In a stark intervention that rattled gilt markets this morning, veteran Middle East analyst Sir Jeremy Bowen has warned that the current trajectory of US and Israeli policy under President Donald Trump and Prime Minister Benjamin Netanyahu risks locking the region into a state of 'permacrisis'. The term, once reserved for financial market meltdowns, now applies to the geopolitical landscape. The UK government, through the Foreign Office, has issued a carefully worded call for restraint, but the market signal is clear: instability carries a price.
Bowen’s analysis, delivered during a BBC broadcast, drew immediate comparisons to the 'permabear' calls of the 2008 financial crisis. He argued that the combination of Trump’s transactional diplomacy and Netanyahu’s coalition-driven hardline stance has eliminated the safety buffers that once contained regional conflicts. 'We are seeing a capital flight scenario in terms of political credibility,' Bowen said. 'Every escalation depletes the trust required for eventual de-escalation.'
The British response, while measured, reflects growing unease in Whitehall. A Foreign Office spokesperson stated: 'We urge all parties to exercise maximum restraint and avoid actions that could lead to an uncontrollable cycle of violence. The long-term stability of the region is paramount.' But such diplomatic boilerplate increasingly rings hollow against the drumbeat of airstrikes and retaliation.
From a fiscal perspective, the stakes are immense. The UK’s own defence budget will be squeezed if the Gulf states, facing their own security dilemmas, reduce their purchases of British bonds. The 10-year gilt yield, already elevated due to sticky inflation, could spike further if investors demand a risk premium for holding UK sovereign debt amid a broader Middle Eastern crisis. The Bank of England will be watching nervously: a permacrisis would complicate its delicate balancing act between curbing inflation and supporting growth.
Market participants are already pricing in higher volatility. The VIX, an index of US stock market fear, has ticked up, and oil prices have drifted higher on the prospect of supply disruptions. For the UK, which imports over 40% of its gas from the region, any sustained conflict would feed directly into household energy bills, undoing some of the recent disinflation progress.
Bowen’s warning is not merely an academic exercise. He cuts through the noise with a historical perspective that many in the City ignore. 'The Middle East has always been a source of uncertainty,' he noted. 'But the absence of strong US brokerage means that local actors are now free to escalate to levels not seen in decades.' This is a structural shift, not a cyclical one.
The UK’s call for restraint is likely to be ignored by both Washington and Tel Aviv. Trump’s 'America First' doctrine is deeply sceptical of multilateral restraint, while Netanyahu’s coalition depends on Knesset members who favour annexation over ceasefire. The result is a vacuum that no European power can fill.
Investors should take note. The 'peace dividend' that once justified holding emerging market debt and international equities is evaporating. Safe havens such as gold and the Swiss franc are likely to see inflows. Sterling, already under pressure from weak domestic growth, could face further headwinds if the crisis deepens.
The bottom line: Permacrisis is bad for business. Without a credible diplomatic off-ramp, the market will impose its own discipline through higher risk premiums, lower asset prices, and slower growth. The UK government can call for restraint all it likes, but the markets will have the last word.
Alastair Thorne, Chief Financial Editor
