http://news.independent.co.uk/business/comment/story.jsp?story=605890

Expert View: Be very afraid if Bush takes the war on terror to Iran
Iran is a much bigger oil producer than Iraq. The surge in prices might be
greater this time
Mark Cliffe
30 January 2005


The risk of a US attack on Iran can no longer be dismissed. George Bush has
identified the country as the next potential target in his campaign against
terrorism and tyranny. A military attack is still unlikely, but the
consequences are too serious to ignore. The market impact could surpass that
of the Iraq war in 2003.

The US is impatient for progress. Aside from concerns about Iran's nuclear
programme, its sponsorship of terrorism and the insurgency in Iraq - on top
of its threat to Israel - suggest that the US may seek a regime change
within the next two years. On the other hand, elections in the UK, the US's
leading ally, and in Iran itself, argue for action being delayed beyond May.

Since the US has put the nuclear weapons issue at the heart of its dispute
with Iran, the presumption is that any military action would initially
involve a targeted attack on its nuclear facilities. But whether this would
meet the US goal of preventing Iran from acquiring nuclear weapons, still
less its ultimate aim of regime change, is doubtful. Thus even if the
threatened retaliation by Iran proved to be muted, this would still leave
the option of a full-scale invasion "on the table".

Indeed, US military planners may have to allow for the possibility that an
attack on Iran's nuclear facilities would be the prelude to an all-out
invasion. If so, as in the case of Iraq, a winter assault early in 2006
would be the first practicable opportunity from a military point of view.

If the financial markets' responses in the build-up to the Iraq war were
replicated, this would imply: a $12 per barrel increase in the oil price,
taking West Texas crude up to more than $60 per barrel; a 14 per cent drop
in the Dow Jones, taking other stock markets with it; a plunge in bond
yields, taking US 10-year yields down by around 0.75 per cent; and a 10 per
cent drop in the US dollar.

But the surge in oil prices and flight from risk might be greater than
during the Iraq conflict. Iran is a much bigger oil producer than Iraq, the
US is starting from a stretched military and budgetary position, and an
invasion would increase the risk of a more serious breach in relations not
just with countries in the Middle East but with other erstwhile allies.

The damage to international relations might have a more direct impact on the
markets by reducing the willingness of investors to hold US assets. This
would compound the downward pressure on the dollar, while offsetting the
"safe haven" buying of US Treasury bonds. That said, for most central banks,
the priority would probably be to avert a calamitous surge in their
currencies. In particular, in its efforts to curb the euro's strength, the
European Central Bank might find itself mopping up dollars offloaded by
others.

Even if the military victory were swift, the experience of Iraq would make
the markets sceptical of the US ability to "win the peace". The terrorist
insurgency could be on an even larger scale than in Iraq, and the damage to
international relations might prompt a protracted loss of confidence in the
financial markets.

Thus the victory rally, the upward leg of the V-shaped pattern the markets
traced out for the Iraq war, might be rather more tentative in the case of
Iran. The damage this would cause to global confidence, among businesses and
consumers, would trigger a severe economic slowdown.

Such thoughts might be seen as a serious deterrent to any US plans to launch
an attack on Iran in the first place. But it must be remembered that the
Bush administration is not viewing its agenda through an economic prism. As
one official, asked about the mounting costs of the war in Iraq, put it:
they pale "compared with the costs that the terrorists would like to inflict
on us".

Mark Cliffe is chief economist at ING Financial Markets.




Tom Baxter
USAV 1967-69
tombaxter.livejournal.com
Tallahassee, Florida
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