The Libya crisis has triggered wide-spread global risk aversion. Oil prices struck $108 on Tuesday, a level last seen in September 2008. Asian equity markets have been dragged lower and commodity-linked currencies sold off.
In the CDS market, Morocco has been the whipping boy, according to Markit, widening by 21bp to 205bp on Tuesday, as of pixel time. Egypt has widened 9bp to 365bp, Bahrain 18bp to 325bp, Saudi Arabia 3bp to 148bp and Lebanon 9bp to 380bp.
What's more, Italian oil firm Eni, which generates 14 per cent of its total production in Libya, has seen its spreads widen 5bp to 96bp on Tuesday morning.
Seperatists in the oil-rich Benghazi have reportedly taken control of the eastern Libyan city. Meanwhile, Libyan forces loyal to Muammar al-Gaddafi are waging a bloody mission to keep him in power.
African economist David Cowan mulled the willingness of the army to deploy force on protesters:
...it does seem that in Benghazi, the military was prepared initially to take strong action against protestors, before backing down and effectively handing control of the city to them. In Tripoli it does not yet seem to have reached this tipping point, with the BBC reporting that government forces have remained in control of Green Square by violently crushing protests. Human Rights Watch is reporting that over 200 people have died in Libya during the recent days of protests.
But events in Libya reinforce some key political issues that other more authoritarian leaders, whether in the rest of Africa, the Middle East and Eastern Europe, may have to take on board. First, while the army can be used to suppress protests, events show that there are limits on what it can actually achieve if the protests are determined enough and willing to take considerable casualties. In some ways, the most pointed interviews with protestors across North Africa in recent weeks have been with those effectively arguing along the lines of what have I got to lose. In countries with high levels of un- and under-employment, these are potentially powerful forces to deal with when fully unleashed.
Second, by resorting to such extreme actions, a leader in effect is placing the unity of his entire regime under a huge amount of stress that can easily cause its unity to crack at any point. In Egypt and Tunisia, the military effectively pushed their respective presidents from office before this political breaking point was reached. In Libya, there are already signs that various tribal leaders are withdrawing their support from Mr Gaddafi. Once these defections spread to the military, then it becomes increasingly difficult for an incumbent president, however longstanding, to remain in office.
He concludes that Libya, not Egypt, could prove the 'Berlin Wall' of MENA:
Across North Africa, it is difficult to know how events will play out, but in the Libyan context there does seem to be a real concern, more so than in Egypt and Tunisia, that the country could slip into a period of protracted chaos, or even civil war. In a region already undergoing a major seismic shift in political terms, this is potentially hugely destabilising. In many ways, events in Tripoli in the coming days could prove to be a political tipping point with much wider political ramifications, unlike those in both Egypt and Tunisia.
On the outlook for oil prices, Commerzbank suggests oil production could be ramped up to offset supply shortages, writing on Tuesday:
OPEC will meet informally today on the sidelines of an energy conference in Riyadh. As there have been no supply disruptions so far, OPEC sees no need to respond by expanding production. The International Energy Agency has again warned about the effect of high oil prices on the economy and thus oil demand. Consequently, the meeting may send out a signal that taps will be opened if needed to counter any supply shortages. As long as the conflict is restricted to Libya, OPEC could easily cope with Libya's total absence from the market given the spare production capacities of 5-6 million barrels a day and Libya's current daily output of 1.6 million barrels. It will only get critical if the unrest spills over to other major oil producers such as Algeria or countries in the Gulf region. Uncertainty on this is likely to trigger a further rise in oil prices.
John Cairns and Nema Ramkhelawan of Rand Merchant Bank were sanguine about the oil supply disruption risks but warned that strong global commodity demand would place upward pressure on prices:
The risk to oil production is somewhat lessened by the fact that much of the country's oil industry is located offshore and can therefore be secured quite quickly. Libya is also a relatively small player within OPEC, ranking ninth among 12 members in the cartel. Larger members could therefore increase their output to compensate for a shortfall in production, should the country's oilfields come under threat. While the sudden increase in oil is partly a reflection of recent geopolitical tensions across the Arab world, the main thrust still lies with stronger global demand.
Philip Poole, global head of macro & investment strategy at HSBC Global Asset Management, said the MENA crisis would have an immediate global impact, owing to inflationary pressure caused by the up-tick in oil prices. He wrote on Tuesday:
Food and commodity price inflation in emerging markets has been a catalyst for popular unrest in Tunisia and Egypt and now Libya, Bahrain and Yemen are in the spotlight. There has been an immediate impact on the financial assets in the MENA region with CDS spreads blowing out and equity markets weakening on the back of foreign investor selling.
The broader impact is via heightened uncertainty in a strategically key region (something which is almost always bad for risk appetite) and via the resulting rise in the oil price which feeds back into inflation concerns and runs the risk of damaging global growth prospects.