A Digest of debkafile Round-the-Clock Exclusives in Week Ending March 4, 2005:

A Sharp Weather Eye Advised on Emerging Markets

4 March: debkafile‘s financial analyst warns investors that a sharp sell-off in emerging markets may be round the corner as American interest rates continue their upward march.

Rate hikes in America are the most concrete, immediate risk

Short-term interest rates in America have gone up six times from their historical low of 1% a year ago to 2.5% today. Future contracts on interest rates are pricing 3.75% until the end of 2005. Some investment houses are predicting that US short-term rates will end the year as high as 4%. Long-term interest rates – as priced in American 10-year government bonds – have remained during all that period in the 3.80-4.40% range. Last Monday, February 28, the yield on long term bonds broke through the 4.30% mark and surged to almost 4.40%.

Over-crowded markets

In recent months, the pursuit of emerging markets by investors after high yields has swelled. For example, according to the February 22 Chicago futures data, the Mexican peso’s long speculative positions shot up to a new all-time high.

A clear example is the continuous reduction of the risk premium (the spread between risk-free American bond price and emerging market bond price).

debkafile‘s financial analyst sums up with a warning. Given the continuous short term dollar interest rate hikes and predictions of a rise in long term US interest rates, combined with the stampede of investors into emerging markets, there is a very real risk of a sharp and violent correction in the emerging markets in the coming weeks.

The currencies/markets that appear most vulnerable are Turkey and South Africa and, to a lesser degree, Poland, Hungary and Mexico.

Assad Secretly Deploys Joint Iranian-Syrian Military and Intelligence Units in Lebanon

5 March: Syrian ruler Bashar Assad in his unscheduled address to parliament in Damascus Saturday, March 5. He said: “We will not stay one day if Lebanese consensus asks us to leave”. But then sidestepped the issue by announcing Syrian troops would deploy eastward to the Beqaa Valley. None would be pulled out of the country. Assad joked about the international and Arab clamor to quit Lebanon: “I know that the minute I finish this speech, they will say it is not enough. So I say it now: It is not enough.” He burst out laughing and the chamber roared with him.

debkafile‘s Washington sources reveal the Bush administration’s decision to act for Syria’s total international isolation – firstly, by cutting off Damascus’ international banking ties and the flow of international funds to and from Syria through Lebanese banks. The volume of these transfers is such that it could bankrupt Syria. UN Middle East envoy Terje Roed-Larsen took off Sunday on a 12-day tour of Europe, Saudi Arabia, Egypt and Gulf emirates to finalize the US-Arab-European consensus on international sanctions against Syria. He will wind his tour up with a visit to Damascus to give Assad a last chance to implement Security Council resolution 1559 in full, or else face up to UN sanctions.

debkafile‘s Middle East sources account for the Syrian president’s confident bearing Saturday by the fact that he was acting out a pre-planned strategy. Realizing he could not count on Arab support, Assad furnished himself with an alternative ally: Iran which February 20 airlifted to Damascus shared Iranian-Syrian safeguards against attacks on the Islamic Republic’s nuclear installations and/or Syrian strategic targets.

Assad believes he is gaining on the United States in their duel over Lebanon and holds winning cards.

1. With Iranian backing and Iranian Revolutionary Guards in southern Lebanon, Assad believes he will retain his grip on the country.

2. Assad made no mention of the mixed Syrian-Iranian units scattered in Lebanon.

3. Should the US or Lebanese governments decide to get rid of Iranian forces, they will have to turn to Tehran and the Hizballah. Damascus will be off the hook.

4. Iranian forces, including intelligence units, have been quietly installed on the borders of Israel, thereby upgrading Syria’s and the Hizballah’s defenses and bolstering the Iranian umbrella over Hizballah’s missile emplacements facing Israel. This strengthened structure also signaled the spreading Palestinian opposition to Mahmoud Abbas’ leadership that aid is available from a strong Syrian-Syrian-Hizballah across the border.

5. No Israeli response was forthcoming to the new Iranian deployment in Syria and Lebanon, leaving the Assad regime cock-a-hoop over achieving yet another coup after pulling off the February 14 assassination of the primary threat to Syria’s domination of Lebanon, Rafiq Hariri.

Four Interlinked Terrorist Events in One Afternoon

8 March: As President Bush was saying…”the Lebanese people are demanding a free and independent nation. In the words of one Lebanese observer, ‘Democracy is knocking at the door of this country and, if it’s successful in Lebanon, it is going to ring on the doors of every Arab regime,'” a huge crowd of Lebanese, modestly estimated at 200,000, packed Beirut central Beirut in support of Syria and roared after Hizballah’s Hassan Nasrallah: “America out! Thank you, Syria!” and “Death to Israel!”

Nasrallah yelled back: “We are not Ukraine! We are not Georgia! We are Lebanon!” And “Sharon, Mofaz, Shalom, forget your Lebanese dreams! Lebanon belongs to the Lebanese!”

Again, Bush’s address was punctuated by the breaking news of the death of Chechen rebel leader Aslan Maskhadov at the hands of elite Russian troops in a special operation at Tolstoy-Yurt in northern Chechnya.

Then, as dark fell, Palestinian leader Mahmoud Abbas held his first conversation since the Sharm al-Sheikh summit with a high-ranking Israeli official defense minister Shaul Mofaz at Gaza Strip’s Erez border terminal. They met to try and revive the bilateral security dialogue cut off by the Palestinian suicide attack that killed five Israelis at a Tel Aviv night club February 25. On the agenda was Israel’s offer to start handing five West Bank towns to Palestinian security responsibility.

Weaving round these happenings, Bush said: “The bombing in Tel Aviv is a reminder that the fight against terrorists is critical to the search for peace and for Palestinian statehood.” The US president then added a phrase left out of the text the White House published later. Sourcing the attack to Damascus and attributing its implementation to radical Palestinian organizations, Bush concluded that this strategy had a good chance of recurring.

The four interconnected events occurring on a single afternoon graphically illustrated the huge obstacles still facing the United States in the global war on terror.

debkafile‘s military sources reveal exclusively Assad and Lebanese chief of staff General Michel Suleiman have cut a deal for Syrian troops to quit Lebanon by June, but to leave behind Syrian-Iranian early warning stations, their crews and Syrian secret agents. The Iranian Revolutionary Guards units will remain in Hizballah bases. These forces will ascertain that nobody in Lebanon can disarm Hizballah or the radical Palestinian organizations based in Lebanon in compliance with the same Security Council resolution 1559 that calls for Syrian withdrawal.

Nasrallah turned the Bush argument against him. If democracy and majority government are to rule Lebanon, then, fine, Hizballah’s Shiite following has proved it outnumbers the pro-American, anti-Syrian opposition and it proposes to fight its way to power through the ballot box without renouncing the bullet.

Rated by our counter-terror sources as the best organized and trained armed terrorist militia targeted by the US-led war on terror – bar none, including al Qaeda, it controls a strong territorial base with the solid logistical, strategic and financial backing of Iran. The Hizballah is the Iraqi guerrillas’ senior recruiting agent in Lebanon and Syria.

If Bush and Chirac succeed in ridding Lebanon of Syria, Hizballah and its Iranian sponsors will come up smiling.

Palestinian terrorists are following a similar route. Once Hamas and Fatah-al Aqsa Brigades are entrenched in the Palestinian political establishment, who will disarm them or dismantle their organizations? Certainly not Palestinian security services which Abu Mazen has directed to recruit the hard men and hand them regular pay checks and new uniforms in the hope of taming them.

It is hard to believe that the death of Chechen leader Aslan Maskharov during President Bush’s speech was an accident. debkafile‘s counter-terror experts liken the Chechen revolt’s loss of Mazkhadov to the Palestinians’ loss of Yasser Arafat as a political guide and symbol. But while Arafat died in bed, Putin disposed of the Chechen leader violently to demonstrate to the US president that the only one way to beat terrorist kingpins is to kill them, not try and convert them to democracy.