Market Advisory Features

Another Rollercoaster Week
A Stubborn, Patient Man

Putting the Jigsaw Together
Money, Murder and bin Laden
What Drives Central Banks to Intervene?

When Is "Not a Base" Still a Base for U.S.?

   
   

 

Money, murder and bin Laden
Sep 6th 2002
From The Economist Global Agenda


As the anniversary of September 11th approaches, fears are rising of more attacks by the al-Qaeda terrorist network. It still has cash and may have been involved in several recent incidents, including an attempt to assassinate the Afghan president

AS THE anniversary of the September 11th attacks on America approaches, security forces are having to deal with the threat of further outrages. Al-Qaeda, the extreme Islamist terrorist group held responsible, could be linked to a spate of recent incidents. It has been blamed for a massive bomb attack in Afghanistan and an attempt to assassinate the Afghan president, Hamid Karzai. Evidence has also emerged that the network that funds al-Qaeda is still in place, providing it with plenty of cash.

Urgent efforts to boost security have begun in Afghanistan after a gunman dressed in military uniform opened fire on Mr Karzai's car on September 5th in the southern city of Kandahar. The president escaped injury. His American bodyguards killed the gunman, who was later identified as a former soldier from an area that had once been a Taliban stronghold.

The attempt on Mr Karzai's life followed a massive car bomb exploding near a busy market in Kabul, the Afghan capital. More than 26 people were believed to have been killed. Afghanistan's foreign minister, Abdullah Abdullah, had no doubt who was responsible: he blamed both attacks on al-Qaeda.

Security forces are investigating al-Qaeda connections in other recent incidents. This week, Kerim Sadok Chatty, a Swedish citizen of Tunisian origin, was accused of the attempted hijacking of a London-bound flight, which he tried to board at an airport near Stockholm with a loaded gun in his hand luggage. He denies any intention to hijack the plane. But suspicions were heightened when it was revealed that the 29-year-old had taken flying lessons in America, and that he was on his way to a conference of followers of the conservative Salafi school of Islam, which Osama bin Laden, the mastermind of al-Qaeda, is also believed to support.

Mr Chatty was charged on the same day that Dutch authorities announced that they had arrested seven men suspected of links with al-Qaeda and just days after Mounir el Motassadeq, a 28-year-old Moroccan student, was charged by German federal prosecutors with 3,116 counts of being an accessory to murder. The Dutch authorities rounded up seven men aged between 25 and 35 in several cities. They are suspected of having provided material, financial and logistical support to al-Qaeda. Prosecutors have said that they are unsure of the men's true identities: they are suspected of having used false passports and aliases.

According to prosecutors, Mr Motassadeq was part of an al-Qaeda cell based in Hamburg, which also included three of the dead hijackers. The prosecutors assert that the cell started to plan a massive terrorist attack on America as early as October 1999 and that the World Trade Centre in New York was mentioned explicitly as a target in April or May of 2000. Mr Motassadeq is the first person outside the United States to be indicted on charges directly connected to the September 11th attacks.

German police are also seeking other alleged associates of the Hamburg cell, but the wanted men have disappeared. In America, Zacarias Moussaoui, a French citizen of Algerian extraction, was arrested before September 11th after arousing suspicion at a flight school: he wanted to learn to take off, but not to land. He is suspected of being the so-called “20th hijacker”—the plane that crashed in a field in Pennsylvania had only four hijackers, the other three had five each. American prosecutors are seeking the death penalty for him, but the French government is objecting.

Rather worryingly, according to a United Nations report, the global campaign to cut off funding to al-Qaeda has faltered. The war on terrorists' funds was launched with the dramatic freezing of the assets of dozens of individuals and organisations: over $112m in all. Yet that action was only a small part of the task. The next and harder stage relies on the actions of countries other than America, including many in the Middle East.

Al-Qaeda was said this week to have shipped gold from Pakistan to Sudan, an allegation denied by the Sudanese authorities. Investigators have already been exploring how terrorists use commodities and informal, trust-based ways to move money, known as hawala. They are also trying to tackle the problem of Islamic charities. The biggest are funded by Saudi Arabia's royal family. The vast majority legitimately help the Muslim poor, but some certainly finance al-Qaeda.

An American blacklist

America has blacklisted a handful, including, jointly with Saudi Arabia, Bosnian and Somali branches of the Saudi Arabia-based al-Haramain Islamic Foundation. The foundation recently persuaded the Bosnian government to lift the freeze on its assets, however. Meanwhile, according to Matthew Levitt of the Washington Institute for Near East Policy, American officials despair that Saudi Arabia will ever admit that the domestic headquarters of any Saudi charities (as opposed to their foreign arms) might have colluded in the misuse of funds.

The kingdom has taken some preventative steps, such as ordering charities to tell the foreign ministry about new overseas projects. Ideally, says a report prepared for an upcoming meeting on charities and terrorism under the auspices of the Financial Action Task Force, the world's main anti-money-laundering body, charities should document employees, projects and possible donors, as well as running field audits to ensure that money has not gone astray.

A lawsuit filed on behalf of the families of people who died on September 11th is less tactful. It accuses eight Islamic charities, as well as members of the house of Saud, of financing al-Qaeda. Although the American administration is unlikely to co-operate publicly with the lawsuit, says a senior official, it is taking the evidence seriously and hopes to benefit from any fresh leads that the families' legal team turns up.

The biggest worry about al-Qaeda is the still unknown whereabouts and condition of Mr bin Laden. Nothing has been heard from him in months, suggesting that he is dead. Indeed, some elite American commando units are said to want to stop searching for him on the grounds that the Americans have not intercepted any radio transmissions since they bombed the Tora Bora cave complex last December―implying that he must be dead. However, without a body, or other forensic evidence, there is no proof that Mr bin Laden is no longer alive. Indeed, locals have told Americans that he has been sighted in the inhospitable mountains of Pakistan’s north-west frontier. As long as Mr bin Laden is suspected of being at large, the West will live in fear of another terrorist spectacular.

 

 

World stockmarkets

Another rollercoaster week
Sep 6th 2002
From The Economist Global Agenda


It has been another week of breathtaking falls and sudden rises on world stockmarkets. The Japanese Nikkei 225 index has reached 19-year lows on the back of disappointing economic growth figures. In Europe and America, many of August’s gains have been given up. There remains lots to be worried about—with a war in Iraq looming—and little in the way of positive economic or business news to cheer investors

IT IS a measure of just how volatile markets have become that the 4% sell-off in America and Europe on Tuesday September 3rd hardly raised eyebrows. In the past few years, huge daily price movements have become increasingly common as investors struggle to value shares. During the late 1990s, investors became convinced of the productivity claims being made on behalf of America’s high-tech “new economy”. Since the market’s peak in early 2000, many investors have concluded that the new economy was just an old-fashioned investment boom, which has left lots of excess capacity in its wake. Just as the 1990s stockmarket rally was the longest peace-time rally, the subsequent sell-off has been the longest since the Great Depression. Western stockmarket indices tested five-year lows in July, before a sharp rebound last month. This week saw most of those recent gains wiped out. Investors are now trying to gauge whether July was the bottom or whether there will be new lows.

September is set to be a jittery month. There is some seasonal pressure for a sell-off because American mutual-fund managers often crystallise losses ahead of the fourth quarter starting in October. There are fears that September 11th could bring another massive terrorist attack: even the fear of such an event has caused a huge drop of airline bookings and schedules and will probably lead to a dip in retail sales. Talk of a war in Iraq sent the oil price zooming up in late August. This could constrain growth as winter approaches in the northern, industrialised half of the world. There are also increasing jitters about the outcome of such a war, especially with Arab leaders warning that an attack on Iraq would “open the gates of hell”. Some believe now that August’s rally did not reflect true sentiment, thanks to slim volumes and the absence of many traders, who were on vacation.

There are several explanations for this week’s stockmarket jitters. Japan was plunged into new gloom following the government’s revision of figures for first-quarter economic growth from 1.4% to 0%, implying that the world’s second-largest economy could be about to shrink for the second consecutive year. The Nikkei index briefly fell below 9,000, its lowest level since 1983, compared with almost 40,000 at its peak in 1989. This is an awkward time of year for this sell-off, as it is close to the time when financial companies compile their interim results. Under new regulations, Japanese banks are now obliged to value marketable securities at their market price, rather than at their historic cost. Banks are already vulnerable because they are carrying huge loans on their balance sheets that are not being serviced or are not collectible. A stockmarket fall can only make matters worse unless the government steps in, yet again.

Both America and Europe had bad business and economic news as well. In Europe, insurers, which hold a higher proportion of their investments in shares than do American companies, have been particularly hard hit. Zurich Financial Services announced a cut of 4,500 jobs and the closure of its online bank. And AGF and Axa, two huge French insurers, warned that their results would be hit by the decline in share prices.

In America, a survey from the Institute for Supply Management implied that the manufacturing sector had declined—it had previously been thought to be holding steady. This re-ignited fears that, rather than having pulled out of last year’s shallow downturn, the American economy may be entering a “double-dip” recession, though the rate of unemployment in August actually edged downwards.

Much of the decline in American share prices over the past year has been triggered by huge corporate bankruptcies, such as those at Enron, a Houston-based energy trader, and WorldCom, a telecoms company, and by the accusations of corporate shenanigans that have gone with them. These fears have re-emerged since Citigroup, one of the world’s biggest banks, admitted on August 30th that it had allocated shares in “hot” flotations to Bernie Ebbers, chief executive at WorldCom, then one of the most lucrative clients of its investment banking arm, Salomon Smith Barney. Congressional investigators recently said that they want to widen their probe into so-called “spinning” to Salomon’s Wall Street rivals CSFB and Goldman Sachs.

More fundamentally, investors are struggling with the question of valuation. Shares in most countries are at or below the levels of five years ago. This is highly unusual: does it therefore signal that stocks are great value, and should be snapped up before a rebound? Or are recent sell-offs merely the beginnings of the working out of the excesses of the late 1990s? Pessimists point to several worrying factors. It was the American economy which pulled South-East Asia out of recession following the region’s financial crisis in 1997, thanks to the spending patterns of the American consumer. American consumers have continued to spend right through the stockmarket declines, presumably in part because the gain in house prices has outstripped the reduction in the value of many people’s shareholdings.

However, the American economy is subject to major imbalances. If house-price inflation slows, or even reverses, or if companies finally start making big layoffs, having been hoarding talent so far, American consumers may finally be forced to tighten their belts. Moreover, the economy is running a current-account deficit of more than 4% of national income. Experience shows that as such deficits approach 5%, the currency comes under pressure. The dollar has already declined against other major currencies this year. But it is vulnerable to further falls. If this happens, it will be more difficult for other countries to export to America.

Lastly, the investment boom of the late 1990s has left almost every industry with excess capacity. This will make it difficult for companies to raise prices, and therefore profits. Most share analysts are forecasting double-digit profit increases next year. But it is hard to see how these forecasts will be met. Price-earnings ratios are still running at historic highs. In America, the price-earnings ratio for the S&P 500 index is running at more than 35. This is still way above the post-war average of 15. Over the long term, this ratio has tended to revert to its mean level. If earnings are not going to rise enough for that to happen, some investors fear that share prices will continue to fall instead.

 

 

MANILA, PHILIPPINES
Friday-Saturday, September 6-7, 2002

What drives central banks to intervene?

By MICHAEL FRENKEL and GEORG STADTMANN
Project Syndicate

(Michael Frenkel is professor of economics and Georg Stadtmann a junior faculty member at the WHU Koblenz, Otto Beisheim Graduate School of Management, Koblenz, Germany.)

Central Bank watchers everywhere have a new pastime: comparing the behavior of America's Federal Reserve (Fed) with that of the European Central Bank (ECB).

Although the approach to interest rate management by the two central banks has claimed the most attention, the different styles of each in their interventions in global currency markets bears watching because of their impact on growth.

The euro's value dropped markedly against other major currencies, particularly the US-dollar and the Japanese yen, after its launch in January 1999.

Because the exchange rate influences an economy's competitiveness, the euro's depreciation benefited EU exports and exporters -- at the expense of their American counterparts.

So you might think that US industries exposed to severe international price competition would deem the dollar's strength undesirable. American politicians who fret about America's mounting current account deficit should also have shown concern.

Yet, barring particular sectors like steel, most American politicians and bosses bit their tongues about the dollar's strength and few, if any, have jumped for joy at its recent decline.

Moreover, many economists believe that the euro's post-launch dive against the dollar was simply not justified by macroeconomic fundamentals in America and Europe, which its revival in the spring and summer of 2002 seem to confirm.

Neither growth rates nor interest differentials between the two continental economies had widened.

If anything, these gaps narrowed and began to reverse.

Convinced that the euro was undervalued, several central banks intervened in foreign exchange markets over the past two years to support it.

Specifically, the European Central Bank (ECB) intervened in the foreign exchange markets on at least five occasions between September and November 2000 to support the euro vis-a-vis the dollar.

The Bank of Japan (BOJ) supported the ECB, but intervened on its own even earlier. Recent BOJ data reveal that it sought to increase the value of the euro relative to the yen in June and November 1999, and again in March 2000.

However, only once, in September 2000, did the Fed join these interventions. This year it has taken no action to support the falling dollar.

Such behavior by the Fed is not new. Close analysis of the behavior of the Fed and Germany's Bundesbank between 1979-1995 reveals that central bank interventions tend to cluster over time.

This means that there is a high probability of an intervention on a particular day if an intervention occurred the previous day. This behavior could also be observed after the creation of the ECB, which has inherited the Bundesbank's habits about interventions.

Furthermore, in the past, the Fed and the Bundesbank coordinated their interventions during certain periods. The rationale behind such joint action is that it provides a relatively stronger impact on the expectations of foreign exchange dealers and, therefore, on the exchange itself.

This is because coordinated interventions signal to market participants that all intervening central banks share the judgment that exchange rates are misaligned.

But there is an iron clad requirement for coordination to be genuinely effective: both central banks must see prevailing exchange rates as being in conflict with their domestic policy objectives and share the view that intervention can have a sustainable impact on the exchange rate.

Our research suggests that central banks pursue interventions with the greatest rigor when the exchange rate for their currency deviates strongly from long-term trends, in particular if the actual exchange rate and the purchasing power value of a currency become vastly different.

In the past, however, different central banks exhibited considerable differences in their intervention behavior.

For example, interventions by the Bundesbank were more or less symmetrical, meaning that it intervened both when the dollar was very strong and when the dollar was very weak.

In contrast, Fed interventions were much more likely when the dollar was undervalued than when it was overvalued. This latter behavior hints strongly at America's interest in maintaining a strong currency despite the possible negative effects on US exports.

This asymmetry between the two central banks is best seen by comparing how their behavior when they intervened in the first half of the 1980s.

During this era, the dollar strongly appreciated against major currencies and by 1985 was overvalued by virtually every measure. Throughout this period, the Bundesbank sold dollars to curb the dollar's appreciation but the Fed did not intervene at all.

Despite the advent of the European Central Bank, this asymmetry continues: while the ECB repeatedly tried to break the dollar's appreciation in 2000-2001 through consecutive interventions in the foreign exchange market, the Fed intervened only once. This confirmed America's interest in maintaining a strong dollar.

So long as these interests diverge, we should expect little coordination of foreign exchange policy between the two central banks.

This means that foreign exchange markets will lack clear signals and any intervention will have a low probability of being effective.

 

 

Lexington

A stubborn, patient man
Sep 5th 2002
From The Economist print edition


The next few months will be crucial in defining the Bush presidency

GEORGE BUSH was not elected to face great challenges or bear great burdens. His appeal lay in his very lightness. He wanted to shrink the size of government, reduce the weight of taxes and disentangle America from unnecessary foreign involvement. People who wanted a busy government could vote for Al Gore. People who dreamed of national greatness and rolling back terrorist states could vote for John McCain. Mr Bush sold himself as a laid-back president for a laid-back nation.

How has this lightweight coped with one of the heaviest challenges a president has ever faced? Even Mr Bush's supporters concede that he got off to a lousy start. On September 11th, people looked to Rudolph Giuliani, or even to news anchors, for reassurance while their president zigzagged across the great blue yonder. But Mr Bush smartened up fast. In the disorientating days after the attacks, he succeeded in connecting with ordinary Americans—in feeling their grief without being mawkish and in expressing America's powerful sense of patriotism. He also made a notable effort to reach out to Arab-Americans, condemning racial stigmatisation, visiting mosques and inviting leading Muslims to the White House.

Abroad, the lampooned Texan cowboy, far from striking out blindly in a fit of rage and revenge, was methodical and patient, giving the Taliban every chance to surrender Osama bin Laden before launching military action and constructing an admirably broad coalition to do it. He also understood that the war on terrorism needed to be waged on many fronts at once, through espionage and diplomacy as much as warfare.

Part of Mr Bush's appeal in those first few months lay in the way he visibly grew in his job, finding a sense of purpose that had previously eluded him. One reason why this struck such a chord is that so many other Americans found themselves growing with him. Having voted for him because they took the same fundamentally lazy view of the presidency as he did, they shared his experience in the aftermath of September 11th too—first disorientation and then a realisation that they lived in a more serious world than they had ever imagined.

Most Americans would probably agree that Mr Bush put in a pretty impressive performance in the months after September 11th. The doubts come about his performance since the state-of-the-union address in January, in which he not only extended the war to bring in the “axis of evil” but also repledged his faith in a domestic platform of lower taxes and less government.

That domestic platform looks increasingly wobbly, not least because it has ignored the ramifications of September 11th. Mr Bush has left his policy of cutting taxes untouched despite the extra costs of the war on terrorism. His visceral suspicion of government significantly weakened the attempt to improve security at home. The administration wasted months fighting the creation of a Department of Homeland Security, only to give in to the inevitable at the eleventh hour. The suspicion remains that Mr Bush simply lacks the patience and energy necessary for the dull work of rearranging Washington's bureaucratic architecture. This is one area where a President Gore would have been far more successful than President Bush.

What about foreign policy? Here Mr Bush has certainly rethought his campaign strategy. Rather than withdrawing from the rest of the world, America is now as firmly involved with it as it has ever been. The president who preached a modest foreign policy is now the architect of a Bush doctrine that promises American activism for decades to come. Indeed, the questions all come from people who think that Mr Bush is biting off more than he can chew: that he is wrong to link the war on terrorism to the problem of rogue states; that he is allowing the question of Iraq to distract him from the more pressing issue of al-Qaeda; that he has backed Israel too unconditionally; that he is squandering international support and weakening an international coalition because of neoconservative blood lust.


Don't be deceived by the brush-clearing

The charge is accompanied by renewed doubts about Mr Bush's focus. In recent months Mr Bush has often reverted to his pre-September 11th persona: rather too listless and disengaged for comfort. He seems to have taken a back seat while rival factions in the White House slug it out, via speeches, articles and leaks, over how quickly America should act to eliminate Saddam Hussein. During Mr Bush's long holiday at his ranch in Texas last month, his administration seemed less like a modern government than a medieval court in which rival groups of courtiers were vying for the attention of a pleasure-loving prince (albeit one whose idea of pleasure is the decidedly unaristocratic pastime of brush-clearing).

The next few months will be as much of a test for Mr Bush as the first few months after September 11th. Has the president really been transformed by the attacks on the World Trade Centre and the Pentagon? Or is he returning to his idle old ways?

Given the relative paucity of information or action coming from the administration, nobody can answer this question definitely. But in one respect, at least, it would be foolish to underestimate Mr Bush: his will. The president may be a lazy man; but ever since winning the governorship of Texas he has built his political career on promising a few popular things, and then making sure that he does them (his big tax cut, for better or worse, illustrated this obstinacy). Now, with most Americans' blessing, he has said that he wants to remove Mr Hussein. Whether Mr Bush is going about it the right way is something his allies may query. But the fact that he is thinking about sending troops to Iraq over the objections of most of the world (and several distinguished members of his own party) suggests that September 11th has hardened a certain natural stubbornness in the president—and, perhaps, in his country.

 

 

When Is "Not a Base" Still a Base for U.S.?
3 September 2002

Summary

Although recent reports of a new U.S. naval facility in Indonesia appear to be mainly rumor for now, Washington is working out agreements for U.S. forces to operate throughout Asia. A look at Washington's agreements with the Philippines counters the assertions by both sides that the United States is not looking to establish a permanent presence there.

Analysis

Indonesian and U.S. officials have denied a recent report by Indonesian news agency Antara that the two nations have signed a deal to build a U.S. naval dock in Bitung on the island of Sulawesi, Singapore's Straits Times reported. The paper said the facility in question is a civilian commercial venture and that although Washington did look at establishing a naval facility in Indonesia, the idea has been dropped.

While the Indonesian report may have been speculation, Washington is in fact making arrangements to temporarily utilize land, air and sea bases for U.S. forces throughout Asia -- from Kyrgyzstan and Tajikistan to Sri Lanka and the Philippines -- to help in operations in Afghanistan and in the wider hunt for al Qaeda. Washington and the various host countries have denied repeatedly that any sort of permanent basing arrangements are being considered. But in the case of the Philippines, for example, it is clear that despite the absence of new facilities, U.S. forces will be there for a long time.

Washington is interested in furthering military ties with the Philippines due to the country's strategic location near both Southeast Asian potential terrorist and militant groups and China. Manila is not the only Asian target of renewed U.S. interest, however. Washington also is strengthening its military ties with Sri Lanka, India, Pakistan, Singapore, Malaysia, Indonesia and Thailand, among others.

Adm. Dennis Blair, former commander in chief of the U.S. Pacific Command, was a strong supporter of increased U.S. military cooperation in Asia, and he worked to establish a network of facilities where U.S. forces could train, visit, re-supply and rest during deployments in the region. This program was given added impetus by the events of Sept. 11, and Blair's successor has maintained that momentum.


While the U.S. military does not have a traditional "base" in the Philippines, it is using a series of joint training exercises to give it a relatively permanent position there. For instance, even when the already extended Balikatan 02-1 exercises ended on July 31, the 160 U.S. forces deployed earlier in the year to help train Philippine troops in counterterrorism tactics remained in the country, and they will stay there until October when the next round of bilateral exercises kicks off, according to U.S. military spokesman Maj. Richard Sater.

Sater told Philippine reporters that nearly 900 other U.S. soldiers also would remain in the Philippines in Zamboanga City and Cebu under the Long Term Security Assistance Package program. In fact, Sater admitted that pretty much the only ones leaving the Philippines were the nearly 400 military engineers from the U.S. Naval Construction Task Group who were posted on the rebel-infested southern island of Basilan in April to help construct roads, airstrips and port facilities, according to the Philippine Daily Inquirer.

The next major U.S.-Philippine joint exercises will start in October and are tentatively slated to last nine months, extending the U.S. presence in the Philippines through at least June 2003. And Manila and Washington are still working out the final details of a Mutual Logistics Support Agreement (MLSA) that will allow the U.S. military to leave supplies in the Philippines and to use Philippine bases both in times of peace during military exercises and in times of international tensions or national emergencies.

The MLSA has come under intense scrutiny inside the Philippines, but the executive branch in Manila has decided to "fast track" the accord, leaving little room for congressional input, according to Philippine media. While the agreement will carry a stipulation that no "permanent" U.S. structures are built in the Philippines, it allows for increased U.S. military coordination with Manila.

Beyond the MLSA, U.S. Secretary of State Colin Powell announced an additional $55 million in military assistance for the Philippines during an early August visit, and Manila and Washington have established the joint Defense Policy Board to strengthen bilateral military cooperation and coordination.

The tighter security cooperation between the two sides also can be seen in the search for communist militants in the Philippines. After Manila this summer declared the al Qaeda-linked Abu Sayyaf rebel group all-but defeated, it turned its sights on the New People's Army and related communist militants.

Washington quickly obliged Manila, adding the groups to its list of international terrorists and calling on the international community to block funding to Philippine communist groups. Helping Manila fight the Abu Sayyaf was Washington's original justification for deploying troops to the country in January and seeking closer military links. Now with the Abu Sayyaf fading, both nations have found a new mutual enemy -- laying the groundwork for even more cooperation in the months and years to come.

http://www.stratfor.com/

 

 

Putting the jigsaw together
Sep 4th 2002
From The Economist Global Agenda


The attempt by a Muslim man with a loaded gun in his hand luggage to board a plane from Sweden to London has re-ignited fears that the al-Qaeda terrorist network is still active around the world, and especially in Europe. The alleged hijack attempt came as German prosecutors charged a Moroccan student with being an accessory to the September 11th terrorist attacks. So far, this is only the second prosecution directly connected to the attacks

SWEDISH prosecutors, after some hesitation, have now charged Kerim Sadok Chatty with attempted hijacking. A Swedish citizen of Tunisian origin, Mr Chatty tried to board the flight at an airport near Stockholm with a loaded gun in his hand luggage. He denies any intention to hijack the plane. But, as the anniversary of the September 11th approaches, the circumstances of his arrest looked chilling. Suspicions were heightened when it was revealed that the 29-year-old had taken flying lessons in America, and that he was on his way to a conference of followers of the conservative Salafi school of Islam, which Osama bin Laden, the arch-mastermind of al-Qaeda, is also believed to support.

Mr Chatty’s lawyer insists that his client is “very much against violence” and was sorry for the trouble he had caused. And a friend has claimed that Mr Chatty had simply forgotten the gun in his bag in his rush to catch the plane—an odd assertion in a country where guns are uncommon. These protestations of innocence did not stop prosecutors charging Mr Chatty on Monday, September 2nd with preparing to hijack a plane, aviation sabotage and the possession of an illegal weapon. They also asked the court—unusually—to detain Mr Chatty in solitary confinement on the grounds that he could try to leave the country, destroy evidence or re-offend if released. Mr Chatty has previous convictions for theft and assault.

Mr Chatty was charged on the same day that Dutch authorities announced that they had arrested seven men suspected of links with al-Qaeda and just days after Mounir el Motassadeq, a 28-year old Moroccan student, was charged by German federal prosecutors with 3,116 counts of being an accessory to murder.

The Dutch authorities rounded up seven men aged between 25 and 35 in several cities. They are suspected of having provided material, financial and logistical support to al-Qaeda. Prosecutors have said that they are unsure of the men's true identities: they are suspected of having used false passports and aliases.

According to prosecutors, Mr Motassadeq was part of an al-Qaeda cell based in Hamburg, which also included three of the dead hijackers. The prosecutors assert that the cell started to plan a massive terrorist attack on America as early as October 1999. The World Trade Centre in New York was mentioned explicitly as a target in April or May of 2000, they charged. The plans were allegedly developed between the hijackers in America, cell members in Hamburg and others in Afghanistan, home to al-Qaeda’s terrorist training camps. Members of the cell went to Afghanistan for training and instructions during 1999 and 2000, prosecutors said.

According to Mr Motassadeq’s 90-page indictment, he was one of the “co-ordinators” of the cell’s operations while the hijackers trained as pilots at flight schools in America. Mr Motassadeq had authority over money used to fund the cell, according to the federal prosecutor. He was also said to have submitted false student-enrolment papers for the absent hijackers. He was “a small wheel without which the whole thing would not have happened” said Kay Nehm, Germany’s chief federal prosecutor. Mr Motassadeq has denied direct involvement in the attacks or links to al-Qaeda.

Mr Motassadeq is the first person outside the United States to be indicted on charges directly connected to the September 11th attacks. German police are also seeking other alleged associates of the Hamburg cell, but the wanted men have disappeared. In America, Zacarias Moussaoui, a French citizen of Algerian extraction, was arrested before September 11th after arousing suspicion at a flight school: he wanted to learn to take off, but not to land. He is suspected of being the so-called “20th hijacker”—the plane that crashed in a field in Pennsylvania had only four hijackers, the other three had five each. American prosecutors are seeking the death penalty for him, but the French government is objecting.

America rounded up well over one thousand people in the immediate aftermath of September 11th. There was a lot of secrecy surrounding the detentions, and it is understood that more than seven hundred were retained in custody until the authorities decided that most had nothing to do with terrorism and deported most of them.

Rather worryingly, according to a draft United Nations report, the global campaign to cut off funding to al-Qaeda has stalled. The report concluded that al-Qaeda remains “fit and well” and poised to strike at a time of its choosing. In the months immediately after the attack, some $112m-worth of assets was frozen. However, since then only a further $10m has been blocked. The terrorist network continues to have access to Mr bin Laden’s personal inheritance—his family, with its construction interests, is one of the wealthiest in Saudi Arabia—and to money embezzled and given by dubious charities, according to the leaked report.

One problem is that various countries have not agreed on a definitive list of al-Qaeda suspects. Another is European reluctance to freeze assets without evidence of the account-holders' terrorist links. This has led Luxembourg and Switzerland, both well-known banking centres, to unfreeze assets blocked at America’s request after September 11th. But even less-secretive jurisdictions are unwilling to freeze assets, as they are worried about falling foul of human rights legislation.

The biggest worry about al-Qaeda is the still unknown whereabouts and condition of Mr bin Laden. Nothing has been heard from him in months, raising hopes that he is dead. Indeed, some elite American commando units are said to want to stop searching for him on the grounds that the Americans have not intercepted any radio transmissions since they bombed the Tora Bora cave complex last December-implying that he must be dead. However, without a body, or other forensic evidence, there is no proof that Mr bin Laden is no longer alive. Indeed, locals have told Americans that he has been sighted in the inhospitable mountains of Pakistan’s north-west frontier. As long as Mr bin Laden is suspected of being at large, the West will live in fear of another terrorist spectacular.