Weekly Risk Outlook

Weekly Risk Outlook
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Greeks reject EU terms in referendum. Key issues still unresolved as extended deadline with Iran approaches. EIA releases energy forecast. UK Chancellor Osborne releases budget. BRICS summit in Russia will test new global dynamics. All in the Weekly Risk Outlook.

Following Strong No Vote, Greek and EU Negotiators Scrambling

With preliminary results still pouring in, the No votes appears to have secured about 60%, providing a victory for Prime Minister Tsipras, who has campaigned with Syriza for a No vote. What follows is somewhat unclear.

French President Hollande and German Chancellor Merkel will meet to discuss next steps, and Tsipras has indicated his desire for renegotiations to begin immediately. It is questionable whether Greek banks will reopen on Tuesday as planned without a necessary infusion of capital from the European Central Bank.

Although Greek fiscal hawk and German Finance Minister Schauble appeared to offer a slight concession on Saturday before the vote that Greece would be “temporarily” outside the Eurozone, it is uncertain whether the No vote has actually strengthened the negotiating position of the Greek government.

One opposition leader, who had campaigned for a Yes vote, indicated that the No vote is likely to increase pressure on Tsipras to cut a deal with creditors quickly: “if we don’t have an agreement within 48 hours, as Tsipras has promised, then we are being led to a tragedy.”

Both sides face significant pressure: the Greek government will need an emergency infusion of cash from the European Central Bank, which halted funding in the first place because of the referendum, and it will face pressure from citizens to deliver a beneficial result to justify campaigning for a No vote.

EU negotiators will face pressure to quickly secure a deal to end speculation regarding Greece’s position in the Euro, as well as preventing any further staunching of the institutional credibility of the Eurozone.

P5+1 Extended Deadline with Iran Approaches as Many Questions Remain Unresolved

On Tuesday, negotiations between Russia, China, the United States, France, the UK, Germany, and Iran will face a deadline extended from last week for a comprehensive deal that could reduce sanctions against Iran in exchange for strong oversight of Iran’s nuclear program.

The July 7 deadline carries significant political consequences in the United States. If a deal is forged before July 9, Congress will only have 30 days to review the deal.

If a deal is forged after July 9, Congress would have 60 days to review and possibly reject an Iran sanctions/nuclear inspections deal.

The longer the oversight period in Congress, the more likely a deal will be rejected as opposition is given more time to consolidate forces and the 2016 Presidential and Congressional campaigns draw closer.

Both the United States and Iran have hardened their positions in the past two weeks, making final agreement more difficult.

On June 23, Ayatollah Khamenei listed a series of red lines for the Iranian government that if followed would make for a poisonous agreement in the United States (and probably other P5 countries): immediate sanctions relief (regardless of IAEA compliance), rejection of the IAEA as a fair and independent body, and rejection of outside inspection of Iran’s military sites or speaking with Iran’s nuclear scientists.

In a press conference with Brazilian President Dilma Rousseff last week, President Obama reiterated his willingness to walk away from negotiations if the Iranian negotiators failed to meet the requirements put forward by the P5 and Germany.

Should the P5+1 and Iran fail to reach an agreement by July 7, it will become even more difficult, if not impossible, to reach a comprehensive deal as political conditions in the United States and Iran become increasingly constricted.

EIA Releases Energy Forecast 

On Tuesday, the U.S. Energy Information Administration will release its Short-Term Energy Outlook for oil, natural gas, and energy prices. This will be followed by the U.S. oil inventory report the next day.

The EIA’s reports will likely be used in a number of energy debates in the United States, each with significant international implications: the oil export ban that Senate Energy Chair Lisa Murkowski (R-AK) has sought to lift with either legislative or Executive action, the oversight of the recently released Renewable Fuel Standard (RFS) update (which has drawn significant skepticism from the fossil fuel industry and farming states that support expanded corn production for ethanol blends), and the EPA’s soon-to-be-released Clean Power Plan.

Despite the likely ripple effects EIA reports will have on these debates, criticism has grown regarding the limited success of the EIA in accurately forecasting energy production of both non-renewable sources (like coal) as well as renewable sources (particularly wind and solar).

While the criticism has not hit a critical mass yet to diminish the rhetorical impact of the EIA energy forecasts, this will likely change with time. This is especially true if current methodologies do not change and create an alignment of disparate political forces to compel more accurate forecasts.

This may or may not include phenomena such as coal manufacturing conservative states and renewables-producing states on the coasts, both of which have had the viability and credibility of their energy sources questioned with low-ball estimates from the EIA.

Osborne Releases UK Budget

On Wednesday, British Chancellor of the Exchequer George Osborne will announce the first UK budget following the Conservatives’ electoral victory in May.

Without the Liberal Democrats as a coalition partner, this budget will likely follow a very tight spending portfolio: cuts to housing (particularly for 18-21 year-olds) and reductions in welfare benefits and tax credits are all likely to be considered to the tune of £12 billion.

The Conservative government has already announced it would scrap the child poverty target and replace it with a report on educational attainment, and one recent PwC report indicated that cuts for the upcoming budget will likely be at least twice as deep as last year’s cuts.

Historically, the harshest budget cuts usually occur early in a parliamentary term, and the Conservative election manifesto forswore a rise in taxes or the VAT. The continuing use of austerity, despite strong economic growth figures in the UK will likely be attacked strongly by the opposition.

Another nagging question that may be addressed in the budget is how Osborne intends to fulfill his desire to ensure that governments run a budget surplus even in “normal” times.

BRICS Summit in Russia Will Test a Changing Dynamic

On Thursday and Friday, Russia will host the 7th BRICS Summit in Ufa, Russia.

Following the announcement that the European Union intended to extend Russian sanctions in light of the situation in Ukraine, the Russian government is seeking to reach friends beyond the European Union and United States.

Aside from projecting stronger relations with China, South Africa, Brazil, and India, the event will also likely mark the formal launch of the BRICS New Development Bank (NDB) with an expected capitalization of $50 billion that will expand to $100 billion.

K. V. Kamath of India was recently appointed as first head of the NDB, and in May Russia extended an invitation to Greece to join as a 6th member, an offer Greek Energy Minister Panagiotis Lafazanis noted his government was seriously considering.

Presenting a united counter-balance to the United States and EU will likely be difficult for the Russian government, though.

Brazilian President Rousseff’s visit last week to the United States was largely seen as the beginnings of a rapprochement between Brazil and the United States following the NSA scandal, and Indian Prime Minister Modi has also worked to make inroads with the U.S.-India relationship.

The GRI Weekly Risk Outlook (WRO) provides analytical foresight on the economic consequences of upcoming political developments. Covering a number of future occurrences across the globe, the WRO presents a series of potential upside/downside risks, shedding light on how political decisions affect economic outcomes. 

The Weekly Risk Outlook is written by GRI analyst Brian Daigle.

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