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>
> He has read the market reaction if his read on the political risk is
> correct. He is a great market participant but he is clearly groping
> when he gets into the medium and long term political risk impacts on
> global economy.
>
> Prepare for a shock from the Middle East
> By Mohamed El-Erian
> Published: February 22 2011 12:54 | Last updated: February 22 2011
> 12:54
> Global markets paid scant attention to the Egyptian and Tunisian
> revolutions. Both were seen as lacking systemic economic and
> financial significance.
>
> This is now changing as youth-inspired uprisings spread to other
> countries in North Africa and the Middle East. While related
> political and social issues rightly dominate the headlines, this
> past weekend could also prove a tipping point when it comes to the
> implications for the global economy; and there is little that
> western countries can do to offset short-term stagflationary winds.
>
> It is understandable that Egypt and Tunisia had essentially not
> registered on the markets’ traditional scale of systemic influence.
> The two countries are not significant global economic powers; they
> do not owe much money to western banks and governments; and they are
> not large exporters of commodities.
>
> Yet Egypt and Tunisia are catalysts for a broader phenomenon of
> change that is gaining systemic importance. Over the weekend,
> protests occurred in a growing number of countries in the region,
> from Algeria and Morocco in the west to Bahrain and Yemen in the
> east. Two developments are particularly important when it comes to
> global demand and price dynamics.
>
> With an oil exporter such as Libya now in the grips of a popular
> uprising, markets will push oil prices higher to reflect much
> greater supply uncertainties for this key global commodity. And with
> sectarian issues now on display in Bahrain, geopolitical risks are
> higher for the region – especially as other countries seek to
> influence events in the Kingdom.
>
> Unfortunately, this weekend also saw a deplorable change in
> dynamics; and one that makes this transformational period even more
> unpredictable and dangerous.
>
> Relatively peaceful movements in Egypt and Tunisia regrettably gave
> way to violence elsewhere as governments applied force to clamp down
> on street protests. Casualties multiplied alarmingly. Yet the
> strength and determination of the popular movement became even more
> apparent for all to see.
>
> In the short run, regional developments will be stagflationary for
> the global economy due to three main factors: First, higher oil
> prices will increase production costs and act as a tax on consumers.
> Second, greater precautionary stockpiling around the world will
> intensify pressures on commodities as a whole, aggravating the
> impact of demand-supply imbalances and large injections of
> liquidity. Third, the region will be a smaller market for other
> countries’ exports.
>
> This economic reality is far from encouraging for western countries
> that have few options in reacting to what is an increasingly fluid
> situation.
>
> On the regional stage, they are essentially bystanders to
> developments in countries where protests are in their early phases.
> At best, they can only marginally offset tendencies towards violence.
>
> Fortunately, they can do more in post-revolutionary Egypt and
> Tunisia, where both Europe and the US are eager and able to support
> the peaceful path to democracy, including the important visit to
> Cairo of David Cameron, the UK prime minister.
>
> Domestically, having already countered aggressively the impact of
> the global financial crisis, western economies have little room left
> for further demand stimulus. Some have already embarked on fiscal
> consolidation, while for others it is only a matter of time.
> Moreover, recent evidence of inflationary pressures is already
> influencing the narrative of some central banks.
>
> In the next few days, markets will react to the changed outlook for
> the region and the global economy. Higher commodity prices will be
> accompanied by greater risk aversion in the equity and credit
> markets. Over time, however, such market apprehension is likely to
> give way as the impact of greater long-term stability in a key part
> of the world is felt. In the long term, after all, democracy and
> individual freedoms are the best drivers of prosperity.
>
> The writer is chief executive of Pimco
>