The report, which will further strain ties between Western powers and Islamabad, is the result of interrogations of thousands of Taliban and other insurgent fighters.

The insurgents told their interrogators that the Taliban was increasingly confident of regaining power once US forces leave in 2014, and said Pakistan was positioning itself for that outcome.

Key points from the report State of the Taliban published by the BBC:

• Taliban consider victory inevitable once the International Security Assistance Force leaves Afghanistan
• Senior Taliban representatives maintain residences near the ISI headquarters in Islamabad
• Taliban see little hope of negotiated peace in Afghanistan

A NATO spokesman in Kabul confirmed the existence of the report, which was reported by Britain’s Times newspaper and the BBC, but said it was not an analysis of the military campaign.

“The classified document in question is a compilation of Taliban detainee opinions,” said Lieutenant Colonel Jimmie Cummings, a spokesman for the NATO-led International Security Assistance Force.

“It’s not an analysis, nor is it meant to be considered an analysis.”

Pakistan has denied any link with the Taliban, and says claims contained within the report are not new.

Pakistan’s foreign minister Hina Rabbani Khar, who is in Kabul on a fence-mending mission, says her country has no hidden agenda in Afghanistan.

“I think I can just disregard this as potentially strategic leak – this is old wine in an even older bottle,” she said.

She added that the neighbours should stop blaming each other for strained cross-border ties.

Relations between Pakistan and Afghanistan have been tense since the assassination of a peace envoy and former Afghan president – an attack the Afghan government blames on its neighbour.

For years the US has argued that Pakistan’s ISI has been providing support to the Taliban in Afghanistan.

It has also been pressuring Pakistan’s government to do more to stop cross-border raids by the Taliban.

Large swathes of Afghanistan have been handed back to Afghan security forces, with the last foreign combat troops due to leave by the end of 2014.

But many Afghans doubt their security forces can maintain control once the foreign troops leave.

No negotiations

Meanwhile, the Taliban denied reports that it would soon hold talks with Mr Karzai’s government in Saudi Arabia to end the war.

“There is no truth in these published reports saying that the delegation of the Islamic Emirate would meet with representatives of the Karzai government in Saudi Arabia in the near future,” said a statement on the Taliban website.

Afghan officials had suggested that talks in Saudi Arabia would be in addition to contacts in Qatar between the Taliban and the United States.

But it was never clear whether the Taliban, which has resisted talks with the Afghan government, or the Saudis, who have made involvement conditional on the Taliban renouncing Al Qaeda, would come on board.

Taliban negotiators have begun preliminary discussions with the United States in Qatar on plans for peace talks aimed at ending the war.

But they said in their statement on Wednesday that they had not yet “reached the negotiation phase with the US and its allies”.

“Before there are negotiations there should be a trust-building phase, which has not begun yet,” the statement said.

ABC/wires

Efforts to preserve the euro zone and its common currency have intensified in the past month—witness the summit in Brussels on December 8th-9th, which led to support for a “fiscal compact” to improve budget discipline. That said, the Economist Intelligence Unit continues to attach a 40% probability to the break-up of the euro area in the next two years. Were that to happen, the implications for countries and companies in the euro zone and globally would be severe—far worse than during the 2008-09 recession.

In recent coverage we have discussed a chain of events that could lead to a break-up of the euro zone (see “After Eurogeddon? Frequently asked questions about the break-up of the euro zone“). We build on that discussion by listing several implications of a collapse of the euro zone, which we define as several countries—mainly in the periphery—leaving the euro zone because of actual or imminent sovereign debt defaults, or because governments no longer believe that they can remain within the currency zone. These events are by no means the only likely consequences of a euro zone collapse. Indeed, there is hardly enough space in this, or any, report to capture the contagion that would strike every country, every company and every asset class. These are, however, among the most significant.

Any figures, such as GDP growth rates, listed in the analysis below are largely qualitative judgments. They are not based on economic modelling, which is especially challenging when so many variables—exchange rates, interest rates, trade flows, capital controls and many others—would be subject to unprecedented change, and when underlying political and economic structures would be in danger of coming apart. We discuss these issues, if only briefly, to convey the severity and the magnitude of the impacts of a potential euro zone break-up.

* Economic output (measured from peak to trough) in the euro zone as a whole could contract by at least 10% and possibly by as much as 25%. This would result from widespread bank collapses as well as major corporate bankruptcies, neither of which occurred after the failure of Lehman Brothers, a US investment bank, in 2008. Legal uncertainty would confound most commercial contracts between countries and companies. Supply chains in much of Europe, and globally, would be seriously disrupted (consider Japan and global car production after the March earthquake); and industrial output in the worst-hit countries would collapse. Tax revenue would plummet as corporate profits evaporated overnight and companies laid off millions of workers; and the public debt burdens that sit at the core of the crisis would surge. Unemployment would climb above 20% in most countries, and to close to 50% in the worst-hit economies. Capital controls would be introduced in weaker countries and possibly in stronger ones to prevent extreme currency appreciation. The European Central Bank (assuming it still existed) would have no choice but to print money to finance public payrolls and keep essential services in the euro zone from collapsing. These effects would ease over time, and output would recover, but it would be years in much of Europe before standards of living returned to pre-crisis levels. The state would have a much larger role in the economy, with banks and many companies in government hands.

* Most of Europe would see a return to the national currencies it used before 1999.The value of these post-euro currencies in the immediate aftermath of a euro break-up would be difficult to predict, given the imposition of capital controls, plunging asset prices, and interest rates that would soar for some countries and fall for others. Assuming currencies could be traded freely, large depreciations/appreciations beyond “fair” values would be likely in the short term. Over a period of several years, the value of post-euro currencies would be determined by factors such as structural external and fiscal imbalances, inflation trends following the break-up and how wage-setting behaviour responded. Taking as a starting point current external imbalances and real effective exchange rates, it is reasonable to assume that a number of countries currently in the euro zone would see large currency depreciations from the current value of the euro. A new Greek currency would be likely to lose two-thirds of its value. Portugal and Spain might experience depreciations of 40-50% and 30-40% respectively, with smaller falls of 20-30% for Ireland and Italy. In the event of a complete break-up of the euro area, most other countries would probably experience modest depreciations of between 0% and 20%. Only Germany, the Netherlands, Finland and Austria would be likely to see their new currencies appreciate—in the case of Germany by between 10% and 20%, but possibly much more.

* Few European banks would survive in their current form. As a break-up loomed, banks in the euro zone’s periphery would suffer runs as customers fearing devaluation under a new currency withdrew euros. Mass insolvencies would result, saddling sovereigns with new liabilities that they could not afford, hastening partial or full defaults on government debt. This would reverberate around the world in waves, as holders of defaulted private and public euro zone debt would themselves be forced to seek state support, with the resulting fall in asset values creating crises for their lenders, wherever they were based and regardless of whether or not they had direct exposure to the euro zone. Some states might choose to seize the local subsidiaries of parent banks based in the worst-affected countries, pre-empting the drainage of funds from the host country and setting the scene for protracted legal battles with the home country during insolvency proceedings. In the former euro zone countries, exchange and capital controls would probably be accompanied by freezes on withdrawals of deposits and savings for a time. Nationalised banking systems would undergo deep restructuring, separating formerly independent banks into a smaller set of firms. These would either be placed into run-off (ie, as entities created to dispose of toxic assets) or operated under state control with an overwhelmingly, if not exclusively, domestic focus.

* The US economy would be plunged into a deep recession if the depression in the euro zone were to be near the low end of our estimate. The sudden tightening of credit conditions, the loss of wealth across the economy and the collapse in external trade would cause the US economy to contract by at least as much as it did during the 2009 slump—3.5%—and possibly by twice that level. The effects on the US initially would come through the financial channel. The direct exposure of US banks to Europe’s periphery is not high, but through derivatives and guarantees their exposure is worth US$640bn, equivalent to 5% of their assets. Lending to French and German banks, which would need to be rescued in the event of a euro collapse, amounts to another US$1.2trn. Perhaps even more importantly, all US financial institutions would suffer large losses on their assets, especially their risky assets, as risk aversion soared. Major US equity indices such as the S&P 500, which more than halved from peak to trough during the 2007-09 crisis, would fall by at least 40% if the euro zone collapsed.

* A euro zone collapse would destroy Barack Obama’s chance of re-election as the US president. A new US recession would push the unemployment rate, now at 8.6%, back above 10%, and possibly much higher. Jobs will be the primary issue in the 2012 election, and no sitting president will stand any chance of re-election with an unemployment rate in double digits. One of the two current front-runners for the Republican party nomination—Newt Gingrich, the former speaker of the House of Representatives, or Mitt Romney, the former governor of the state of Massachusetts—would become the next US president.

* Asian economies would be highly exposed through the trade channel to a depression in Europe, given the high export dependency of the region. India, Indonesia and China stand out in this respect; China’s economy would contract for at least one quarter before the government could respond. There is scope for most countries, led by China, to respond to a collapse in external demand through monetary and fiscal policy, given that interest rates are well above zero and public finances are in good shape in most countries. However, policymakers would not be able to avert recession, possibly quite deep ones. In Asia’s favour, its banks are not heavily reliant on external financing to fund their operations. They would, however, need to rein in their lending in response to an inevitable fall in the value of their assets.

“We will have to slow down a little as far as fiscal adjustment is concerned and move faster – much faster – with the reforms needed to modernise the economy,” Poul Thomsen, a Danish IMF official overseeing the Greek austerity programme told Greek daily Kathimerini on Wednesday (1 February).

He spoke of the “limitations” of political support and social tolerance toward the deficit-cutting measures – Greece saw violent street clashes and several days of general strikes in protest at cost-cutting last year.

Thomsen also called for political recognition of the painful reforms that Greece has already undertaken.

“I share the frustration of many Greek officials that much of the criticism from abroad overlooks the fact that Greece has done a lot, at a great cost to the population. While much still needs to be done, Greece has already come quite a long way. Failing to recognise this will not help mobilise support for the programme,” he said.

“In this regard, I think that officials – myself included – need perhaps to be more sensitive to ensuring that we send a balanced signal when we say that the programme is off-track.”

His words come just days after EU leaders scolded the Greek premier for not keeping to an agreed reform programme, including lowering labour cost and privatising the remaining state assets.

Germany has been the loudest critic. Chancellor Angela Merkel spoke of her “frustration” with Athens even as Berlin circulated a controversial idea to have an EU commissioner put in charge of Greece with power over all its spending decisions.

On the difficult talks between the Greek government and the “troika” – comprising of the IMF, the EU commission and the European Central Bank (ECB) – Thomsen said a deal on the second bail-out, worth €130 billion, will be “completed very soon, it’s a matter of days.”

According to the Imerisia newspaper, Athens is willing to sign up to another €4.4 billion worth of spending cuts this year to secure the deal. The cuts – amounting to about 2 percent of gross domestic product – will be in defence, health-care and pharmaceutical spending.

Greece’s first bail-out from May 2010, amounting to €110 billion, relied on tax hikes and cuts in wages and pensions, reducing the country’s deficit from €24.7 billion to €5 billion in just two years. But the country’s soaring borrowing costs have made its debt unsustainable.

A parallel, unprecedented deal with private lenders is being sought to slash at least 50 percent of the interest creditors would cash in on some €200 billion worth of Greek bonds – a precondition for the second IMF-EU-ECB bail-out.

Negotiations on the deal have become drawn out over recent weeks. One of the sticking points concerns whether the ECB and governments should also incur losses alongside the private sector.

The next meeting in Tehran, slated for Feb. 21-22, would follow three days of talks that ended on Tuesday between high-level IAEA officials and Iranian government representatives. The U.N. nuclear watchdog said it had outlined its questions and goals related to eliminating ambiguities over potential defense-related elements of Iran’s atomic activities.

The agency in November noted “serious concerns” that the Persian Gulf regional power was seeking a nuclear-weapon capacity; Tehran insists its atomic activities are strictly nonmilitary in nature (see GSN, Nov. 9, 2011).

The Vienna, Austria-based organization conferred with Iran on “the topics and initial steps to be taken” to resolve the matter, “as well as associated modalities,” according to an IAEA press release.

“The agency is committed to intensifying dialogue. It remains essential to make progress on substantive issues,” IAEA Director General Yukiya Amano said in the statement (International Atomic Energy Agency release, Feb. 1).

No major developments took place in the most recent discussions between the sides, informed envoys told the Washington Post on Wednesday.

Despite their congenial atmosphere, this week’s exchanges yielded no rationale for apparent nuclear-bomb design studies conducted by Iran, according to the sources.

“This was just a start,” a European envoy said (Joby Warrick, Washington Post, Feb. 1).

“It does seem to us that there has just been no indication of any substantive progress during this meeting, that Iran was very focused on process and modalities and not engaging the IAEA on answering the questions or providing the information and access that they have been asking for,” one diplomatic source told Reuters.

The three-day trip involved ”long, intensive discussions about procedures, issues, but no discussion on concrete issues,” according to another source in Vienna. Nonetheless, ”some headway” was made toward initiating additional discussions that might prove more concrete, the envoy said.

Tehran reportedly rejected a request by the IAEA team to visit the Parchin armed forces installation, which was cited in the November agency safeguards report (Fredrik Dahl, Reuters I, Feb. 2).

“This visit will be judged by whether the Iranians provided the visiting IAEA team with cooperation on substantive issues. Anything short of that type of cooperation is not acceptable,” a diplomat told Reuters.

Agency safeguards chief Herman Nackaerts, who led this week’s mission, offered grounds for optimism by referring to plans for a second trip, former U.S. State Department analyst Mark Fitzpatrick said.

“The IAEA would not be scheduling another trip unless they had an expectation of progress in clearing away at least some of the questions about suspicious past nuclear activity,” the expert said (Michael Shields, Reuters II, Feb. 1).

Iran should rule out further visits by the U.N. nuclear watchdog team if it releases an “unrealistic report” on Iranian atomic efforts to “mislead the global community,” the nation’s Press TV quoted Mostafa Kavakebian, a member of the Iranian parliament national security body, as saying on Tuesday (Press TV, Jan. 31).

Meanwhile, Israel’s military intelligence chief on Thursday said Iran possesses sufficient 20 percent-enriched uranium to fuel four nuclear weapons if the material is refined further, Ynetnews reported. Bomb-grade uranium has an enrichment level of roughly 90 percent.

“Iran is vigorously pursing military nuclear capabilities and today the intelligence community agrees with Israel on that. Iran has over 4 tons of enriched materials and nearly 100 kilograms of 20 percent-enriched uranium — that’s enough for four bombs,” Maj. Gen. Aviv Kochavi said at an event in Tel Aviv.

Iran’s atomic ambitions are aimed at establishing its dominance over neighboring states, dissuading foreign aggression and bolstering the nation’s role in the surrounding area, Kochavi said.

“We have conclusive evidence that they are after nuclear weapons,” he said, adding Iran’s atomic infrastructure would have little significance in its eventual determination on potentially assembling a nuclear bomb.

“When [Iranian supreme leader Ayatollah Ali Khamenei] gives the order to produce the first nuclear weapon — it will be done, we believe, within one year,” the official said.

Economic penalties, domestic setbacks and other issues “have yet to result in a change in Iranian strategy, but if they intensify they might lead to change, because the most important thing to them is the regime’s sustainability,” Kochavi said (Neri Brenner, Ynetnews, Feb. 2).

Speaking at the same event, Israeli armed forces chief of staff Lt. Gen. Benny Gantz on Wednesday said Jerusalem should be “willing to deploy” its defense capabilities because Iran might be 12 months away from gaining a nuclear-weapon capacity, according to Bloomberg Businessweek.

“There is no doubt that Iran is striving for a bomb,” Gantz said, adding that those efforts “must be disrupted” (Ferziger/Lerman, Bloomberg Businessweek, Feb. 2).

The officer called on other countries to maintain punitive steps against Iran, which he said are “starting to show progress,” the Associated Press reported (George Jahn, Associated Press I/Google News, Feb. 1).

Israeli Vice Prime Minister Moshe Yaalon on Thursday indicated that the use of armed force could be successful in eliminating Iranian nuclear facilities, AP reported.

“At the end of the day it’s possible to strike all the installations,” he said.

Other Israeli defense sources and issue experts have questioned the ability to wipe out Iran’s hardened and subterranean atomic sites, AP reported (Karin Laub, Associated Press II/Boston.com, Feb. 2).

Former CIA Director James Woolsey backed suspicions that Iran is pursuing nuclear armaments.

“To believe anything other than that Iran is working to get a nuclear weapon is hopelessly naive,” Woolsey told the Jerusalem Post at the gathering in Tel Aviv.

“At some point someone is going to have to decide to use force to prevent Iran from getting a nuclear weapon. I’d argue that those who say we can deal adequately with Iran through deterrence are quite naive,” he said.

“National survival is at issue. In the near term that’s the case for Israel, but in the somewhat longer term it is (the case) for the U.S., which from Iran’s point of view, is the ‘Great Satan,’” Woolsey added (Oren Kessler, Jerusalem Post, Feb. 2).

Iran by June could acquire the 85 kilograms of 20 percent-enriched uranium necessary for a 15-kiloton bomb, and it could then refine the material to weapon grade in roughly 10 weeks, according to an assessment published on Monday by the American Enterprise Institute’s Critical Threats Project. Other experts have suggested Iran would require no less than 12 months to accumulate sufficient material for a bomb, the Christian Science Monitor reported (Howard LaFranchi, Christian Science Monitor, Feb. 2).

In Beijing, German Chancellor Angela Merkel on Thursday said China should throw its weight into convincing Tehran to abandon its disputed atomic efforts, Reuters reported. The European Union last week finalized a six-month time line for prohibiting petroleum purchases from Iran.

During a three-day trip to China, Merkel was set to press for the harsher Iran penalties put forward by Washington. The German leader said she had previously carried out “long discussions” with Chinese President Hu Jintao and Premier Wen Jiabao on punitive measures against Iran.

“If we talk about the European sanctions against Iran, the question is how China can make better use of its influence to make Iran understand that the world must not have another power with nuclear weapons,” Merkel said.

She expressed a wish for the U.N. Security Council to address the issue through a measure backed by all of its members (Hornby/Rinke, Reuters III, Feb. 2).

Merkel on Thursday added that her country hopes to join new talks with Iran and the five permanent U.N. Security Council member nations. The six powers convened talks with Tehran on two separate occasions in December 2010 and January 2011, but neither gathering yielded clear progress toward resolving the nuclear dispute (see GSN, Jan. 24, 2011; Andreas Rinke,Reuters IV, Feb. 2).

U.S. and Japanese diplomats are conducting talks in Washington on compliance with measures targeting Iran, the U.S. State Department indicated on Wednesday in remarks reported by the Xinhua News Agency.

“The United States and Japan reaffirm their shared interest in preventing Iran from acquiring nuclear weapons and the importance of a dual-track strategy in dealing with Iran: both pressure and engagement, to persuade Iran to address the international community’ s serious concerns about its nuclear program,” State Department spokeswoman Victoria Nuland said (Xinhua News Agency, Feb. 2).

Tokyo has pledged to expedite curbs in its purchases of Iranian petroleum to meet recently enacted U.S. legal mandates, but the sides have yet to settle on the pace of the decrease in imports, the Atlantic magazine reported on Wednesday. Factors of importance in the discussion include replacement of Iranian petroleum with oil from other sources, protection of Japanese financial institutions and satisfaction of political interests within Japan (Sheila Smith,The Atlantic, Feb. 1).

Iran would slash government expenses by 5.6 percent and seek to lower reliance on petroleum exports under a yearly national spending plan presented on Wednesday to Iranian lawmakers, the Associated Press reported. Iran’s next budget cycle begins on March 20 (Ali Akbar Dareini, Associated Press III/Google News, Feb. 1).

Separately, Iranians have succeeded in evading international restrictions on weapons transfers through the use of cargo vessels registered with other governments, AP quoted the Stockholm International Peace Research Institute as saying in a report published this week (Jahn, Associated Press I).

First elements of the investigation lead to the Revolutionary Armed Forces of Colombia (FARC). Indeed, General Rodolfo Palomino, director of public security department, stated that the perpetrators could be members of the Daniel Aldana mobile section of the FARC.

Russian Foreign Minister Sergei Lavrov has accused “foreign players” of supplying arms to the Syrian opposition” (Interfax, January 29). Lavrov taunted his US counterpart Hillary Clinton, for “bemoaning” a refusal to hold urgent telephone talks on Syria and proposed: “this is the result of indescribable manners” (www.mid.ru, January 31). The Russian envoy in the UN Vitaly Churkin, supported by China, has insisted that any acceptable resolution on Syria must be based on the Russian draft, introduced on December 15, requiring a ceasefire and negotiations between the al-Assad regime and the opposition. Russia rejects any sanctions or threat of sanctions or of an arms embargo, if the al-Assad regime continues to use force. Lavrov has offered Moscow as a possible venue of  future talks, but the Syrian opposition has refused to participate without an assurance that al-Assad quits power – an assurance Moscow refuses to make, since that is tantamount to unacceptable “regime change.” According to Lavrov, “Some outside powers are setting on the opposition groups to crawl away from a dialog [with al-Assad]. This is a provocation that will lead to no good” (Interfax, January 31).

The official reason of Russian stubbornness is the often expressed fear that any UN resolution rebuking al-Assad for mass murder will be used by the West as the March 2011 Security Council resolution 1973 on Libya that contained a mandate to protect civilians, but in effect led to the overthrow of Muammar Gaddafi, backed by NATO air strikes. Western assurances that no one is considering military action are not taken at face value. Lavrov pledged to continue to honor arms contracts with Syria (Interfax, January 31). At present the Russian policy seems to be to buy time for al-Assad by dragging on negotiations at the UN.

The al-Assad regime is Russia’s last long-term ally in the Middle East. Russia maintains a naval supply station in the Syrian port of Tartus – the only Russian military outpost left outside the borders of the defunct Soviet Union. During the Cold War, Russia sustained a constant and formidable naval presence in the Mediterranean, facing off NATO’s navies. The Tartus naval facility was a strategic asset providing the Soviet flotilla with constant supplies, munitions and maintenance. The Russian flotilla was recalled some 20 years ago and never returned. Today, Russian ships pass through the region infrequently and do not need Tartus; the base is mostly deserted. Only a naval maintenance support ship is permanently moored at Tartus, idling for half a year before returning to Sevastopol, Crimea, to be replaced by another maintenance ship that will idle on for another half year.

The Tartus “naval base,” with two floating piers, one maintenance ship and a small contingent of noncombat personnel, is a vestige of a lost empire, a matter of prestige with zero military significance. Arms trade is more important: In 2010, Syria imported some $700 million worth of weapons and wants more. Russian investment by state-connected corporations into the Syrian economy (most notably the natural gas sector) is estimated at some $20 billion. Without al-Assad, billions may be lost in arms deals and Russian investment would be at risk (Kommersant, February 1).

Since the Cold War, Russia maintains a high-level troop of military advisers in Syria. Russian military intelligence has an important foothold in a volatile region. If Sunni Muslim extremists Russia traditionally dislikes and distrusts take over Assad’s minority Alawite-sect secular-orientated government, Russia’s military and intelligence services would lose valuable assets.

Still, Russian support for the Syrian regime is predominately internal in nature, as is the constant recall of the Libyan example. Last March President Dmitry Medvedev and Prime Minister Vladimir Putin publicly clashed over Libya. Putin publicly denounced the Security Council Resolution 1973 as “flawed and defective” and a pretext for a “crusade.” Lavrov advocated an immediate stop of “all hostilities,” and negotiations, which would allow Gaddafi to continue to butcher the opposition – the same remedy Lavrov is today proscribing the Syrians. The Russian Foreign Ministry was ready to veto the 1973 resolution in the UN, but was overruled by Medvedev (EDM, March 24). Ambitious and well connected senator Mikhail Margelov, appointed by Medvedev as his special representative in Africa specifically to deal with the Libyan crisis, denounced Gaddafi as a bloody dictator that “must leave” (Interfax, June 21).

Today, Lavrov is assertive and getting his revenge, supported by Putin. Medvedev is stepping down as president, while Margelov, once seen as a possible Lavrov successor has fallen from grace. Last week, the Foreign Ministry suddenly issued a statement denouncing “malicious rumors that Lavrov has written a letter to the Kremlin demanding the ouster of Margelov as special representative in Africa” (Interfax, January 27). In fact, the Moscow mainstream press did not carry any such “malicious rumors” before the statement was published.

The West went after Slobodan Milosevic, Saddam Hussein and Gaddafi. They are all dead. The West will dispatch al-Assad, they will come for us, Russia’s chief justice (chairman of the Constitutional Court), Valery Zhorkin, wrote last week. The West promotes opposition movements and destroys the principle of equal sovereignty and non-interference in internal affairs by humanitarian interventions. The West is promoting a malicious pro-democracy mass movement in Russia to have a pretext to intervene and destroy our nation, writes Zhorkin (Rossiyskaya Gazeta, January 26).

Russian national interests and assets at risk in Syria do not seem to validate a steadfast stand to defend a doomed butcher, disregarding international and Arab opinion. In fact, Putin and the Russian corrupt top elite are defending not al-Assad, but themselves.

“We have to implement the conclusions from October. That means the voluntary restructuring of Greek debt must be pushed forward. And from our point of view, the second Greek programme – including debt restructuring – must be achieved quickly otherwise it will not be possible to pay out the next tranche for Greece,” she said following a working lunch in Berlin with President Nicolas Sarkozy on Monday (9 January).

“We want Greece to stay in the euro area. We have repeatedly said that the restructuring of Greece’s debt is an offer to improve Greek debt sustainability. However, Greece must really implement its troika obligations,” she said, referring to conditions laid down by the EU, the European Central Bank and the International Monetary Fund (IMF).

The EU and the IMF in 2010 agreed to lend Greece €110 billion. Last year they signed off a further loan of €109 billion.

Since then both sides have been locked in negotiations over whether Greece is fulfilling its side of the bargain and how to make the private sector voluntarily accept a 50 percent loss on the value of their Greek bonds.

Talks have been complicated by suggestions from various experts that the private sector deal should either be scrapped altogether or that the writedown should be more substantial for it to make a real difference to Greece’s debt.

Outlining a vague to-do list following the meeting, Merkel said France and Germany are working on plans to speed up contributions to the eurozone’s permanent bailout fund (the ESM) and promised to look into the best practices of member states when it comes to labour market policies.

They also expressed confidence that a new intergovermental treaty on tightening fiscal discipline in the eurozone would be ready quickly. There is a “good chance” that it can be signed by the end of January, Merkel said.

The chancellor supported President Sarkozy’s decision to forge ahead with plans for a French-only financial transactions tax, but did not say if Germany would come onboard, admitting there is no agreement within her own cetnre-right/liberal ruling coalition on the issue.

Finance ministers should come with a report on the issue by March at the latest, she noted.

Small step

Sarkozy acknowledged that Monday’s meeting was just a small step in the drawn-out eurozone crisis.

Asked if enough measures had been taken to ensure the eurozone would be safe in the event of a Greek default, he said that if they were feeling “calm” about the situation they would not feel the need to meet so often.

“The situation is very tense,” he said.

The Merkel-Sarkozy event marks the beginning of a series of meetings leading up to the EU summit on 30 January. Merkel will hold talks with IMF chief Christine Lagarde on Tuesday and see her Italian counterpart Mario Monti on Wednesday. The leaders of France, Germany and Italy will meet on 20 January while EU finance ministers will meet three days later.

“All nuclear material in the facility remains under the agency’s containment and surveillance,” IAEA spokeswoman Gill Tudor said in released remarks. The U.N. nuclear watchdog has monitored the site since its existence became publicly known in 2009.

Iran in 2010 began generating the higher-enriched uranium, enabling the nation to potentially more quickly produce nuclear-weapon material, which must be refined to roughly 90 percent. Tehran has denied international assertions that its nuclear program is aimed at developing a nuclear-weapon capability, and insists the more refined material is intended to fuel a medical isotope production reactor.

The Qum facility’s activities would probably be detailed in a quarterly IAEA safeguards assessment expected near the end of February, according to the Times (William Broad, New York Times, Jan. 9).

“If they (Iranians) are enriching at [Qum] to 20 percent, this … is a further escalation of their ongoing violations with regard to their nuclear obligations,” U.S. State Department representative Victoria Nuland said Monday.

“We call on Iran once again to suspend enrichment activities, cooperate fully with the IAEA and immediately comply with all [U.N.] Security Council and IAEA  Board of Governors resolutions,” Agence France-Presse quoted Nuland as saying.

“This development, given their track record and what the IAEA inspectors have been able to report, it’s not a surprise to us what we’re hearing,” the spokeswoman said. The production of 20 percent-enriched uranium “generally tends to indicate that you’re enriching to a level that takes you to a different kind of a nuclear program,” she added (Agence France-Presse I/ABS-CBN News, Jan. 10).

British Foreign Secretary William Hague called the new enrichment “a provocative act which further undermines Iran’s claims that its program is entirely civilian in nature,” AFP reported (Agence France-Presse II/Google News, Jan. 9).

The Middle Eastern nation’s “claim to be enriching for the Tehran Research Reactor does not stand up to serious scrutiny,” the Associated Press quoted Hague as saying in released remarks. The country “already has sufficient enriched uranium to power the reactor for more than five years and has not even installed the equipment necessary to manufacture fuel elements” with the refined material, he added (George Jahn, Associated Press I/Google News, Jan. 9).

France decried the transfer of uranium enrichment operations to new facility as a “particularly grave violation by Iran of international law,” and said the development offers “no choice but to strengthen international sanctions and to adopt, with our European partners and all willing countries, measures of an unprecedented scale and severity” (Agence France-Presse III/Breitbart.com, Jan. 9).

Germany added that “the international community’s concern that the Iranian nuclear program is serving military purposes is growing,” AFP reported.

Independent analysts expressed similar alarm over the Iranian milestone.

Tehran’s move “clearly represents an escalation,” said Mark Hibbs, an analyst with the Carnegie Endowment for International Peace. “Israel, which has already warned Iran that it could take military action against installations is very very worried by this facility. … We are moving into dangerous territory.”

The development “is worrisome because 20 percent is so close to being weapons-usable and because there is absolutely no civilian need for it now,” former U.S. State Department analyst Mark Fitzpatrick said.

“It brings them closer to being able to quickly produce enough fissile material for a nuclear weapon,” said Fitzpatrick, now with the International Institute for Strategic Studies in London (Agence France-Presse II).

Institute for Science and International Security head David Albright said Iranian leaders “appear to have taken the decision to acquire a nuclear weapons capability, but not a decision to build the bomb. And that means that they can be dissuaded from doing that.”

Hibbs expressed a similar position.

“Because of the opaque nature of leadership in Iran and the lack of deep knowledge on how the leadership is thinking, this escalation could represent an effort by Iran to stake out a tough negotiating position,” the analyst said (Agence France-Presse III).

Iran’s envoy to the International Atomic Energy Agency, though, on Tuesday said responses in the United States and Europe to the new enrichment were “exaggerated and politically motivated,” the London Telegraph reported (London Telegraph, Jan. 10).

“All nuclear activities, notably uranium enrichment at Natanz and [Qum], are under the supervision of the International Atomic Energy Agency,” AFP quoted the official, Ali Asghar Soltanieh, as saying on Monday (Agence France-Presse IV/Times of India, Jan. 9).

Meanwhile, U.S. Deputy Secretary of State William Burns was expected to discuss Iran’s atomic activities on Monday with Turkish Foreign Minister Ahmet Davutoglu, according to Turkish diplomatic insiders (Agence France-Presse V/Now Lebanon, Jan 9).

The top Turkish diplomat said Iran had communicated its readiness to rejoin multilateral discussions on its atomic efforts, United Press International reported on Monday. It has been a year since the last such talks between Iran, the five permanent U.N. Security Council members and Germany (United Press International, Jan. 9).

European Union nations on Tuesday decided to convene their top diplomats on Jan. 23, seven days sooner than previously planned, for discussions anticipated to finalize sanctions prohibiting imports of petroleum from Iran, Reuters reported.

Governments within the 27-nation bloc have achieved consensus on the planned ban, but they had yet to agree on the specifics of its implementation. An EU discussion on Monday yielded no clear progress on the matter, envoys said. Additional talks are anticipated this week (David Brunnstrom, Reuters I, Jan. 10).

One expert said China would probably not participate in efforts to isolate Iran’s petroleum sector, AP reported. U.S. Treasury Secretary Timothy Geithner was set to meet with top officials in Beijing on Tuesday and Wednesday to seek Chinese backing for such measures.

Nearly 33 percent of shipped Iranian oil goes to China.

“China has no reason to go along with this,” Peking University expert Wang Lian said. “China does not want to be seen as helping the U.S. when China’s own interest is concerned” (Joe McDonald, Associated Press II/Google News, Jan. 10).

Former Chinese Ambassador to Iran Hua Liming added: “Iran will expect China to support its interests at the U.N. and other international circumstances, while the U.S. will exert tremendous pressure on China and use the Iran issue to judge if China is a ‘responsible’ major power.”

“China will need to strike a balance in this dilemma,” Reuters quoted the former official as saying.

“What I can say for sure is China is not going to sacrifice its national economic interest in answer to a big power,” he said, adding his country believed it had sacrificed its interests in endorsing four U.N. Security Council sanctions resolutions targeting Iran’s nuclear efforts.

“The previous rounds of sanctions have already hit China. Our top energy firms’ business in Iran has skidded nearly to a halt,” Hua said.

“If you look back on all the U.S. sanction[s] since World War II, there has been no such precedent that you can force a nation to surrender through sanctions. Especially countries like Iran,” he added.

“The West has an illusion that a pro-West regime would give up the nuclear plan. But in Iran, no matter which regime comes to power, they will not give up,” he said. “To become a nuclear power is many Iranians’ dream of a strong nation.”

Hua added: “I don’t think the U.S. is hopeful of winning support from the Security Council for the new round of sanctions” (Chen Aihzu, Reuters II, Jan. 10).

South Korea is preparing for a potential decrease in its petroleum purchases from Iran, an official in Seoul told the Yonhap News Agency on Sunday.

“Unlike other countries, our country’s oil imports from Iran increased over [2011]. It won’t be difficult to return the volume back to the level of [2010],” the official said (Yonhap News Agency, Jan. 8).

Japan and the European Union are also preparing for cutbacks in Iranian oil, Reuters reported (Hafezi/Dahl, Reuters III, Jan. 10).

Elsewhere, the United States on Monday said its military had seen no indications that Iran is getting ready to obstruct the strategic Strait of Hormuz, AFP reported. Tehran has threatened to block the strait, a key waterway for the shipment of Middle Eastern petroleum, in retaliation to a possible Iranian oil embargo.

“We would have some knowledge of an intent to actively impede maritime traffic to the Strait of Hormuz. We don’t see any active steps being taken by the Iranians to close the strait,” Defense Department spokesman George Little said.

“We really do want to ratchet down the tensions surrounding the Strait of Hormuz. This is an important waterway for the region and for Iran itself,” the official added (Agence France-Presse VI/Google News, Jan. 9).

In Venezuela, Iranian President Mahmoud Ahmadinejad played down assertions that his country has nuclear weapons ambitions, AP reported.

“They say we’re making (a) bomb,” the Iranian leader said through an interpreter. “Fortunately, the majority of Latin American countries are alert. Everyone knows that those words … are a joke. It’s something to laugh at,” Ahmadinejad said. “It’s clear they’re afraid of our development.”

Venezuelan President Hugo Chavez said Washington and European capitals were employing inaccurate assertions over Iran atomic activities “like they used the excuse of weapons of mass destruction to do what they did in Iraq” (Ian James, Associated Press III/Time, Jan. 10).

In Israel, an analysis suggests an Iranian nuclear test would significantly alter political dynamics in the region, AFP reported on Tuesday.

The United States would probably offer security guarantees to Israel while cautioning against direct action, according to the assessment by the Institute for National Security Studies. Moscow would pursue a collaborative effort with the United States to prevent the further spread of nuclear arms in the region, while Saudi Arabia would probably establish an independent atomic initiative, the analysis states.

“The simulation showed that Iran will not forgo nuclear weapons, but will attempt to use them to reach an agreement with the major powers that will improve its position,” the London Timesquoted the document as saying.

“The simulation showed that (the Israeli military option), or the threat of using it, would also be relevant following an Iranian nuclear test,” it states (Agence France-Presse VII/The Australian, Jan. 10).

President Obama is ready to order military action to stop Iran from obtaining a nuclear bomb if economic pressure and negotiations prove inadequate, a former Obama administration adviser on the Middle East told Bloomberg on Monday.

The president has “made it very clear” that he has deemed an Iranian nuclear weapon to pose such a significant danger that “the Iranians should never think that there’s a reluctance to use the force” to prevent it, Dennis Ross said in an interview. “There are consequences if you act militarily, and there’s big consequences if you don’t act,” he said (Indira Lakshmanan,Bloomberg, Jan. 10).

One high-level U.S. government source, though, told CNN that the United States has established no firm threshold for employing armed force against Iran.

“The precise step at which action might be taken is not defined. It’s a complex set of variables,” CNN on Monday quoted the insider as saying (Barbara Starr, CNN, Jan. 9).

Separately, the United States denounced a death sentence Iran has given to a purported U.S.-born CIA informant, the Washington Post reported.

“We strongly condemn this verdict,” Nuland said.

“Allegations that [one-time U.S. Marine Amir Hekmati] either worked for or was sent to Iran by the CIA are simply untrue,” the State Department spokeswoman said. “The Iranian regime has a history of falsely accusing people of being spies, of eliciting forced confessions and of holding innocent Americans for political reasons” (Erdbrink/Warrick, Washington Post, Jan. 9).

In the speech Assad stated that he will not step down, insisting that Syrian people support him despite 10 –months-long uprising. The uprising, according to Assad, was orchestrated by the foreign conspiracy. He also mentioned that a referendum on a new constitution will be held in the first week of March and will be followed by general elections.

The President also accused Arab League of hypocrisy over calling for reforms in Syria and attempting to destabilize further situation in the country.

It is his fourth speech  of Assad since the beginning of popular uprising in March and the first public statement since the President agreed to an Arab League plan to halt the government’s crackdown on opposition protests.

Meanwhile so far despite the presence of 165 Arab League monitors in Syria military crackdown on protestors continues.

They are hoping that the talks will lead to peace talks whose ultimate goal is to end the Afghan war, the Daily Mail reports.

Failure would likely condemn Afghanistan to continued conflict, perhaps even civil war, after Nato troops finish turning security over to Afghan president Hamid Karzai’s weak government by the end of 2014.

The U.S. has been in talks with the Taliban for ten months to release Afghan detainees at Guantanamo Bay

Success would mean a political end to the war and the possibility that parts of the Taliban – some hardliners seem likely to reject the talks – could be reconciled.

The effort is now at a pivot point.

Officials acknowledged that the Afghanistan diplomacy, which has reached a delicate stage in recent weeks, remains a long shot.

Among the complications: U.S. troops are drawing down and will be mostly gone by the end of 2014, potentially reducing the incentive for the Taliban to negotiate.

The reconciliation effort, which has already faced setbacks including a supposed Taliban envoy who turned out to be an imposter, faces hurdles on multiple fronts, the U.S. officials acknowledged.

Critics of President Obama’s peace initiative are deeply sceptical of the Taliban’s willingness to negotiate given that the West’s intent to pull out most troops after 2014 would give insurgents a chance to reclaim lost territory or nudge the weak Kabul government toward collapse.

While the United States is expected to keep a modest military presence in Afghanistan beyond then, all of Obama’s ‘surge’ troops will be home by next fall and the administration – looking to refocus on domestic priorities-is already exploring further reductions.

If the effort advances, one of the next steps would be more public, unequivocal U.S. support for establishing a Taliban office outside of Afghanistan.

U.S. officials said they have told the Taliban they must not use that office for fundraising, propaganda or constructing a shadow government, but only to facilitate future negotiations that could eventually set the stage for the Taliban to re-enter Afghan governance. (ANI)

* Redefining political Islam. For the first time in the Arab world, political parties whose basic purpose is to create a society conforming to Islamic principles will be taking charge of elected governments. This is the culmination of a long-term trend, whereby Islam had filled the space left by the stifling of meaningful political activity by corrupt and authoritarian regimes. The Muslim Brotherhood and other Islamist groups built up social networks in many countries across the region and, where possible (for example in Egypt and Morocco), took part in elections, fully aware that they would not be allowed to win. Following the 2011 uprisings, Islamist parties have used this platform of popular support and political experience to good effect, helped by their strong financial position, stemming from their extensive membership and effective fund-raising activities in Saudi Arabia and other Gulf states. The Nahda party in Tunisia and the Parti de la justice et du développement (PJD) in Morocco emerged as the largest parties in their respective elections in late 2011 (for the constituent assembly in Tunisia) and are likely to preside over coalition governments for much of the coming year. Both these parties have devoted much effort to presenting themselves as modernist and committed to democracy, while insisting that they have no intention of imposing a dogmatic Islamist agenda or interfering in areas such as women’s rights and tourism. However, these parties face pressures from within their own ranks and from more radical Islamist groups to take a harder line. The challenge to the Muslim Brother mainstream is stronger in Egypt, where an alliance led by the Freedom and Justice Party (FJP, which has a similar outlook to those of its Moroccan and Tunisian peers) will be the largest party in the new Egyptian parliament, and may even have an overall majority, but will have to cope with a resurgent Salafist movement, whose bloc, led by the Nour party, is in a strong second place. Even if the FJP manages to form a Salafi-less coalition, the preponderance of Islamist MPs in parliament will ensure that there will be a powerful Islamic tinge to the political discourse. The parliamentary election result also suggests that there is a stronger likelihood than is generally supposed that Egypt will have an Islamist president. The responsibilities of government will provide a major test of the ability of the Islamist parties to sustain popular support. Their policy programmes are broadly in favour of a free market economy, but businesses will be on the look-out for punitive taxes and retroactive legislation (for example affecting past land sales in Egypt) that could be brought in as the new governments struggle to raise sufficient revenue to match their social spending promises. Assuming the democratic systems survive, the electoral politics will look very different four or five years down the line.

* Unfinished revolutions. The revolutionary momentum created at the start of 2011 is still far from over. Even in Tunisia, which has made the most orderly start to the task of democratic transformation, there are risks that the process may yet be derailed by fresh social upheavals. The fate of Egypt’s revolution hangs in the balance following the repeated violent confrontations between security forces and protesters over the past three months. The Supreme Council of the Armed Forces (SCAF) has, in the eyes of many of Egypt’s political activists, become an instrument of oppression, seeking to preserve at any cost the privileges it has accumulated in the decades since the 1952 Free Officers coup. Both the SCAF and some of the revolutionary activists have blamed outside forces (unspecified, but presumed to include the US and Israel) for the continue turmoil in central Cairo. The Muslim Brothers, for their part, have accused the SCAF of interfering in the elections to limit the Islamist gains. We expect the Egyptian political process to continue more or less according to the periodically updated plan, but there is clearly a risk that it could unravel. Similar doubts apply to Libya, as the overthrow of the Qadhafi regime and the gruesome killing of the dictator have given way to militia turf wars in the absence of any clear direction from the National Transitional Council. The uprisings against Ali Abdullah Saleh in Yemen and Bashar al-Assad in Syria have turned into a bloody stalemate. Arab political intervention has offered a way out of the crisis in Yemen, but it would come as no surprise to see the conflict persisting throughout the coming year. The Arab League is also making an effort to tackle the Syrian crisis, but there seems to be little chance of any negotiated settlement between the Assad regime and the opposition. The Syrian regime’s strategy is based on battering its opponents into submission, enacting cosmetic political reforms and seeking to outmanoeuvre its international foes in the diplomatic sphere. The opposition will find it hard to dislodge the regime without external military help, but it stands little chance of receiving the level of support that was afforded to the anti-Qadhafi rebels in Libya.

* Trouble ahead in Iraq. The US troop withdrawal in December has introduced a further element of uncertainty in Iraq’s political scene. The most recent tensions, following the announcement of an arrest warrant for Tareq al-Hashemi, the vice president, raised the stakes. Mr Hashemi’s Iraqiya bloc has boycotted parliament and suspended its ministers from the cabinet. Two scenarios have arisen as a result; the government could stumble on in its current form, or the prime minister could follow through with his threat of forming a majority government centred on his Shia-dominated parliamentary bloc, the National Alliance. Both outcomes are far from ideal, and could further add to the already highly-charged sectarian climate in Iraq. Despite the deteriorating political scene, a return to full-scale sectarian civil war is not in our central scenario, partly because the memories of the last one are still fresh.

* Algerian outlier. There have been plenty of disturbances in Algeria over the past year, but they have been mainly localised and have not had the unifying theme of the protests in other Arab countries. The Algerian president, Abdelaziz Bouteflika, has brought forward some piecemeal political reforms, but has acknowledged that his country is still an “apprentice” in democracy. Algeria’s bloody recent history has provided a measure of insulation against renewed civil conflict, and the allure of Islamist politics is perhaps not so strong as in its neighbours. Although there is deep cynicism about electoral politics in Algeria, the country does have a broader spectrum of political parties than many of its peers in the MENA region, and its press allows more scope for critical comment about the country’s rulers. Algeria is scheduled to hold a parliamentary election in the spring of 2013, followed by a presidential election the following year. One of the keys to Algeria’s stability will be whether Mr Bouteflika and the remnants of the military establishment can come up with a credible succession scenario.

* Gulf Arab anxiety. The Gulf Arab states were not insulated from the spirit of revolution elsewhere in the region, as there was a full-blown uprising against the established order in Bahrain in February and March, protests in Oman and Kuwait, disturbances in Shia areas of Saudi Arabia and the suppression of dissenting voices in the UAE. The Bahraini uprising was violently suppressed, with the backing of Saudi Arabia, but the ruling family has since tried to revive representative politics through dialogue with elements of the mainly Shia opposition. Dialogue is likely to continue over the next 12 months, but its pace is unlikely to meet the expectations of the opposition, or indeed the protesters who will continue to take to the streets, particularly in the Shia villages around the capital, Manama. The crown prince, Salman bin Hamad al-Khalifa, who is widely perceived to be the leader of the royal family’s reform-minded faction and who lost considerable influence after the unrest in February, will work hard to generate grass roots support in an effort to wrestle some of the power back from the ascendent hardline prime minister, Khalifa bin Salman al-Khalifa. Sheikh Salman will also work, through the Economic Development Board, to repair some of the considerable reputational damage Bahrain has suffered, but business sentiment is expected to remain well below what it was prior to the 2011 unrest. Sultan Qaboos of Oman reacted to the protests in his country by pushing through reforms aimed at devolving more powers to parliament, and this initiative received a clear popular endorsement in the elections that were held in October. However, he has retained considerable powers in his own hands, and the efficacy of the new parliamentary system is yet to be tested. Saudi Arabia underwent a seamless succession after the death of the long-ailing crown prince, Sultan bin Abdel-Aziz al-Saud, with Prince Nayef making the expected leap to become next in line to the throne, and Prince Salman slotting in behind him in the pecking order. However, the spectacle raised fresh questions about the sustainability of the Al Saud gerontocracy. The Gulf Arab states would be hit hard in the event of a sharp global economic slowdown, which would depress oil prices, but Saudi Arabia and Qatar have sufficient accumulated wealth to continue to spend heavily on development projects, while the UAE (in particular Abu Dhabi) has already trimmed some of its spending plans in anticipation of such a downturn.

* Iranian dramas. The temperature of the dispute over Iran’s nuclear programme has risen during 2011, as the new director of the International Atomic Energy Agency (IAEA), Yukiya Amano, has been less coy than his predecessor in voicing suspicions that Iran is seeking to make nuclear weapons. The IAEA report that was issued in November stated for the first time that the agency was convinced that Iran had been working prior to 2003 on the development of nuclear weapons, although it also acknowledged that there was no evidence of any diversion of enriched uranium for military purposes. The stage has been set for a tightening of sanctions, most probably in the form of an EU embargo on importing Iranian oil. Iran will still be able to sell oil to China, India and Japan, but there is a risk that it could react to the increased financial pressure through threatening to close the Strait of Hormuz, which could set off a chain reaction of military escalation. We doubt that matters will reach this pitch, but there is a constant risk of miscalculation among the various parties involved. The next steps in the nuclear dispute will be influenced to a large degree by developments in Iran’s domestic politics. The majlis elections in early 2012 are likely to be a trial of strength between factions aligned, respectively, with the Supreme Leader, Ali Khamenei, and the president, Mahmoud Ahmadinejad. The president has lost considerable ground over the past year, and his apparent bid to preserve his influence after the end of his second and final term in 2013 appears to have been decisively checked. However, Mr Khamenei has also been damaged, as he has become increasingly associated with hardline tendencies in the Revolutionary Guards, and there is growing suspicion about the role of his second son, Mojtaba. Iran is set for another turbulent year, and its domestic political struggles will have a wider impact across the region.

Source: EIU

In spite of denials by the Pakistani military, evidence is emerging that elements within the Pakistani military harbored Osama bin Laden with the knowledge of former army chief General Pervez Musharraf and possibly current Chief of Army Staff (COAS) General Ashfaq Pervez Kayani. Former Pakistani Army Chief General Ziauddin Butt (a.k.a. General Ziauddin Khawaja) revealed at a conference on Pakistani-U.S. relations in October 2011 that according to his knowledge the then former Director-General of Intelligence Bureau of Pakistan (2004 – 2008), Brigadier Ijaz Shah (Retd.), had kept Osama bin Laden in an Intelligence Bureau safe house in Abbottabad. In the same address, he revealed that the ISI had helped the CIA to track him down and kill on May 1. The revelation remained unreported for some time because some intelligence officers had asked journalists to refrain from publishing General Butt’s remarks. [1] No mention of the charges appeared until right-wing columnist Altaf Hassan Qureshi referred to them in an Urdu-language article that appeared on December 8. [2]

In a subsequent and revealing Urdu-language interview with TV channel Dawn News, General Butt repeated the allegation on December 11, saying he fully believed that “[Brigadier] Ijaz Shah had kept this man [Bin Laden in the Abbottabad compound] with the full knowledge of General Pervez Musharraf…  Ijaz Shah was an all-powerful official in the government of General Musharraf.” [3] Asked whether General Kayani knew of this, he first said yes, but later reconsidered: “[Kayani] may have known – I do not know – he might not have known.” [4] The general’s remarks appeared to confirm investigations by this author in May 2011 that showed that the Abbottabad compound where bin Laden was captured and killed was being used by a Pakistani intelligence agency (see Terrorism Monitor, May 5). However, General Butt failed to explain why Bin Laden was not discovered even after Brigadier Shah and General Musharraf had left the government.

General Butt was the first head of the Strategic Plans Division of the Pakistan army and the Director General of Inter-Services Intelligence (ISI) under Nawaz Sharif, Prime Minister of Pakistan from 1990 to 1993, and again from 1997 to 1999. Sharif promoted General Ziauddin Butt to COAS after forcibly retiring General Pervez Musharraf on October 12, 1999, but the army’s top brass revolted against the decision and arrested both Prime Minister Sharif and General Butt while installing Musharraf as the nation’s new chief executive, a post he kept as a chief U.S. ally until resigning in 2008 in the face of an impending impeachment procedure.

Brigadier Shah has been known or is alleged to have been involved in several high profile cases of terrorism. The Brigadier was heading the ISI bureau in Lahore when General Musharraf overthrew Prime Minister Sharif in October 1999. Later, General Musharraf appointed Shah as Home Secretary in Punjab. As an ISI officer he was also the handler for Omar Saeed Sheikh, who was involved in the kidnapping of Wall Street Journal journalist Daniel Pearl in 2002. [5] Omar Saeed Sheikh surrendered to Brigadier Shah who hid him for several weeks before turning him over to authorities. In February 2004, Musharraf appointed Shah as the new Director of the Intelligence Bureau, a post he kept until March 2008 (Daily Times[Lahore] February 26, 2004; Dawn [Karachi] March 18, 2008). The late Pakistani Prime Minister Benazir Bhutto accused Brigadier Shah, among others, of hatching a conspiracy to assassinate her (The Friday Times [Lahore], February 18-24).

Prime Minister Nawaz Sharif and the Pakistani top military brass had serious differences on several issues. One of the most serious of these concerned Pakistan’s relations with Osama bin Laden. However, the disastrous1999 Kargil conflict in Kashmir overshadowed all of these. General Butt says that Prime Minister Sharif had decided to cooperate with the United States and track down Bin Laden in 1999. [6] According to a senior adviser to the Prime Minister, the general staff ousted Sharif to scuttle the “get-Osama” plan, among other reasons: “The evidence is that the military regime abandoned that plan.” [7] General Butt corroborates this. In his latest interview, he says that Prime Minister Nawaz Sharif had constituted a special task force of 90 American-trained commandos to track down Bin Laden in Afghanistan. If the Sharif government had continued on this course, this force would likely have caught Bin Laden by December 2001, but the plan was aborted by Ziauddin Butt’s successor as ISI general director, Lieutenant General Mahmud Ahmed. [8]

Notes:

1. Author’s telephone interview with an Islamabad journalist who requested anonymity, November 16, 2011.

2. Altaf Hassan Qureshi, “Resetting Pak-U.S. relations” (in Urdu), Jang [Rawalpindi], December 8, 2011.  Available athttp://e.jang.com.pk/pic.asp?npic=12-08-2011/Pindi/images/06_08.gif

3. See “Government – Army – America on Dawn News – 11the Dec 2011 part 2,”   http://www.youtube.com/watch?v=b4bYHC2_ito&feature=youtu.be

4. Ibid

5. Author’s interview with a security officer who requested anonymity, Islamabad, May 2000.

6. “Government – Army – America on Dawn News –December 11, 2011, part 1,”                http://www.youtube.com/watch?v=-4WLtaxxPPw.

7. Author’s interview with a former government minister who requested anonymity, Rawalpindi, February 2006.

8. “Government – Army – America on Dawn News –December 11, 2011, part 1,”                http://www.youtube.com/watch?v=-4WLtaxxPPw.

The Eurozone sovereign debt crisis has entered a critical new phase with France’s prized AAA rating being downgraded by Fitch and the spectre of more sovereign downgrades looking imminent by the beginning of next year.

As borrowing costs increase in the euro area amid slowing economic growth, the 17-member currency union teeters on the brink of collapse. Analysts fear there will be catastrophic consequences for the global economy should the Eurozone break up.

So far, the efforts to tackle the Eurozone crisis have been half-hearted at best, leaving more questions than answers. The worst-case scenario in Europe includes sovereign debt defaults, probably starting with Greece early next year, which may trigger credit default swaps (CDS). Should this happen, the most natural outcome would be a frantic sell-off in riskier assets worldwide. The spectre of a global inter-bank crisis, wherein banks stop lending to each other, also looks a possibility, given their heavy exposure to toxic assets, including sovereign debts of peripheral euro nations.

Proposed

“[Euro] member states need to repay €1.1 trillion of debt in 2012, the bulk of it in the first six months. The Eurozone banks also have $665 billion of debt coming due in the first half of 2012. Eurozone leaders have proposed using the European Central Bank [ECB], the European Financial Stability Fund [EFSF], the European Stability mechanism [EMS] and they are now going around the houses to use the IMF [International Monetary Fund],” said Gary Dugan, Chief Investment Officer — private banking at Emirates NBD.

“However, whichever way you look at it, the Eurozone still cannot safely say it can underwrite its bond markets in the coming 12 months because it has insufficient funding.

“The EFSF has supposedly €440 billion to deploy but few people know where the funds will come from. The EFSF has struggled to raise €11 billion in the public markets,” Dugan added.

No money after December

As matters stand, Greece has money to fulfil its debt obligations only through December. Any more bailout money from fellow Eurozone member countries seems unlikely, unless Greece agrees to offer physical assets as a collateral.

“We saw glimpses of a worst case scenario recently with considerable yield widening for Italy and Spain and the rise in yields even for German bonds. Assuming this trend carried forward, it would mean Italy and Spain would be excluded from the public markets and hence raising the prospect of a default with a catastrophic chain reaction across the core Eurozone countries and a major ripple effect globally,” said Anastasios Dalgiannakis, Head of Trading at Dubai-based Mubasher Financial Services.

Giyas Gokkent, chief economist at National Bank of Abu Dhabi, said a Greek default by itself would have manageable ramifications, but the fear was always possible deterioration in the larger periphery euro area economies and that is occurring. “The fundamental problem is that periphery euro area countries are not competitive. Interlinked to this is the emergence of high debt and lack of growth. Had these countries had their own currencies, they would have devalued, monetized the debt and cost of adjustment would have been easier. With the single currency, the only way they can become more competitive is for these economies to see sharp price and wage declines which are politically very, very difficult. The current path is the break-up of the euro unless politicians can take hard decisions: on the periphery that will mean more austerity and on the core euro area that will mean sharing more of the costs for sorting out periphery problems,” said Gokkent. He said in the near term, the markets are interpreting each passing day as more dithering by euro area politicians and choosing to reduce exposure to periphery, whereby the economic situation is deteriorating further. Pradeep Unni, Senior Relationship Manager at Richcomm Global Services DMCC in Dubai, said the euro’s current crisis isn’t likely to have a quick solution.

“If the current market conditions prevail, the euro may slide to $1.20 or below in the next three or four months. The factors are clear – zero confidence in the political/financial system of Europe, widening bond yields, significant underperformance in core European Union nations, and low to insignificant capital inflows,” said Unni. “Any mass downgrade as feared by the rating agencies may increase the pace of the slide.”