Roubini Global Economics - Q2 2011 Geostrategy Note: The Scent of ...

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ANALYSIS Q2 2011 Geostrategy Note: The Scent of Jasmine, Japan's Mega-Crisis and Other Global Drama

Michael Moran Mar 24, 2011 6:03:00 PM | Last Updated

EXECUTIVE SUMMARY

RGE Share

Political risk lived up to potential in Q1 2011, and Q2 shows no sign that old stabilities will return. In the Middle East, in particular, old certainties and assumptions have fallen away following the“Jasmine Revolution” in Tunisia and the waves of social-media-accelerated risings that followed. Egypt’s revolution shatters decades of calculations for the United States, Israel and the West, as well as Iran, al Qaeda and other regimes that prefer instability to stability. It may take years, and more bloodshed like that raging now in Libya, before a “new normal” sets in.Japan’s triple-tragedy—earthquake, tsunami and nuclear disaster—has far-reaching implications across global asset classes and is likely to bring a change of government in Tokyo before the year is out. Eurozone (EZ) attempts to wish away a massivesovereign debt crisishave again failed, and Spain, Italy and others look newly vulnerable after Portugal’s surrender to bond market realities. The U.S. is in better shape, but the onset of a presidential election cycle will retard potential solutions toU.S. fiscal woesand exacerbate the risk that Washington will mishandle the most important political and economic relationship on the planet: theG2 tiesthat bind it to Beijing.

1. THE SCENT OF JASMINE

Themes Oil Price Spike Risk

MENA's Political Contagion

Algeria Domestic Stability

Bahrain Domestic Stability

Libya: Civil Conflict

Egyptian Stability

Iran Domestic Stability

Jordan Domestic Stability

Kuwait Domestic Stability

Lebanon Domestic Stability

Q2 2011 Rating Upside/Downside Notes De te riorating ↓ W hile , contagion inonly one major oil producer disrupted (Libya) play and Gulf producers not entirely immune. De te riorating ↓ As Libya's conflict dominates news, deeper risk stalks major MENA regimes, including Iran and Saudi, with Israel looking on warily. Stressed ↓ New subsidies, policy moves quell early protests; spillover risk if Libya unrest, refugee flow ignites local al Qaeda wing. Deteriorating ↓ ↓ Saudi/GCC intervention indicates desperation, inflexibility; regime change unlikely, though Iran's influence bolstered in Gulf. Deteriorating ↓ Full-blown civil war raging, with int'l intervention raising prospect of long stalemate; OPEC capacity takes slack for now. Stressed ↔ Post-Mubarak politics still coalescing, army firmly in command; dashed reform expectations could prompt renewed unrest. Deteriorating ↓ 'Jasmine' risings initially undercut Iran though Saudi move in Bahrain bolster Tehran's narrative; oil prices boost Ahmadinejad. Stressed ↓ Quick concessions (subsidies, cabinet reshuffle) and promise of deeper electoral reforms so far keeping lid on unrest. Managed ↔ Kuwait's modicum of democracy has helped ward off serious unrest; its ability to dole out subsidies likely staves off trouble. Stressed ↔ Hezbollah will form government this spring, raising tensions with Israel; 'Jasmine' passions blunted by local eccentricities.

3/25/2011 6:20 AM