The Week in Breakingviews: What’s next for Iran?

LONDON, March 8 (Reuters Breakingviews) - Welcome back! A week ago I woke up to find out that the United States and Israel were attacking Iran. It’s the second time this year that President Donald Trump has targeted another country’s leader – on a Saturday. If this newsletter was forwarded to you, sign up here to get it in your inbox every weekend.

OPENING LINE

“In Siena’s brutal Palio horse race, a steed can ​still win after losing its rider. Banca Monte dei Paschi di Siena (BMPS.MI), opens new tab, headquartered in the same picturesque Tuscan town, is applying that tradition to hostile bank M&A.”

The Reuters Iran Briefing newsletter keeps you informed with the latest developments and analysis of the Iran war. Sign up here.

Read more here: Italy’s MPS adds governance risk to dicey ‌M&A.

FIVE THINGS I LEARNED FROM BREAKINGVIEWS THIS WEEK

1. Overseas investors doubled their holdings of South Korean stocks in the year to January. (More on the Kospi crash)

2. Lending to non-banks is 14% of U.S. bank loans, up from 5% a decade ago. (Another credit cockroach)

3. Short bets on the dollar using derivatives hit a five-year high in February. (Now they’re reversing)

4. Enterprise customers bring in 80% of Anthropic’s revenue. (That’s a vulnerability)

5. Fintech Revolut’s revenue is growing at 50% a year. (Valuation still a stretch)

GULF IN EXPECTATIONS

“No operational plan can extend with any degree of certainty beyond the initial encounter with the main enemy force.” Field Marshal Helmuth von Moltke’s advice, opens new tab to military ​strategists is also a warning for anyone drawing lasting conclusions from the first days of a war. A week after the United States and Israel attacked Iran and killed its Supreme Leader, Ayatollah Ali Khamenei, it would be ​foolish to predict the outcome of the conflict, let alone its long-term repercussions. Instead, here are the five most pressing questions:

1. HOW LONG DOES IT LAST?

This key question is the hardest ⁠to answer. Many strategists expect it to be short, in part because the U.S. bombing campaign means Iran will eventually run out of missiles and launching sites it needs to retaliate. With tepid public support at home and the price of petrol rising, ​U.S. President Donald Trump may also want to avoid a drawn-out battle. But on Friday he demanded “unconditional surrender”. Financial markets are beginning to price in a longer conflict: the price of a barrel of oil ended the week above $90. Yet while the spot ​price of gas in Europe has jumped, contracts for delivery in a few years have barely budged.

2. WHAT HAPPENS IN IRAN?

Trump could declare “mission accomplished” and attempt to move on, as his predecessor George W. Bush did six weeks after the invasion of Iraq in 2003. But that historical precedent reminds us that an end to fighting depends on what happens on the ground. As George Hay argues, there are three broad scenarios for Iran: the current government clings on to power under a new leader; the country splits along factional or ethnic lines; or the population rises up ​and takes power. Only the third scenario is consistent with more enduring calm. Don’t forget that it’s less than nine months since Trump claimed to have destroyed Iran’s nuclear program.

3. HOW SCRAMBLED ARE ENERGY MARKETS?

Blocking the Strait of Hormuz was long seen ​as a move Iran would only make in desperation. About a fifth of the world’s oil and gas passes through the narrow waterway. Yet the outbreak of hostilities has produced two extraordinary outcomes. First, tanker traffic has stopped largely on the strength of Iranian threats: anxious shipping ‌companies and jittery ⁠insurers did the rest. Second, the blockage has not yet led to the $200-a-barrel oil price traders once predicted. Markets may expect a swift reopening, but as Yawen Chen points out, this is not entirely in Trump’s gift.

4. HOW SEVERE IS THE DAMAGE TO GULF STATES?

The United Arab Emirates, Qatar, and their neighbours have presented themselves as hyper-modern and impartial finance and technology hubs. They have attracted banks, tax exiles and tourists, while making splashy investments around the world. Iranian missiles and drones flying over gleaming towers shattered that glitzy image. Even though most of the projectiles have been shot down, George Hay and Afiq Fitri Alias make the case that the blow to the Gulf’s regional reputation is likely to last – and may benefit Saudi Arabia. Meanwhile, extra spending on domestic defence ​means less cash for overseas investments.

5. WHAT DOES DONALD TRUMP ​DO NEXT?

The president revels in his unpredictability. After abducting Venezuelan ⁠President Nicolas Maduro and killing Khamenei he may feel emboldened to settle other scores. On Thursday, he hinted at intervention in Cuba as “just a question of time”. Yet overseas military adventures clash with his domestic agenda. Meanwhile, increased military spending, higher interest rates and missing tariff revenue are increasing the risks of a sovereign debt spiral, Gabriel Rubin warns. Success in Iran could backfire ​at home.

CHART OF THE WEEK

Every financial meltdown brings obscure acronyms to the fore. The Enron scandal taught us about special purpose entities (SPEs). In 2008 collateralised debt obligations (CDOs) were on everybody’s ​lips. Today, BDCs are finding a ⁠wider audience. Business development companies are vehicles that allow asset managers to accumulate funds without a set expiration date. Now they’re under stress. Jonathan Guilford explains what’s going on.

THE WEEK IN PODCASTS

If you’re looking for something a bit more optimistic, how about a fresh perspective on Africa? It’s easy to be gloomy about its prospects. But Joe Studwell, author of “How Africa Works”, offers a glass-half-full perspective about the vast continent. He joined me on The Big View, opens new tab to discuss his research and conclusions.

Over on the Viewsroom, opens new tab, George Hay and Yawen Chen joined Aimee Donnellan ⁠and Jonathan Guilford ​to provide a download on the fast-moving Iran conflict, and the fallout for energy markets.

PARTING SHOT

For years, Goldman Sachs (GS.N), opens new tab hid its inner workings behind a ​thick veil of discretion. But the firm has changed, and this week Lloyd Blankfein published “Streetwise: Getting to and Through Goldman Sachs”, an amusing and at times brutally frank account of his career at the bank he led between 2006 and 2018. It makes for a highly readable book – and also reminds us ​that Goldman is now a bit less special.

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Editing by George Hay; Production by Oliver Taslic

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Peter Thal Larsen

Thomson Reuters

Peter is Global Editor of Reuters Breakingviews, based in London. He was previously EMEA editor, and before that spent four years in Hong Kong as Asia Editor, where he oversaw the launch of Breakingviews’ Asian edition. Prior to joining Reuters in 2009, Peter spent 10 years at the Financial Times, including five years as the paper’s banking editor, leading its award-winning coverage of the credit crunch. Between 2000 and 2004 Peter reported for the FT from New York, where he covered a range of stories including the 9/11 attacks and their aftermath. A Dutch national, Peter has degrees from Bristol University and the London School of Economics.

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