Daily Archives: November 9, 2011

When it comes to Iran, the best is consistently the enemy of the good. The International Atomic Energy Agency report issued on Tuesday on Iran’s nuclear programme uses strong language relative to earlier reports, but essentially affirms what western governments already know or believe. Parsing the bureaucratese, the IAEA details information that it believes to be “credible”, indicating “that Iran has carried out activities to the development of a nuclear explosive device”; that before 2004 “these activities took place under a structured program”; and “that some activities may still be ongoing.”

In short, for all the sanctions and diplomacy, Iran continues to make steady progress toward producing a nuclear weapon. We might be able to make a deal that would at least bring some Iranian stocks of low-enriched uranium into the custody of a third country – starting a process of multilateral cooperation to meet Iran’s legitimate needs for nuclear fuel, while constraining its illicit activities. This would still leave Iran enough LEU to produce a bomb, and could legitimise its enrichment efforts, allowing them to continue contrary to UN demands. That would be bad. But continuing with a policy of sanctions and pressure that is not working is worse. 

The IAEA report documents repeated Iranian violations of UN obligations and IAEA requests. It catalogues Iranian military efforts to obtain nuclear-related and dual-use equipment, to ramp up production of nuclear fuel by “undeclared pathways,” to acquire nuclear weapons development information from a “clandestine nuclear supply network,” and to design an actual weapon, including testing of components. Harvard Professor Graham Allison, a leading expert on nuclear proliferation, has a more direct approach. He has a chart showing a nuclear football field, with the endzone being the possession of enough highly-enriched uranium to create a bomb. It shows that Iran has enough low-enriched uranium (5 per cent) to create four bombs, but that the time needed to upgrade this keeps Iran 30 yards from the endzone. In addition, though, Iran is building a large stockpile of medium-enriched uranium (20 per cent), which takes much less effort to convert to bomb-grade material. That puts it on the 10-yard line – a very short distance from its goal.

The Stuxnet worm does appear to have set Iran back by perhaps two years, but that is being overcome. New generations of cyber-viruses may be harder to insert and easier to defend against. Military action will remain an option, but would run counter to the Obama administration’s entire strategy of integrating rising powers into a strong international order. It is also not certain to work, and would have deeply counter-productive political effects inside Iran and probably across the Muslim world.

That leaves diplomacy. In late 2009 the US, France and Russia proposed a deal whereby Iran would give up its own stocks of LEU in return for international provision of sufficient nuclear fuel to run a medical research reactor in Tehran. Mahmoud Ahmadi-Nejad originally seemed receptive, but Iran then backed out quickly. In the spring of 2011, Brazil and Turkey reached a weaker version of the same deal, in which Iran would transfer 1,200kg of LEU to Turkey in return for the same quantity of nuclear fuel for the Tehran reactor. That move widely was seen as an Iranian ploy to blunt another round of UN sanctions. The US pointed out, rightly, that Tehran was not committing to stop enrichment, and secured agreement on more and stronger sanctions. Meanwhile, it made its displeasure clear in Ankara and Brasilia; the deal fell through; and Tehran continued its programme. What was lost was any opportunity to establish a precedent of keeping Iranian fuel outside Iran, and working within a cooperative rather than a coercive frame that would allow Iran to save face.

Today, if Barack Obama were to put that deal on the table, he would be hammered by his Republican opponents, in Congress and on the presidential campaign trail, for giving away the store, negotiating from weakness, affirming US decline, and so on. But if we are really as worried about an Iranian bomb as we claim, results should trump political perceptions.

The IAEA report has the dual advantage of expressing global concern over Iranian behavior and of focusing attention on Iran’s violation of its international obligations. Western governments should now turn back to Turkey and Brazil. Turkish-Iranian frictions are on the rise, particularly over Syria and Arab uprisings across the region. But Turkey has a direct stake in avoiding an outcome in which Iran upstages it as the region’s only nuclear power besides Israel; and Iran has a stake in working with Turkey at least some of the time in the complex triangular politics emerging among Turkey, Iran, and Saudi Arabia. Dilma Rousseff, Brazil’s new president, has a stake in doing something that Lula was unable to accomplish; Brazil also has a strong incentive as a nation that flirted with developing nuclear weapons but then renounced its programme. Let them initiate a new round of negotiations under UN auspices – with full backing from the US, France, Russia and other powers concerned. At the least, it deprives the Iranian government of its familiar US whipping boy. At most, we might succeed in halting play on the 10-yard line and then changing the game. 

President Obama is riding high in national security matters these days, largely as a result of following his own instincts. He can afford a return to his initial policy of pragmatic engagement, particularly on an issue that does not pit the Iranian government against his own people. He may fail, but he has proved himself to be a leader willing to risk failure to get results. Given the price of continuing our current policy, it’s time to change course.

The writer is a professor at Princeton University and former director of policy planning at the US State department

Here we go again. Europe’s debt crisis has entered a new, more dangerous phase with the yield on Italian 10-year bonds crossing the seven per cent level on Wednesday morning. This is a eurozone-era record that, if sustained, would severely destabilise the debt situation of the world’s third largest bond issuer and one of the original six founders of the modern European project.

Those who lived through the horrid days of the various emerging market debt crises will quickly recognise the four distinct factors that have come together in the last few days to form a highly destabilising cocktail. And they may well agree on what needs to be done to stop a bad situation getting worse.

Messy domestic politics have undermined the already-complicated relations between those with the potential to solve Europe’s debt crisis – the highly-indebted countries, their official creditors and private holders of their debt.

As in Greece, Italy is now going through an uncertain political transition. While the media has understandably focused on when and how Prime Minister Silvio Berlusconi will resign, what Italy urgently needs is much more complex – namely, a new government that can credibly design, implement and shepherd multiyear efforts to lower debt and deficits, while also increasing economic growth.

Secondly, it has become fashionable not only to sell Italian bonds but also to tell the world about it, as loudly as you can.

In the last few days several banks have rushed to announce that they have been actively reducing their holdings of Italian debt – as a means of reducing market concerns about their own well-being. This phenomenon is similar to the 1980s phase of “macho provisioning” that saw banks trying to outdo each other in telling the world that they were fully protected against their past loans to Latin America. The result today is to encourage and push other Italian creditors to also sell, adding to the market pressures. In too many cases, the damage to the demand for Italian bonds is much more than transitory.

Third, a series of technical changes are disrupting the Italian bond market, adding to its instability. They range from Tuesday night’s increase in margin requirements imposed by a major clearing house, to the decrease in availability of hedging instruments in the derivative markets.

Finally, the European Central Bank has appeared more hesitant in recent days to purchase Italian bonds. Whether it is an issue of willingness or ability, the result has been to add to the mounting market instabilities.

Left to their own devices, several of these factors could get even more disruptive. Italy is now in the grips of what economists call a ‘path-dependent multiple equilibria’ – where one bad outcome raises the probability of another, even worse outcome.

There is only one institution that has an immediately-available balance sheet that could stabilise the situation in the next few days and weeks – the ECB. But before we all join the chorus urging the bank to do more, we should recognise that it, alone, cannot deliver good outcomes.

To act as a durable circuit breaker, the ECB needs others to help on four critical issues: a bold and lasting separation in how we deal with Europe’s insolvent nations and its illiquid ones; a regional programme to enhance growth and employment; immediate actions to counter the fragility of the banking system; and bold political decisions to strengthen the institutional underpinning of the eurozone, either as it is configured today or via a smaller and less imperfect one.

The European summit on October 23 came close to partially addressing some of these factors but slow progress and disruptive national political developments limited its impact. As a result, Europe’s crisis has entered a new and even more worrisome phase.

With neither the region nor the global economy in a position to afford many more slippages, let us hope that this latest development will serve as a loud, urgent and effective call for proper diagnosis and comprehensive action.

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

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