The Squeeze is on

The Spiegel Online is reporting how the USA is pressurising the German firms to stop trading with Iran. While the German government is resisting, the German banks are quietly agreeing. Personally speaking, I dont think that boycotts work in the long term and i have said this before. But in the short term and for economies which are badly managed or are lopsided, sanctions can bite. Of course, the leaders, rich and powerful would never get impacted. Its the commoner who gets hit.

But going after the banks is a very very effective weapon for gumming up the nation's financial system, even if it is another country. And it could potentially only be done by very large economies such as USA and the EU. So effectively, the USA can say to a bank, fine, you go ahead and trade with Iran but if you do, then we wont let you trade in the USA. Now any bank with ANY kind of international activity will have to deal with US dollar transactions (since that's the main trade, reserve and pricing currency of the world). And that means that it has to deal with US financial institutions. And the SEC can lock you out. Result? no trade, no transactions, no import/export, no guarantees, no loans, no hedging, no insurance, no nothing. To further put on the pressure, the SEC can do this.

Given the economic illiteracy of the Iranian President, the vast amount of corruption, the lopsided structure of the Iranian Economy, the huge amounts of subsidy, bad banking system with large amounts of non-performing loans, the very heavy hand of the public sector/republican guards and other opaque state firms, financial pressures such as this can slowly and steadily ratchet up far more pressure than any UN Security Council resolution. The question is, which will come first? the fall of President Ahmadinejad, the stopping of the Iranian Nuclear Weapon Programme, the launch of a military strike by USA and/or Israel?

Your guess is as good as mine.

Update: The Jerusalem Post has a rather tilted op-ed on this issue, so read with a grain of salt.