Monday, 23 June 2014

UK and Spain bond yields

Check out this table of 10-year gilt yields for various European countries... (Source)


Germany is paying 1.35% to service its debt, as befits the powerhouse of Europe. France 1.79% because they don't have a massive debt like we do. Greece (5.86%) and Portugal (3.51%) are paying a premium for being risky - not currency risk, they all borrow in euros - but default risk.

The UK is paying 2.73% and Spain 2.72%, practically identical. That's a bit surprising. Are we really equal in the default risk? The Spanish economy is supposed to be flat-lining.

Well, let's have a look at the cost of insuring sovereign debt against default. The so-called credit-default-swap (CDS) market. Here is the cost in percent of insuring debt for 5 years... (Source)


So the UK is actually the cheapest to insure. According to the markets we are the least likely to default on payments. Spain is more that three times as risky as the UK. Even Germany is just sliver more likely to default than the UK.

To square our low default risk with our (relatively) high cost of borrowing we can only assume that the markets are pricing in a fall in the value of sterling. According to the markets, if you buy UK bonds you risk losing money, not because of default, but because of a fall in the value of the pound vs the euro.

Maybe it's time to buy something European.

Wednesday, 18 June 2014

Gulf War 3 - This time it's not personal

A quick recap. Back in 1990 Iraq president Saddam Hussein noticed that his neighbour to the south, Kuwait, was encroaching by moving the rocks that marked the border, and was also helping itself to Iraqi oil by means of some creative sideways drilling from their side of the border. Saddam resolved to teach the tiny nation a lesson by annexing it. Being a cautious fellow he checked out his plan with the Americans first.

US ambassador to Iraq April Glaspie was dully consulted and advised that the USA was unconcerned about Arab-on-Arab conflicts and gave him the green light (the go-ahead coming originally from her boss Secretary of State James Baker.)

So in August 1990 Iraqi troops entered Kuwait and had conquered the whole country a few hours later.

At which point the then world's bigger oil producer Saudi Arabia caught fright thinking they were next on Saddam's list and persuaded US president George Bush Snr to kick the Iraqis out of Kuwait. A coalition of 34 nations was put together and a big military presence was built up in Saudi. This was called Operation Desert Shield.

Iraq was attacked from Saudi in Operation Desert Spear. Needless to say the Americans (with a bit of British and other help) won easily. This was Gulf War I. It cost $60bn, and most of the cost was paid for by Saudi Arabia. Saddam was left in office as president of a much weaker Iraq.

This war could generally be considered "a success". The mission objective was achieved. Someone else paid most of the bill.

President George Bush Snr only got one term in office and was succeeded by Bill Clinton at the start of 1993. Clinton had his problems in office (the Oval Office mainly) but he didn't actually declare war on anyone and served two terms as president, ie until January 2001.

George Bush Jnr, "Dubya" to his friends, son of the previous President Bush, was "elected" president in 2001, despite receiving fewer votes than his rival Al Gore - for a month or so no-one really knew who had won. Nine months into Dubya's presidency nine-eleven happened and America went to war in Afghanistan. By 2003 Afghanistan was deemed done and attention turned back to Iraq.

By this time Tony Blair was PM in the UK and was getting on quite well with Dubya. Dubya seems to have decided to pick up where his pa left off and have another crack at Saddam. Blair, playing the Thatcher role, was right behind him. Some dodgy dossiers alleging that Saddam was building "Weapons of Mass Destruction" were downloaded from the Internet and published far and wide. The British parliament voted; the UN security council voted; and before you know it Gulf War II was born.

Gulf War I was reactive to Iraqi actions; albeit actions the US had originally condoned.

Gulf War II was more of a: let's have a war and think of a reason afterwards. Both the main players, Dubya and Blair, were walking in the footsteps of previous leaders much greater than them: Dubya, his father; Blair, Mrs Thatcher. This was a war born out of the insecurity of two of the most powerful men in the world.

Thus in March 2003 Operation Iraqi Freedom began. Half a million Iraqis were killed and the basic invasion was over by April. Saddam ran away (he was captured in December that year and executed in 2006) Baghdad was taken and statues were toppled. However American and allied forces were kept busy in Iraq dealing with insurgencies until 2011, ie Dubya never finished the job and left it as work-in-progress for Obama who took over in 2009.

Saddam Hussein was not a strongly sectarian leader. His regime was essentially Sunni but he had Christians in his government, and even women.

After the invasion the Americans ran the country by decree for a year, during which time they passed laws allowing "foreign investment" ie asset stripping, and granting immunity from all civil and criminal court actions for foreign contractors.

Then a Shiite called Allawi was elected prime minister. He lasted a year and was succeeded by another Shiite called al-Jaafari , who, topically, was educated at Mosul university. He lasted a year and then al-Maliki, also Shiite, took over in 2006.

Meanwhile all the Sunnis Saddam used to employ as army officers, civil servants and the like, were out of work and feeling the odium of being an oppressed minority. However, since Iraq is a Shia majority country there hasn't been much they can do about it.

It has to be said that al-Maliki has not attempted any sort of inclusive or conciliatory government. All his appointments to high office have been Shiites. He has openly hob-nobbed with the Shiite elite in Iran.

Now it seems the Sunnis  have finally got their act together to do something about this "unfair" situation. Sunnis are 70% of all muslims. Al Qaeda is Sunni. The Saudis are Sunni; 99% of all muslims in the UK are Sunni. So the new kid on the block, Sunni ISIS, can expect money to be lavished on it, and foreign fighters to come flocking to its banner.

This is where it all gets a bit confusing. The Saudis would naturally like ISIS to take over in Baghdad. The Saudis have major behind-the-scenes pull in America. Taking the US presidency requires money and money comes from Saudi. Bushes Snr and Jnr were both "oil men" ie, beneficiaries of Saudi largess. But Obama is more of a Israeli pawn, and he will be in office through the end of 2016. So the strong Sunni alignment isn't there. It looks like even the Shiite mother ship Iran is coming in out of the cold. The old instinctive animosity isn't there at the moment. (Iran has been PNG to America since the CIA-employed Shah was kicked out in February 1979. The embassy hostage crisis of November 1979 didn't help.)

At the moment, the Americans don't care if a Shiite regime runs Iraq. The media offensive to build up ISIS leader Abu Bakr al-Baghdadi as a major villain in the mould of Saddam Hussein or Bin Liner hasn't really got any steam behind it and the American sheeple have not been revved up to get boots on the ground. The Saudis aren't getting traction with the White House and Israelis don't care enough to make anything happen.

So Gulf War III? Mainly a low-key affair consisting of drone strikes and persuading other countries to do the grunt work and accept the inevitable body bags.

Thursday, 12 June 2014

Interesting situation developing in Iraq

If you drive out of Baghdad, heading north on Highway One, you come after three or four hours to Tikrit, birthplace and hometown of the late Saddam Hussein. A few hours after that you'll be in Mosul, oil capital of the North. Time was you would have had to negotiate (bribe) your way through a lot of army checkpoints along the way, but they're all gone now.

Stay on the road after Mosul and it takes you over the border into Syria (where it's called the M4.) There's not much to see there in northern Syria, just a civil war really. The monotony of the desert will be relieved briefly when you cross the Euphrates using the bridge at Qere Qozaq. Stick with the road and eventually, if you're lucky, you'll be in Aleppo - a city which once ranked with Constantinople and Cairo - it was the western terminal of the Silk Road to China.

Now it's a bombed out war zone. It was loyal to the government but got taken by the "Free Syrian Army" in 2012 before being taken back by Assad forces. Needless to say a to-fro war across a city rather wrecks the place. The current "sit rep" is the city is 70% government, 30% rebel.

So you'll want to be pushing on. West out of Aleppo the countryside turns greener but no less deadly until the road turns into the Homs bypass. The bypass is recommended because Homs is the birthplace of the Syrian Spring. It all started there back in 2011. Homs was the first city to throw off the Assad yoke. The yoke went back on in 2012 and currently the city is under Syrian army martial law.

Giving Homs a wide birth, staying on the road, by now it is called the M5, it's a quick 50 mile hop down to Damascus.

Not that anyone is making this journey at the moment. The traffic is all in the other direction, especially if your name is Abu Bakr al-Baghdadi, commander of ISIS (Islamic State in Iraq and Syria) second in command of all Al Qaeda and a decidedly more effective general than Bin Liner was in his later years.

Abu Bakr is a mysterious figure: he wears a mask in public so his features are not known, he doesn't seem to have been particularly warlike until the Americans locked him up in Camp Bucca down on the Gulf coast for four years. Prior to that he was an accademic. He has a PhD from the University of Baghdad. He comes from Samarra, a town thirty miles south of Tikrit and it seems he will be returning there shortly since yesterday his forces took Tikrit; although "took" may be too strong a word since the Iraqi army melted away and the native Tikritis would have been quite happy to see him. They've been under a Shia heel since the fall of Saddam Hussein. (Note that Saddam, Abu Bakr and al Qaeda are all Sunni while the official Iraq government in Baghdad is Shia.)

ISIS has been working its way south along Highway One since they crossed over from Syria earlier this year. Last week they captured Mosul and the way south is currently open to them.

Which is all a bit awkward for the West, well the Americans mainly. This was not part of the plan. Shias are a majority in Iraq. They were supposed to be able to hold the place. But it looks like they lack the guts for a fight. They have indulged in a common Arab practice of switching back to civilian clothes as soon as it looks like they might lose a battle. They cannot be blamed really; Abu Bakr is keen on beheading captured fighters. He's done about a hundred so far this week.

Boss of the official Iraqi government is Prime Minister Nouri al-Maliki,  a Shia who has appointed nothing but other Shias to government posts. The President is more of a figurehead. His name is Jalal Talabani - which isn't exactly reassuring. Plan A would be to bolster these two with matériel support: guns, ammo, money.

If the Americans just stand back the whole "Iraq War" will unravel. All those casualties; all that money spent - for nothing. But it is not likely the public in America or the UK will tolerate another big war. The first one only really happened because Saddam Hussein had been demonized to the max in the media. Afghanistan happened because Bin Liner was the new bogey man. But Abu Bakr? Not seeing it. Maybe the West can bolster them enough to keep them in power. But it's going to have to be money and guns and a little air support. The public won't wear another ground war.

This means that if ISIS takes Iraq the future is sanctions rather than intervention. Call an ISIS government illegitimate. Embargo the whole country. This despite the fact the Americans were pretty close to helping ISIS take over Syria at one point. Only Russian intervention stopped them.

The other big powers in the region: Saudi and Israel, would probably not be too unhappy to see ISIS in power. ISIS are Sunni; the Saudis are Sunni. ISIS hates Assad. Israel hates Assad (because he supports Hezbollah.) The elephant in the room is the Shia stronghold of Iran. ISIS may yet turn out to be our new best friends.