by Bill O’Grady

On Sunday, July 5^th, Greeks voted in a special referendum to decide whether to accept the troika’s most recent proposal to end the current debt and financial crisis.  Voters in Greece overwhelmingly rejected the EU’s offer.  Since the vote, EU and Greek officials have been meeting, trying to determine the path forward.  As of this morning, Greek PM Tsipras agreed to rather harsh measures to begin the bailout process.  However, nothing has been finalized yet.

In this report, we will update our views on the Greek situation, using game theory as a theoretical construct.  We used a similar construct in an earlier report on Greece but, in light of the referendum and subsequent negotiations, we believe that further clarification is necessary.  And so, in this report, we will review the “game of chicken,” which we believe best describes this situation.  After this description, we will discuss in detail the particular aspects of this game and why it leads to rash and aggressive behaviors in participants.  In the aftermath of the referendum, we will review the choices available to the troika and offer our expectations on the outcome, with the caveat that games of chicken do not necessarily lead to easily predictable outcomes.  As always, we will conclude with market ramifications.

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by Bill O’Grady

As is our custom, at mid-year, we update our geopolitical outlook for the rest of the year.  This report is less a series of predictions as it is a list of potential geopolitical issues that we believe will dominate the international situation into year’s end.  It is not designed to be exhaustive; instead, it focuses on the “big picture” conditions that we believe will affect policy and markets going forward.  They are listed in order of importance.

Issue #1: The South China Sea

Issue #2: Russia Returns

Issue #3: The End of Sykes-Picot

Issue #4: The Unwinding of the European Union

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by Kaisa Stucke, CFA

In April 2007, Estonian government workers found their internet connectivity interrupted and e-mail access compromised.  In hindsight, this marked the beginning of a three-week cyber attack on the country’s government and private servers.  The attacks forced many servers to block international connections.  At the same time, street riots by ethnic Russians were erupting in the country in response to the Estonian government’s decision to move a war memorial for fallen Soviet soldiers from the center of the capital to a military cemetery.  It is still unclear who was actually responsible for the cyber attacks, but these events are considered to be the first cyber attacks aimed at a sovereign nation, and were significant in setting a precedent for future cyber incidents.

In August 2008, the country of Georgia experienced multi-faceted cyber attacks targeted at government websites.  The country’s servers were overloaded with connection requests coming from abroad, forcing many servers to go offline.  Additionally, many government websites were defaced with images of various fascist leaders.  Concurrently, Georgia and Russia were involved in a military conflict in South Ossetia, in the northern regions of Georgia.  It is also still unclear who was responsible for these attacks, but this is considered to be the second large-scale organized attack against a sovereign nation.

This week we will look at these two case studies of cyber attacks aimed at sovereign nations.  We will then look at the current state of international cyber attack research, readiness and cooperation.  We have had the pleasure of talking to the NATO Cooperative Cyber Defence Center of Excellence about their work and will communicate their vision and challenges.

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by Kaisa Stucke, CFA

Shortly after being elected into office last year, the new Indian Prime Minister, Narendra Modi, visited a memorial for Veer Savarkar, an Indian independence fighter, praising his lifetime of “tireless efforts toward the regeneration of our motherland.”  On its surface the move seems to be nothing out of the ordinary; however, the historical context of Savarkar as the father of the Hindu nationalist radicalism movement makes it somewhat controversial and a worry for the country’s religious minorities.  Savarkar was a contemporary of Mahatma Gandhi, although the two men took radically different views on fighting for Indian independence.  As is well known, Gandhi supported the peaceful non-compliance movement, and his ideology welcomed all the religions of India.  History is written by the victors thus Savarkar and his take on the struggle for independence have not received widespread attention.  Savarkar argued for a more aggressive fight against the British and had strong views that India should be 100% Hindu.  The Hindu radicalism movement is more significant than is generally recognized and is currently enjoying a revival.

Prime Minister Modi has been in power for a year now.  Although he represents the Bharatiya Janata Party (BJP), which is considered to be the Hindu nationalist party, he was elected on the promise of economic reform, including infrastructure spending and labor laws.  It is too early to judge his economic effectiveness on a national scale, but he has a successful track record as the former head of the Gujarat region.  He is well-liked by voters, but he makes minorities very nervous as evidenced by the large-scale, religion-based riots that took place under his leadership in the Gujarat region.  He was cleared of any wrongdoing in connection with the riots, and even received the support of some minority leaders during his campaign for his economic liberalization aptitude.  It does not help that some members of his party incite minority discrimination.  So far, Modi has been conspicuously silent in response to the inflammatory rhetoric from his party, which leaves observers wondering if he, in fact, agrees with it or is too weak of a leader to confront it.

There is no denying that Indian politics have been chiefly molded based on Gandhi’s peaceful non-compliance movement, which emphasizes equal acceptance of all religions within India.  It was a goal of the founders of the modern state of India to form a multi-religious constitution.  However, we could see a return to more Hindu-centric policies under the current trends.  This week, we will look at the resurgence of the Hindu nationalist movement.  We will start by briefly describing the political history of independent India, looking at Gandhi and Savarkar’s conflicting ideals.  Next, we will look at contemporary politics and explore the Hindu movement and its likely forms under Modi’s rule.  As always, we will conclude with market ramifications, both within India and for international markets, in general.

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by Bill O’Grady

On May 27^th, Swiss authorities arrested several top officials affiliated with Fédération Internationale de Football Association (FIFA) on various charges, mostly related to corruption.  Later that day, the U.S. Attorney General and the U.S. Department of Justice (DOJ) unveiled indictments against FIFA officials, indicating that the Federal Bureau of Investigation (FBI) had been conducting investigations of corruption for some time and had evidence of illicit schemes going back 24 years.

The ongoing investigation into this scandal continues to unfold as we write this report.  Therefore, we will not spend too much time on arrests or new charges.  Instead, we will offer a short overview of the arrests and the election and resignation of FIFA President Sepp Blatter.  We will discuss the structure of FIFA and how this organization is prone to corruption.  We will follow this discussion with the most important part of the report, the extension of U.S. law enforcement into the international realm as a function of the superpower role.  As always, we will conclude with potential market ramifications.

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by Bill O’Grady

In February, we reported on the situation in Greece.  Over the past few months, there has been no resolution to Greece’s debt problem, despite numerous deadlines and meetings.  In our earlier report, we framed the conflict between Greece and the EU in terms of game theory.

In this report, we will begin by recapping our earlier analysis.  Using this framework, we will discuss how a third option has evolved which will likely force PM Tsipras to acquiesce to the EU.  As always, we will conclude with potential market ramifications.

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by Bill O’Grady

The May 7^th elections in the U.K. shocked pollsters, who had predicted a hung parliament.  Instead, the Conservatives (Tories) won an outright majority of seats in the legislature, allowing the party, led by David Cameron, to form a government without a coalition.

In this report, we will begin by recapping the election results and discuss the campaigns and what they may indicate for future U.K. policy.  An examination of the impact of the election will follow, beginning with an analysis of the geopolitics of Britain and ending with how the election affects the country’s geopolitical situation.  As always, we will conclude with potential market ramifications.

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