January 15th - 22nd
Welcome to the Dispatch for January 15th through the 22nd. It’s been a big week, but first, a couple quick notes:
First, you probably already noticed the new theme. Do let me know if there are any problems, but I find it rather more readable than the old one. I’ve decided the Dispatch will now cover from Monday through Sunday - a decision born largely of events of this week. It’s a bit tougher catching changes on the day of publication, but I think it’ll be an improvement. I’ve also included notes from a talk I attended this week - I often get the opportunity to see interesting speakers, so I’ll try to share a few more in the future. Finally, I’m omitting the “Comment” heading now - I think the divide is fairly self-evident.
That about covers the changes, so let’s get to the news.
On Monday, the Nigerian government announced a partial retreat on the fuel subsidy in response to both widespread protests and a massive spike in prices across the nation after just two weeks. Boko Haram added to the country’s woes with one of its largest attacks to date, a series of eight coordinated bombings killing more than 100 people.
Promises on the part of the government to use the subsidy money to improve infrastructure ring hollow to much of Nigeria’s population. As mentioned last week, the government is, and has been, notably corrupt. The Nigerian people have no reason to believe that any savings will come back to them – and good reasons to believe the contrary. The government has claimed the subsidy imposes an unsustainable fiscal burden. If that’s the case, this government’s days are numbered: the people simply won’t stand for the subsidy’s removal, and by all impressions the economy can’t sustain its removal either.
In response to pressure from the military, the courts, and the opposition, the Pakistani People’s Party agreed this week to call early elections. Prime Minister Gilani appeared in court to answer questions about corruption charges against President Zardari, though the court was adjourned to February without making any decisions.
The specifics of the case against Zardari are fairly inconsequential: the point of the proceedings is to remove the Zardari government without using tanks. Gilani’s court appearance serves to de-escalate the situation, and the offer of early elections should serve to keep the military satisfied for now. The most likely outcome looks to be early elections, probably late in summer, that end in Zardari’s party, the PPP, out of power one way or another.
The new round of sanctions against Iran caused fears over oil prices around the world. Saudi Arabia indicated it would increase its production to keep oil at a target price of $100 per barrel, while the Chinese met with the Saudi government to secure access to non-Iranian oil supplies. The mission appeared to be a success: later in the week, the Chinese Prime Minister issued a strongly worded condemnation of Iran’s nuclear program. Israel announced this week they had made ”no decision” on a military strike against Iran.
The turmoil in Iran comes at a very bad time for the oil markets. Prices are already under pressure due both to uncertainty from the Arab Spring and massive spending on the part of Arab countries attempting to keep their populations quiet. The US Sanctions on Iran are supposedly contingent on oil prices staying stable, but that seems nearly impossible: the US is relying largely on Saudi Arabia to make up the lost production, but there are serious doubts about Saudi production capacity. Iran’s contributions to the world oil supply are around 3.5 Million barrels per day, nearly a third of Saudi production. Any significant increase in oil price could be a severe drag on the already fragile world economy - the choice could soon be between putting pressure on Iran and preventing a global recession.
The Muslim Brotherhood won 47% of the seats in Parliament, with another 25% going to a coalition of ultra-conservative Islamists. Egypt requested a $3.5Bn loan provision from the IMF to shore up the economy, which has been reeling since the uprising. The economic uncertainty this week lead to a gas shortage prompted by fears the gas subsidy would be suspended.
The Muslim Brotherhood’s victory surprised no one. They’re the only party that had any sort of existing organization, and they’ve been operating in Egypt for nearly 85 years. The Brotherhood is a relatively moderate party these days, and they’ve promised to promote ideals of individual liberty. The party is not particularly well aligned with the more conservative Islamists. With only 47% of the seats in Parliament, they’ll still need to form a coalition government, but it’s not at all certain with whom they’ll partner. Of note, though, is that this first Parliament will be responsible for drafting Egypt’s new constitution, so the makeup of the group is likely to bear heavily on Egypt’s identity for years to come.
After an attempt at delaying elections earlier this week, Yemeni President Ali Abdullah Saleh left Yemen to head to the United States for medical treatment. While elections are scheduled for Feb 21, the year-long turmoil in the country has allowed militant groups in the south to gain more traction; this week they claimed control of a city within 100mi of the capital.
Saleh’s final departure is a pleasant surprise given the length and ambiguity of the negotiations preceding it. While an agreement on elections has been in place for some time, Saleh has made several contradictory statements on his intent. His departure address was met with some relief.
The New York Times reported that the Burmese military is intensifying its campaign against the Kachin ethnic group in the north of the country. This comes as an unfortunate followup to last week’s news on Burma’s rapid liberalization, and stands as a reminder of the length of the road left ahead.
Three stories out of the Eurozone this week:
The Greek government is getting close to a deal with private bondholders on debt restructuring. The two remaining sticking points are the interest rate, which the IMF wants below 3.5%, while creditors prefer above 3.8%; and a proposed exemption from the restructuring for bonds held by the European Central Bank, which private investors are not likely to accept.
European Central Bank
The ECB’s new bank lending program appears to be showing fruit. The program combines low interest rate loans to private banks with a strong recommendation that the banks buy sovereign debt. Italy and Spain’s interest rates have already improved.
Basel III Bank Regulations
France and Germany are trying to soften some of the language in the new Basel III banking regulations to prevent, in their words, ”negative effects on grow th.”
Overall, the Eurozone leaders appear to have gotten serious about dealing with the crisis. The moves from the ECB are in keeping with the letter of the Euro treaty, but are fairly aggressive, on the order of what economists have been saying are needed, and France and Germany’s attempts to soften the Basel regulations are essentially a backdoor bailout for their banks. What separates the Greeks and their borrowers are a couple tenths of a percentage point and a technicality about the ECB’s role - given the Euro leaders apparent adroitness with paperwork, it would be shocking if a deal weren’t reached.
US GOP Primaries
Early this week, Jon Huntsman, Jr. and Rick Perry dropped their bids. Romney was dogged by demands to release his income tax statements. After eventually doing so, he was criticized for paying a comfortable rate of 15%. The primary on Saturday capped a terrible week for Romney with a crushing defeat: Newt Gingrich won 40% of the vote to Romney’s 28%, dragging out an already tortuous primary season.
The Florida primary is held on the 31st, and we’ll find out if Newt’s challenge can stick. Gingrich remains the least popular candidate in the race among the general populace. At this point, it would be shocking to see the nomination go to anyone but Romney. The only real potential challenge could be a new contender - it’s obvious the GOP is not thrilled with its current options.
The Times this week ran a fantastic article on Apple’s Chinese manufacturing. It’s a must read if you’re interested in the future of American manufacturing - be warned, the prognosis is grim.
Sandwiched as I am between UC Berkeley and Stanford here in San Francisco, I have frequent opportunity to attend exceptional talks and lectures. This week, I took in a talk by Shmuel Rosner, an Israeli journalist who’s been covering the peace process for a number of years. He spoke on the Obama administration’s attempts at advancing an Israeli-Palestinian peace, and the missteps made along the way.
Note, the opinions expressed below are those of Mr. Rosner - I make no claim to their veracity or neutrality.
In Mr. Rosner’s opinion, the Obama administration’s biggest misstep was attempting to dramatically accelerate the process at the absolute wrong time. The Israelis don’t feel like the current Palestinian government is capable of either coming to the table or upholding a bargain if one should be reached - as such, they’re extremely reluctant to invest much in the current negotiations. The Israelis feel they got very little in return for agreeing to freeze settlements for nearly a year, and feel they were unfairly pressured by the Obama administration after making considerable concessions. Between that and the insistence on a 2-year timeline for an agreement, the Israelis feel they do not have a strong partner in the Obama administration.
Mr. Rosen states that the Israelis are already aware they cannot keep the West Bank; the question has become tactics, not strategy. Hamas continues to pose a problem, and without significant changes in the group, the Israelis would be unwilling to negotiate with any government that includes Hamas.
His final assertion is that it behooves the US to be a friend to the Israelis. The best progress on the peace process has come when the US has stood close at hand with Israel. He cautions, however, that no good treaties can be made during troubled times, and the Middle East right now is incredibly unstable. For the time being, Israeli sentiment is focused on domestic affairs, as it seems little progress is to be made elsewhere for now.
The two big trends this week were around the Iranian sanctions and the Eurozone. Both show the hand of technocratic intervention: in the case of the Iranian sanctions, the US is hard at work trying to invent away a rise in oil prices; in the Eurozone, the ECB and the governments of Germany and France are using complicated schemes and indirect action to reshape the financial situation. Complexity, to me, is not a virtue. These plans feel over- engineered, and I’m extremely suspicious of clever solutions to problems of this sort. It’s entirely possible the efforts on both parts will succeed, and my concern certainly isn’t born of any perceived deficit of talent on the part of the architects of either plan. The devil, though, is always in the details, and I’m highly suspicious of the ability of anyone to truly predict the outcome of a plan with so many moving parts. The history of the world is one of unintended consequences, and many of our stickiest problems today began as side effects of earlier efforts to solve the problems of yesterday.
Thanks again for joining me - my best wishes to all for the week ahead!
(My thanks to Des (@scholarus) for editing)