S. regarding the extension of the payroll tax cut and emergency unemployment insurance. In today’s ENA, we’ll look at some of the significant global issues—the Syrian uprising, friction between Iran and Israel, and the Greek debt situation.
The uprising in Syria has garnered quite a bit—though maybe not enough—media attention. Syrian President Bashar al-Assad has been fighting an insurrection. Most members of the U.N.—including the U.S.—have advocated for Assad to step down and allow for a democratically elected government to take over Syria. However, the most recent U.N. proposal to intervene was vetoed by representatives from China and Russia.
This past weekend, a Chinese representative said the government is siding with the Arab League—a group of countries that consider themselves “Arab” and are in opposition to the Assad regime. This could show that China will continue to work toward integrating into the global system of governance and hopefully work toward bringing democratic reforms to Syria.
Russia, on the other hand, remains opposed to any U.N. intervention. The obduracy of the Russian government continues to make me hesitant to invest in Russia, while I remain slightly more optimistic about the new regime now in place in China. Russia’s resistance seems emblematic of Prime Minister Vladimir Putin’s (soon-to-be Russian president again?) opposition to cooperating with other countries in promoting democratic reforms.
A replay of 1973—with a twist?
Over the weekend, Iran sent ships through the Suez Canal into the Mediterranean and cut off Britain and France from its oil exports, a move that could escalate tensions in the Middle East. This provocative action is eerily similar to the events surrounding the 1973 Yom Kippur War, which was fought between Israel and a number of Arab states. At that time, it was Egypt that crossed the Suez Canal and dug in against Israel. In 2012, could Iran have a similar plan?
During the 1973 war, the U.S. backed Israel, prompting Saudi Arabia to declare an oil embargo against the U.S., which led to the 1973 oil crisis. Today, relations between the U.S. and Saudi Arabia are much stronger, but there is still the increased threat of oil-supply disruptions stemming from heightened aggression between Israel and Iran. While the impact of outright violence between Israel and Iran on the oil market could be short-lived, I believe it could be abrupt and severe.
Lingering issues in Greece
Despite the flare-up in tensions last week between the German and Greek finance ministers, it is beginning to look more likely that Greece will avoid a default on its March 20 debt payment to creditors. Late on Monday, the European Commission, the International Monetary Fund, and the European Central Bank agreed to give Greece a 130 billion euro bailout—the second in two years—provided private-sector investors agree to a 53.5% reduction in the face value of their Greek debt (previously, it was 50%) and numerous other provisions. To get the private-sector investors to go along with the write-down, the Greek parliament may need to pass a “collective action clause,” which would force all private-sector investors to participate in a write-down of Greek debt. Although this could mean triggering credit default swaps (CDS) on Greek debt, this has been so long in the making that I think central bankers and regulators have adequately assessed the implications of a technical default by Greece. The net amount of CDS coverage is miniscule in comparison with the total amount of outstanding Greek debt. Even if the issuer of all CDS was a single entity, the size and scope would in no way compare with the 2008 Lehman Brothers event.
Is there such a thing as an “orderly default”?
While the media fixates on the fact that Greece must avoid a “disorderly” default, I’m left wondering what the difference is between a “disorderly” and an “orderly” default. It may be a distinction without a difference. A disorderly default would basically be a lock-down of the entire country, involving outright default and an immediate nationalization of the Greek banks and closure of its borders to capital flows and the movement of goods, services, and people. That would be extremely disorderly and probably quite unnecessary. In my opinion, there is no reason Greece cannot default and continue to use the euro. Even if Greece was forced out of the eurozone—which I think is highly unlikely—it would be almost inconceivable for the drachma—the Greek currency that preceded the euro—to be reintroduced because of the social disruption that it would cause. Every contract with a Greek citizen or company would be defaulted on. Unless Greece wants to go back to the Stone Age, it will probably—at worst—default but continue to use the euro as its legal tender.
Of course, just about any default could be called “disorderly.” As a result, I continue to believe that the Greek situation will be resolved over many years and Greece will retain the euro as its currency. While it may trigger CDS on Greek debt, it is unlikely to cause problems like we saw during the financial crisis of 2008.