SCENARIOS-Global impact if Israel strikes Iran

By Peter Apps, Political Risk Correspondent

LONDON, March 29 (BestGrowthStock) – If Israel were to strike Iran
over its nuclear activities, markets would be watching one thing
only – Iran’s response.

The scale of that response could be the difference between a
brief spike in oil prices and pushing the world back to economic
crisis.

Below are possible scenarios together with projected
potential market reactions suggested by analysts, economists and
foreign policy strategists.

NO IMMEDIATE REACTION

Tehran announces that Israel’s military attacked civilian
locations but inflicted little damage. It hurls furious rhetoric
at Israel but stops short of any military response.

“It may make sense for the Iranians to play the victim,”
said IHS Global Insight Middle East analyst Gala Riani. “They
may also use it to build the regime’s legitimacy internally.”

— news of the strike would see oil prices spike $10-$20 and
wider investor flight to safer assets such as U.S. treasuries,
while equities and risky currencies would suffer. But without
further action, sentiment would recover.

— relatively used to conflict, Israeli markets might prove
more resilient to the initial news. Some analysts suggest that a
successful strike that significantly put back an Iranian nuclear
programme could be positive for Israeli markets.

Key unknowns:

— assessing the effectiveness of an attack on Iranian
facilities could prove almost impossible. The longer-term impact
of the strikes on Iran’s internal politics, regional politics
and Western support for Israel would be hard to predict.

— can Israel achieve its aims with a single strike, or
would it require a more sustained operation potentially lasting
several days and hitting markets much harder?

PROXY RETALIATION

Iran steers clear of any overt response, but backs
intensifying attacks by Hamas from the Palestinian territories
and by Hezbollah from Lebanon. It might also back proxy attacks
on Western forces in Iraq and Afghanistan.

“The most likely response would be to increase their
subversive activity across the Middle East,” said IHS’s Riani.
“It would most likely be focused in Palestine, Lebanon and to a
lesser extent around the Gulf.”

— might have some short-term impact on oil prices —
particularly if the attacks included Iraq — but generally
global markets would be little affected.

— Israeli markets would likely take initial attacks in
their stride, but a prolonged campaign would drag on the
economy, driving up defence spending and undermining markets as
they did during the Palestinian Intifada.

Key unknowns:

— the duration of increased violence. Proxy violence could
escalate to include militant attacks on Western and oil targets.

— If Hezbollah strikes Israel, Israel will retaliate in a
way that quickly expands the conflict. Israel has threatened to
hold the governments of Lebanon and Syria responsible for any
Hezbollah attacks.

MISSILES STRIKE ISRAEL

Iran retaliates by launching ballistic missiles with
conventional warheads. While more accurate than the Scuds
launched by Iraqi leader Saddam Hussein at Israel during the
1991 Gulf War, damage from each strike would be limited.

“It’s certainly not something you can rule out,” said Metsa
Rahimi, intelligence analyst for risk consultancy Janusian. “The
Iranians are going to want to retaliate. But they know if they
do this, they are going to get hit back again.”

— oil prices would certainly spike higher, although attacks
on Israeli cities would not directly have any impact on oil
production. Wider global markets would sell off and watch
nervously for any further escalation.

— Israeli markets might again prove more resilient. They
actually rallied in January 1991 during the missile attacks as
it became clear the strikes were not chemical and not causing
significant damage. Much would depend on the level of damage and
for how long any missile barrage continued.

Key unknowns:

— Israeli and Western reaction. Would there be further
retaliation? Would weapons used remain conventional?
[ID:nLDE6023HI].

— Would Israel strike military targets and civilian
infrastructure in Iran, possibly including oil facilities? That
would push-up prices and force primary customer China to look
for supplies elsewhere.

CLOSING HORMUZ

Iran makes good its threat to close the Straits of Hormuz to
traffic, blocking the flow of some 17 million barrels a day of
oil, roughly 40 percent of all seaborne oil trade — but likely
inviting swift retaliation from United States forces.

“Iran doesn’t even need to be successful in their threat,”
said Michael Wittner, global head of energy research at Societe
Generale. “Even a credible threat or near miss and insurance
rates will spike. Then no one’s going to send any oil through
there for a couple of weeks until somebody’s navy can
re-establish control.”

— analysts estimate this could push oil prices up towards
$150 a barrel. Alternative oil producers such as Russia, Nigeria
and Angola might benefit, but rising fuel costs would likely
undercut growth everywhere. China, Iran’s main export
destination, would have to seek supplies elsewhere.

— Other financial markets would suffer and fall sharply if
they believed disruption would be long term.

— Israeli markets are likely to be affected by the wider
frenzy, although probably less than volatile emerging markets.

Key unknowns:

— how long could Iran maintain its blockade? Military
analysts believe its handful of mine-laying ships, helicopters
and submarines might quickly be neutralised by the US military.

see also:-Iran unlikely to risk blocking Hormuz
[ID:nLDE60612O]

SPARKING WIDER CONFLICT

Ultimately, the consequences of an Israeli strike on Iran
are hard to predict. At worst, it could fuel an upsurge in wider
regional violence.

“I worry a great deal about the unintended consequences of a
strike,” Chairman of the US Joint Chiefs of Staff Admiral Mike
Mullen said on a recent visit to Israel.

— a more violent Middle East would put an inherently higher
risk premium on oil, pushing up prices and possibly undermining
global recovery from the financial crisis. It might also drive
consuming nations towards non-Middle Eastern suppliers and
alternative technologies.

— investors would also view Israel as much higher risk,
while much higher defence spending would weigh on the economy.

Key unknowns:

— duration and severity of any conflict. Would the world’s
wider powers – China, Russia, the United States and European
Union in particular – move towards a consensus on the Middle
East or would the conflict exacerbate their differences further?

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(Editing by Samia Nakhoul/Janet McBride)

SCENARIOS-Global impact if Israel strikes Iran