A Digest of debkafile Round-the-Clock Exclusives in Week Ending December 10, 2004:

Syria Woos Israel with Peace Serenade to Avoid Disarming Hizballah


4 December: Syrian ruler Bashar Assad is pitching his offer of peace talks with Israel to disguise and dodge his real woes.

Washington has warned him that if Syrian military intelligence and the Lebanese security service customize the list of candidates and tinker with the Lebanese voting process, he will be in trouble

He is also beset by quarrels in his own tight circle.

Newly-appointed interior minister Ghazi Kanaan insists that his department cannot be subordinate to any other intelligence body. But by backing him up, the Syrian president has caused his brother-in-law General Assad Shawqat to resign as head of Syrian intelligence and security and take the job of deputy military intelligence commander.

These musical chairs bear on Assad’s attitudes on the Lebanese and Israeli questions. Kenaan belongs to the pro-reform faction in the Syrian leadership which advocates Syria’s withdrawal from Lebanon and negotiations with Israel to stave off American punishment. Shawqat’s boss, head of military intelligence General Hassan Khalil, is due to retire early next year. Shawqat may replace him, although this is not certain. If he does, he will attain equal rank with Kenaan. This may be a setback for the faction seeking to disengage from Lebanon and engage Israel.

Syrian civilian government is also split into two camps. The pro-reform faction, led by propaganda minister Dr. Mahdi Dahlallah and deputy foreign minister Walid Mualem want talks with Israel to start from the point they were broken off four years ago. They claim that late Israeli prime minister Yitzhak Rabin agreed to Israel evacuating the entire Golan except for a chain of hills commanding the Sea of Galilee. If what has become known as the Rabin deposit is accepted, an accord can be wrapped up in 24 hours.

The conservative camp, headed by vice president Khalim Haddam and foreign minister Farouq al-Shara reject the Rabin deposit and demand a full return to pre-1967 lines, including also the Syrian strip of shore on the eastern bank of the Sea of Galilee, the entire Golan and the Shabaa Farms at the foot of Mt. Dov, to which the Syrians claim sovereignty.

Washington asked the French to find out if Assad is willing to publicly renounce Syria’s territorial claims to the Shaaba farms to prove his genuine desire for progress on Lebanon and the dispute with Israel. Damascus has not replied

As seen from Washington, Assad is consistently evading response to American demands by turning the subject round and offering to start talks with Israel, which makes him look good in the world media.

To get around this blank wall, the Americans enlisted president Hosni Mubarak, who summoned the Syrian ruler to a meeting and warned him that ignoring Washington’s demands would end badly for him. Once again Assad threw out a peace offer to Israel.

Catching on to his game, Israeli prime minister Sharon says words are cheap; he wants to see action.


Azzam’s Release Signals Mubarak’s Decision to Withdraw as the Palestinians’ Patron


5 December: In the first week of March, a senior Israeli intelligence official visiting Cairo collected a Note from president Hosni Mubarak informing prime minister Ariel Sharon that he had decided to let Azzam Azzam go. He was only waiting for the right moment.

The Egyptian president took ten months to carry out his promise. But when he did it became a symbolic watershed: Azzam’s release infuriated the Palestinians who caught the message. Egypt had stopped indulging the Palestinians and their “struggle;” Mubarak was no longer their patron; he had decided to join the Americans and Israelis in an effort to make them set their house in order with no nonsense about Arafat’s legacy.

In the brief month after Arafat’s death, Mubarak decided to let go of his constricting bonds with the Palestinian cause and reverse their former roles. The key to this reversal would be the return to the peace relations with Israel inducted by Sadat’s 1977 pilgrimage to Jerusalem and embodied in their 1979 peace treaty.

From now on, Egypt’s government instead of keeping step with the Palestinians is determined to govern their fate by deploying Egyptian officers and intelligence agents in the Gaza Strip and West Bank in line with policies shared with the US and Israel. The CIA and Egyptian intelligence will work together in the field under the direction of Egyptian intelligence chief General Omar Suleiman. Sharon will instruct Israeli military intelligence and the Shin Beit to cooperate fully with the Egyptian force.

This cooperation will carry on discreetly so as not to impair the chances of the fourth wheel of the cart, Mahmoud Abbas (Abu Mazen), in the January 9 election. Cairo will appear to extend the Palestinians a lifebelt. Egypt will emerge as the Number One Middle East power. Immediately after the January 9 Palestinian elections, an Arab summit will be convened – probably in Saudi Arabia. Mubarak and the new Palestinian Authority chairman will take the stage and ask for a pan-Arab seal of approval plus financing. Mubarak will be riding high at home and on the Arab front when the time comes to transfer government to his son, Gemal Mubarak, at the end of next year or early 2006.

The revival of the peace model established by Sadat and Menahem Begin a quarter of a century ago – extended now to embrace a Palestinian partner – will go down as a stunning achievement credited to George W. Bush – and may even do some good in Iraq.

Syrian president Bashar Assad will find himself backed up in a corner and made to choose between deepening his ties with radical Iran and jumping aboard the Egyptian-American cart.

The Palestinians will be told that Egypt’s presence in the Gaza Strip and West Bank and Cairo’s sponsorship of Abbu Mazen are their only hope of escaping from their woes and their passport to Palestinian statehood at the end of next year.

Israel may end up giving up most in tangible assets for the settlement. It is hard to image Bush nor Mubarak – and certainly not Abbas – being satisfied with Israel retaining the largest part of the West Bank and relinquishing only its northern tip. Sharon will be squeezed hard for more substantial territorial concessions and larger settlement evacuations.


After Plunging Dollar, Watch for US Government Bonds Sell-off


7 December: The sinking dollar and the soaring US stock market will lead, according to our financial expert, to a sell-off of American government bonds and, as a result, an increase in long-term interest rates. What is the connection between the price of bonds and interest rates? And how do they affect real-estate and the stock and foreign exchange markets? Unlike most of Asia – and the rest of the world, China pegs its currency the yuan to the US dollar, to the annoyance of America, which is calling for a yuan revaluation. Since China is the biggest exporter to America and therefore the prime cause of America’s escalating trade deficit, the Bush government hopes for a stronger yuan to help cut that deficit. The effect of a sharp sell-off of US bonds on world stock-markets, real-estate and currency trading would be powerful and could even in some circumstances trigger world crises.

The last round of dollar plunges was caused primarily by central banks diversifying their reserves by trading in some of their dollars for other currencies, mostly euros.

Central banks, particularly in Asia – Japan, China, Taiwan, India and Singapore – hold vast foreign exchange reserves in amounts of hundreds of billions of dollars. These reserves are generated partly by those countries’ current account surpluses (in contrast to “spendthrift America”), and partly by their dollar surplus balance, which is deliberately kept high by their central banks buying dollars in the foreign-exchange markets to build a bulwark against their own national currencies growing strong enough to impair their export trade.

Alan Greenspan, chairman of the Federal Reserve, talking last month with unusual bluntness about the state of the dollar, remarked: “… considering the size of America’s trade deficit, devaluation in the dollar could occur at some point.”

Devaluation of the dollar may happen by selling off dollar assets like… American bonds.

Selling US assets=American bonds held by Asian central banks – or even a partial sell-off – could sharply depress the bond price and raise long-term interest rates.

Those banks would register a loss on their American bond holdings – which would prompt them to throw more US bonds onto the market.

Sounds like catch 22, or in market language: Pass the hot potato on to someone else….

In recent months, the manager of American PIMCO, one of the world’s biggest bond trading companies, has been recommending a reduction in holdings in the bond market.

The anomaly between currency markets (dollar down), and bond markets (fairly level) cannot last long.

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