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NightWatch 20111018

NightWatch

For the night of 18 October 2011

North Korea- South Korea: In an informal meeting at the University of Georgia on 17 October, a senior North Korean party official on a rare trip to the United States said the security situation on the Korean Peninsula was so unstable that a war could occur again anytime.

Rhee Jong-hyuk, a ranking member of the communist nation's Workers' Part responsible le for inter-Korean affairs, blamed the situation on the conservative government of South Korea, claiming Pyongyang remains committed to peace on the peninsula.

Comment: The University of Georgia has been host to the Track II discussions between North and South Korea since shortly after President Carter met Kim Il Sung in June 1994. Other accounts reported the talks were cordial on a personal level, despite the distance between official positions. The importance of the meeting is that it occurred, after a considerable lull.

The key point is that North and South Korea and the US have many venues for communications. The activation of little used or unproductive venues, such as Track II, is an important sign that the North really wants or needs to do business.

Pakistan-Afghanistan: Pakistan deployed army and paramilitary troops to the Afghan border to stop militant attacks that have killed about 100 troops, police and militiamen in the past four months, Pakistan Army Major General Athar Abbas told state radio on 18 October.

Abbas said Pakistan has not seen any security forces in Afghanistan's Konar, Nuristan and Nangarhar Provinces, which are havens for militants. Pakistan cannot launch operations in Afghanistan but has strengthened all border checkpoints in the Dir district and brought its concerns to Afghan security forces and the International Security Assistance Force.

Afghanistan: Security forces and the International Security Assistance Force began "enhanced official operations" to reduce the Haqqani network in the eastern region of Afghanistan near the Pakistani border, a NATO spokesman said on 18 October. The operation is tied to recent disagreements between the United States and Pakistan, an unnamed Afghan Defense Ministry official said. The Haqqani network is responsible for attacks on Afghan civilians and coalition forces.

Comment: The locations of the Pakistani and the Afghan Coalition operations appear complementary. The operational areas appear to be adjacent to each other, north to south. If true, it would suggest a much higher degree of tactical coordination than is usual, which neither side is willing to admit in public. The two operations look like a joint effort to suppress the Haqqani syndicate.

Iraq: Discussion between Turkey, Iran, Saudi Arabia and Iraq, as part of Iraqi parliament speaker Osama Nujafi's Quartet initiative, will focus on political stability and security in Iraq after the U.S. military withdraws, an al-Iraqiya List member of parliament said on 18 October. The member said that the initiative has been discussed among leaders of Iraqi political blocs, including Islamic Supreme Council of Iraq head Ammar al-Hakim and Prime Minister Nuri-al Maliki. Resolving issues between the other three countries will lead to positive political and security outcomes in Iraq, he added.

Iraqi parliament speaker Osama al-Nujaifi's initiative to have quadrilateral talks between Iraq, Iran, Saudi Arabia and Turkey should have been discussed with the Iraqi political blocs first, State of Law coalition member Khaled Asadi said on 18 October. Al-Nujaifi announced the initiative after Iranian parliament speaker Ali Larijani agreed to it in Bern, Switzerland, on 17 October. Asadi called on al-Nujaifi to develop a strategy to solve regional problems through dialogue with the neighboring states.

Special comment: Despite breaches of protocol and process, the quartet members represent the real parties at interest with the greatest stakes in the next phase of Iraq's political evolution. They will determine whatever comes next. The United States is not a party and is not invited.

The NightWatch thesis for the past three years has been that the Iraqis will solve Iraqi problems. The US role has been primarily that of referee, keeping a semblance of peace provided US military strength remained daunting to the parties. The NightWatch thesis predicted a slow but steady resumption of civil war after the US referee role became less effective, as it has.

The US created through a democratic process the second Shiite governed state in the Islamic world. In the Sunni view of the world, the US abetted the expansion of an apostasy. So Iraq will remain an unstable battleground for the other three members of the quartet, whose interests a democratic Iraq threatens: Kurds, Shiites and Sunnis. The Islamic quartet will craft the guidelines for the future and the US will be kept informed and asked for money. To paraphrase eecummings, the US adventure in Iraq thus may end not with a bang but a whimper.

Israel:  Gilad Shalit was returned to Israel today, after five years in captivity. That is tonight's good news.

Somalia-Kenya: Somali and Kenyan troops killed 75 militants and took control of at least four al Shabaab strongholds in Somalia, including Dhobley, Afmadow, Beles Qoqani and Tabda, on 18 October, KBC News reported. The soldiers will advance to Indamfor, nearly 150 kilometers (93 miles) into Somalia.

Kenyan forces pursuing al Shabaab militants entered a second area of southern Somalia, VOA News reported on 18 October. Kenyan troops, supported by helicopters, moved through El-Waq district on the 17th, and are now in Somalia's Gedo region, witnesses said.

Comment: The normal pattern for a new entry in an old problem is initial success, followed by opposition counter attack and stalemate. Kenya will have deployed into a quagmire, unless its logistics are more robust than they appear and its military leadership remains agile and creative.

The Somali tribes that support al Shabaab are Islamic and anti-Christian, aka anti-Kenyan, and live where the Kenyan soldiers now operate. They will remain after the Kenyans withdraw, but they might be less hospitable to al Shabaab, depending on the Kenyans.

More important is the issue of Kenyan strategic objectives. The Kenyan incursion into Somalia far exceeds a symmetrical response to al Shabaab kidnapping and holding tourists for ransom. The success of the Kenyan operation will hinge on adherence to the narrowest definition of the strategic objectives and the determination by Kenyan political leaders and generals to resist overreaching, to resist blandishments and pressure for mission creep, and to withdraw when the initial objectives have been achieved.

Europe:

Italy. Standard & Poor's downgraded ratings for Italian banks Monte dei Paschi di Siena, Banco Popolare and UBI Banca on 18 October, The Financial Times reported. S&P also lowered the ratings of 21 regional banks, citing higher funding costs resulting from high yields on Italian sovereign debt. Italy's sovereign rating was downgraded in September due to weaker growth prospects.

Spain. Moody's Investor Service downgraded Spain's credit rating on October to A1, stating that the country is vulnerable to market stress and event risk, The Wall Street Journal reported. Spain's moderate growth prospects were scaled due to the worsening global and European growth outlook. The banking sector continued to impact the wider economy with its difficult funding situation, Moody's stated. Spain's real GDP growth in 2012 would be 1 percent rather than the earlier expectation of 1.8 percent, and budget deficits for the general government sector would be above target in 2011 and 2012, Moody's stated.

Special Comment: NightWatch is a threat analysis commentary based on analytical techniques that were applied successfully for many years in US defense intelligence. That means that the comments that follow are not those of financial analysts.

The threats to the European financial system are systemic, arising from a loss of investor confidence which concerns the financial subsystem of the economy and the inability of debtors to pay their bills which concerns the vitality of the economy itself. The financial subsystem is one of several information subsystems in a nation, which is a processor of information, energy and matter to sustain life. The enforceabilitiy of promises is the foundation of contract law which underpins modern commercial life. Contract law is failing in some sectors of economic activity in Europe and the US.

The potpourri of bank recapitalization, downgrading of sovereign or bank debt and bail out loans reflects the angst of the financial subsystem managers and blends the tools for managing risk, not threat. Those measures do not address stress from systemic economic threat.

Threat is the probability of real damage in a measureable time. Threat arises, in this instance, from the consequence of real damage to the economy by past practices of the financial sector managers and the borrowers themselves.

In international security affairs, the processes for managing threat and for controlling and stabilizing damage are not the same as those for managing risk, which is a hypothetical construct about levels of possible damage. The difference is the difference between possible vs. actual threats, and real damage.

Threat invariably creates crisis which begets actual damage and further escalation. Significant economic damage has already occurred in Europe and the US. The obvious question is what are the damage limitation, damage control, stabilization and normality restoration plans that European and US political and financial leaders are following? These are the stages of crisis management. Thus far, only risk management -- vice crisis management -- proposals appear to be under discussion.  No orderly crisis management is apparent on either side of the Atlantic.

In a living system analysis, the financial sector is an information subsystem of the larger economic system that processes information, energy and matter to produce a national economy, the GNP of any state. The financial information system is under stress in Europe, but the energy and matter processing sectors of the European economies have been seriously damaged. Remedies that relieve stress in the financial information systems miscarry as remedies for damage to the energy and matter processing systems.

Bankers and finance ministers do not seem to understand the incongruity. Their focus is on the information system, more than the energy and matter processing systems.  They believe that confidence in financial information will result in new stuff. That  linkage is tricky and arguably backwards. The normal historic pattern is that innovation in matter and energy production attracts venture capital and success builds investor confidence. 

Thus far, the Eurozone parties continue to address risk, but fail to address damage and its multiplier effects on threat. When a solution fails to match a problem, the problem invariably gets worse. As damage grows, the threat of further damage expands, apparently in Malthusian fashion.

What this means is that France and Germany and international bankers, for example, are applying techniques that are mismatched to the underlying  problems. They are treating symptoms, not causes. The financial sector is not just at risk, it is under threat because the underlying social economy of multiple European nations has been damaged, which in turn increases the threat to the financial sector, not just the risk.

The result of applying a risk solution to a threat problem is well known: it fails. In this case, the bailout money vanishes in the financial sector; the risks cannot be managed, even by using credit cards to pay credit card bills; the actual debtors will remain unable to pay and they will begin to agitate for systemic changes. This sequence is a no brainer. It leads to revolution.

End of NightWatch for 18 October.

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