Influence Operation Revealed

China’s intelligence agencies are conducting a major covert influence campaign aimed at derailing the Obama administration’s military shift to Asia, according to U.S. intelligence officials.

According to the officials, who spoke on condition of anonymity, the Air Sea Battle Concept—a Pentagon program to develop new weapons and capabilities to counter China’s military buildup—was a tightly guarded secret.

In November, the Pentagon briefed reporters on the creation of the joint Navy, Air Force, and Marine Corps office called the Air Sea Battle Office; this new office is developing new military strike capabilities that range from the use of special operations forces deep inside China, to long-range precision attacks with missiles and aircraft.

Defense Secretary Leon Panetta said last month that the latest defense budget request protects—and in some cases increases—investment in power projection in Asia.

“Since last summer, Air Sea Battle has become the highest Chinese intelligence priority,” said one official familiar with U.S. counterintelligence programs. “To protect the program, our counterintelligence efforts are crucial.”

Pivot to Asia targeted

As part of the shift to Asia, dubbed the “pivot,” the Pentagon will send 2,500 Marines to a base in northern Australia and move several new Littoral Combat Ships to Singapore. It is also bolstering alliances in the region, specifically with Japan, which is working closely with the U.S. military on missile defenses.

The Chinese intelligence and influence targeting of the Air Sea Battle Concept is being led by Beijing’s military intelligence service, known as the Second Department of the People’s Liberation Army, or 2PLA. In 2010, that service began an aggressive spying program to learn about the Air Sea Battle program after its existence was publicly disclosed by a think tank.

The 2PLA sent spies to the United States and spoke to academics who travel frequently to China in an effort to find out about the new Air Sea Battle Concept.

Major General Yang Hui, the head of Chinese military intelligence, is believed by U.S. officials to be heading up the spying and influence operation. Yang secretly visited the Pentagon in October 2009 and during meetings with officials complained that the Pentagon was trying to undermine U.S.-China relations by disclosing information to the press about China’s military activities.

Two other intelligence-related units were also linked to the anti-Pentagon spying program.

One is the PLA’s General Political Department, a unit under the Central Military Commission, the most powerful organ of government in China.

The U.S.-China Economic and Security Review Commission identified the General Political Department in a draft report last year as having an “intelligence bureau” that worked with a group of retired U.S. and Chinese generals and admirals called the Sanya Initiative. The initiative lobbied Congress and the Pentagon to soften its annual report to Congress on China’s military buildup.

The report also said the Chinese sponsor of Sanya “is linked to the Intelligence Bureau of the Liaison Department of the PLA’s General Political Department … [with additional] ties to both the Ministry of State Security and the Ministry of Foreign Affairs.”

The Ministry of State Security is China’s civilian intelligence agency. The Liaison Department of the PLA is in charge of “conducting propaganda and psychological operations directed at other militaries.”

A civilian Communist Party organ called the United Front Work Department, a quasi-intelligence group under the Party Central Committee, is also engaged in intelligence-gathering operations.

U.S. counterintelligence officials learned about the Chinese spying and influence program because the Pentagon had launched a special program that was designed to protect Air Sea Battle. The Air Force Office of Special Investigations and the FBI conducted the joint anti-Chinese intelligence program.

Pentagon and FBI counterintelligence spokesmen declined to comment on the Chinese program and U.S. efforts to counter it.

Document lists influence themes

One key to understanding the Chinese program was a document obtained by U.S. intelligence listing at least five themes being used by the Chinese in the effort to stop Air Sea Battle programs.

According to officials familiar with the influence themes, China has been telling its agents and others who can influence U.S. policy that Air Sea Battle is provocative and will undermine the official U.S. policy of building trust and closer relations between the two countries.

Additionally, Chinese influence organs—state-controlled news media, government think tanks, their officials, and others—have hinted that Air Sea Battle would never be successful in conducting attacks deep inside China against its weapons systems and infrastructure because China’s nuclear forces would be used in retaliation.

China is modernizing its nuclear arsenal with new missiles, including two long-range road-mobile ICBMs, a new submarine-launched ballistic missile and a new land-attack cruise missile. All these would be used to attack the United States if it were to engage in a war against China in the future, according to this propaganda theme.

A third influence theme is that U.S. allies in Asia and elsewhere will oppose all U.S. efforts to conduct military operations against China and would prevent U.S. forces from attacking China by limiting the use of U.S. military bases in Asia.

The U.S. military currently has forces in Japan and South Korea and will send Marines to Australia. It is also negotiating returning some military forces to the Philippines, where both air and naval forces were based until the 1980s.

More counterspying needed
Some officials said they are concerned that too little is being done to prevent China from influencing the U.S. government regarding the new battle concept and that U.S. intelligence gathering in China is too limited by policy officials worried about upsetting diplomatic and economic relations.

U.S. military spying will need to be increased as part of Air Sea Battle to better identify weaknesses and vulnerabilities in both China’s government and military that could be exploited in a future conflict.

Counterintelligence officials said they are eager to step up efforts against Chinese intelligence and the anti-Air Sea Battle effort. Little is publicly said about Chinese spying, but the current administration is reluctant to engage in large-scale counterintelligence operations against China.

Battle concept surprised China
Former State Department intelligence analyst John Tkacik said disclosures about Air Sea Battle three years ago caught the Chinese military by surprise.

“Almost immediately [they] tasked all their intelligence assets, from overt military attaches to informal academic ‘Track-2’ scholars, to find out what it was all about,” Tkacik told the Washington Free Beacon.

Tkacik said U.S. secrecy frustrated the Chinese who were unable to learn details.

“When it came into the open last November, the Chinese immediately saw it as a doctrine designed to counterbalance their own expansion in the Western Pacific,” he said. “After all, the idea is for the United States to supply air and sea power projection to augment the ground forces of allied and friendly countries in the region that might be threatened by, who else?”

As a result, the Chinese are now engaged in a full-court press to discredit Air Sea Battle as somehow “aimed at containing China,” Tkacik said.

The success of the influence pressure can be seen in the “poor quality of debate within the U.S. government on Air Sea Battle,” Tkacik said.

“None of it really addresses China’s current military rise, but instead focuses on how to appease China’s indignation,” he said.

Richard Fisher, a China affairs specialist with the International Assessment and Strategy Center, said the major influence and propaganda campaign by China against Air Sea Battle was expected.

“Those who go out of their way to say the Air Sea Battle is not ‘China-focused’ may think they are being politically correct, but they are also helping China to undermine its political support in Washington,” Fisher said.

“China can be expected to undertake many types of influence operations, ranging from giving its favor to mainstream think tanks and journalists who talk down or oppose the Air Sea Battle Concept, to urging its friends in other Asian capitals to oppose this U.S. concept, to its being added to the regular list of complaints against U.S. policy that every American visitor will have to listen to ad nauseam,” he added.

Washington free beacon

Iran 'seeking to build nuclear weapon', warns David Cameron

David Cameron has warned that Iran is seeking to build an "inter-continental nuclear weapon" that threatens the west, as he urged Israel to allow time for sanctions to force the Iranians to change their strategic stance.

He was speaking after the cabinet was briefed for an hour by the national security adviser, Sir Kim Darroch, on the imminence of the threat to the UK posed by Iran.

It is the first time Cameron has made such an explicit warning that Iran could endanger UK security, and has faint echoes of the warnings from Tony Blair's government that Iraq could fire weapons of mass destruction with 45 minutes' notice.

It is understood that the government's National Security Council is also looking at potential reprisals in the UK if Israel were to launch a pre-emptive strike against an Iranian nuclear weapons site. Cameron will be briefed by President Barack Obama next week on the US approach to any such strike when the two leaders meet in Washington.

Speaking to MPs on the Commons liaison committee, the prime minister said Tehran's ambitions were dangerous for the Middle East.

But Cameron also added that Iran "is a danger more broadly, not least because there are signs that the Iranians want to have some sort of inter-continental missile capability.

"We have to be clear this is a threat potentially much wider than just Israel and the region."

The Israeli prime minister, Binyamin Netanyahu, told an American Jewish group in Washington on Monday that diplomacy and sanctions had failed and that "none of us can afford to wait much longer" to act against Tehran.

On Tuesday six global powers agreed to resume negotiations with Iran on its nuclear programme, calling for "concrete and practical steps" to restore international trust in Tehran's stated intentions.

In a letter to Iran's chief nuclear negotiator, Saeed Jalili, the EU foreign policy chief, Lady Ashton, said the negotiations should restart as soon as possible, at a venue to be decided.

Writing on behalf of a negotiating group comprising the US, UK, France, Russia, China and Germany, Ashton said: "Our overall goal remains a comprehensive negotiated long-term solution which restores international confidence in the exclusively peaceful nature of Iran's nuclear programme, while respecting Iran's right to the peaceful use of nuclear energy consistent with the NPT [nuclear non-proliferation treaty]."

The last set of talks broke down in Istanbul in January last year. Western diplomats said Jalili refused at that meeting to negotiate over Iran's nuclear programme or any confidence-building measures previously discussed, such as an exchange of Iranian enriched uranium for foreign-made fuel rods for the Tehran research reactor.

At the meeting, the Iranian negotiator laid down preconditions for talks including the lifting of all sanctions and a guarantee that Iran could continue its nuclear programme, including the most controversial element, uranium enrichment.

Tehran says the programme is for purely peaceful purposes, but the west and Israel allege it is a front for an effort to build a nuclear arsenal, or at least establish the capacity to build a bomb at short notice.

Jalili's reply to Ashton was delivered in February, four months after her proposal, suggesting talks on "a spectrum of issues" including "Iran's nuclear issue".

French officials argued that in order to satisfy Israel that all was being done to resolve the nuclear crisis by peaceful means, the international response would have to make it absolutely clear that the talks would have to end with the "full implementation" of UN security council resolutions calling for the suspension of uranium enrichment. That language was spelt out in Ashton's latest letter.

A report by the International Atomic Energy Agency (IAEA), presented to the agency's board this week, said Iran had tripled its rate of production of 20%-enriched uranium – seen by the west as a particular proliferation threat – and reported that Iran had not co-operated with an inspection visit last month, refusing access to a sensitive military site known as Parchin.

Iran is thought to have already developed a ballistic missile which can travel approximately 1,200 miles, but it is also working with the Koreans to turn this into a missile that can accommodate a nuclear warhead.

Cameron stressed that Iran should not be seen as "a mini superpower" but as "a disastrous country" with mass unemployment and a dysfunctional economy.

He said he still believed the track of sanctions should be pursued, arguing EU-wide sanctions were causing dislocation to the Iranian foreign exchange position and "should not be sniffed at".

He said the next step was to get the Indians and Chinese to also refuse to buy Iranian oil.

"The more pressure we pile on Iran through sanctions the more incentive they have to take a different path – it is the best option we have".

The prime minister said that no plans were being laid at this stage to increase the UK military presence in the region.

The Guardian

Euro-Zone Central Bank System Massively Imbalanced

The crucial clue came from the same man whose signature once adorned the deutsche mark: Helmut Schlesinger, former president of Germany's central bank, the Bundesbank. He was the one who pointed Hans-Werner Sinn, an economist in Munich, in the direction of a strange entry in the Bundesbank's statistics: In late 2010, records showed claims on other euro-zone central banks totaling over €300 billion ($400 billion). Curious, Sinn began to dig deeper. What he found exceeded his worst expectations.

"In the beginning, all I had was this number, and I didn't really know what it meant," says Sinn, who is president of the Munich-based Ifo Institute for Economic Research. "The Bundesbank told me those were irrelevant balances. But that didn't reassure me."

Sinn spoke with specialists at various central banks and with colleagues in his field. "Each person knew a little bit," Sinn explains, "and I had to fit the pieces of the puzzle together. It was real detective work."

After weeks of work, Sinn had assembled enough pieces to create a picture that would make any one shudder: Since the 2007 financial crisis, immense imbalances have formed within the otherwise harmless payment system that exists between the central banks of the 17 euro-zone member states. While Italy, Spain, Ireland, Portugal and Greece, all hit hard by the debt crisis, show deficits totaling over €600 billion, the claims owed the Bundesbank have climbed to €498 billion.

'Caught in a Trap'

As long as the monetary union continues to exist, this isn't a catastrophe. The money is virtual, created by central banks, and its existence doesn't mean that an equivalent amount is lacking elsewhere. But as soon as a country leaves the euro zone, or the currency union collapses entirely, things get critical.

"We're caught in a trap," Sinn says. "If the euro breaks apart, we're left with an outstanding balance of nearly €500 billion, owed by a system that no longer exists." That figure, €500 billion, is more than one and a half times Germany's annual federal budget.

This, though, is the worst-case scenario, and would only apply if the euro zone falls apart entirely. A far more realistic possibility is that one country, such as Greece, would leave the monetary union. In this case, all of the other euro-zone central banks would have to bear the Greek central bank's debt together. Germany's Bundesbank, in accordance with its share of the European Central Bank (ECB), would assume about 28 percent. With Greek debt at €108 billion, Germany's share would be approximately €30 billion.



SPIEGEL ONLINE

The Bundesbank's claims are set off by massive debts in crisis-stricken euro-zone countries.Sinn loves to be provocative. In this case, though, it seems he truly has serious concerns. Sitting at a restaurant in Berlin's government quarter with his laptop open on the table in front of him, he uses the tip of his coffee spoon to trace the yellow and blue lines that snake across the screen. These lines are meant to show the extent to which the euro zone has gone off track.

"This is dangerous," Sinn says, his eyes flashing. These outstanding balances owed by other central banks open Germany up to blackmail, he explains. "Now everyone knows we have to save the euro, at almost any cost."

His thesis sounds dramatic, yet so far Sinn hasn't managed to get the general public interested in the problem, which is only slowly spreading beyond economic circles. He has made it into the major newspapers, but the mass-circulation tabloid Bild won't be publishing Sinn's discovery on its front page any time soon.

Sinn certainly isn't shy about making himself heard. He's a welcome guest on talk shows because he makes his case clearly and sums it up in pithy sound bites. But that approach doesn't work with Sinn's current subject, which is too complex for a talk show. Then there's the name of the payment system between the central banks -- "TARGET2" -- which sounds about as exciting as the title of an accounting seminar.


The Genesis of the Problem


In theory, the system ought to be as harmless as it sounds. TARGET2 is meant to help process the payment claims between central banks that result with every cross-border bank transfer within the monetary union. As long as the economy is in balance and goods and money are flowing in all directions, the balances always even back out. Even if a country imports more goods than it exports, it is generally able to make up the difference through capital inflow from abroad, keeping TARGET2 balances at or near zero. This was the case until the beginning of 2007.

Here's an example: A Greek business buys a truck from a German company. The Greek company's local bank in Thessaloniki transfers the payment for the truck to the German company's bank in Stuttgart. Because the payment is carried out through the two countries' central banks, this creates a liability on the part of Greece's central bank toward the ECB within the Target2 system, while the German Bundesbank now has a claim from the ECB for the same amount.

The balance evens out when money flows from Germany to Greece, as happened most years before the crisis: The commercial bank in Greece would borrow the money it needed for its loan to the Greek business, for example, from a German bank.

That, in itself, is a problem. Since countries such as Greece, Spain and Portugal have for years imported more than they exported, even before the crisis they relied on capital inflow from abroad to pay for the goods and services they bought. Germany, on the other hand, has consistently produced export surpluses, which means it has to export capital as well.

Such imbalances cause difficulties in the long term, even in good times. But in a financial crisis, they can potentially lead to catastrophe because the cash flow between banks suddenly falters. This is what has happened since 2007:

Banks in all of the euro zone countries have had to hold onto their money. They withdrew from supposedly unstable countries, and loans that expired were not renewed.
The fears of the wealthy also came into play: Concerned that their money might soon lose its value, they began to pull out of Greece, Ireland and Portugal, then later Spain and Italy as well. This left banks in those countries with a smaller pool of savings they could pass on as loans.
The result of all this was that Greece and the other countries in crisis no longer had enough money to fund all of their imports. If Greek banks wanted to offer further loans, for example to pay for the purchase of German or Dutch products, they had to borrow from their central bank.
The central bank, in turn, simply created money out of nothing, charging it to the entire euro zone as an outstanding claim within the TARGET2 system. "These countries simply pull money off the printing press," Sinn complains.





SPIEGEL ONLINE

Bundesbank claims are rising -- as are the debts of crisis-stricken euro-zone countries.Even worse, the central banks also grew increasingly lax in the collateral they required for loans they made to banks in their country. Whereas in the past they accepted only government bonds with top-level credit ratings, now they began to accept second and third-tier securities. This can be seen clearly in the statistics: Just between 2005 and 2010, the volume of securities accepted by central banks rose from €8 billion to €14 billion -- and has likely increased even more since then.

Especially those banks in crisis countries, which are already reliant on their central banks, now submit even their worst securities. Greek banks, for example, have primarily their own country's sovereign bonds on their books. No one on the free market wants these securities, but the Greek central bank continues to accept them as collateral, issuing new money to the banks in exchange. "Private cash flow is replaced by public cash flow," Sinn explains.

This becomes dangerous if those securities ever need to be used, for example if Greece leaves the monetary union or declares bankruptcy. At that point, Greek bonds would be valueless, and the probability that Greece's central bank will be able to repay its debts to the euro system becomes miniscule.

'If Only One Person Says It, It Can't Be True'
At first, Sinn took a great deal of criticism for his beliefs. There was something of an outcry among economists the first time he published details of his thoughts in theFrankfurter Allgemeine Zeitung, partly because not all of those thoughts were as clearly formulated as they are in his most recent paper on the subject. He was exaggerating and artificially playing up the risks, other economists said. The Bundesbank itself also initially dismissed the divergent balances as more or less harmless. Sinn was essentially alone in his views.

"Everyone thought: If only one person says it, it can't be true," Sinn says. Still, the economist says, he never doubted his own interpretation of the facts. And by this point most of the critical voices have fallen silent.

"I spent two weeks looking into the subject," says one German economics professor. "Mr. Sinn is right. The analysis is brilliant." Others concede, though some through gritted teeth, that the risks of the TARGET2 balances do seem to be higher than they originally thought.

The ECB, meanwhile, has confirmed the principles behind Sinn's analysis, but draws considerably more innocuous conclusions, at least publicly. The fact that central bank funds within the euro system are distributed so unevenly, according to the ECB, actually helps promote stability, since financially solid banks even "in countries with financial strains" are able to satisfy their liquidity needs.

That statement only seems reassuring on first glance. In plain language, what it means is that commercial banks in crisis-stricken European countries are forced to rely on funds from their central banks because they can no longer get money anywhere else.

Eurobonds Would Help Solve the Problem
It is difficult to come up with ways to reduce risk without plunging the euro zone into chaos -- which is precisely what would happen if central banks in crisis countries were forced to pay back their debts overnight. Sinn suggests tightening regulations on the collateral banks use to borrow money from central banks. In the medium term, he says, central banks could be forced to regularly settle their liabilities with valuable securities, which is common practice in the Federal Reserve System in the US.

Another option for reducing risk in central banks would be to shift aid from monetary policy to fiscal policy, for example through the introduction of eurobonds. That, though, is a route Sinn would rather not consider. Instead, he advocates tougher methods.

"The rules need to be stricter," he says. "Anybody who can't comply with them doesn't belong in the euro zone."

Spiegel

Greeks move billions from local bank accounts to the UK

The bulk of the €16bn (£13.33bn) withdrawn from Greek banks that flowed overseas since the financial crisis began in 2009 ended up in the UK, the country's finance minister said yesterday.

Evangelos Venizelos said a total of €70bn had been withdrawn in the past two years, mainly by families and businesses hoarding cash against the worst-case scenario or struggling to meet their bills as they spend their savings. Much of the Greek cash has found its way into the London property market, sparking complaints among estate agents of shortages of prime housing stock.

"This money, if it existed in the banks, would allow for loans to be made to businesses, for the economy to move, for unemployment to be tackled," Mr Venizelos said.

He also ratcheted up pressure on bondholders to accept the terms of the country's €130bn bailout, which involves them taking a 53.5 per cent loss on their loans. Creditors were inching towards a deal yesterday but Mr Venizelos added: "Whoever thinks they will hold out and be paid in full is mistaken," he said. The deal has to be ratified by Thursday night.


The Independent

Oil is the new Greece: HSBC Chief Economist

Rising oil prices have displaced Greece as a source of investor anxiety, a new HSBC report says, warning that if the trend of rising oil prices persists, a fragile economic recovery in the developed world could quickly be derailed, and inflation could return to emerging markets.

Oil prices have risen to all-time highs in euro and sterling terms in recent days and are edging close to the USD 147 per barrel high seen in 2008, mainly as a result of rising tensions over Iran.

HSBC Chief Economist Stephen King said in the report that sanctions against Iran have already led to supply shortages which have doubtless lifted oil prices.

There are also plenty of other Iranian-related issues to worry about, he said.

"Has Iran developed a nuclear capability, will there be a war with Israel or, indeed, the US, and, in a bizarre self-defeating act of retaliation, would Iran be tempted to seal the Straits of Hormuz?" he asked.

King pointed out that the rise in oil prices was not just a result of geopolitical tensions however.

One explanation for the latest increase is the impact of quantitative easing .

"If the supply of paper money is constantly being increased, its value will fall relative to alternative stores of value," he said.

"This argument has particular resonance given not only quantitative easing in the US and the UK but, in addition, the ECB`s LTROs (Long Term Refinancing Operation) and the Bank of Japan`s renewed enthusiasm for the printing press," the report said.

A shift in the balance of global growth toward the emerging world is also among the causes of the spike in oil prices, according to HSBC.

How High, How Long?

How long prices would stay high depended purely on Middle Eastern politics, HSBC said.

"We surely know from bitter previous experience, however, that major political upheaval within the region threatens a significant spike in oil prices.

"Think USD 150 or even USD 200 a barrel," the report said.

But even in the absence of political upheaval, it was worth thinking about the possibility of higher oil prices, it added.

HSBC does not expect prices to stay very high for very long however if the driver is purely geopolitical tensions in the Middle East.

"The bigger challenge, in our view, is the rotation in global growth from the developed world," it said.

Investors seeking protection from high oil prices would do well to buy oil stocks, the report added.

"Valuations are attractive and they offer a decent hedge in the event of a major deterioration in conditions in the Middle East," he said.

CNBC

Greek default priced at 1 trillion euros, bondholders say

LONDON - A disorderly Greek default would cause more than a trillion euros ($1.3 US trillion) of damage to the euro zone and could leave Italy and Spain dependent on outside help to stop contagion spreading, the main bondholders group has said.

Greek private creditors have until Thursday night to say whether they will participate in a bond swap that is part of a bailout deal to help it manage its finances and meet a debt repayment on March 20.

Investors will lose almost three-quarters of the value of their debt in the exchange. Finance Minister Evangelos Venizelos told Reuters on Monday it was the best deal they would get and those who did not sign up would still be forced to take losses.

Analysts said the Institute of International Finance document, marked “IIF Staff Note: Confidential,” may have been designed to alarm investors into participating in the exchange.

“There are some very important and damaging ramifications that would result from a disorderly default on Greek government debt,” the IIF said in the Feb. 18 document obtained by Reuters.

“It is difficult to add all these contingent liabilities up with any degree of precision, although it is hard to see how they would not exceed 1 trillion euros.”

If Greece misses the March 20 payment without a deal in place, this would be seen as a disorderly default and could be taken as a sign that politicians have lost control of the euro. Investors might then target other weak euro zone countries.

Spain and Italy might require 350 billion euros in outside support to contain the fallout, the IIF said, while the cost of helping Ireland and Portugal could total 380 billion euros over five years.

If the deal fell apart, the European Central Bank would suffer substantial losses because its estimated 177 billion euros exposure to Greece is over 200 percent of its capital base, the IIF said.

The bank lobby group, which helped negotiate the swap on behalf of creditors, also said bank recapitalisation costs could easily hit 160 billion euros if no swap is agreed.

It could threaten the euro and would be a catastrophe for Greek living standards.

“Social strains (in Greece) would intensify as the economy reeled and unemployment surged from an elevated level already in excess of 20 percent,” the report said.

“When combined with the strong likelihood that a disorderly Greek default would lead to the hurried exit of Greece from the euro area, this financial shock to the ECB could raise significant stability issues about the monetary union.”

JITTERS

A dozen major Greek bondholders, all on the IIF steering committee that helped draw up the deal, said on Monday they would support the swap. They hold about one-fifth of the 206 billion euros of bonds in circulation.

The remaining investors are under pressure to sign up.

Greece wants a take-up of 90 percent or more and if it falls below that but exceeds 75 percent it is expected to use collective action clauses (CACs) to force losses on those who do not volunteer.

Below that level, the deal could be off, potentially plunging the euro zone back into crisis.

The Greek finance ministry denied speculation that it was planning to extend the deadline on the offer, highlighting the jittery mood just two days before final decisions are due.

“Obviously the report is written on a worst case basis to try and encourage participation in the exchange,” said Gary Jenkins, analyst at Swordfish Research.

“The most likely outcome may well be that Greece passes its 75 percent target and then uses CACs to ensnare the remainder.”

Greece needs to reach that target to ensure it makes the budget savings agreed under its 130 billion euros bailout deal.

Venizelos has said he would not hesitate to activate the CACs. His deputy called them a “weapon” to help the exchange.

Using the CACs would probably trigger payouts on bond insurance contracts (CDS) and would also increase the chance of hedge funds or other bondholders pursuing legal action.

Complicating the process is the fact that 177 billion euros of the bonds fall under Greek law, and the remainder under English law.

The deadline for acceptances is 2000 GMT on Thursday, although the foreign law bondholders must hold approval meetings March 27-29 so they would settle at a later date.

Read more: http://www.vancouversun.com/business/Greek+default+priced+trillion+euros+bondholders/6257991/story.html#ixzz1oRHawzkd

The axis of error....lieberman, Mc Cain and Graham