Daily Archives: September 22, 2011

The showdown at the UN corral has been averted, for now. Palestinian president Mahmoud Abbas will deliver a letter seeking statehood to the UN Security Council, but has made clear that he does not expect an immediate vote, thereby at least delaying, the need for a US veto. But no one should be breathing a sigh of relief, because without swift action, the Middle East is now teetering on the edge of a new period of armed conflict.

In recent months the existing order in the Middle East and north Africa has been upended; new powers are jockeying for position and old ones (including Israel) have many reasons to deflect attention from internal unrest by magnifying external threats. Avoiding a vote on the current proposal for Palestinian statehood is the right short-term expedient for all concerned, but a new international strategy to move the peace process forward is now a regional and global imperative.

The US and Israel have recently pushed abstention strategy, getting enough Security Council members to abstain to avoid a veto. Diplomatic observers and the media have framed this process as a case of America and Israel versus the world. But in fact all Security Council members have an overriding responsibility to avoid a vote. The Security Council is meant to act promptly to stop any “threat to the peace”. A vote on the Palestinian request for statehood, or any US veto of such a request, would be just such a threat.

The potential paths to a future war in the region are increasingly easy to trace. In recent weeks Turkish Prime Minister Erdogan has called Israel a “spoiled child” and stated that the Turkish Navy would challenge Israel in the Eastern Mediterranean. Recent Israeli behaviour, most notably a refusal to apologise even for a disproportionate use of force in the exercise of rightful self-defence, also shows a state that is becoming dangerously defensive and defiant.

In theory, any UN Security Council resolution in favour of Palestinian statehood ought to increase international leverage to bring Israel to the peace table. In practice, it will probably deepen Israeli intransigence and trigger a frightening round of brinkmanship. Just imagine the domestic Israeli impact of statements that statehood is a “step to wiping out Israel,” as Iran’s ambassador to Egypt noted last week.

The disappearance of Hosni Mubarak, Israel’s staunchest peace partner in the region, followed by widespread protests against Israel and a violent attack on the Israeli embassy in Cairo, intensify the sense among many Israelis that the Arab spring means nothing but bad news. Many, myself included, would disagree; indeed, many would argue that Israel has backed itself into its present corner.

So, fine, let the US issue its veto. Then what? The move is likely to trigger violence in Gaza and possibly the West Bank; Israeli countermeasures risk igniting more anti-Israel demonstrations across the Middle East, particularly in Egypt, and possibly in Syria. In both cases a direct clash between the Israeli and Egyptian or Syrian soldiers in the Sinai or the Golan Heights is all too possible, with potentially catastrophic consequences.

Beyond Israel’s immediate neighbourhood the situation is just as bad. Saudi Prince Turki al-Faisal has already said that a US veto would trigger a Saudi re-evaluation of the extent to which it will work with the US, particularly with respect to Iraq and possibly Yemen too.

Saudi opposition to the Shia government in Baghdad would destabilise Iraq, and heighten tensions between Saudi Arabia and Iran. The beleaguered Yemeni president is currently in Riyadh; Saudi refusal to co-ordinate its diplomacy in Yemen with the US would make it nearly impossible to resolve the current impasse.

These are threats growing daily on the horizon. The move from threat to confrontation may seem unlikely, but remember the inexorable, deadly sequence of mobilisation that turned the assassination of an Austrian archduke into first world war. These things can get out of hand quickly.

An abstention strategy is at best a holding pattern, creating a moment of respite. The Security Council should now move to adopt – and the US should allow – a resolution endorsing the Palestinian aspiration to UN membership, while also condemning the steady Israeli encroachment on Palestinian land. It should set forth the parameters for negotiating that President Barack Obama set out in May. Oversight should be delegated to the Quartet.

The US can and should stop the Palestinian request going forward in the Security Council as a request divorced from a larger process of negotiations. But it cannot put the genii back in the bottle and insist that resolution of the Israeli-Palestinian conflict be a purely or even primarily US preserve. A threat to international peace and security is just that. The world must respond.

The writer is Bert G. Kerstetter ’66 University Professor of Politics and International Affairs at Princeton University former director of policy planning for the US state department.

Conventional wisdom may now be only half right when it comes to solving Europe’s mess. Fixing the sovereign debt problem is still necessary, but it may no longer be sufficient. Europe must also move quickly to stabilise the banks at its core in ways that go far beyond what the European Central Bank announced on Wednesday. As senior BNP Paribas executives prepare to tour the Middle East in an attempt to raise fresh funds and shore up confidence, other banks must also show greater urgency and seriousness in dealing with capital and asset quality shortfalls.

Much of the discussion on the crisis is based on the assumption that sovereign debt is both the problem and the solution. Initially, this was correct. The combination of too much debt and too little growth pushed the most vulnerable countries (Greece, Ireland and Portugal) into a classic debt trap. Timid policy responses then fuelled contagion waves that undermined other sectors.

The problem today has become much more complicated. In addition to being on the receiving end, some of these sectors have become standalone sources of regional dislocations.

Italy is, of course, the most visible example. Interest rates on what is the third-largest government debt market in the world remain stubbornly high in spite of persistent market intervention by the ECB. Wednesday’s rating cuts of some of Italy’s leading banks, following Standard & Poor’s downgrade of the country’s sovereign debt on Monday, complicates matters.

Yet, as notable as this is, it is not the most immediately threatening issue for a global economy that, in the words of Christine Lagarde, International Monetary Fund managing director, has entered “a dangerous phase”. The rapidly burning fuse is in the European banking system, particularly in France, and Europe is getting very close to yet another tipping point.

The facts are striking and worrisome. Private institutions around the world, and even some public ones, have sharply reduced short-term lending to French banks. Credit markets now put their risk of default at levels indicative of a doulbe B rating, which is fundamentally inconsistent with sound banking operations. Bank equity now trades at a 50 per cent discount to tangible book value on average. To make things worse, the ratio of market capital to total assets has fallen to 1–1.5 per cent (compared with 6-8 per cent for healthier banks).

These are all signs of an institutional run on French banks. If it persists, the banks would have no choice but to delever their balance sheets in a very drastic and disorderly fashion. Retail depositors would get edgy and be tempted to follow trading and institutional clients through the exit doors. Europe would thus be thrown into a full-blown banking crisis that aggravates the sovereign debt trap, renders certain another economic recession and significantly worsens the outlook for the global economy.

So far neither the authorities nor the banks have done, or are doing, enough to stop – let alone reverse – this trend. While the ECB has stepped in to offset the liquidity crunch, including by relaxing collateral requirements to make it easier for banks to access the central bank’s repo window, capital cushions and asset quality remain unaddressed. As a result, Europe is on the verge of losing control of orderly solutions to its debt crisis.

To counter this, fiscal authorities and banks must work with the ECB on three immediate, simultaneous and drastic measures. They must inject capital through public-private partnerships, including through Tarp (US troubled asset relief programme)-like mechanisms, present a realistic assessment of the asset side of the balance sheet and enhance depositor protection. Greater burden sharing with the private sector may also prove necessary.

Through the bitter experience of the last two years, Europe now understands that a sovereign debt problem is difficult to solve. It must now realise that the challenges and costs to society multiply astronomically when this is accompanied with a banking crisis; and it must act accordingly.

The writer is the chief executive and co-chief investment officer of Pimco

Response by BNP Paribas

Both Mr Mohamed El-Erian’s article and Mr Magnus’s response include inaccuracies, as far as BNP Paribas is concerned.

Senior executives are not preparing a tour to the Middle East in an attempt to raise fresh funds, as confirmed this morning by our CEO Baudouin Prot. He reminded the market that BNP Paribas, which currently has a common equity Tier one ratio of 9.6 per cent, intends to be at nine per cent under the full Basel 3 rules by 1st of January 2013, six years ahead of the official schedule. The only people to tour the Gulf at present are members of our investor relations department, who are not members of the Executive Commitee of the bank, and who go to this region as a part of their usual global roadshow programme.

The article mentions that private institutions around the world have sharply reduced short-term lending to french banks. Regarding BNP Paribas, most of our short term lending and deposits are in euro, and we therefore didn’t observe such a move. Concerning our funding in dollars, we had anticipated, from the beginning of 2011, that deposits from American money market funds were going to be reduced and took appropriate measures to ensure the appropriate level of short term liquidity, using a range of means provided by our global presence. Our short term liquidity in dollars is thus fully ensured.

We didn’t urge the french regulators to do any kind of stress test.

Regarding Greece, BNP Paribas has a very clear situation : €3.5bn of sovereign debt, but almost no exposure to the private sector. This figure needs to be compared to our first half 2011 pretax profit of €7.4bn: this shows that whatever happens to Greece, the outcome is easily manageable.

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