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NightWatch 20120103


For the night of 3 January 2012

Afghanistan-Qatar: The Taliban announced on Tuesday, 3 January, that they had come to an 'initial agreement' to open a political office in Qatar. This will be the Taliban's first foreign political office since they were overthrown in 2001 and their embassies were forced to close.

Comment: The office is being opened with US approval in order to establish an authoritative point of contact for negotiations to end the Afghanistan fighting or arrange a ceasefire for withdrawal. This is part of the US exit strategy for Afghanistan in which the Pashtuns would be partially rehabilitated. It signifies a scaling back of American expectations.

For the Taliban and other anti-government fighters, their leaders will interpret it as signifying that they have fought well and long enough to induce the US and NATO to seek talks. That represents a compromise in that their initial objective was to fight so that the Western soldiers would just leave.

Iran: Comment: The Iranians continued their bombastic propaganda campaign with an implied threat by senior military officers to prevent a US aircraft carrier from transiting the Strait of Hormuz. Without adding to the many news commentaries on Iran's capabilities to execute its threat, the facts of military training are that the Iranian navy, at least, can't do it now or soon.

Training is essential for military forces, but it always degrades force readiness because training consumes stores and supplies, tires out personnel and increases the wear and tear on equipment. Readiness will not peak again until after the training ends, units return to base, maintenance is completed, stocks are replenished and the personnel get rest. That process takes a few weeks.

The Iranians are bluffing if they intend to use their naval forces to try to block a US Navy transit of the Strait any time soon. Of course, they have other assets for causing trouble, ranging from commandos to terrorists and shore-based installations.

The second point that gets overlooked in Western news commentaries is that Iran is once again the focus of diplomacy by the most powerful countries in the world. By this reckoning, Iran is the leader of the Islamic world and, as Shiites, its leaders expect its people to suffer for that honor.

Egypt: Update. Egyptians in nine provinces participated in parliamentary elections, the third and final phase of the staggered elections that began last month. Some 14 million voters in a third of Egypt's 27 provinces are to elect 150 members of parliament. All observers expect the Islamists to dominate this round of voting, as they have the prior two.

Egypt-Israel: Over the weekend, a top Muslim Brotherhood leaders said that the Brotherhood intends to put to a referendum at some point in the future Egypt's peace treaty with Israel.

Comment: The Brotherhood has strained to present a tolerant image on domestic policy since it emerged from the political shadows almost a year ago. On policy towards Israel, however, it has not projected tolerance or compromise. This is important because the Brotherhood's party is likely to win a plurality in all three rounds of elections.

Two points are implied in the statement. First, the Islamists expect they will lead the next government, after the military government resigns or is overthrown. Second, they are preparing for a confrontation with the Egyptian armed forces and their American backers. That is what is implied in revisiting the peace treaty with Israel. If the Brotherhood would win such a confrontation, Egypt would experience at last a revolution, a fundamental change of political system, but it would be nothing like the change that the first protestors in Tahrir Square sought.

Greece: The Athens government warned Tuesday that the country will have to abandon the euro if it fails to finalize the details of a second, euro130 billion ($169 billion) international bailout and that more austerity measures will need to be implemented.

A key component of the package, which was agreed last October, is that Greece has to persuade its private creditors like banks and investment firms to take a 50% cut in the value of their holdings of Greek sovereign debt. Some analysts now expect they might have to take a 75% loss in order for Greece to have any chance of stabilizing its condition of insolvency.

Greece's debt will expand to almost twice the size of its economy this year unless its creditors accept at least 50% losses on their investments, according to the IMF. Even then, a second bailout would only be a temporary reprieve to postpone default.

During this Watch, The top lobbyists representing Greek bondholders said Tuesday that progress has been made in negotiations over an agreement to cut the nation's debt. It is "essential" that a voluntary agreement between the Greek government and its creditors be reached "in the days ahead," said top officials from the Institute of International Finance.

Comment: In light of German Chancellor Merkel's comments over the weekend that Germany will do whatever is necessary to preserve the euro, the Greek government's warning rings hollow. Greece appears to be undergoing something like a bankruptcy proceeding in which losses are spread among all of the claimants, at least theoretically. On the other hand, investors have good grounds for skepticism and resistance because Greek authorities have failed to deliver on past promises of austerity and prudent fiscal management.

Greece will not leave the eurozone because the costs of and the investment losses associated with leaving would exceed the costs of joining, which several experts assert should never have occurred in the first place.

Plus Germany wants it to remain a member, even in a second tier status, to save face. Perhaps more important is that a Greek withdrawal would threaten a chain reaction of bankruptcies and capital flight to safety.

A Greek default within the eurozone system would be less damaging to the European economy than a Greek return to the drachma, which would signify a significant loss of confidence in the euro and its managers. Every interested party expects and has had time to prepare for Greece to default on its obligations.

The best assessments are that it will take a generation - 20 years - for Greece's GDP to equal or exceed its obligations. That means the undertaker is Greece's best fiscal friend, meaning a generation of pensioners must die before the economy can right itself, barring an economic miracle. Meanwhile, Greece holds its investors and its fellow eurozone countries hostage, one way or the other, if Mrs. Merkel's assertions are serious.

End of NightWatch for 3 January.

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