Yemen slides into civil war

March 26, 2015

A Houthi fighter walks on a vehicle damaged by an air strike at a residential area near Sanaa Airport

Dramatic escalation in Yemen overnight with Saudi Arabia and its Gulf allies launching military operations including air strikes in Yemen to counter Iran-allied forces besieging the southern city of Aden where the U.S.-backed president is holed up.

Media reports said the Saudis would contribute as many as 150,000 troops and 100 warplanes and Egypt, Jordan, Sudan and Pakistan were ready to take part in a ground offensive.

Yemen’s slide towards civil war lays bare Saudi Arabia’s rivalry with Iran, which Riyadh accuses of fomenting unrest throughout the region. A proxy war looks to be in prospect.

Brent crude oil shot up nearly 6 percent after the operation was launched. Most oil tankers from Arab producers such as Saudi Arabia, the United Arab Emirates, Kuwait and Iraq have to pass Yemen’s coastlines via the narrow Gulf of Aden.

U.S.-led coalition warplanes launched their first air strikes against Islamic State targets in Tikrit, backing up Iraqi forces which have failed to wrest back the city alone. In the complex world of Middle East geopolitics, that lines the Americans up alongside Iran-backed Shi’ite militia who are supporting Iraqi troops on the ground.

This week’s economic data have hardened the trend of the euro zone outperforming expectations this year.

The currency bloc’s PMI survey for March jumped to a near four-year high this week, well above what was forecast, Germany’s Ifo index put business morale at an eight month high and confidence is even improving in France.

Tail winds of cheap energy, a weak currency and ECB money printing should ensure that continues for a while. In Germany, inflation-busting pay rises are helping to boost domestic demand.

There is a big question as to how durable this recovery will be once the plunge in oil falls out of the equation and the QE effect fades but if bank lending picked up that would point to at least a sturdy cyclical recovery.

Euro zone money supply figures for February will show today whether net bank lending to companies and households has finally turned positive after years of decline. On a narrower measure it has already done so.

There seems little doubt that German domestic demand has perked up. A GfK survey, just out, showed morale among German consumers was at its brightest in 13-1/2 years heading into April, helped by expectations that incomes will rise.

Better-than-expected French public finances have allowed the government to shift its budget deficit forecast for 2015 to 3.8 percent of GDP, down from a previous target of 4.1 percent.

Greece failed in a bid on Wednesday to secure a quick cash payment from the euro zone rescue fund to help stave off potential bankruptcy next month, raising pressure on Athens to deliver a convincing reform programme within days.

The government has committed to producing one by Monday and the economy minister is just out saying the government would reach a deal with the euro zone on planned reforms next week.

The Greek central bank releases bank deposit data for February which are somewhat historical but worth perusing nonetheless. Greek banks have suffered a steady outflow of deposits since December. That eased after a Feb. 20 deal to extend the country’s bailout by four months but has started spiking again, leaving the banks increasingly dependent on emergency liquidity assistance from the central bank.

The world’s central banks have been buffeted by currency volatility but South Africa has taken the view that the foreign exchange market is like the weather – something that has to be endured rather than influenced. It is likely to leave rates on hold at 5.75 percent today.

The Swiss National Bank, which has pledged to keep intervening to lower what it sees as a significantly overvalued franc, publishes its annual report to shareholders. SNB board member Fritz Zurbruegg will make a speech later in the day on monetary policy after the demise of the franc cap.

With UK elections only six weeks away, a bid to set up a series of televised debates between party leaders – including a head-to-head between the only two men who could be prime minister – has foundered.

A session with seven party leaders will take place and tonight we get the only event featuring only Prime Minister David Cameron and opposition leader Ed Miliband. However, at the ruling Conservatives’ insistence, they will not debate each other but face questioning from a TV anchor and studio audience in turn.

Expect Miliband to accuse Cameron of running scared. The Conservatives’ calculation is that with Cameron’s personal ratings much higher than Miliband’s, that is a price worth paying to rob him of an opportunity to turn the tables.

U.S. Secretary of State John Kerry, Iranian Foreign Minister Mohammad Javad Zarif, and other western foreign ministers will meet in Lausanne, Switzerland with an end-March deadline for a political framework agreement in nuclear talks between Tehran and the six powers looming very large. Success is far from certain given the deep differences between the two sides.

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