Davos 2012: The unfinished and the unmentionable

oil refinery in Iran Image copyright AP
Image caption Europe imports a lot of oil from Iran

Anyone who listened to the main sessions in Davos could tell you the top two items now on the to-do list for European leaders: fixing the eurozone's financial firewall and finally sealing the deal on Greece.

But there's a second list I'd like to compile after a few days talking to senior leaders and business people here in the mountains. That's the list of fears, lurking on the sidelines, which could come back and bite us, but no-one wants publicly to confront.

Call it the Davos Unmentionables.

Greece was the big one in 2010: I called it the "unattended baggage at the back of the hall, which everyone was nervous about but no-one wanted to be first to open".

This year, the two unmentionables were Portugal and the price of oil.

Portuguese debt

As I mentioned in my Today package on Saturday, in the calmer waters which Europe's financial markets seem to have sailed into, Portugal is a bit of an iceberg.

We won't necessarily hit it. But, as one G20 finance minister said to me privately this week, "it's one to watch".

Portugal has singularly failed to share in the fall in the cost of borrowing for eurozone governments since the ECB did its stuff in December.

In fact, the interest rate - or yield - on Portuguese sovereign debt has risen relentlessly, especially in the last week, as the deal to cut the value of Greek debt owned by the private sector has moved closer to a reality.

Put simply, private sector creditors think Portuguese bonds will be next for the Greek treatment. That's despite all of European officialdom insisting that "private sector involvement" in bailouts will never happen again.

We shall see who turns out to be right. What is clear is that Portugal is in a very bad way economically, and is not going to meet its deficit targets this year without further Herculean budget cuts. It could well be heading into the kind of downward spiral that the US Treasury Secretary, Tim Geithner, warned about in Davos.

Portugal has a gaping current account deficit, a shrinking economy and 7.5% of GDP's worth of austerity in train, for 2011-12 alone. Its debt has jumped from 70% of GDP to 110% in just three years and its deficit is still going up.

That said, Portugal's borrowing needs in 2012 are not that big - around 17bn euros ($22bn; £14bn). If officials grapple with the Portugal issue early, and decisively, they could avoid the iceberg. But looking at how the last two years have been handled does not exactly inspire confidence.

The spike in Portuguese bond yields could signal trouble for Europe. An unexpected spike in oil prices in 2012, due to a stand-off - or worse - with Iran would be a problem for nearly everybody.

Iranian oil

All the mainstream forecasts for global growth in 2012 assume a flat or falling price of oil. Last year's updated IMF forecasts, for example, assume the average price of oil falls from around $105 per barrel last year to $100 in 2012 and $95 in 2013.

For the UK, you'll remember the likely fall in inflation (helped by stable or falling oil prices) was one of my biggest "reasons to be cheerful" in 2012.

US and EU sanctions on Iran could well mess with these hopes, especially if Iran decides to cut oil shipments well before the EU sanctions formally come into force. In the past few weeks, Iran's leaders - and its parliament - have been talking about doing precisely that.

Iran exported roughly 2.2 million barrels of crude per day in 2010, equivalent to around 2.5% of global demand. A good chunk of that oil went to Europe, unfortunately quite a lot of it to the countries in crisis. Around 15% of the oil imported by Spain, Greece and Italy comes from Iran.

The oil price has crept up in recent weeks, but if you want to insure yourself against a major price spike later in 2012, you can do it very cheaply. The market just doesn't think it's very likely.

There are lots of sensible reasons for traders to be relaxed. Saudi Arabia has pledged to increase its production, if necessary, to keep the oil price stable; the US financial sanctions, which would make it very difficult for Iran to get paid for its oil, have quite a lot of flexibility built into them; and the EU sanctions are likely to be phased in.

And yet, this is the oil market we are talking about. And Iran. Neither exactly has a reputation for stability, or predictability.

Senior Israeli politicians at Davos were suggesting privately that there was a one in three chance of some form of violent confrontation with Iran this year.

Of course, Israel has an interest in talking up the threat posed by Iran. But the noises coming out of Tehran are not exactly reassuring. You have to wonder whether the rest of the world - including traders in oil futures - is taking it seriously enough.

The EU Summit this week will be an opportunity for European leaders to get on with curing the economic headaches we already know about. Here's hoping that Portugal and Iran don't give them a lot more.