GOLD Issue 03 by Kevi Chishios

ISSUE 03 JUNE 2011 PRICE €6.95

the international investment, business & finance magazine of cyprus Gold

ARE POLITICS OR ECONOMICS TO BLAME? Can cyprus banks cope with a greek default?

5 29 1 295 0 0 057 7

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ISSUE 03 JUNE 2011

SOVEREIGN DEBT & EURO FEARS

WHY GERMANY WILL NOT ALLOW A EURO FAILURE

+ InterviewS DESPO LEFKARITI DEMOSTHENES MAVRELLIS ARBITRATION

Could Cyprus become an international centre?

gold_cover_issue_03_final.indd 1

ONE MAN’S CRISIS… The Gold Guide to Hedge Fund Investing

Interview ACCA President Mark Gold

Plus:

MONEY / BUSINESS ECONOMY TAX & LEGAL LIFESTYLE / opinion

6/6/11 10:34:14 AM

More than just a holiday destination with pristine white beaches and 300 days of sunshine, Cyprus can also cater to your business needs ranging from registering and setting up your companyâ&#x20AC;&#x2122;s operations to managing your EU, North African and Middle Eastern clients at a considerably lower cost. As well as being an EU country and a member of the European Monetary Union since 2008, Cyprus enjoys the lowest corporate tax rate in the EU of 10%. Cyprus belongs to those jurisdictions on the OECD White List which have substantially implemented the internationally agreed tax standard. ,Q DGGLWLRQ WR WKLV &\SUXV SURYLGHV HIÂżFLHQW business services, has a transparent legal and regulatory system and is committed to sustainable growth.

â&#x20AC;&#x153;Columbiaâ&#x20AC;&#x2122;s growth and expansion over the years is attributed to the uniqueness of Cyprus; being the islandâ&#x20AC;&#x2122;s strategic position at the crossroads of three continents, its comprehensive legal framework, double tax treaties regime,

communication

system,

banking system, infrastructure in general and last but not least its highly educated labor force.â&#x20AC;? Captain Dirk Fry, Managing Director Columbia Ship Management Ltd

â&#x20AC;&#x153;The the

favorable excellent

infrastructure,

business

climate,

telecommunications the

well

educated

and skilled human resources, the favorable tax rates and the proximity to the Middle East and Africa markets, were some of the key factors that enabled NCR to decide to move its UHJLRQDO RIÂżFHV WR &\SUXV LQ WKH ÂśV

Cyprus welcomes both visitors and investors to work here, so, if you are searching for a new business base, consider Cyprus. Itâ&#x20AC;&#x2122;s more than just beaches and sun.

Cyprus Investment Promotion Agency Tel + 357 22 441133 Fax + 357 22 441134 www.cipa.org.cy info@cipa.org.cy

The Ministry of Commerce, Industry and Tourism Tel + 357 22 867100 Fax + 357 22 375120 www.mcit.gov.cy/ts perm.sec@mcit.gov.cy

Gradually, NCR managed to expand WKH RIÂżFH LQ &\SUXV WR FRYHU DOVR DOO the African Countries.â&#x20AC;? Managing Director of NCR Cyprus, Mr. George Flouros

8 EDITORIAL 10 NEWS BRIEFING: GLOBAL 14 NEWS BRIEFING: LOCAL 16 COMMODITIES/FOREX WATCH

issue 03 june 2011

COVER STORY Sovereign Debt and Euro Fears 24 Haircuts and Pigs 25 Why Germany Will Not Allow

a Euro Failure

26 Politics, Not Economics, Is To Blame 30 How Well Would the Cypriot Banks

Cope With a Greek Default? 32 The Prospects for Cyprus Through the Debt Crisis

+ opinion The Euro’s Political Weakness by Simon Smith 18 The Debate: “Will the price of gold continue to rise over the next decade?” by Andreas Andreou (Yes) and Marios Mavrides (No) 20 Neither A Borrower Nor A Lender Be… by Alexis Erotocritou

Survival Of The Fittest by George Th. Karaolis

Unlimited Communication: 50 Years of Cyta by Rita Hadjiloizou-Karatzia 58 And The Sea Smiled Back :) by Peter Economides

FEATURES 34 | Private Sector ADR Initiatives Secure Business Community Backing An in-depth look at how Cyprus is starting to come to terms with Arbitration

44 | One Man’s Crisis…Is Another Man’s Hedge Fund Return The Gold Guide to Hedge Fund Investing

the international investment, business & finance magazine of cyprus

50 | Hard Times in the Global Village Physics and Philosophy meets Economics in an interview with Lou Marinoff

63 | Taking Cyprus On The Road The role of the Cyprus Chamber of Commerce and its foreign trade missions in promoting Cyprus to the international business community

66 74 84 88 88

{money} {business} {economy} {tax&legal} {lifestyle}

the international investment, business & finance magazine of cyprus

{editorial}

Safe As Houses

t’s often said that if you want to get the view of the proverbial ‘main in the street’, you should ask a taxi driver for his views on issues of importance. If it’s true that taxi drivers are some kind of modern Everyman, then I can tell you that the issue of Greece’s present worries is crystal-clear in his mind. On my way back from the airport last week, I was told in no uncertain terms that Greece’s woes are all down to a conspiracy led by Germany and France, whose leaders have decided that they want to destroy the country and that if Cyprus isn’t careful, it will be next. When I asked why two leading members of the eurozone would want to take any action that would cause untold problems for their own currency, the driver’s reply was that they didn’t care. He was willing to admit that successive Greek governments are to blame ‘to a certain extent’ but he was adamant that ‘the EU and the Americans’ want to bring Greece to its knees. Later the same evening I watched a discussion on Greece’s satellite channel, during which an unemployed woman was explaining in measured, eloquent terms to Greece’s Deputy Prime Minister, Theodoros Pangalos, why she felt that it was unfair that she and hundreds of thousands of her fellow citizens should be obliged to tighten their already tight belts and make even more sacrifices in order to put right a situation for which they bore absolutely no responsibility. She had previously worked hard, paid her taxes and been a law-abiding citizen. Now she was out of work, out of money and being asked to do even more. Pangalos, to his credit, agreed that she could not be held responsible for Greece’s huge sovereign debt and acknowledged that his party and the previous ruling party were responsible for such wasteful scandals as appointing more than 100,000 people ‘who shouldn’t be there’ to the civil service. It is easy to watch the demonstrations and strikes in Greece on the TV news bulletins from the comfort of our armchairs in Cyprus and to ask ‘what good will they do?’ but it is clear that for the people who are out of work or who are seeing their salaries and benefits slashed, the sovereign debt issue is far more than a talking point for politicians and economists. They are now feeling the tangible results of their politicians’ long-term failings. It is natural for Greek Cypriots in particular to sympathise with their plight but there is also a palpable sense of worry among many people that if something so devastating could occur in Greece, it might happen here. One reason is the fact that, as well as close historical and political ties, there are strong business links between the two countries. As you will see in this month’s cover story, the island’s three main banks have lent billions of euros to Greece. Fortunately, all the indications are that they could withstand the blow of even 40% of this debt having to be written off. However, we are being reminded every day that what happens in one country cannot fail to affect another, especially within the EU and even more particularly within the eurozone. The answer to the burning question of whether Greece will default on its obligations cannot be answered with a simple ‘yes’ or ‘no’. You will read the arguments for both possibilities set out by eminent contributors to this issue of Gold. Taxi drivers are not necessarily the shrewdest of analysts when it comes to complex economic and political issues and I do not subscribe to the German-French conspiracy theory. But politicians need to be aware of the ideas and views that their constituents hold. It will be interesting to see if any attempt is made by the new House of Representatives to deal seriously with the problems facing Cyprus now that the elections and the desperate struggle for prime time TV soundbites has ended. The unseemly horse-trading that we have observed regarding the position of Speaker of the House does not bode well. Our banks may once have been considered to be safe as houses but if the global financial crisis taught us one thing, it is that houses are nowhere as safe as we have traditionally believed them to be. Our leaders, in Cyprus, Greece and throughout the EU, need to have the courage to be honest with us and take the measures they think necessary to lead us to recovery. Otherwise, you know what France and Germany have in mind for the rest of us…

Published by IMH ISSN 1986 - 3543

Managing Director:

George Michail General Manager:

Daphne Roditou Tang Media Manager: Elena Leontiou Editor-In-Chief:

John Vickers Senior Editor:

Konstantine Ioannides Contributing Editors:

Angelos Angelodimou, Antonis Antoniou, Stella Mourettou, Maria Pilidou, Erato Pishiara Contributors to this issue:

Andreas Andreou, Dinos Andreou, Antonis Antoniou, Steven Archer, Haris Christoforou, Peter Economides, Alexis Erotocritou, Isavella Frangou-Pavlou, Rita Hadjiloizou-Karatzia, George Th. Karaolis, Marios Mavrides, Dimis Michaelides, Fiona Mullen, Dr. Savvas Savouri, George Savvides, Simon Smith. Art Direction:

Andreas Koumis Photography:

Olesia Constantinou, Michael Kyprianou Marketing Executive:

Kevi Chishios SALES & BUSINESS DEVELOPMENT EXECUTIVE:

Christos Kyriakides Advertising Executives:

Irene Georgiou, Christopher Constantinou Operations Manager:

Voulla Nicolaou

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6/6/11 10:15:02 AM

©2011 KPMG Limited, a Cyprus limited liability company and member of the KPMG network of independent member firms affiliated with KPMG International Cooperative (”KPMG International”), a Swiss entity. All rights reserved.

Global experience, local approach in the Funds Industry KPMG provides comprehensive audit, risk advisory, tax and regulatory services to fund managers in setting up and operating through Cyprus. Our clients look to us for leadership and guidance in such areas as domiciliation / re-domiciliation of funds; acquisitions and due diligence; regulatory interpretation and support; proactive tax advice and fund liquidations and restructuring. Our local practice is at the forefront of industry issues, working closely with the industry and its representatives and actively participating in the firm’s global product development programmes. The combination of a strong local practice, with significant professional and industry experience, along with the global reach of KPMG International fund services network places us in optimal position to provide added value service to our clients as they address the industry challenges and guide them in grasping opportunities.

For more information please contact our offices: NICOSIA: T: +357 22 209 000 E: nicosia@kpmg.com.cy

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issue_03_editorial.indd 9

6/6/11 10:15:02 AM

{news briefing: global }

one MOTHERCARE TO CLOSE STORES Mother and baby products firm Mothercare says it will close over a quarter of its UK stores over the next two years following a 23% slump in profits and share price. CHINA POSTS TRADE SURPLUS China posts its biggest trade surplus in four months in April, as exports hit a record on stronger global demand. BURBERRY POSTS REVENUES OF £1.5bn Strong sales of leather bags and other accessories boost profits at luxury fashion brand Burberry. Profits were £296m, up 40% on a year ago, with revenues up 27% to £1.5bn. SEX WORK One in three university students in Berlin would consider sex work as a means to finance their education, a study from the Berlin Studies Centre reveals. The figure for Paris was 29.2% and for Kiev 18.5%.

r accesbrand 0% on a 1.5bn.

VOLKSWAGEN CHINA VENTURE German carmaker Volkswagen is to launch electric cars in China under the new Kaili brand together with FAW Group. Volkswagen says it expects to start production by the end of 2013.

Playboy goes digital

Moving further into the digital age, Playboy has decided to put 57 years of its iconic magazine online. The web-based subscription service i.Playboy.com, which is also optimized for the iPad, gives users the opportunity to read, search and explore every issue of Playboy magazine ever published. With more than 130,000 pages in total, the iPlayboy will house every pictorial, interview, centrefold, investigative reporting piece, story, advertisement and image that ever appeared in Playboy, ranging from the current issue all the way back to the inaugural 1953 issue. This month, the site will also feature exclusive videos and curated content recommendations from a panel of individuals in the areas of art, design, fashion, media and technology to be collectively known as the Playboy Commission. A subscription to iPlayboy costs $8 a month or $60 per year.

M & S PROFITS British retailer Marks & Spencer announces pre-tax profits of £714.3 million for the year ending April 2. Revenues rose by 4.2% to £9.3 billion and the dividend was increased 13.3% percent to 17pence per share.

TIFFANY 25% UP Net profits at Tiffany & Co rise 25% in the first quarter in a sign that the luxury sector remains strong. The jeweller announces a profit of $81.1m for the three months to April.

+ 3 10

Sony reports $3.1bn loss Last month, Japanese electronics giant Sony reported a loss of $3.1bn (£1.9bn) for the year to 31 March. The net loss was largely due to writing off $4.4bn related to a tax credit though the company noted that a stronger yen had also affected earnings during the year. Business was also affected by the earthquake in Japan in March. This is the third successive year that Sony has reported a loss. However, it is forecasting a profit of 80bn yen ($976m) for the current fiscal year.

the international investment, business & finance magazine of cyprus

Lagarde’s IMF bid support moves up a notch

FOUR

Christine Lagarde looks sure to become the next Head of the International Monetary Fund (IMF), particularly after Russian President Dmitry Medvedev acknowledged after the recent G8 summit that, ‘on the whole, consensus has practically been reached on this issue’. France, Germany, the UK and Italy strongly support Lagarde, who is the French Minister of Finance, and US Secretary of State Hillary Clinton, noted last week that, ‘unofficially, we welcome women who are well qualified and experienced to head major organisations such as the IMF’. The other candidate for the position, vacated by Dominique Strauss-Kahn following the latter’s arrest for attempted rape, is Agustin Carstens, Governor of the Bank of Mexico. ‘If elected, I will give the IMF all my experience as a lawyer, a director of enterprise, a minister and a woman,’ Ms Lagarde told a news conference in Paris where she announced her candidacy for the post.

SIX

1 million ticket applications for Olympics 100m final

Over one million ticket applications have been received for the men’s 100 metres final at next year’s London Olympics. While the London Organising Committee (LOCOG) is not giving a detailed breakdown of how many applications it has received for individual sessions at the two-week Games, a spokesman confirmed that those for the 100m final had topped the million mark. However, with around 50% of seats in the 80,000-seater stadium being taken up by sponsors, VIPs and the media, most people will be disappointed. The initial application process for the 6.6 million tickets available for the Games has now closed. LOCOG said it had received 20 million applications from 1.8 million individuals, an average of 12 ticket requests per applicant. Money is already being taken from bank accounts although exactly what tickets people have secured will not be known until June 24 – a system that has attracted some criticism and was labelled ‘peculiar’ by London Mayor Boris Johnson. ‘We can’t tell people what tickets they’ve got until we’ve charged their card. We need to make sure it’s a fully paid for order before we inform people,’ head of ticketing Paul Williamson said in a statement this week. LOCOG is expected to raise a quarter of its £2 billion operating budget from ticket sales.

Germany to Phase out Nuclear Power Stations Germany’s coalition government has announced that it intends to phase out all seventeen of the country’s nuclear power plants by 2022.The decision makes Germany the biggest industrial power to give up nuclear energy. Chancellor Angela Merkel had set up a panel to review nuclear power following the crisis at Fukushima in Japan and there have been mass anti-nuclear protests across Germany in the wake of the crisis, triggered by an earthquake and tsunami.

the international investment, business & finance magazine of cyprus

{news briefing: global }

deals of the month said Mamut. ‘I believe that our investment and strategy will secure a dynamic future for the UK’s largest bookshop chain and I look forward to working with its booksellers in building on the principle of excellent bookselling, which is at the very heart of the business.’

HMV sells Waterstone’s

HMV has sold its Waterstone’s book chain to a fund controlled by Russian billionaire Alexander Mamut for £53m. Mamut, who owns the San Francisco-based social networking site LiveJournal, already holds a 6.7% stake in HMV. He has bought the business for cash through A&NN Capital Fund Management, a company controlled by a trust in which Mamut has an interest. The deal is expected to be completed by the end of June. HMV Group, which issued its third profit warning in April this year, put the 314-strong Waterstone’s chain up for sale in March. The company said on Friday that the sale represented an ‘important step towards strengthening the capital structure of the remaining HMV Group’. HMV said that it needs to reduce its borrowing requirements in the short term to ‘achieve a satisfactory refinancing’ and had concluded that the most timely and effective way to achieve this was through the disposal of Waterstone’s. The proceeds of the sale – which will see £40m paid on completion in June and £13m in October – will be largely used to reduce HMV’s borrowing requirements. ‘We are extremely pleased to have reached an agreement to acquire Waterstone’s and its great heritage,’

Fiat to take majority share in Chrysler

Fiat says it will buy the US government’s 6% stake in Chrysler, which will give the Italian carmaker a majority share in the US company. After Chrysler emerged from bankruptcy protection in 2009, Fiat agreed with the US government to share technology and management in return for a 20% stake and has quickly built that up. Buying out the government would give Fiat 52% ownership of Chrysler. In a statement issued on 27 May, Fiat notified the US Treasury that it was exercising its option to buy the government’s share. Its stake is likely to increase to 57% by the end of the year, when it is expected to have met certain government targets. On Tuesday, Chrysler said it had repaid $7.6 billion in US and Canadian government loans, six years ahead of schedule, leaving only small equity stakes as a reminder that the two countries helped Chrysler emerge from bankruptcy in June 2009 and form a new company with Fiat. Last month, it reported a profit of $116m (£69m) in the first three months of the year, its first quarterly profit since it emerged from bankruptcy protection.

Microsoft buys Skype

Skype’s owners, led by private equity firm Silver Lake , are set to earn more than three times their investment, for a total capital gain of more than $5 billion, on the sale of Skype to Microsoft Corp. The gain is particularly large considering that the investors have only owned the Internet phone service Skype for 18 months, since buying a majority stake from eBay. The $8.5 billion price Skype is commanding from Microsoft reflects the premium being put on hot social media properties and the number of potential buyers. Skype, which was considering an IPO, had already sparked interest from parties including Facebook and Google. For Microsoft, the stakes were high. The world’s largest software maker has been beset by a string of setbacks including the failed acquisition of Yahoo Inc and a halting start in the mobile phone arena now dominated by Google Inc and Apple.

EU Inflation up

Ireland

Slovenia

Netherlands

France

States rose from 2.9% to 3.2%. One exception was Greece where it fell from 4.3% to 3.7%.

Malta

Germany

Italy

Belgium

Finland

Eurostat. The inflation rate in the eurozone was 2.8%, up from 2.7% in March, while inflation across the 27 Member

Spain

Cyprus

Greece

Austria

Slovakia

Annual inflation rates recorded an increase in the EU and the Eurozone in April, according to data released by

3.9% 3.7% 3.7% 3.5% 3.5% 3.4% 3.3% 2.9% 2.7% 2.4% 2.2% 2.2% 2.0% 1.5%

the international investment, business & finance magazine of cyprus

{news briefing: local }

cy news

Britain to Review Bases

OVER 100,000 CYPRIOTS TAKE EASTER TRIP ABROAD The Statistical Service reports that 110,672 residents of Cyprus returned from a trip abroad in April. A total of 39,017 travelled to Greece and 28,866 to the UK.

Controversial Conservative Party donor and Deputy Party Chairman Lord Ashcroft is to lead a review of the UK’s military bases in Cyprus. British Defence Secretary Liam Fox confirmed in May that Lord Ashcroft would undertake the role of senior independent advisor to the review of the Cyprus bases, working alongside Conservative MP and former Army officer Patrick Mercer. The study, due to be completed by the end of 2011, is part of the UK’s strategic defence review. More than 3,000 UK personnel are currently stationed in the two Sovereign Bases at Akrotiri and Dhekelia.

INDUSTRIAL OUTPUT FALLS Industrial production falls by 5.9% in March 2011 compared with March 2010 though pharmaceutical exports rise by 9%. As a percentage of GDP, industry is down from 13% in 1995 to 8.3% in 2010.

DISY Tops Poll

FULL BROADBAND COVERAGE THIS YEAR Communications & Works Minister Erato Kozakou Marcoullis announces that broadband coverage is expected to reach 100% in Cyprus during 2011. SHIPMANAGEMENT REVENUE GROWS A Central Bank survey reveals thatshipmanagement revenues rose by 7.3% in the second half of 2010.The shipmanagement sector accounts for 4.8% of GDP.

COURT OVERTURNS FUEL PRICE FINE The Supreme Court overturns a fine on local fuel companies for uncompetitive pricing after ruling that the composition of the Competition Commission was invalid. NO IMPROVEMENT IN CAR MARKET Registrations of motor vehicles are down for the 28th consecutive month in April. They fell by 15.2% to 3,160 from 3,728 in April 2010 MARFIN ISSUES €1 BN IN BONDS Marfin Popular Bank issues €1bn in mortgage-backed covered bonds which are trading on the Irish Stock Exchange. They carry an annual interest rate of 3-month Euribor plus 2%.

The main opposition party, the right wing Democratic Rally (DISY), topped the polls in last month’s parliamentary elections with 34.27% of the vote. The ruling left wing party AKEL came second position with 32.67%. Both parties increased their share of the vote, compared with the 2006 elections. In a country where voting is compulsory, it was big news that 21.32% of registered voters abstained. Following the main two parties were the Democratic Party (DIKO) with 15.77%, the Socialist party EDEK with 8.93% the European Party (EVROKO) with 3.88% and the Green Party with 2.21% of the vote. DISY President Nicos Anastasiades

Qatar deal finalised Agreement was reached in May with Qatar over the development of a prime site opposite the Hilton Cyprus in Nicosia. It provides for the construction of a luxury hotel, apartments, shops and offices for Cypriot and foreign investors. Government Spokesman Stephanos Stephanou described the investment by Qatar, one of the biggest investors in the world, as a vote

Lower Airport Charges Welcomed 14

of confidence in the Cypriot economy, one which is expected to boost growth by creating hundreds of new jobs, upgrading and enriching Nicosia’s tourism product and opening up new prospects for other investments in Cyprus by Qatar and other countries. The Chairman of the Council overseeing the joint venture is former Minister of Finance, Christos Mavrellis.

Ryanair has welcomed last month’s announcement of lower airport charges at the island’s two international airports as a way of encouraging tourism growth and new routes. Ryanair’s Director of New Route Development, Ken O’Toole said that his company congratulated the government and Hermes Airports on their decision to focus on delivering new routes and opening up new markets. “Cyprus must break free of its dependency on high cost Tour Operators and the UK market by lowering costs to ensure it attracts many thousands of new visitors from currently un-served markets and countries,” he said.

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Eurofast Global Offices: Athens Lefkosia Sofia Bucharest Belgrade Podgorica Tirana Skopje Zagreb Pristina Banja Luka/ Sarajevo Cairo/Alexandria Cyprus: Cypress Centre, 5 Chytron str. 4th floor, P.O. Box 24707, 1302 Lefkosia, Tel.: +357 22 699 222, Fax: +357 22 699 004 the international investment, business & finance magazine of cyprus

commodities forex watch

COMMODITIES & INDICES ROUND-UP By Isavella Frangou-Pavlou Director- Global Marketing, KAB Strategy (Cyprus) Ltd.

Gold May was a month of consolidation for gold prices. After a remarkable climb in April, gold dipped to US$1460/oz early May on a stronger dollar but got support as the European debt crisis concerns intensified and investors returned to gold as a safe haven. Early on in the month, the US Federal Reserve kept its monetary policy unchanged but confirmed that QE2 would end late June. Meanwhile, the eurozone debt crisis intensified again as rating agencies downgraded Greece’s sovereign debt and negatively remarked on the credit outlook for Spain, Italy, and Belgium. Both QE2 exiting expectations and euro debt worries helped strengthen the dollar, the index of which rallied from 72.70 to 76.30. Demand for gold remains strong. Though reports show that George Soros abandoned his gold ETFs, the strong demand from emerging countries will support the price of gold. China, the world’s largest gold producer, also became the world’s largest gold buyer in Q1 2011. Investors should keep an eye on the US Non-Farm Payroll report due June 3, and the Fed’s new interest rate decision on June 23. Both BOE and ECB will also decide their monetary policies. ECB may keep its rates unchanged as the eurozone debt crisis is likely to deteriorate support a bullish outlook on gold price. Support is around US$1460/ in the future. BOE may hike its rates since inflation in the UK has oz and gold may resume the up spiral after consolidation. been hovering at high levels. Consumption demand, risk aversion on Source: KAB-MetaTrader eurozone debt worries, and the relative loosening of monetary policy

US Stocks It was a rollercoaster ride for the US stock market in May. On May 2, the S&P 500 index climbed to a three-year high at 1373 points, followed by the index testing 1300 for support. The current global economic situation makes further declines possible. The European debt crisis, inflation, China’s slipping economic growth, and turmoil in the Middle East are major influences. Among them, inflation is the core, caused by high commodity prices due to loose monetary policy. In June, several events need to be paid close attention to:  US Federal Reserve Meeting on June 22nd  European Central Bank meeting on June 9th  Bank of England meeting on June 9th (BOE is expected to raise its interest rate in the short term)  Greece’s progress on cutting public spending. Technically on the weekly chart, the S&P 500 index has completed 5 uptrend waves and now it is in for correction wave B. The target of 1300 for correction wave A has almost been reached. Then a rebound should kick in and the index should probably reach a range of 1335-1340 before the final fall. The final correction wave should not be lower than 1240 and 1275 before another round of climbing begins. Source: KAB-MetaTrader

oil Oil prices were significantly pressured downwards at the beginning of May, as the killing of Osama Bin Laden by the U.S. and eurozone debt worries both led to an appreciation of the dollar. Investors took profit and NYMEX oil futures fluctuated between US$95 and US105/barrel over May. Additionally, oil prices faced policy pressure in May. The IEA released a report blaming the surging oil prices for hurting global recovery and the CME hiked oil futures trading margin requirements this month to control speculation, which was blamed for causing the unacceptable high oil prices in April. Oil prices are likely to fluctuate in the coming months. On the demand side estimates for oil may be lowered, as the US economy recovery is below expectations. On the supply side, Libya’s supply may not resume in the short-term. Fundamentally, inflation risk, eurozone debt issues and world monetary policy changes will affect the direction of oil prices. Technically, oil may continue its wide range consolidation, the support is 95/93and the resistance is 105/110. In June investors should watch the U.S. Non-farm Payrolls (June 3), U.S. CPI (June15), and a series of data that will suggest the economic outlook. Source: KAB-MetaTradertor.

info: Isavella Frangou-Pavlou is Sales and Marketing Manager at KAB Strategy (Cyprus) Ltd (CySEC-License No. 058/05)

the international investment, business & finance magazine OF CYPRUS

FOREX WATCH GBPUSD May was not a very good month for Sterling. The pound fell for most of May reaching a low of 1.605 on May 24. A rebound followed on hopes that the BOE will hike its interest rate during its next meeting, reaching a peak at 1.651. On the weekly chart, the pound has been trading in the range of 1.605-1.675 for weeks. In the near-term, it is expected to trade around the resistance region of between 1.655 and 1.66, followed by a decline down to roughly 1.60 again. However, if more signs confirm that the BOE will increase rates on June 9, Sterling will break the trading range upwards. Source: KAB-MetaTrader

EURUSD The euro trended downwards in May from a high of 1.494 due to European sovereign debt worries, mainly from Greece. Neighbouring economies such as Spain, Italy, and Portugal also seem to be deteriorating. EU Finance Minister Junckerâ&#x20AC;&#x2122;s suggestion that Greece may not receive the next tranche of its financial assistance from the IMF next month as the group awaits 12-month refinancing guarantees topped the headlines. In the meantime, Spain is reportedly looking for a six-month extension on guarantees for 80 billion euro in bank bonds. To sum up, there is no quick and easy solution to lift the EU out of trouble in the near future, and therefore bears have support from fundamentals. The focus in June is without doubt inflation and Greece. High inflationary pressure will push the ECB to hike its rates; however, such a measure is not likely to be implemented in June. Technically, the euro is in correction wave B and we shall see the rally wave reaching the 1.431.445 region before final correction wave C. Wave C will send the euro lower than 1.40 and the depth will be determined by developments around the debt crisis. Source: KAB-MetaTrader

This research report or summary has been prepared by KAB Strategy (Cyprus) Ltd (CYSEC Licence No. 058/05) and KAB Financial Advisory Ltd from information believed to be reliable. Such information has not been independently verified and no warranty, representation or warranty, express or implied, is made as to its accuracy, completeness or correctness. Â This report is provided for information purposes only. Nothing in this report should be considered to constitute investment advice. It is not intended, and should not be considered, as an offer, invitation, solicitation or recommendation to buy or sell any of the financial instruments described herein. Leveraged products incur a high level of risk and can result in the loss of all your invested capital. KAB Strategy (Cyprus) Ltd and its affiliates accept no liability whatsoever for any direct or consequential loss arising from the use of this document or its contents. the international investment, business & finance magazine OF CYPRUS

{opinion}

The euro’s

By Simon Smith

political

seem to spend more time worrying about who, rather than what, is going to pull the eurozone out of the current crisis. Whilst the crisis has transformed over the past eighteen months or so in terms of intensity, focus and implications, the lack of leadership and strategic oversight has been a constant. Unless this changes, I struggle to see what will allow the eurozone to turn a corner and put the worst of times behind it. We knew from the outset that the eurozone would be unique; a single currency without political or fiscal union. Many said it would not work (and they may yet be proved correct) but systems were put in place to aid coordination of policies, the pinnacle of which was the stability and growth pact, designed to prevent government deficits and debt from getting out of hand. These measures proved to be weak at best, because when push came to shove, politicians put their domestic interests above that of the eurozone as a whole. Ironically, Germany and France were the main culprits in undermining the very procedures they had pushed for most, gaining exemption from fines in 2004-05 and permanently softening the rules. We’re seeing a similar pattern in the present day. There are many tough choices that have to be made so as to ensure the long-term survival of the single currency but they often come at the price of disenfranchising domestic electorates. That’s become all too apparent for Germany and Finland recently, where voters are punishing incumbent administrations for the perceived cost of bailouts. But in a bid to capture the most appealing collective option, these choices are skirted around. Absurd as it is, the notion of debt ‘re-profiling’ was floated in May, despite the fact that it is a default by any other name (as the rating agencies have confirmed). Furthermore, whilst Germany insisted on the no bail-out clause in the Maastricht Treaty that founded the euro, the initial terms and subsequent easing of lending conditions info: Simon Smith is Chief Economist at FxPro.

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weakness

(albeit in return for concessions) to Greece is in effect a fiscal transfer. Germany has pledged to lend to Greece at rates and on terms that would be unobtainable elsewhere. It’s not quite handing money over, but isn’t that far off. If the eurozone is to wake up to the reality that a Greek default is the only way out and that fiscal transfers are inevitable, then it needs a leader who is going to push these to the top of the agenda. They’ve shown a particular lack of interest in creating one up to now. Given the choice between an EU President that would have been a leader and one whose name few can remember, they chose the latter. The IMF leader stepped up to the plate when it was needed last year but there’s a vacuum there that will take time to fill. Meanwhile, whilst the ECB was fairly vocal in its opposition to government fiscal policies and the flouting of rules during the last decade, this was from a powerless position over government policies. Now, given the size of its bond buying and lending to stressed eurozone banks, it has itself become too involved in the current crisis to be the dispassionate voice of reason that it once was.

{

The notion of debt ‘re-profiling’ was floated in May, despite the fact that it is a default by any other name

{

Such a leader is never likely to emerge, though, as domestic politicians naturally don’t want to sign away their control to someone over whom they have little control and who will no doubt undermine their chances of electoral success. This inherent shortcoming of the single currency is here to stay and may ultimately prove to be its downfall.

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{the debate}

QUESTION: Will the price of gold continue

to rise over the next decade?

YES!

By Andreas Andreou In his 2005 book The Long Emergency, American author James Howard Kunstler argued that the end of the cheap oil era would also signal an end to the modern global economy’s infinite growth paradigm. The book also predicted a debt market and real estate crisis whereby, as growth rates slowed and stalled, it would become impossible for debtors to service their repayments. Kunstler’s advice for survival was twofold: Get out of debt to protect against the prospect of high interest rates, and invest only in physical gold as the only easily tradable asset holding its value. Today’s indebted governments, heavily swayed by the ever more powerful and consolidated financial sector, are trying to maintain the status quo through quantitative easing in a desperate attempt to keep their economies afloat. However, printing money has the implicit effect of devaluing that currency (and any non-index linked bonds/ stocks, etc. denominated therein) and its price relative to gold. When it comes to the price of gold, it’s important to understand that the money supply and inflation are two critical elements in its calculation but how the adjustment for inflation is made is also crucial. Using dollars as the benchmark, the peak gold spot price of $850 per ounce in the 1980s would actually be around $2,300 using the US government’s consumer price index. Moreover, if we consider expansion of the money supply as a measure of inflation, today’s gold price should actually be somewhere between $7,000 and $14,000, especially when the bank bailouts are taken into consideration. Therefore, no matter how we calculate it, the price of gold is not nearly as high as it could be given the levels of scarcity in the commodities market and uncertainty in the global financial system. In the short term, the price of gold may fluctuate wildly. However, given the relative inelasticity of the gold supply and rising energy prices, inflation (in monetary terms) can only increase. As such, the law of supply and demand dictates that the price of commodities will also continue to increase in price. With securely stored physical gold being the most universally tradable commodity in the world, it should prove to hold its real value (and therefore increase in terms of monetary value) against most, if not all the world’s declining, inflation-ridden fiat currencies.

NO!

By Marios Mavrides The beginning of the credit crisis in summer 2007 marked the beginning of an upward trend in the price of gold which is still continuing today. The price has risen from $600 per ounce right before the crisis to the historic record of $1,560 per ounce a few days ago. Can the price of gold continue to rise into the future? There is no clear answer to this – if there was, we would all be making easy and quick money. The point is that gold has traditionally been considered (until today) a safe haven for investors during periods of uncertainty and inflation. Since inflation reduces the purchasing power of money, gold is a good way to maintain this purchasing power due to the fact that its price will always rise at least by the rate of inflation. Also, uncertainty and an unstable financial environment discourage investors. Because of the high risk, investors invest less in real estate and shares and are looking instead for a safe haven until the financial climate improves. Gold has been a very good option for those investors who are not willing to take high risks. Speculation has added to all of the above to make things worse. Speculators have been buying with the expectation that prices will continue to go up and provide them with quick and easy profits. This speculative activity is responsible for the dramatic increase in the price of gold. As investors speculate, the increase demand for gold and the price also increases. The expectation of a quick and easy profit attracts more buyers, increasing demand and the price even more. Speculation in the market for gold is destabilizing and has resulted in what is called a ‘bubble’, where the price continues to increase without any substantial reason. Such phenomena are occasionally observed in organized markets such as oil, commodities and shares. The dramatic increase in the price of gold is not sustainable as destabilizing speculative activity cannot continue for ever. At some point, the market for gold will begin to collapse and its price will fall sharply. It may even go back to where it was before the crisis began. The price will begin to fall when the uncertainty and instability in financial markets begin to vanish. The price of gold will collapse. We just don’t know when. The dramatic increase in the price of gold is not sustainable as destabilizing speculative activity cannot continue for ever.

info: Andreas Andreou is an economics analyst. 20

Marios Mavrides is Chair, Department of Accounting, Finance and Economics, School of Business Administration at the European University Cyprus. the international investment, business & finance magazine OF CYPRUS

%MERALD 'ROUP OF #OMPANIES /FFICIAL 2EPRESENTATIVE OF #AP 3T 'EORGES IN #YPRUS Ã¦ INFO EMERALD GRP COM Ã¦ WWW CAPSTGEORGES COM the international investment, business & finance magazine OF CYPRUS

cover coverstory story

SOVEREIGN

DEBT & euro fears By K. Ioannides

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lthough there is a generally high awareness of the ongoing sovereign debt crisis, the possible scenarios and implications of each of the options available to Greece in particular are not so clearly appreciated. We invited economists and investors to share their views on the monumental political and economic challenges facing Greece and the broader eurozone and to predict how they think events are likely to unfold, including the possible effect on Cyprus’s major banks and how well equipped they are to deal with the result of a Greek debt default.

Why It Matters There has been much speculation about the possible impact on Cypriot banks of Greece defaulting on its sovereign debt obligations. The reason for this is that most banks take their depositors’ money (i.e. the money that you and I give them) and invest some of it in what are perceived as safe investments that offer

good returns. Sovereign debt (generally in the form of bonds also known as gilts or Treasury Bills) used to top the list of ‘safe’ investments. According to recent estimates based on the 2010 financial reports by Cyprus’ three leading banks (i.e. Bank of Cyprus, Marfin Laiki and Hellenic Bank), their combined total exposure/loans to Greece amounts to almost €29 billion. Therefore, if Greece (and, in turn, Greek companies) defaults or delays payment on these debts, how will the Cypriot banks’ balance sheets be affected? Such a development could instigate mass withdrawals of deposits, and a collapse in the bank’s share price. What would this mean for the government of Cyprus? Could it step in to bail out or nationalise the banks and thereby protect peoples’ savings, as happened in the UK and US? This might imply that its own solvency is questionable and it would be unable to borrow to fund itself further down the line.

Why Governments Need To Pay Their Debts Despite the fact that government (sovereign) debt levels have risen worldwide since the start of the global financial crisis in 2008, the percentage of debt owed to foreign creditors is critical when times get tough (much like owing money to a bank instead of to a close relative). Because foreign creditors are much more likely to sell debt (in this case government bonds) that is perceived to be risky, which increases the interest rate at which that country must offer its bonds in order to keep investors interested in buying its debt. However, once the interest rates become too high to pay back, that country becomes unable to finance itself and in effect goes bankrupt. As a result, the government becomes incapable of paying its employees (civil servants, police, rubbish collectors, etc.) state pensions, social security obligations and everything that enables a country to function properly.

GOVERNMENT DEBT & PORTION OF IT THAT IS FOREIGN-OWNED Total debt as a % of GDP % of debt that’s foreign owned

Greece

Spain

Japan

Ireland

113% 83%

204% 7%

39% 78%

137% 75% 81% 60% Germany

Portugal

99% 80% USA

99% 31%

Italy

France

97% 59%

Data compiled from OECD, RBC Capital Markets and Moody’s Investor Services Likelihood of Default Ranking (based on Moody’s Ratings)

133% 46%

89% 30% the international investment, business & finance magazine OF CYPRUS

cover story Haircuts and PIGS

he latest crisis has thrown up an interesting selection of unusual words and acronyms which may confuse the non-

specialist. The term ‘haircut’, used to refer to a nation effectively defaulting on its debt obligation, is a curious one. After all, if it’s only hair doesn’t it grow back? In this case no. In the case of a Greek haircut, it will be Greece’s creditors, not Greece itself, that will be on the receiving end, at least initially (before EU/IMF terms and conditions start to bite). Furthermore, the ‘hair’ is in fact billions of euros and the scale of the restructuring (to use the slightly more alarmist term) of debt repayments to a serviceable level will no

doubt strike at the very core of banking sector solvency (at least in highly exposed foreign banks such as those of Germany and Cyprus). Proponents argue that in the long term, a restructuring of the debt may enable Greece (and indeed perhaps other troubled Euro countries like Ireland and Portugal) to pay the money back eventually. However in the immortal words of John Maynard Keynes “In the long term everyone is dead” so the knock-on effects of the sovereign debt crisis on those living in the here and now is what we need to worry about. Meanwhile, by some curious linguistic accident, the names of the four countries that are currently being viewed as the most likely to default on their huge debt repayments (Greece,

Ireland, Portugal and Spain) conveniently give us the acronym PIGS (rather than the logical GIPS if we take them in order of the dire economic straits in which they find themselves), which lets people in the other 23 EU member states enjoy an even greater idea of their own superiority over such financially unsound…pigs.

The top 5 riskiest and safest countries in terms of sovereign debt default

NORWAY

ARGENTINA

SWEDEN

PORTUGAL IRELAND

FINLAND

VENEZUELA

SWITZERLAND NETHERLANDS (According to the CMA Global Debt Credit Risk Report Q1 2011)

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GREECE

By Dr. Savvas Savouri

Germany Will

Why

Not Allow a

Euro Failure

ot that long ago the consensus was the eurozone would most likely fragment. Not only have there been no defections or ejections, but the euro is now trending upwards against the dollar. Remarkably, the euro is strengthening as the sovereign debt of the euro ‘PIGS’ (Portugal, Ireland, Greece, Spain) suffers a buyers’ strike with yields lingering at ‘default warning’ rates. Of course, few will bet against Spain needing a bailout. Indeed, if it comes it will be of a quantum dwarfing of the combined rescues of Greece, Ireland and Portugal. So why, despite all its problems, is the euro proving so resilient, most notably against the dollar? A large part of the explanation for the euro’s relative strength can be put down to what I would describe as savings rebalancing. For decades the dollar has been the default currency for storing wealth. Crucially, this hegemony has had its day. Excess savings in dollars are moving elsewhere and the euro, as the world’s second mosttraded currency, is proving a significant beneficiary. This brings me to the most interesting aspect of events. As capital is rotated into euro, it is choosing the preserve of core over peripheral euro sovereign debt. This is even though, or rather despite ‘PIG debt’ being far higher yielding. Outside investors see a value trap where insiders do not and Germany is the insider supreme. From the perspective of the German Debt Management Office, there is perfect visibility as to whether haircuts will occur. Quite frankly, they will not. Germany’s motivation is both the political capital it has invested in the euro and the considerable financial consequences that would arise from its failure. Germany will guarantee that defaults do not occur for three self-interested reasons: 1. Germany has a lot to lose from any unilateral default. Its monetary authorities know that one will beget two and two will beget more. The reality is that it is cheaper to bail out the PIGS than to let them restructure. 2. As onerous as the conditions attached to European Financial Stabilisation Facility (EFSF) funding may seem to those in the

nations forced to agree to them, to Germany these offer a chance to impose its own thrifty housekeeping on nations not used to such discipline. 3. There is budgetary opportunism. Germany has a great deal to gain from the survival of the existing debt structures, a lucrative arbitrage present, in fact, between what it sells euro debt for and what it can presently buy that of others for. Germany knows that the default risk of the PIGS is being grossly exaggerated by outsiders. The latter will therefore opt to own German and other core euro debt, despite it being far lower yielding than paper comparable by currency and maturity but issued by peripheral euro nations. This brings us back to the dollars of outsiders rotating into the euro. Notionally Germany, France, the Netherlands and other euro ‘insiders’ can sell debt at a yield of less than 4% to outsiders looking to convert their dollar wealth into ‘low risk’ euro sovereign debt. They can then use the proceeds to purchase paper from soft nations of the same maturity and in the ‘same’ currency at upwards of twice, in some cases three times, this rate. Of course, with time the spreads we currently see across eurozone debt will narrow, converging towards German rates (which I feel could actually compress from here). There is another reason why, despite yields signalling that they will, I do not believe Greece et al will default unilaterally. It may surprise many that I should claim this but the reason is pure self-interest. Given their option to default, those in power in Athens are perfectly aware how strong a bargaining position they are in. The Greek authorities know very well that a unilateral default would prove contagious and they know that they can elicit concessions using this as a bargaining tool. There is an analogy here for those frightened of bees. We fear bees because they can sting and we steer clear or antagonising them. This gives the bee protection. The bee knows, however, that if it did sting it would disembowel itself. The consequence is a self-preserving fear between man and bee; as between bees and humans, so too between Germany and Greece. Greece will not sting Germany and Germany will not provoke it too much.

Germany has a great deal to gain from the survival of the existing debt structures

info: Dr. Savvas Savouri is a Partner and Chief Economist of Toscafund.

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cover story

interview

is To

Politics Not Economics,

Blame

or a more academic evaluation of the European sovereign debt crisis, Gold asked Dr. Henning Meyer, a German political scientist, analyst and commentator currently based at Centre for the Study of Global Governance at the London School of Economics and Political Science, for his insights into the issue.

Interview by K. Ioannides

Gold: What are the implications for the European and global economies, given the deterioration of the sustainability of sovereign debt in countries such as Greece, Ireland and Portugal and the fact that even the US has recently received a negative review from Standard & Poor’s? Henning Meyer: Other commentators such as Wolfgang Munchau [associate editor of the Financial Times] have stated, from a macroeconomic point of view this is not a proper debt crisis. If you look as the eurozone in its entirety and the overall debt levels to GDP, it is much lower than the UK, the US and Japan. So if you view the eurozone as one economic entity, this is not a debt problem but a political crisis caused by asymmetric shocks, without the corresponding political mechanism to deal with it. If you take the overall GDP of Greece, Ireland and Portugal combined, it is not much more than that of Northern Australia. If we look at it in this way, we realize that this is a political crisis much more than it is a debt crisis. Gold: What is your view of the bailout packages provided to Greece, Portugal and Ireland? H.M: The lending facility created by the EU and the IMF to deal with the debt issue is the result of a misguided policy prescription that does little more than simply buy time. I’m firmly of the opinion that countries can only achieve healthy debt to GDP ratios if they have decent rates of growth. Contracting fiscal policy at a time when the private sector is already over-leveraged will only diminish any prospects for growth. As such, it’s virtually impossible to achieve the levels of growth required for Greece and the other troubled eurozone states to service their debts. Also, what I find particularly astonishing in this debate is that it’s seen entirely as a sovereign debt crisis. In many cases, such as Ireland for instance, a third of public debt is just the private banking debt that they took over on their books. Without any public debate, one of the core principles of capitalism was just abandoned, i.e. that the investor is the first in line to take the

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Ultimately, it’s a problem stemming from European politicians not being straight with their populations investment risk. If you and I put money into the wrong shares, we don’t expect someone else to step in and absorb our losses. Even if certain banks were deemed important to the system, there should have been reforms to address this issue. What we have now is the creation of a big moral hazard. The banks have now come to expect that they can take investment risks and, if things go wrong, they will be bailed out by the public. Then these same institutions go after the governments and say that they are unsustainable due to the bailing out of the banking sector!

Gold: How do you view the role that rating agencies have played in all this? H.M: The same rating agencies that assured everybody that the credit default swaps and derivatives based on the mortgage market were AAA, which was the cause of the financial crisis, are now downgrading governments for bailing out the institutions that were exposed to those very same derivatives based on the mortgage market.

Gold: What do you make S&P’s negative outlook for the US? HM: Well, it was interesting that Senator Rand Paul stated that, given the surprising lack of reform in the US after the credit crisis, he foresaw that that another bailout for the US banking sector would probably be required. The problem is that the US government’s fiscal position will not enable it to be in a position to provide another bailout for the banks.

Gold: Coming back to Europe, you seem to be very pessimistic about the fate of the eurozone. H.M: I honestly cannot see how Greece, for example, can get out of the current crisis without some sort of restructuring or default. There are different ways for this to happen, some more painful than others but painful it will be. The repercussions will invariably be unfair to the Greek people themselves. This is true to a greater extent in Ireland where its people are exposed to severe austerity measures although they had nothing to do with the causes of the crisis [i.e. the bailing out of the Irish banking sector]. Ireland was in a very strong fiscal position before the crisis, it had a balanced budget and low ratio of debt to GDP. Now they [the Irish government] are facing a big political backlash against the situation. In the same vein, Greece is also suffering with street riots and protests. On the other side of the spectrum we have backlashes from populations in creditor countries where countries such as Finland and Germany are becoming very hostile towards further bailouts. Ultimately it’s a problem stemming from European

politicians not being straight with their populations. There is a perception in the creditor countries that their money is simply being given away in order that the indebted countries can continue to fund their early retirement systems. This simply isn’t the case and provided that there is no default there will be a profit to be made from the interest on the bailout loans.

Gold: So what, in your view, are Greece’s options? H.M: The most painful and expensive option would be the unlikely event of Greece exiting the eurozone. Apart from it being politically lethal and the inevitable run on the banks that would be implicit in such a move, a return to the drachma would automatically incur a substantial devaluation whereas its debt obligations would still be denominated in euro. This would make the debt to GDP ratio jump by 20-30% to an estimated 200% of GDP. Any competitive gains to be had through devaluation would be offset by the increased levels of debt. This scenario would be motivated by European politicians being unable to converge on a political solution that would enable the eurozone to act as a single economic entity. Given the size of the debt burden and Greece’s inability to service market rates, it seems likely that the European credit facility and the IMF will end up becoming the country’s sole lender. However, due to the austerity conditions attached to this type of loan it could end up fundamentally undermining Greece as a democratic country. No matter what government the Greeks elect, their economic and fiscal policy will end up being dictated to them from abroad. This would create a huge democratic problem. The issue is that the longer a plan of action is postponed, the more costly the solution will be. Right now the plan of action seems to be to simply buy time.

If you and I put money into the wrong shares, we don’t expect someone else to step in and absorb our losses Gold: Buying time towards what end? H.M: Well, there’s a lot of talk and speculation that the delay is in order to allow the banks time to sort out their balance sheets to absorb the hit. It may make sense for the banks but when a solution does come two or three years down the line it will be more expensive, so does that make sense? the international investment, business & finance magazine OF CYPRUS

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Gold: In terms of more trouble to come, do you believe that Spain will be next? H.M: There’s a lot of murky water surrounding the Spanish banking sector and I suspect that there’s a lot of risk there with huge losses yet to be written off. Spain’s growth ended with the bursting of a substantial property bubble and a continued exodus of its skilled people. They are now actually paying the contractors that build new houses to demolish them in order to limit the housing supply and stabilize prices and keep people employed! However, I don’t think that Spain will get into the same situation as Greece, Ireland or Portugal. Its fundamentals are, at least for now, better. If you look at Ireland, it has been hit by the triple whammy of bailing out a highly irresponsible and overleveraged banking sector, the bursting of a highly overvalued property market the disadvantage of having pursued a beggar thy neighbour growth strategy which sought to attract foreign direct investment with a 12.5% corporate tax rate. The fundamental problem is that no mechanism exists in the eurozone to deal with all this divergence without creating profound public backlashes.

It shouldn’t be legal for speculators to drive countries against the wall Gold: We haven’t even mentioned the role of the markets and speculators on events.

H.M: I’m firmly of the opinion that it shouldn’t be legal for speculators to drive countries against the wall. There should be barriers to prevent this from happening. I appreciate that doing this would be hugely difficult but there’s no justification for such activities. It should be made impossible for speculative activities to have consequences such as huge levels of unemployment or for a country’s growth prospects to be severely limited for a decade. Again, it’s a political issue as well as a financial one. Speculators will, of course, look to make money wherever possible but political decisions should be taken in order to change the legal framework governing the markets and so shield populations from the results of speculative activity.

Gold: How do you view the future of the EU and the euro? H.M: The EU is suffering because it was set up as an economic union without the corresponding political union necessary

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to steer it when things got tough. Some speculate that it was designed that way for the political elements to catch up when circumstances obliged it to move in that direction. So here we are now, and if the EU and the eurozone in particular are to survive, the EU must forge new political structures that allow for a much greater level of assimilation. In order for there to be proper assimilation, issues such as tax harmonization must be addressed. You can’t have individual member states electing to pursue their own policies and, when things don’t go right, expecting the partner countries to bail them out. Then there also have to be mechanisms in place to allow for intra-eurozone capital transfers. Currently the Treaty doesn’t allow this. At some level there should be some sort of eurozone taxation enabling the EU to have an independent income that can be utilized to alleviate such asymmetric financial stress. In the current environment there seems to be a diminishing appetite for increased European integration which will make steps toward the necessary political integration that much harder. With 27 member states and lots of veto players, it doesn’t look very likely that it will be possible to amend the current Treaty and allow the necessary political union to progress in the near future.

There seems to be a diminishing appetite for increased European integration Gold: So what options does this leave? H.M: Well it’s not completely unthinkable that the economic pressures will become too great and that there will be a disintegration of the eurozone where not just one, but quite a few countries may end up leaving the single currency. This could leave a core eurozone which could include Germany, France and the Nordic countries. Personally I am very disappointed in Europe’s leaders who seem to have failed to grasp the magnitude of what is happening and have focused instead on maximizing their domestic political appeal rather than looking at the bigger picture and what’s at stake. Only recently Denmark was in breach of the Schengen Agreement for unilaterally re-introducing border controls, for example. What our leaders should be doing is taking a birds eye view of things and explaining to their electorate what’s at stake and what needs to be done in the common long-term European interest.

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cover story

How well would the Cypriot banks cope

with a Greek default By Fiona Mullen

itch Ratings downgraded the Republic of Cyprus’s long-term foreign and local currency Issuer Default Ratings (IDRs) to ‘A-’ from ‘AA-’ on May 31 and removed them from Rating Watch Negative. The outlook on the long-term IDRs is Negative. Fitch simultaneously downgraded the short-term foreign currency IDR to ‘F1’ from ‘F1+’. On 13 May, Moody’s ratings agency had put Cyprus’ three biggest banks on review for another downgrade, having cut their ratings in March. Both agencies cited ‘the severity of the crisis in neighbouring Greece and the risk this poses for the Cypriot banking system and consequently the public finances of Cyprus,’ as the main reason for the downgrade. But how big is the banks’ exposure to Greece? And will they be able to cope with a Greek restructuring? The talk of a Greek default or restructuring or ‘reprofiling’ (extending maturities of existing debt) seems to increase every day. The European Central Bank is adamant that this cannot be allowed to happen, not least because of the huge impact it would have on banks across the eurozone, including Cyprus. How much have the banks lent to Greece? What are their capital adequacy ratios? The banks themselves do not make it easy to measure their total exposure to Greece. But with a little digging and guidance from those in the know, it is possible to come up with some solid figures. The investor relations presentation of Bank of Cyprus, the largest bank in Cyprus, showed that at the end of 2010 the bank had lent €2 billion to the Greek government. It had lent a further €10.1 billion to Greek corporations and individuals. BOC’s total exposure to Greece is therefore €12.1 billion or 43.6% of total group loans of €27.7 billion.

Marfin Laiki, Cyprus’s second largest bank, had lent €3 billion to the Greek government at end of 2010 and another €12.5 billion in corporate and individual loans. Marfin Laiki’s total exposure to Greece is therefore €15.5 billion or 56.6% of its total loan portfolio. Hellenic Bank, the island’s third largest bank, announced earlier this year that it had lent just €110m to the government of Greece at the end of 2010. Hellenic’s financial statement for the final quarter of 2010 shows that additional loans to corporations and individuals in Greece amounted to €995 million. Hellenic is therefore the least exposed, with loan exposure to Greece of €1.1 billion or 20.4% of its group loan portfolio of €5.4 billion. How badly these banks would be affected by a Greek default, restructuring or ‘reprofiling’ depends to a large degree on their capital buffers. A large amount of capital would help ‘plug the hole’ created by any default on debt. At present, the three banks have capital ratios well above the regulatory minimum. While the Tier 1 capital minimum is 8%, Bank of Cyprus has 12.7%, Marfin Laiki has 12% and Hellenic has 11.9%. Core Tier 1 ratios are 8.1%, 9.3% and, inferring from financial statements, 9.0% respectively. The Economist Intelligence Unit (EIU) is currently forecasting a 42% ‘haircut’ of Greek sovereign debt in 2013. The EIU Greece analyst Megan Greene has told me that the non-rounded number is the result of a number of calculations. But to keep things simple, the following analysis looks at the impact of a 40% haircut on the Cypriot banks’ Core Tier 1 ratios. At present, the regulatory minimum for Core Tier 1 is 4%. From January 2012, new Basel III rules will push this to 4.5% and with incremental increases thereafter. If a 40% default on Greek

Hellenic Bank is the least exposed, with loan exposure to Greece of €1.1 billion

info: Fiona Mullen is Director of Sapienta Economics Ltd, which analyses economic trends in Cyprus and elsewhere for local and international clients. 30

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THE ‘BIG THREE’ CYPRIOT BANKS & THEIR EXPOSURE TO GREECE government debt were to happen tomorrow, I estimate that the Core Tier 1 ratio of Bank of Cyprus as of December 2010 would fall from €2.1 billion to €1.3 billion. BOC’s Core Tier 1 ratio would fall from 8.1% to 5%. BOC would therefore stay inside even the January 2012 minimum Core Tier 1 capital ratio of 4.5%. Marfin Laiki would probably see the Core Tier 1 dropping from €2.5 billion to €1.3 billion but again the ratio would remain above the January 2012 minimum, at 4.9%. Hellenic passes with flying colours, with a Core Tier 1 falling from €0.5 billion to €0.4 billion and the ratio slipping from an estimated 9% today to a very comfortable 8.2%.

The ‘known unknown’ here is the wider impact of a Greek default on other loans So can the banks sit back and relax? Not quite yet. The ‘known unknown’ here is the wider impact of a Greek default on other loans – what economists call ‘contagion’. A government unable to pay its debts might also be a government unable to pay its salaries, pensions, unemployment benefits, private-sector subcontractors and so on. What proportion of Greek individuals and companies could be expected to default if the government went under and, more importantly, how fast? Even a 10% default on the non-government loans would have an enormous impact on what remained of the bigger two banks’ Core Tier 1 if it happened all at once. This is really what keeps the regulators awake at night. It also explains why the ratings agencies keep getting out the knife, despite the banks’ ongoing efforts to raise their capital levels.

Bank of Cyprus

Marfin Laiki

Hellenic Bank

27.7

27.4

5.4

2.0

3.0

0.1

Other loans to Greece

10.1

12.5

1.0

Total loans to Greece

12.1

15.5

1.1

43.6%

56.6%

20.4%

Tier 1 (EUR bln), of which:

3.3

0.6

Core Tier 1 (EUR bln)

2.1

2.5

0.5

Tier 1 ratio (%)

12.7%

12.0%

11.9%

Core Tier 1 ratio (%)

8.1%

9.3%

9.0%

Risk weighted assets

26.3

27.4

5.4

1.3

0.4

5.0%

4.9%

8.2%

Loans to Greece Total group loans (EUR bln), of which: Loans to the Greek government

Greek loans as % of total

Capital adequacy

Impact of 40% Greek default Core Tier 1 post-default Core Tier 1 ratio post default

the international investment, business & finance magazine OF CYPRUS

cover story

The

Cyprus

By Stephen Archer

debt

through

prospects for

The

crisis

An objective look at Cyprus’ debt position relative to other key global economies

t the recent ICPAC Annual Economic Congress, Stephen Archer, a strategic advisor for CEOs and boards of FTSE 100 companies including Nestle, GE, KPMG, Carlsberg and Oracle, explained why Cyprus is in a relative position of strength despite (unwarranted) credit rating agency gloom and downgrades.

Top 10

Reasons Why Cyprus is in a relative position of strength 1. Proven history of a dynamic and growing economy 2. Economy mixed with strong diversity in tourism and financial services 3. Transparent and open economy 4. Exposure to Greek public debt limited to EU6.4billion 5. Cyprus has means for growth 6. Cyprus has room for some austerity measures 7. 20% of GDP in manufacturing, construction and agriculture 8. For Cyprus, EU membership offers some security 9. Cyprus banks are well capitalised with strong overseas partners 10. EU under German and Finnish political pressure may find more radical solutions for Greece that do not entail the bond ‘haircut’

“I cannot see a major debt default for Greece on the cards. it’s not remotely affordable for anyone. another solution must and will be found. if I’m proven wrong over the next few weeks or months, this remains to be seen but I doubt it!”

the international investment, business & finance magazine OF CYPRUS

Global Sovereign Ratings Q1

Credit Ratings:

Has Cyprus been treated fairly? No, not really…

Ranking

Country

Score

Rating

Outlook

USA

Greece

Cyprus

France

Norway

stable

Deficit % GDP

11%

13%

Sweden

stable

Public Debt

9.9 Trillion

1.7 Trillion

370 Billion

13 Billion

1 Trillion

USA

stable

Switzerland

stable

31k

28k

34k

16k

32k

Denmark

stable

Germany

stable

12 Netherlands

stable

France

stable

Belgium

BBB

stable

Cyprus

stable

China

BBB

stable

BBB

stable

Spain

BBB

stable

Italy

BBB

stable

Russia

BBB

stable

India

positive

Ireland

stable

Portugal

negative

Greece

stable

Turkey

stable

Libya

negative

Public debt per capita Public Debt % to GDP Debt change

66%

78%

133%

63%

85%

18%

10%

-5%

-2%

Stephen Archer comments: ‘How can the USA possibly be ranked in 3rd place given its $9.9 Trillion public debt position? The Americans are now in the process of lifting the ceiling off their debt which is now $14.2 trillion.. its estimated that if you pile that amount of dollars on top of one another the resulting pile will go beyond the earth’s atmosphere and head towards the Moon!’ ‘Despite Cyprus’ relatively low deficit as a % of GDP, low public debt per capita, and low public debt to GDP it has still been downgraded ahead of much worse offenders such as the USA, the UK and France. Among the above countries Cyprus is best-in-class!’

Tips for Cyprus to ensure it survives the crisis Take an international PR lead on credit rating agency reform. Re-balance the economy. Market your financial services industry overseas more, especially in emerging economies wanting to trade in Europe. Cyprus is currently punching below its true weight. Seek inward investment to boost manufacturing. Take effective steps to cut Cyprus’ deficit Act to stimulate the economy, especially for tourism and small businesses.

Re-brand tourism in Cyprus. Inferior destinations are taking your market share due to better international marketing campaigns. Take a lead in proposing a much longer maturity period for Greek debt in the region of 30 years. Stay close to possible future eurozone re-formulation discussions. Take steps to balance debt exposure and risk. Hope contagion spreads! If the problem becomes bigger, then the solution will be bigger and more universal.

the international investment, business & finance magazine OF CYPRUS

arbitration

Private Sector

ADR

Initiatives

Secure Business community backing Cyprus begins to come to terms with arbitration

the international investment, business & finance magazine OF CYPRUS

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fter years of procrastination, or perhaps we should say conservative thinking, about the merits of establishing an Alternative Dispute Resolution (ADR) centre in Cyprus, consensus has at last been reached. As alternatives to litigation, which is often extremely time-consuming and costly, ADR methods such as arbitration and mediation are increasingly gaining preference for the settlement of cross-border business disputes in many parts of the world.

By Haris Christoforou

info: Haris Christoforou is a communications consultant and business writer. the international investment, business & finance magazine OF CYPRUS

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arbitration

Arbitration essentially takes the form of imposing a settlement on the parties to a dispute by an independent arbitrator or panel of arbitrators whose services they have both agreed to. Mediation’s approach is different in that there is no outside imposition of a settlement: the two sides are instead guided by an independent mediator to come to an amicable, mutually acceptable compromise. This steadily growing support for the promotion of the island as an ADR centre is seen by many as economically sound and well grounded. After all, the provision of ADR services by the country would give rise to yet another valuable source of income from foreign companies (namely those selecting the island as the legal venue to resolve their disputes through non-litigation channels). Others, though, endorse the campaign for ADR facilities in Cyprus on the grounds that it is a necessary ‘enrichment’ of the full package of professional services that the island provides to foreign-interest corporations registered in the country. These companies, but also a whole host of others located in the broader Eastern Mediterranean region, would, the argument goes, be interested in using the services of a reputable, well-established ADR centre that could save them precious litigation time and spiraling expenses. So why not strive to establish such a centre on the island and give foreign as well as local companies the option of resolving their disputes though legally-binding but faster and less expensive processes, such as those of arbitration and mediation? There is still another argument in favour of developing the country’s potential as an ADR centre: namely that of lifting a tremendous workload from a court system that has long reached its endurance limits. By providing the local business community with facilities for out-of-court dispute settlement, litigation will

At the end of 2009 there were 87,156 cases pending in the district courts

Attorney-General On the part of the government there is a very supportive view of suggestions about the country’s potential to develop into a regional centre for arbitration services. Serious thought is being given in this respect to the possibility of the government filing an application to the Permanent Court of Arbitration in The Hague, seeking recognition for the island as a regional centre of the PCA. Justice Minister Loucas Louca has already alluded to that prospect whereas, for his part, Attorney-General Petros Clerides has stated the Law Office’s readiness to work closely for the establishment of a court of arbitration whenever such a decision is taken at senior government level. At a recent international conference on commercial arbitration, the AttorneyGeneral spoke openly about the government’s full endorsement of the trend towards Alternative Dispute Resolution forms for business and expressed government support for private initiatives to establish a fully-fledged commercial arbitration centre on the island. He went on to acknowledge that the country has the potential to develop into a regional arbitration centre but that for progress in that direction to be registered, a number of prerequisites must be fulfilled. These, he said, included ‘the development of convincing safeguards guaranteeing an objective, legitimate, speedy and effective arbitration process. Further, new, specialized legislation is required, based on economic and other practices familiar to interested parties and relying on a legal system guaranteeing the existence of all those factors rendering arbitration an attractive option.’ He noted, however, that even if new legislation and the necessary infrastructure are set in place, there will still be a need for ‘the right choice of qualified and knowledgeable persons and the identification of those characteristics composing the personality of a good arbitrator’.

CIBA remain the resort for a sharply-reduced number of cases, thereby making it possible for courts to dispense justice more swiftly and efficiently and at a reduced cost for the plaintiffs. By the same token, by providing the ADR option to businesses, the latter will be empowered to make sizeable savings on their huge litigation bills but also to obtain a definite and binding ruling in a fraction of the time normally warranted for their case to go through the official court system.

Also looking favourably at the prospect of Cyprus developing its range of professional services into the direction of ADR and arbitration, in particular, is CIBA, the Cyprus International Business Association. CIBA Vice President Ronny Verhoeven told Gold that there is an urgent need for a specialized and competent commercial conflict resolution facility on the island: ‘Since there are no specialized commercial courts in Cyprus, business disputes are handled by the district courts. At the end of 2009 there were 87,156 cases pending. As a result there are

the international investment, business & finance magazine OF CYPRUS

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extremely long delays to have new cases heard and finalized. Furthermore, District Court Judges are supposed to have all-round knowledge, hearing a very wide range of cases, from that of an unpaid invoice up to a breach in a complicated multi-national contract.’ Also making life hard for CIBA members, as Mr Verhoeven notes, is the fact that documents deposited before a Cyprus Court have to be in Greek, or translated into Greek, while hearings are carried out in Greek only, necessitating the presence of a translator in many cases. ‘For these reasons CIBA welcomes the creation of international arbitration centres in Cyprus; these will benefit mainly the local international businesses.’ But CIBA has strong reservations about the regional-importance potential of any future arbitration centre in Cyprus, seeing few possibilities that the island could end up ‘competing with well-known and highly respected international arbitration centres such as those of London, Paris, Singapore, Hong Kong, etc.’

CIPA No less enthusiastic about the prospects of Cyprus enriching its menu of professional services on offer by incorporating arbitration and other ADR forms is CIPA, the Cyprus Investment Promotion Agency. CIPA says it strongly supports efforts to help put Cyprus on the map as a regional arbitration/mediation centre. CIPA Director General Sotiris Sotiriou told Gold that the organisation is fully supportive of any initiative that will promote the regional status of the island as a centre for alternative dispute resolution for business. Progress in that direction, he said, ‘will be good for business, good for the business environment, while also helping the international image of the island as a business services centre.’ In the meantime the private sector has been actively looking into ways of establishing legal entities and facilities as a necessary, preparatory step leading to the creation of a fully-fledged and smoothly functioning ADR centre. We take a look at three such efforts the common thread of which is an entrepreneurial desire to put Cyprus on the world arbitration map.

The MMAA’s relocation should give the island increased publicity and inject valuable foreign exchange into the economy

The Cyprus International Arbitration Centre (CIAC) Established in 2009, the Cyprus International Arbitration Centre, headed by former Nicosia District Court President Sotos Demetriou, is a non-profit organisation designed to offer local and foreign businesses a fast-track and less expensive option for dispute resolution than litigation. Uppermost in its founders’ reasoning is a genuine desire to provide something manifestly absent in the country’s legal system, namely expertise in the cases of commercial disputes and a faster way of concluding cases than that of the court system. As CIAC Vice President Michalis Sarris told Gold, ‘This is not really about competing with other forms of dispute resolution such as the court system but rather about offering companies a less time-consuming alternative and on terms that go directly to the heart of the matter’. The VP, a former finance minister, also noted that the CIAC will offer parties in dispute a sense of a fair resolution as the conclusion of a case under dispute will normally be decided by a person of proven negotiating skills but also of indepth knowledge of the field of economic activity in which the two sides are active. For his part, CIAC President Sotos Demetriou told Gold that the management committee had two concerns when contemplating the launch of the institution: “First, we wanted to make sure that our arbitrators, and indeed the centre itself, would have the required prestige and qualifications to conduct arbitration services without leaving the slightest doubt about the objectivity of their decision. A second issue concerned the need to get people, especially Cypriots, to familiarize themselves with arbitration, the pluses and minuses of the process, thereby giving them an incentive to seek this form Sotos Demetriou of dispute resolution. We have been working hard in this direction, always in the knowledge that our committee comprises a lot of eminent persons of proven qualifications and skills.’ Also helping the stature of the CIAC is, no doubt, the fact that its president is a member of the renowned Permanent Court of Arbitration which is based in The Hague. Demetriou is confident that the institution’s indirect connection to the PCA could give it considerable help in the longer term. He openly states that as the PCA, which has already recognised the CIAC, normally takes up cases originating from northern Europe, its General Secretary would be more than willing to encourage parties in dispute in the southern part of the continent to refer their case for ADR

the international investment, business & finance magazine OF CYPRUS

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arbitration

treatment in Cyprus once the centre commences operations. The CIAC has not yet begun fully-fledged arbitration services due to the considerable amount of paperwork required and a huge number of contacts needing to be made over the past two years. Nonetheless the Centre’s directors are confident that the date when regular services will begin is not far off. Support from the judiciary, the Attorney-General’s office and a large number of Cypriot and foreign Cyprus-based companies has been forthcoming, assuring the CIAC founders that a bright future lies ahead for their institution.

Cypro-Mediterranean ADR Centre Already in its final preparatory stages, with a tentative September 2011 launch date, the Cypro-Mediterranean ADR Centre will be vying to provide a wide range of non-litigation services to its clients, foreign as well as local, corporate but also politicians and statesmen. A major party behind the ADR initiative is the established, Limassol-based law firm of Andreas Neocleous & Co LLC which has secured strong backing for the project from other leading legal services firms, both local and foreign. An early success of the project has been the acceptance on the part of the Mediterranean Maritime Arbitration Association of Andreas Neocleous an invitation to relocate to Cyprus where it will be operating out of the premises of the Cypro-Mediterranean ADR Centre. The decision effectively means that the CM centre will be well-endowed to offer specialised maritime-dispute ADR services, utilizing the services of leading professionals in the field of shipping from all over the Mediterranean area. Given Cyprus’s strong maritime presence, both as a major commercial-fleet registry as well as one of the world’s largest centres for shipmanagement activity, the MMAA’s relocation should give the island increased publicity and inject valuable foreign exchange into the economy. But the CM Centre’s range of services will not be limited to corporate clients, as Andreas Neocleous &Co LLC’s Marketing Manager points out. David Stokes told Gold that the intention is to offer ADR services for disputes that could well have a political dimension, so long as the parties in dispute would be prepared to seek the CM Centre’s services. The centre will also offer training to aspiring mediators and arbitrators as well as others with a keen interest in taking up a career in ADR methods. Ultimately the CM Centre will be housed in a purposebuilt building complex but that will probably take about two

years to operate. Initially it will operate out of rented premises in the Limassol area. Some members of the arbitrators’ panel will clearly be located in Cyprus but the majority of them will probably have to come to Cyprus when they undertake to offer their services in a particular case. The important thing, as Stokes points out, is to have a pool of competent and respectable arbitrators and mediators who will be available to offer their services to the CM Centre, irrespective of whether they live permanently abroad. ‘The quality of their work is what matters and not whether they live in this or that country,’ he explains. As for the clientele, the CM Centre will be very much outwardlooking and with a strong preference for international/regional cases. It will certainly not be a Cypriots-only arrangement, catering just for the local business community. ‘We will be looking to cater to the needs of businessmen and other personalities of stature from all over the region, from North Africa, the Middle East and, of course, the whole Mediterranean region, as our project will very much have a regional-international dimension’, David Stokes said.

ICC & the Paris-based ICA Another private sector initiative for the promotion of Cyprus as a forum for ADR services is that of the Cypriot branch of the International Chamber of Commerce. Through the ICCaffiliated and Paris-based International Court of Arbitration, the country has been receiving advice and assistance in recent years in building up its profile as a credible and desirable venue for arbitrations. Already a number of ICC-sponsored conferences on ADR have taken place in Cyprus while the ICA has collaborated with the Cypriot branch of the ICC to nominate expert arbitrators in a number of cases involving disputes between foreign enterprises. In addition the Cyprus Chamber of Commerce and Industry (an ICC member), offers consultancy services on mediation and arbitration. While not endowed with an arbitration court, the CCCI provides a range of ADR-supportive services, including the following: • Proposing to the parties in dispute potential arbitrators selected among expert lawyers, retired judges but also non-legal experts who enjoy the necessary qualifications on a case-by-case basis. • Undertaking all necessary arrangements such as the location of arbitration procedures, the provision of secretarial services and any other supportive services. • In consultation with the appointed arbitrator(s), the CCCI decides upon the level of fees to be paid by the parties in dispute, on a case-by-case basis. At the same time both the CCCI and the local chapter of the ICC encourage companies in dispute which are bound by international contracts to seek recourse to the ICC’s International Court of Arbitration in France. They also advise Cypriot companies to incorporate in their contracts the ICA’s arbitration clause. The inclusion of the clause facilitates the application of the country’s International Commercial Application Law, currently the subject of an extensive review by the Attorney-General.

the international investment, business & finance magazine OF CYPRUS

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6/6/11 10:09:29 AM

The Arbitrator’s View Andrew Demetriou

ll the talk about how Cyprus could become an international or regional arbitration centre may give the mistaken impression that arbitration is an unknown practice in Cyprus. Andrew Demetriou, Chairman of the Cyprus Branch of the Chartered Institute of Arbitrators (CIArb), has been involved in arbitration for the last 20 years. Andrew Demetriou told Gold about the extent of arbitration on the island and why it is not more widespread.

Gold: What exactly is the Cyprus branch of the Chartered Institute of Arbitrators?

Andrew Demetriou: The London-based Chartered Institute of Arbitrators (CIArb) is the foremost organisation worldwide in arbitration. It has a global membership of around 12,000 individuals based in over 100 countries who have professional training in private dispute resolution. CIArb has had a branch in Cyprus since 1995. Our branch currently has 54 members, all trained members of CIArb who reside in Cyprus. Our branch is the only organisation in Cyprus that provides training for arbitrators.

Gold: What does membership mean in professional terms?

A.D.: The main focus of the Institute relates to education and training and seeking to set assured global standards with the longer term aim of promoting confidence amongst parties who utilise arbitration and ADR users that the practitioners involved have the necessary skills and expertise is helping to resolve their dispute. For arbitrators, there are four levels of members: Associates (ACIArb), Members (MCIArb), who have demonstrated a higher professional level of knowledge in relation to arbitration; Fellows (FCIArb), who have been assessed by the Institute as having undergone the requisite training and having the necessary experience to serve as professional arbitrators; and Chartered Arbitrators status which was introduced in 1999 and was intended to act as a ‘gold

standard’ for arbitration practitioners. The Institute also has similar levels of recognition and members for mediators, although these have not obtained the same level of international recognition.

Gold: What are your views on the idea that Cyprus should try to promote itself as a regional or even an international arbitration centre? A.D.: First of all, you need to know that this is nothing new. The Government showed its commitment to arbitration as far back as 1986 when the International Arbitration Law was passed. It was there to foster the idea of making Cyprus an ADR centre.

Gold: So why has nothing happened in the 25 years since then? A.D.: Because the Government has committed no funds whatsoever to the project. In fact, in various guises, it actually fights arbitration. For example, the arbitration clause has been removed from international contracts for large projects.

Gold: Won’t things change with the EU Directive on Mediation coming into force? A.D.: Not necessarily. There is a difference between mediation and arbitration. The settlement of a case through mediation is non-binding while an arbitration settlement is binding on both parties and it has the same authority as that reached in court.

Gold: You are also Chairman of the Cyprus Arbitration Club. What is that? A.D.: The Arbitration Club is an informal gathering of people engaged in arbitration from all professions and in which current topics or arbitration are discussed. It also maintains a panel of suitably qualified arbitrators who may be appointed to decide disputes. The panel is restricted to members of the Chartered Institute of Arbitrators Cyprus branch who have member status and who have over five years experience in their profession.

PANEL OF ARBITRATORS NAME

STATUS

OCCUPATION

Y.P.O.*

Andrew Demetriou

Chartered Arbitrator

Advocate

Anna Stylianou

Chartered Arbitrator

Chartered Quantity Surveyor

Duncan Charles Kirby

Fellow

Chartered Quantity Surveyor

Larry Brindle

Fellow

Civil Engineer

Nicos Chrysanthou

Fellow

Advocate

Constantinos Messios

Fellow

Advocate

Aghis Georgiades

Member

Advocate

Alexandros Papadopoulos

Member

Advocate

Andis Sphikas

Member

Civil Engineer

Andreas Demetriades

Member

Advocate

Christos Mavrellis

Member

Advocate

Constantine Agathangelou

Member

Chartered Surveyor

Efthymios Andreou

Member

Chartered Quantity Surveyor

Goran Svenson

Member

Advocate

Maria Andreou

Member

Advocate

Nicos Rozatos

Member

Civil Engineer

Petros Zographos

Member

Chartered Quantity Surveyor

Soteris Pittas

Member

Advocate

Varnavas Lambrou

Member

Civil Engineer

Yiannis Vacanas

Member

Civil Engineer

* Years practising occupation the international investment, business & finance magazine OF CYPRUS

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arbitration EU Directive on mediation comes into

Force Mechanisms for the promotion and facilitation of alternative forms of dispute resolution are now obligatory throughout the European Union.

ast month, the European Union Directive 2008/52/EC on certain aspects of mediation in civil and commercial matters took effect across 26 member states of the European Union. The directive had secured approval by all the competent bodies of the Union in May 2008 and member states were given a 36-month period in which to transpose the provisions of the directive into their national laws. One member state, Denmark, decided to opt out of the obligation to comply with the directive’s provisions, on the grounds that it would prefer to limit its applications to domestic disputes, for which it already had in place extensive mediation legislation. That said, Denmark was in a position to remain outside the directive’s area of application on the basis of an opt-out from certain member state obligations, which it has been enjoying since it agreed to endorse the Maastricht Treaty in 1993. Essentially the mediation directive was designed to ‘facilitate access to Alternative Dispute Resolution (ADR) and to promote the amicable settlement of disputes by encouraging the use of mediation and by ensuring a balanced relationship between mediation and judicial proceedings’. It was primarily intended to apply to cross-border disputes though, upon the directive’s transposition into their national legislation, member states would have the option of extending its provisions to internal cases as well. It should be pointed out that the directive does not provide regulation for the entire spectrum of mediation issues. Important issues such as those relating to the mediation process, the appointment and accreditation of mediators have not been addressed through legislation but left to a voluntary code of conduct to set out self-regulatory principles (see box). The decision

was taken on the basis of stakeholder response to the 2002 Green Paper on alternative means of dispute resolution from which it was inferred that legislation was not the preferred tool to address all topics under the mediation theme. Referring to the significance of the mediation directive, the EU Commissioner for Justice said: “These measures are very important because they promote an alternative and additional access to justice in everyday life. Justice systems empower people to claim their rights. Effective access to justice is protected under the EU Charter of Fundamental Rights. Citizens and businesses should not be cut off from their rights simply because it is hard for them to use the justice system and because they cannot afford it, cannot wait for their time in court, or cannot deal with the red tape.”

Citizens and businesses should not be cut off from their rights simply because it is hard for them to use the justice system As defined in the Directive, mediation means a structured process whereby two or more parties to a dispute attempt by themselves, on a voluntary basis, to reach an agreement on the settlement of their dispute with the assistance of a mediator. This process may be initiated by the parties or suggested or ordered by a court or prescribed by the law of a member state. The process

the international investment, business & finance magazine OF CYPRUS

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European Code of Conduct for Mediators

aunched in July 2004, the European Code of Conduct for Mediators (ECCM) provides a set of principles with which individual mediators may voluntarily choose to comply. The ECCM lends itself for use by mediators involved in a wide range of activities in commercial as well as civil issues. Organisations offering mediation services may also decide to abide by the code and appropriately ask their mediation staff to follow suit. They may also provide information about the measures, such as training, evaluation and monitoring on which they rely to safeguard the respect of the ECCM by individual mediators.

There are four sections to the code: 1. Competence, appointment and fees of mediators and promotion of their services; 2. Independence and impartiality; 3. The mediation agreement, process and settlement; 4. Confidentiality. Each of these sections provides some basic guidelines designed to help mediation processes maintain a high standard of service. Last, but by no means least, organisations offering mediation services may well decide to go beyond the basic stipulations of the ECCM and draft more detailed codes, adjusted to their specific content or the particular area of application.

described by the Directive includes mediation conducted by a judge who is not responsible for any judicial proceedings concerning the dispute in question. Further, the term ‘mediator’ refers to any third person who is asked to conduct a mediation in an effective, impartial and competent way, regardless of the denomination or profession of that third person in the member state concerned and of the way in which the third person has been appointed or requested to conduct the mediation.

Member states are obliged to set up a mechanism that will allow mediationgenerated agreements to be enforceable

n summary form, the principal components of the Directive provide for the following: • Member states are called upon to encourage the training of mediators and the development of, and adherence to, voluntary codes of conduct and other effective quality control mechanisms relating to the provision of mediation services. According to the European Commission, ‘these mechanisms may include marketbased solutions provided that they aim to preserve flexibility of the process and the autonomy of the parties’, and to ensure that mediation is conducted effectively, competently and impartially. • Every judge in the European Union, and at any stage of the procedure, is given the right to invite the parties to seek recourse to mediation if he/she considers this to be the appropriate next step. The judge can also suggest that the parties attend an information meeting on mediation. • Member states are obliged to set up a mechanism that will allow any mediation-generated agreements to be enforceable

if both parties to the dispute so wish. An example of attaining this goal is the secure a court’s approval or to seek appropriate certification by a public notary. The specifics of the mechanism are left to the member states. As the Commission explains, ‘this provision will enable parties to give an agreement resulting from mediation a status similar to that of judgment without having to commence judicial proceedings. This possibility, which until now did not exist in all member states, can provide an incentive for parties to resort to mediation rather than go to court’. • Upholding the principle of confidentiality is of the utmost: Due care must be taken to ensure that information given or submissions made by any party during mediation cannot be used against that party in subsequent judicial proceedings, if the mediation fails. Such an undertaking is essential to give parties confidence in the usefulness and, indeed, motivate them to seek recourse to the mediation process. For this purpose, it is specified that the mediator cannot be compelled to provide evidence about information and events related to the mediation proceedings in any subsequent judicial process between the parties. • Effect on limitation and prescription periods: ‘Member states shall ensure that parties who choose mediation in an attempt to settle a dispute are not subsequently prevented from initiating judicial proceedings or arbitration in relation to that dispute by the expiry of limitation or prescription periods during the mediation process.’ Thus the parties to any mediation process will not forego their right to future recourse to justice in the event that the mediation fails to deliver results. It is noteworthy that Article 11 of the Directive explicitly makes a provision for a review of the workings and results of the arrangement five years into its application. By May 2016, therefore, the Commission will have to submit to the European Parliament, the Council and other EU institutions, a report on the directive’s application. This report should examine the development of mediation across the EU and analyse the impact in the member states. If deemed necessary, the document should also include a series of proposals for appropriate amendments to the directive. the international investment, business & finance magazine OF CYPRUS

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arbitration

In search of cost-effective channels

of dispute resolution inside the EU

ADR Center Study: Litigation in Cyprus takes on average 4 years

ast year, in a pioneering and comprehensive research paper, the Rome-based ADR Center carried out extensive surveys of the cost that orthodox channels of dispute resolution, namely litigation, imply for European Union member states. It also sought to compare these costs with those associated with alternative channels of corporate dispute resolution, both for member states as well as at the EU average level. The findings of the research, which had been commissioned by the EU, are rather telling as they show the enormous burden that the orthodox channel of dispute resolution imposes on the parties. To begin with, the 2010 study provides a tabulated exposition of the cost, both in terms of time as well as money, of domestic litigation across the Union, for a dispute involving the relatively small amount of â&#x201A;Ź200,000. With respect to the time aspect 42

The island appears to be the cheapest jurisdiction for court procedures within the EU

of the intra-EU comparison, Germany takes the shortest time for litigation to arrive at a result: 246 days. Italy, by contrast finds itself at the bottom of the table, as a commercial-dispute case involving the said amount would, on average, take no fewer than 2,205 days (i.e. more than 6 years) to come to a definite conclusion. And while Cyprus might not be bottom of the league in terms of timeconsuming court procedures, it still ranks 24th as its legal system would use up no fewer than 1,445 days for a standard case such as the one cited above to be resolved.

the international investment, business & finance magazine OF CYPRUS

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ict

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By contrast, the island appears to be the cheapest jurisdiction for court procedures within the EU. On average, the cost of getting a business dispute sorted out in a Cypriot court would be under €6,800 (€6,796 to be precise). By contrast, similar cases pushed through the Irish and Swedish legal systems would literally cost a fortune: €53,800 in the former and €65,710 in the latter. Perhaps a more detailed impression of how Cyprus compares with the rest of Europe on the subject may be obtained from the study’s tabulated cost and time data with respect to such forms of corporate dispute resolution as litigation, arbitration and mediation. In the case of litigation procedures, for a specimen €200,000 dispute case, it would take a whopping 1,445 days to come to a definite conclusion. Only in Italy and Malta would litigants have to wait longer before they can have their dispute concluded in court. On the cost front, however, litigation expenses in Cyprus are the lowest in the EU and amount to just 3.4% of the value of the dispute involved. That percentage is not only the lowest in the Union; it also amounts to just a quarter of the percentage average of the cost/dispute ratio for the EU, which stands at 13%. A somewhat similar outcome, with respect to the cost incurred, is arrived at when the option of mediation is considered: the cost is set at €7,000 which corresponds to 3.5% of the value of the dispute. It is noteworthy that the mediation cost burden in Cyprus fares well when compared to an EUwide average of 4.7% (and a figure of €9,488). But the choice between mediation and litigation cannot be made solely on cost considerations. Consider, for instance, the fact that the case under review would take 4 years to run its course through Cypriot courts but would be over in no more than 45 days under the mediation option. In fact, even when compared to the arbitration alternative, litigation is not an attractive course of action for the parties in dispute. True, the estimated cost of arbitration in Cyprus for the specimen case amounts to €8,300 (equivalent to 4.2% of the amount involved). Do take note, however, that while the parties which go down the arbitration path have to pay about €1,500 extra than if they had stuck to the court process, the arrangement would come to a definite conclusion in nearly half the time that litigation typically requires (732 days vs 1445 days). For companies operating strictly according to the logic that ‘time is money’, such

.O rag n 65ave ,7 1 0

A case which would take 4 years to run its course through Cypriot courts would be over in no more than 45 days under the mediation option

, the islan

woul u d b o e h legal systeumnsdw er €6 ,8

trast

the cheapest

con

r ea

d is

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time wastage as implied by standard court processes is hardly expected to enhance corporate confidence in litigation. On the basis of the ADR Center study, mediation turns out to be, by far, the most cost-effective option to dispute resolution in the EU. On average, costs incurred under the mediation course of dispute resolution amount to just 4.7% of the value of the dispute while a conclusion is reached within 87 days. In the case of arbitration, the corresponding figures are 17.2% and 503 days while as far as litigation is concerned, the cost burden is estimated at 13% and the required time framework for concluding the case is quite huge: 697 days. Another interesting feature emerging from the study is the considerably high percentage of success in cases where out-ofcourt procedures were adopted for the resolving of businessbased disputes across the EU. Thus the settlement rate for ADR programmes where there was an element of mandatory mediation (i.e. a court ordering the parties to resort to mediation) has been estimated at about 70%. An even higher success rate has been recorded when recourse to mediation has been more freely forthcoming, meaning that the procedure was the voluntary selection of both parties. However this fairly high level of assessment of the conclusion of the cases in the Union ending up outside litigation contrasts sharply with the extent to which companies in the EU resort to alternative means of dispute resolution. In most member states, for instance, the ratio of cases relying on an ADR format in seeking dispute resolution is but a tiny percentage of the cases filed in European courts. In the majority of member states this ratio is well below 1% which is quite telling about the inclination of the corporate sector to seek dispute resolution through orthodox litigation channels. Can this excessive corporate reliance on litigation change or will it take something like the EU’s 2008 mediation Directive, which was supposed to be transposed into member states’ national laws by May 21, 2011, to move things in that direction? For their part, researchers seem to agree that the promotion of ADR and training of the stakeholders will not suffice. What appears to be of vastly greater significance is public policy and concerted efforts by member-state governments to incentivize businesses to make more extensive use of the ADR option. How exactly governments can go about attaining that goal is, for the time being, a good question to which no adequate answer has yet been proposed. the international investment, business & finance magazine OF CYPRUS

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6/6/11 10:09:59 AM

arbitration

interview

Why INTERNATIONAL INVESTORS

SHOULD MIND THEIR BITs Bilateral investment Treaties (BITs) disputes are a rapidly expanding and high-profile area of international litigation.

By K. Ioannides hawar Qureshi QC is one of the few arbitration barristers effectively bridging the gap between public, international, and commercial law. As one of 20 Treasury Counsel barristers advising and representing the UK Government from offices in Qatar and London, he has worked on matters concerning more than 60 states including multi-billion dollar contracts, infrastructure, foreign investment and regulatory matters. In 2009, Qureshi acted in a multibillion dollar claim brought by the Dubai Islamic Bank against the Government of Iceland following the collapse of the latter’s banking sector as well as acting on behalf of the US, UK and Italian regulatory authorities. Now focusing on international arbitration, commercial litigation and public international law for McNair Chambers in Qatar, Qureshi spoke to Gold about the latest developments regarding the arbitration of disputes between corporations and countries.

Khawar Qureshi QC

Gold: Which states are most notorious in trying to renegotiate contractual terms with foreign companies or investors after a change or shift in political leadership? Khawar Qureshi: Most observers in the field would cite Argentina, Bolivia and Venezuela as prime examples of regimes that interfere with foreign investment. Such cases usually arise when negotiated contractual terms between foreign entities and a previous government are perceived as unfair or overly biased toward benefiting those in power. Bilateral investment Treaties (BITs) disputes are a rapidly expanding and highprofile area of international litigation. More than 70 states have faced BIT claims, with Argentina having faced the most following the aftermath of its currency crisis in 2001.

Gold: What are the most effective means of redress for

Photo by Olesia Constantinou

aggrieved parties in this respect? K.Q: Most agreements are struck between states that wish to promote inward investment and foreign companies and investors whose priority is to make a profit. In order to protect the interests of each party it’s critical to have very clear agreements establishing the rights of each one. If a contract has been properly drafted then it may be possible for the investor to get an asset freezing order in a 3rd party jurisdiction such as New York, Paris or London. As such, in the potential utilisation of BITs for Foreign Investors and the scope for claims against states, it is vital to be aware of the key features of Investment Treaties – whether from the perspective of advising on the negotiation of an inward investment agreement and hence considering issues such as the strategic use of jurisdictions which have Investment Treaty arrangements with the host state, or when considering a potential claim against a State. BITs provide foreign investors with a level playing field and access to an international arbitral tribunal in the event that the host state uses its sovereign power with detrimental effect to the foreign investor.

the international investment, business & finance magazine OF CYPRUS

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6/6/11 10:10:11 AM

Cyprus has a unique opportunity establishing itself as an international centre of arbitration

Gold: When was the first BIT drawn up? K.Q: The first BIT was entered into in 1959, in the wake of the Cold War and nationalisations which exposed the lack of effective protection for foreign investors. There are now almost 3,000 BITs, most of them bilateral and some linked to multilateral treatybased systems such as the International Centre for Settlement of Investment Disputes (ICSID) Convention (1965), and the Energy Charter Treaty (1994).

Gold: Which locations have the best prospects for becoming international arbitration centres for such disputes?

K.Q: Recent studies have shown that London is now becoming the favoured location for settling international disputes whereby cases are heard by the English or London-based international courts. Second is Paris and then come Geneva, Hong Kong, Singapore, Dubai and New York. On this point it should be mentioned that, given its physical location as the easternmost tip of the EU where English is widely spoken, and as a destination of choice for establishing foreign companies, Cyprus has a unique opportunity to establish itself as an international centre of arbitration.

Gold: If you were advising a foreign company interesting in becoming involved in exploiting Cyprus’s offshore energy resources what would be the key areas they should consider? K.Q: Well the checklist would be: 1. Make sure that there has been an accurate evaluation of the scale of the resources under consideration. 2. Establish a thorough understanding of the legal framework concerning the rights granted. 3. Ensure that the competent authorities in Cyprus are sufficiently bound by the agreement under consideration and 4. Ensure that there are provisions for arbitration between the two parties in a location where there are existing BITs.

Venezuela’s Hugo Chavez leads his country to a new era of international disputes

BITS & Numbers… 63%

of ICSID cases are based on BITs for jurisdiction.

30%

of cases concern South American State Parties and 22% concern Eastern Europe/Central Asia State Parties.

26%

of cases are in the Oil, Gas and Mining sector. 15% are in the Electricity and energy sector.

67% of cases lead to an award. 33% of proceedings are discontinued.

70% of cases lead to an award on the merits.

21%

of awards decline ICSID jurisdiction.

71% of arbitrators in ICSID cases are from North America and Western Europe (7% of cases involve such State Parties).

The top 3 nationalities for ICSID arbitrator appointments are: US (127), French (110) and British (100).

Uruguayan Foreign Minister Luis Almagro and his Argentine counterpart Hector Timerman sign Agreement to end their International Pulp Mill Dispute

For those interested in further research into BIT negotiations/disputes via the databases of Bilateral Investment Treaties, the leading online sources are:

www.unctad.org Research data on trends in BIT negotiations/disputes and a very good database of

Bilateral Investment Treaties

www.icsid.org Case list, procedural orders, decisions on jurisdiction/merits and BIT list (of around

1,100 BITs)

www.encharter.org Case list, information relating to the 1994 Energy Charter Treaty the international investment, business & finance magazine OF CYPRUS

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6/6/11 10:10:14 AM

{opinion}

By Alexis Erotocritou

Neither a

nor

borrower

a lender be...

verruling its previous decision in the case of Stelios Shiammas v Cyprus Popular Bank (2007), the Supreme Court of Cyprus recently decided in the Bank of Cyprus plc case (2011) that in the event of non-payment of the principal debt by a borrower, the lender (often a bank) is no longer obliged to pursue the borrower in the first place, in order to bring legal action against the guarantor to recover the debt. No difference is made if the borrower remains solvent and would, therefore, be in a position to discharge the debt himself. While the Court has not expressly stated the above, one interpretation of the Court’s decision does not exclude this possibility. According to the pre-existing law, in cases of non-repayment of a loan, a lender had to pursue the borrower in the first place and only then was he allowed to take legal action against the guarantor. This aimed at putting an end to the practice by which lenders (usually hire-purchase companies or other financial institutions) could choose to pursue the guarantors or some of the guarantors first instead of suing the principal borrower. The rationale behind the Court’s latest decision to overrule the precedent of the Shiammas case was based on the fact that “the issue of judgment against a codefendant does not determine neither does it have conclusive effect on the result of another judgment against another co-defendant”. According to the Court, every case must be judged on its own merits and in accordance with the evidence brought before it. Is it a welcome decision, however? A common scenario is that of a buyer who has purchased a house and defaults over the payment of the loan granted to him by the bank. The buyer leaves the country for a certain period and the bank, unable to trace him, turns to the guarantor for the loan repayment. One result may be that after some years, the initial buyer returns to the country with his house intact and his debt obligations to the bank effectively discharged. Whilst the guarantor

may bring a claim against the initial buyer to recover the money, he will certainly need to spend significant time on litigation, with his chances of success depending on a number of parameters, including the initial buyer’s financial status at the time of judgment and his ability to compensate the guarantor if the claim is successful. Of course, if a requirement is placed on the guarantor to pursue the borrower in the first instance, this may in certain situations prove ineffective. It may hinder business efficacy and, in general, it will inevitably prove costly and time-consuming as separate legal proceedings will need to be initiated against the borrower (even if it is clear that he is unable to fulfil his obligations under the loan agreement). Whilst the above example indicates that there are no clear-cut answers and solutions, from a practical point of view a guarantor should be aware from the outset – and in any case before signing the contract of guarantee – of the possibility that the lender may elect to pursue him in the first instance for the outstanding debt obligation of the borrower. Two key points worth bearing in mind are these: First, the borrower’s financial capacity, since the guarantor’s best protection is a responsible and financially capable borrower.

{

the guarantor’s best protection is a responsible and financially capable borrower.

{

If the guarantor is satisfied with the borrower’s efforts and ability to repay the loan, the risk on him will be greatly reduced. Second, a well-secured loan may also limit the guarantor’s exposure as the collateral may provide a secondary source of repayment, despite the borrower’s credit problems.

info: Alexis Erotocritou is an associate at Chrysses Demetriades & Co. LLC

Barclay by the and in

the international investment, business & finance magazine of cyprus

-1

opinion_erotokritou.indd 46

6/6/11 12:24:37 PM

A BUSINESS PARTNER WITH SOLID FOUNDATIONS. When it seems that stability is a thing of the past, you need to be sure that your business partner will be around when you really need them. Barclays was established over 300 years ago, and that experience has seen us safely through the recent financial turmoil to emerge stronger and more vigorous than ever. In Cyprus, Barclays Wealth offers a range of specialist services including corporate banking, personal banking and wealth management. To find out how you could benefit from working with us, call either Nikolas Gerkotis on +357 2265 4454 (nikolas.gerkotis@barclayswealth.com) or Andreas Rouvis on +357 2535 6660 (andreas.rouvis@barclayswealth.com) or visit barclayswealth.com

Barclays Wealth is the wealth management division of Barclays and operates through Barclays Bank PLC and its subsidiaries.Barclays Bank PLC is registered in England and is authorised and regulated by the Financial Services Authority. Registered No: 1026167. Registered Ofﬁce: 1 Churchill Place, London E14 5HP. Barclays Bank PLC is authorised by the Central Bank of Cyprus to conduct banking and investment business. -1 LQGG

opinion_erotokritou.indd 47

6/6/11 12:24:37 PM

One Man’s Crisis… is Another Man’s Hedge Fund Return By K. Ioannides

hedge_final.indd 48

the international investment, business & finance magazine of cyprus

6/6/11 10:16:53 AM

The Gold Guide to Hedge Fund Investing

iven the exceptional profits recently announced by the world’s leading arbitrage money managers, you may be sorely tempted to consider joining the elite world of hedge fund investing. Since their formation, the top 10 hedge funds have earned an estimated €130bn, with the famed hedge fund guru George Soros alone making a career total of $35bn for his privileged clients. On the other hand, more than 100 funds have collapsed in the past five years so it is by no means an infallible way of making serious money.

he first modern hedge fund is said to have been established by Alfred Winslow Jones in 1949, and employed a combination of leverage, short-selling and equity purchases to reduce the impact of adverse market conditions. Modern ‘hedging’ derives from the utilization of an array of derivatives to protect investments from extensive down-side losses (for example buying options to buy or sell securities at a predetermined price/level if something unforeseen happens). As such, hedge funds have evolved dramatically, employing massively complex analytical tools and seasoned global asset managers and traders to rapidly move in and out of investments and market positions. The key to hedge fund investment strategy is, in essence, to have the maximum exposure to profits while limiting – hedging – the possibility of major downside risks or losses. Despite the hedging elements apparently employed, not all hedge fund managers are equally capable of totally protecting against considerable losses. The inherent risks are considerable and one cannot ignore the fact that over 117 hedge funds have gone bust over the past 5 years. Such casualties include funds from leading names like ING, Carlyle Capital and Bear Stearns. Some argue, however, that funds which are audited by the Big Four (Deloitte Touche Tohmatsu, Ernst & Young, PwC, KPMG) should provide enhanced visibility of a fund’s financial position at a given point in time. Hedge funds, the majority of which are based in the US, are primarily empowered to operate the way they do due to because the U.S. Securities and Exchange Commission (the government agency charged with protecting individual investors) does not scrutinize these ‘private’ investing vehicles. Hedge funds are, therefore, free to employ ‘risky’ investment strategies such as investing in derivatives or betting on currency moves, often using derivatives to leverage their bets to a far greater degree than most individual investors are capable of. At a time when historically low interest rates, geopolitical upheavals, and tsunami provoking earthquakes are adding to the woes of company shareholders, investors are clamouring for investments capable of simply maintaining the real value of their

assets. Amid such turmoil and market ‘panic’, hedge funds have the innate capability to cash in on the arbitrage opportunities arising during such financial market mayhem. Indeed, in 2010 the top 10 hedge funds delivered fantastic returns for their clients and are reported to have made €20 billion for their clients in the second half of the year alone.

Which Fund? There are thousands of hedge funds to choose from when considering where to allocate some capital. Bearing in mind the typically substantial minimum level of investment needed, most of the bigger and more successful funds have much higher minimum initial investment requirements, meaning that it is not easy to gain access to them. In the US, managers are only allowed to accept investments from a limited number of people who are not accredited investors. The key to gaining access is simply ‘being in the know’ about an upcoming fund looking for investors. This is because hedge funds are not allowed to market to the public and so news relating to access must only be directed to accredited investors or qualified purchasers (accreditation implying that an individual is wealthy enough to absorb a potential loss). The only way a non-accredited investor may get into a hedge fund is if they get to know the manager personally. To become an accredited investor, you (and your spouse) are require to prove that you have a combined net worth of €700,000. You will also need an individual income approaching €150,000 or a joint income of just over €200,000. Critics have argued that these requirements are not strict enough since the thresholds were set in 1982 without any subsequent adjustment. It is worth noting that some larger hedge funds set the bar a little higher and to gain access to a fund approaching 100 shareholders, you need to be in the wealthier ‘qualified purchaser’ class of investor (which requires that you have at least €3.6 million in personal assets under management). Meanwhile, the rules governing European-based funds are due to become stricter as the EU seeks to impose the new Alternative Investment Fund Managers Directive.

the international investment, business & finance magazine of cyprus

hedge_final.indd 49

6/6/11 10:16:56 AM

Once upon a time…

he first recorded hedge fund–style investment was a basic ‘call option’ trade said to have occurred approximately 2,500 years ago. Aristotle tells the story of the philosopher Thales, who developed a ‘financial device’, which involved the principle of universal application, by making a profit from negotiating with owners of olive presses for the exclusive rights to use their equipment in the upcoming harvest. Olive press owners were happy to pass on the risks of future olive prices and to accept

payment now as a ‘hedge’ against a bad harvest later. As it turned out, Thales had correctly predicted a bountiful harvest and the demand for olive presses rose. He then sold his rights to use the presses and made a profit. Thales’s ‘call option’ risked only his down payment. Although he did not invest money in fields, workers or, indeed, olive presses, he participated actively in olive production by taking on the kind of risk olive growers and press owners were unable or unwilling to take.

Hedge funds are free to employ ‘risky’ investment strategies

hedge_final.indd 50

the international investment, business & finance magazine of cyprus

6/6/11 10:16:58 AM

Hedge Fund Selection, Monitoring and Administration

nvestments in hedge funds should never be undertaken without careful research and due diligence into the operation of the hedge fund managers being considered. A careful examination of the history, investment techniques and compliance procedures of every candidate fund should be made before any investment is undertaken. Hedge funds are inherently volatile and at the high risk-high return end of the investment class spectrum. For this reason, an investor should only consider allocating a small fraction of his/ her assets in hedge fund investing, and then, only after a solid traditional portfolio has been in constructed.

3. Examine the fee structure and

the effect on the audited returns of the funds you are reviewing. Hedge fund manager fees are considerable, given the unpredictability of their returns. Make sure that you are familiar and comfortable with peaking high returns and the possibly large losses. An investor should study the performance of each candidate fund through both bull and bear markets. Eliminate any inconsistent performers.

Rank the candidate funds you are considering in order of suitability and choose at least two or three that specialise in different asset classes, e.g. bonds, stocks, international, currency, for your final selection. This will provide further diversification.

How to go about it 1. Send out a request for proposal to the 5. Meet and interview the senior candidate hedge funds in which you are interested.

Consider your strategic investment needs and the investing techniques of each hedge fund in question to verify if that they pursue an investment strategy that matches your financial needs (i.e. in a way that diversifies your portfolio overall). You should be reassured if large institutional investors are involved in a particular fund. Any manager that has negative or ongoing concerns by regulatory authorities should be disqualified from consideration.

management of the funds you have shortlisted and eliminate the ones who do not answer your questions in a direct and concise way.

6. Ask each manager to rank the

competing managers on your shortlist. Review and investigate your final choices and consult a lawyer to review the necessary agreements and documentation. Make certain you understand how to withdraw from the fund and any fees and time delays that may occur.

hen it comes to fund selection a good sign is if the fund in question holds its assets with a major third-party broker. This makes it tougher for managers to run off with their investorsâ&#x20AC;&#x2122; money! Given that the hedge fund market enjoys minimal regulatory supervision, it is also advisable to have a reliable auditor reviewing your fund annually. But note that, however diligent an investor you may be, it is almost impossible to reliably monitor a hedge fundâ&#x20AC;&#x2122;s activities. Regarding administration, fund administrators such as Citco Fund Services, GlobeOp Financial Services and Goldman Sachs Administration Services provide regular information to investors about their investments with alternative fund managers such as hedge funds. Their role is to collate information from fund managers and their prime brokers, and combine it with pricing information, in order to derive a net asset value. The administrator also maintains the register of investors, and administers the collection of subscriptions and the remission of redemptions. Fund administrators are usually appointed by the fund manager, but are accountable to the investors. As such, investors have a crucial interest in ensuring that their fund administrator follows best practices in valuation, investor service and tax and regulatory compliance. the international investment, business & finance magazine of cyprus

hedge_final.indd 51

6/6/11 10:17:03 AM

The Concept of arbitrage The Concept of Arbitrage

ere’s a popular metaphor used by alternative investment commentator Veryan Allen to explain how hedge funds look for arbitrage opportunities. Consider that a €500 note is anonymously and unintentionally dropped in the street. It would get picked up sooner or later, probably sooner right? But what if you happen to be the person that finds the note? What if you decided to specialise in walking the streets day and night looking for dropped money? What if you took it even further and hired lots of observant employees and sophisticated technology to monitor more streets in many cities and countries world-wide?

Taking it to the extreme, what if you had the lowest latency execution and modelled trends and behaviour so that you could identify the streets with the highest probability of rewards and your costs were so low that even finding €20, €10 or even just 10 cent coins would be profitable? What if your watchful systems were so quick that they could capture the money before it even hit the floor? What if you monitored areas where no-one else had thought to look? Hedge funds basically have the patience, resources and expertise to take advantage of arbitration opportunities available in the financial and securities markets – just as money gets dropped on other streets every day.

What the Experts Say Daniel Solin, Senior Vice-President of Index Funds Advisors: ‘No guru is going to deliver outsize returns without taking commensurate risk. This includes hedge fund managers. Some investors correctly equate hedge funds with stupid rich people. These funds are illiquid. When things go bad, the fund can prevent you from liquidating your investment for significant periods of time. And the fees are obscene. Usually 2% of the assets, plus 20% of the profits.’

Mario Gabelli, Founder and Chairman of GAMCO Investors: “.. if asked to define a hedge fund, I suspect most folks would characterize it as a highly speculative vehicle for unwitting fat cats and careless financial institutions to lose their shirts.”

David F. Swensen, Chief Investment Officer at Yale University: “I wouldn’t say that I have faith in hedge funds per se, but I have reasonable faith in our ability to discriminately select high-quality partners, many of the hedge fund problems were caused by mindless enthusiasm on the part of the public. A lot of the entrants were low-quality, and a lot of people were throwing money around and doing dumb things.” 52

hedge_final.indd 52

Jim Melcher, Director of the hedge fund Balestra Capital Partners: which focuses on shorting during the beginning of the financial crisis. “I wasn’t worried about the 8,000 or so hedge funds ... I was worried about 400 or 500 of them.. While most hedge fund managers are pretty smart and knowledgeable, it doesn’t take too failures to start a rout. One nervous cow could start a stampede.”

Alex Ehrlich, former UBS prime brokerage chief and global head of Morgan Stanley’s prime services business: “It’s a promising environment for new hedge funds, money is coming in from seasoned investors, many of whom are preparing to redeploy capital.”

the international investment, business & finance magazine of cyprus

6/6/11 10:17:05 AM

The Hedge Fund

Wild West THE GOOD This year’s 100 biggest firms were

The BaD In the days leading up to September 16, 1992, a day dubbed

managing a total of $1.21 trillion at the start of this year, with Pension funds, foundations, endowments and sovereign wealth funds driven by a quest for enhanced returns diversification against traditional stocks and bonds increasingly becoming hedge fund investors.

‘Black Wednesday’, George Soros’s fund earned $1.8 billion by shorting British pounds and buying German marks. This achievement earned Soros the title of ‘The Man Who Broke the Bank of England’.

Founder & President of Bridgewater Associates Ray Dalio: “I learned that I had to think independently, because in the markets, if you think with the consensus, you’ll never make money.”

Bad for • The Bank of England and the former Tory Prime Minister John Major • Sterling bank account holders (ie the British) • The UK’s membership of the European Exchange Rate Mechanism

BEFORE: “It’s a proprietary strategy. I can’t go into it in great detail.” (Bernard Madoff, 2001)

Good for • Foreign tourists visiting the UK • Anglophobes worldwide • Soros’ investors George’s key motto: “Never let a good crisis go to waste”

THE UGLY Madoff Crowned King of the Ponzis Recent years have proved to be extremely challenging for the hedge fund sector, with many funds reporting extremely poor performance figures in the wake of the financial crisis. A bad situation had already been made worse by the discovery of a massive $65 billion fraud by New York investment manager and former non-executive chairman of the NASDAQ Bernard Madoff which triggered one of the largest waves of redemption requests ever seen. In March 2009, Madoff pleaded guilty to 11 federal felonies and admitted to turning his wealth management business into a massive Ponzi scheme that had defrauded thousands of investors out of billions of dollars since the early ‘70s. In June, 2009 he was sentenced to 150 years in prison, the maximum allowed.

AFTER: “I cannot offer an excuse for my behaviour. How do you excuse betraying thousands of investors who entrusted me with their life savings?” (Bernard Madoff, 2009)

(L to R) Bernard “Ugly” Madoff, Ray “Good” Dalio & George “Bad” Soros the international investment, business & finance magazine OF of CYPRUS cyprus

hedge_final.indd 53

6/6/11 10:17:10 AM

The Global

top 10 Hedge Funds

1. Bridgewater Associates (1

[

According to Institutional Investor’s 2011 Hedge Fund 100 ranking

[

) Star Performer Total Capital: 2011: $59 billion • 2010: $35 bn • 2010 rank: #2 With $59 billion in hedge fund assets, Bridgewater’s hedge fund division is now the biggest in the world. It leads the Institutional Investor’s tenth annual Hedge Fund 100 out ranking the former 2010 global premier fund J.P. Morgan Asset Management by $5 billion.

2. J.P. Morgan Asset Management Total Capital: 2011: $54 bn • 2010: $45 bn • 2010 rank: #1 CEO - Jamie Dimon

4. Paulson & Co Total Capital: 2011: $36 bn • 2010: $36 bn • 2010 rank: #3 Founder - John Paulson

6. Soros Fund Management Total Capital: 2011: $28 bn • 2010: $28 bn • 2010 rank: #3 Founder - George Soros

7. Och-Ziff Capital Management Total Capital: 2011: $30bn • 2010: $28 bn • 2010 rank: #6 CEO - Daniel S. Och

8. BlackRock Total Capital: 2011: $25 bn • 2010: $27 bn • 2010 rank: #7 Chairman & CEO - Laurence D. Fink

10. Angelo, Gordon, & Co Total Capital: 2011:$24 bn • 2010: $22 bn • 2010 rank: #10 CEO - John M. Angelo 54

hedge_final.indd 54

3. Man Investments Star Performer Total Capital: 2011: $41 bn • 2010: $22 bn • 2010 rank: #8 CEO - Peter Clarke

5. Brevan Howard Total Capital: 2011: $32 bn • 2010: $32 bn • 2010 rank: #4 Co founders & CEO - Alan Howard

9. BlueCrest Capital Management Star Performer Total Capital: 2011: $24.5bn • 2010: $17bn • 2010 rank: #14 Chief executive and co-founder - Michael Platt

the international investment, business & finance magazine of cyprus

6/6/11 10:17:12 AM

Beware of The Ponzi Dimension

Ponzi Scheme is a fraudulent investment operation that pays returns to separate investors, not from any actual profit earned by the organisation but from their own money or money paid by subsequent investors. The Ponzi Scheme usually entices new investors by offering returns that other investments cannot guarantee, in the form of short-term returns that are either abnormally high or unusually consistent. The perpetuation of the returns that a Ponzi Scheme advertises and pays requires an everincreasing flow of money from investors to keep the scheme going. Some critics argue that the boom and bust cycles of capitalism, the last of which was the 2008 financial crisis, is the result of the

Tim Lee

Economist, pi Economics, Stanford

â&#x20AC;&#x153;

global economy becoming a colossal Ponzi Scheme. As many Cypriot investment veterans recall, the Cyprus stock market experienced a boom in 1999 when its main index registered a 900% increase. The inevitable collapse in share values followed in 2000, with the index falling to 103 points from a high of 882. The illogical rally in the market was fuelled by an inordinate amount of money being ploughed into newly-listed shares by unqualified investors. Those savvy enough to recognise that the situation had all the characteristics of a Ponzi Scheme quietly exited the market, leaving the rest facing massive losses. The experience became the scandal of the decade, though no-one has ever been held responsible for what happened.

The financial system as a whole has had the characteristics of a Ponzi scheme if we look at it fundamentally.. by this I mean that we should think about the

true value of assets as being derived from the future flow of goods and services that the assets can lay claim to or produce. If market prices of financial assets

rise a lot but there is no increase in the ability of the economy to provide goods and services in the future, then the apparent increase in wealth is illusoryâ&#x20AC;?.

the international investment, business & finance magazine of cyprus

hedge_final.indd 55

6/6/11 10:17:17 AM

The Global

top 10 Hedge Funds

1. Bridgewater Associates

[

According to Institutional Investor’s 2011 Hedge Fund 100 ranking

[

Star Performer Total Capital: 2011: $59 billion • 2010: $35 bn • 2010 rank: #2 With $59 billion in hedge fund assets, Bridgewater’s hedge fund division is now the biggest in the world. It leads the Institutional Investor’s tenth annual Hedge Fund 100 out ranking the former 2010 global premier fund J.P. Morgan Asset Management by $5 billion.

2. J.P. Morgan Asset Management Total Capital: 2011: $54 bn • 2010: $45 bn • 2010 rank: #1 CEO - Jamie Dimon

4. Paulson & Co Total Capital: 2011: $36 bn • 2010: $36 bn • 2010 rank: #3 Founder - John Paulson

6. Soros Fund Management Total Capital: 2011: $28 bn • 2010: $28 bn • 2010 rank: #3 Founder - George Soros

7. Och-Ziff Capital Management Total Capital: 2011: $30bn • 2010: $28 bn • 2010 rank: #6 CEO - Daniel S. Och

8. BlackRock Total Capital: 2011: $25 bn • 2010: $27 bn • 2010 rank: #7 Chairman & CEO - Laurence D. Fink

10. Angelo, Gordon, & Co Total Capital: 2011:$24 bn • 2010: $22 bn • 2010 rank: #10 CEO - John M. Angelo 54

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3. Man Investments Star Performer Total Capital: 2011: $41 bn • 2010: $22 bn • 2010 rank: #8 CEO - Peter Clarke

5. Brevan Howard Total Capital: 2011: $32 bn • 2010: $32 bn • 2010 rank: #4 Co founders & CEO - Alan Howard

9. BlueCrest Capital Management Star Performer Total Capital: 2011: $24.5bn • 2010: $17bn • 2010 rank: #14 Chief executive and co-founder - Michael Platt

the international investment, business & finance magazine of cyprus

6/6/11 1:36:47 PM

{opinion}

By George Th. Karaolis

Fittest

Survival of the

imes have not been easy for either the property sector or the hotel industry in Cyprus over the past two years, so it is easy to imagine that a Group of Companies that has embraced both the hotel and property industries with equal zeal must be going through a major crisis of its own. I am very happy to correct this wrong impression. While it is true that the islandâ&#x20AC;&#x2122;s property and tourism sectors are experiencing difficulties as a result of the global financial crisis, the Kanika Group has 46 years of serious business activity to its name and, thanks to some astute management, quality standards, sound investments and strategic alliances, we have posted consistently satisfactory and even enviable results. Of course, like the market as a whole, Kanika has not been immune to the recent crisis, despite the Groupâ&#x20AC;&#x2122;s robust foundations. But my colleagues and I are all agreed that like previous crises, this one will also pass. With our team of experienced, hands-on professionals and our dynamic corporate makeup, we are looking forward to better days. In fact, we are confident that they are already on the way. As we look ahead to the expected post-crisis market revival, Kanika Developments is keeping an eye on the latest trends. It is clear that todayâ&#x20AC;&#x2122;s buyers are showing a preference for residential properties that secure a better quality of life; they want tranquillity, greenery, a private escape from a hectic routine, with easy access to urban centres. My personal favourite at the moment is Kanika Kypros Gardenia, a splendid development on the Limassol coastal road which combines extravagant urban living with services that easily compete with those of a 5-star hotel. However, our goal is to offer different options for different budgets, without compromising on quality, design or workmanship. Kanika is possibly the first property developer to have deliberately diversified its portfolio, in terms of location, size

and price. We need to be aware of what is happening with prices but the government also has a role, particularly in promoting a recovery of the market. For example, incentives might include VAT exemptions on plots of land and properties for young couples purchasing their first home, preferential interest rates for young couples and low-income families, and other tax benefits for buyers with limited resources. Kanika has developed very strong relations with the Russian market where, despite rumours to the contrary, interest in Cyprus properties continues to grow. To be able to serve them better, we have recently established a sales office in the heart of Moscow, which is greatly appreciated by potential clients. While quality construction and aesthetic design are the backbone of Kanika Developments, other vital factors in the Kanika equation multiply the value of every project: a prime location, secure title deeds, attractive payment schemes and an impeccable before- and aftersales service. People want to know that their home will maintain its value as a long-term asset and I believe that once the market rebounds, as it definitely will, buyers will be looking at all these

{

People want to know that their home will maintain its value as a long-term asset

{

factors before parting with their money. Reliable companies such as ours will be the first to reap the benefits not only of renewed buyer optimism but also of buyer caution. Having weathered the storm of the past two years, I am confident that Kanika and other dependable Cypriot property developers will soon be looking at a healthy market once again.

info: George Th. Karaolis is Vice-President of the Kanika Group.

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{opinion}

By Rita Hadjiloizou-Karatzia

Unlimited

Communication 50 Years of Cyta

rom the black Bakelite family telephone, and the crackling voice seemingly forcing its way through the curly wire, we have now reached the era of the wafer-thin smartphone with its crystal-clear voice calls, images, videos and text messages. In one way or the other, both then and now, Cyta has continued to do the same thing since its establishment 50 years ago. With Cyta by its side, Cyprus has never been isolated. Our people have always had a link to the rest of the world. Cyta has always been at the cutting-edge of technology, always in the here and now yet in the future. How has a public corporation achieved this? At first it came from a sense of duty towards the fledgling Republic of Cyprus; later it was a matter of selfrespect and respect for its customers and stakeholders. Then, in no time at all, it had shattered the stereotype of the semi-government organisation that stayed well away from concerns such as research, competitiveness, profitability, learning, innovation and affection. For some time now, Cyta has ceased to focus on products in favour of solutions. It has acknowledged its new responsibilities and sought out new skills. The life of its customers, their desires and needs now play a leading role in its daily routine. It has transformed itself into an organisation of learning and research. It has forged strategic alliances, investing in the present with its eyes on the future. Where will that future take us? Who knows? But we can certainly see where today’s citizens are heading. The ‘average’ person is no longer average. We lay claim to our own special identity from the age of seven, perhaps even earlier. We exercise our creativity, we make up content to share with friends, removing differences in age, sex, colour, creed and, of course, geographical location. Social networking has opened up enormous prospects for an individual to be able to affect his/her network. And content will be like gold in the new era. Technology responds accordingly. Cyta keeps in step. Today we provide Integrated Electronic Communication in a simple, smart and secure manner, anywhere, anytime. Tomorrow,

what is certain is that Cyta will respond in much more than an adequate fashion, in keeping with its nature, which is that of a leader. Everyone knows that leadership is not a privilege but a responsibility. Cyta’s leading role is not an end point. It is an attitude. You do not prove yourself as a leader just once; you do it every time, every minute, every day. A leader creates value by choice, not by obligation. Among the huge amount of evidence for this that we can discover throughout the organisation’s 50-year history, the experience of Cyta Hellas shows that the leadership gene acts even in places where we are considered an ‘alternative’ provider. Following our spectacular entry into the Greek provinces in a relatively short time, we are now ready to stake a claim on Athens and its millions of residents. Cyta has become an exceptionally important ambassador for Cyprus to the rest of the world. It has a restless spirit. It is not prepared merely to survive but it actively seeks to progress. For this reason it will continue to play a leading role in any economy in which it is active and to contribute to whichever society it participates in. With the same sensitivity that has marked its first fifty years, it will continue to give to the environment, to culture, technology, sport and health, sectors that it has been helping all these years, financially and most willingly.

{

Cyta has become an exceptionally important ambassador for Cyprus to the rest of the world

{

If Cyta is celebrating fifty years of… youth this year, it is because years ago, others worked smartly, inventively and passionately for untold hours. And this is how we shall continue to work, providing Cyprus with a strong, trustworthy network, a network of freedom, in order to reach even greater heights!

info: Rita Hadjiloizou-Karatzia is Manager of Communications and Public Relations at Cyta.

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interview

Physics & Philosophy meet Economics

HARD TIMES IN THE GLOBAL VILLAGE Philosopher Lou Marinoff believes that the West needs to reap the benefits of globalisation while becoming less dependent on technology if we are to retain our cognitive ability. By K. Ioannides

riginally a student of theoretical physics and computer science, Lou Marinoff decided in the 1980s to dedicate himself to philosophy. He later qualified as a psychotherapist and published a series of books aimed at helping people find happiness and balance in their lives. Therapy for the Sane, Fair New World and The Middle Way have been very well received all over the world and Marinoff’s biggest-seller to date, Plato Not Prozac, has been translated into no fewer than 27 languages. As the current Chair of the Department of Philosophy at City College of New York and a frequent contributor to the World Economic Forum in Davos, Lou Marinoff specialises in highlighting the effects of today’s economic, technological and cultural trends on society. Gold spoke to him during his recent brief visit to Cyprus.

Despite the severity of the financial meltdown, nothing has been learned and nothing has changed

Lou Marinoff

Gold: Let’s start with a big question for a philosopher: What are the most profound issues facing modern society? Lou Marinoff: The situation that has arisen due to the phenomenon of globalisation is completely unprecedented in human history, partly because of the interconnection of technology which has enabled economic forces to transcend political and religious ones. I travel to many countries and what I see in almost every one of them is that people are living in a kind of bubble. I’m not a conspiracy theorist but let’s call it their national identity, i.e. a reality that has partly been created by them and partly for them. Their media education and socialisation sees everything through the lens of their particular history. Globalisation, however, is eroding this state of affairs. You can now go to YouTube and see everybody’s version of everything. People are able to exchange messages and opinions with others all around the world, instantaneously. This does not negate national identity but transcends it; we are now living in the global village! This marks

the international investment, business & finance magazine OF CYPRUS

the banks and now everyone is hoping that it’s business as usual. The current system is just not amenable to change and at the same time the underlying causes of the crash are still there. I don’t want to disappoint our youth but if you look at it in terms of geography the Caucasian states are definitely in decline whereas the BRIC regions are experiencing phenomenal growth. This decline is, of course, partly down to positive developments such as advances in healthcare and the proliferation of feminism.

Apart from the economic decline we are also, in my view, experiencing a much more serious cultural decline an evolution in human consciousness. It doesn’t mean that we lose our sense of national or tribal identity but we gain a much greater sense of humanity and we start looking at other people as shared neighbours in this global village rather than foreigners, strangers or enemies. Gold: And in terms of the forces that are challenging our societies? L.M: Well if you’re the kind of person that’s defined by the idea of ‘the common enemy’ you will increasingly have a problem, given this new transcendence in human understanding. There is a power struggle going on that’s partly cooperative and competitive, and partly conflicting. We are seeing national systems trying to preserve themselves, their borders, identities, revenues and economies but they are really being trumped by larger, irrepressible forces. At the same time we have clashes of ideologies coming to the fore as people with conflicting religions, ethical or political values are forced to exist alongside each other in this new global village. Despite this, people are increasingly discovering that they don’t have to remain enemies but can become real or virtual exchange partners whereby they learn about each other’s version of history and so gain a new perspective on things. Once shared values are established and mutual understanding is achieved, people start to appreciate each other and start to reclassify an enemy as a friend. Once this is achieved, economics can come into play and enable previously opposed people to become trading partners and engage in ventures that were impossible before. If you take into account what is happening in North Africa, you have the status quo being overthrown by grass roots movements representing the ordinary citizens who have transcended their national borders and now want the same rights, opportunities and freedoms as other global village citizens. They’ve seen the positive aspects of life in the developed world on YouTube. The exception is China where they now have two walls: the Great Wall and the Great Firewall! Gold: Are you optimistic for the developed world over the next 10 years given the substantial economic and social challenges that we are currently facing? L.M: Do I see continued prosperity in the West? Not entirely. The EU and the USA still have the deep demographic and structural faults that precipitated the financial meltdown. Despite the severity of the crash, nothing has been learned and nothing has changed. The taxpayer ended up bailing out

Gold: Feminism? L.M.: Yes. Feminism freed women through education and gave them the choice of bearing far fewer children, whereas improvements in healthcare have enabled people to live much longer. This has inevitably led to the ageing of the population so it’s simple maths: as the number of taxpayers decreases and the number of pensioners increases, the more difficult the state is going to find it to finance society. Even if you look at places like Italy and Ireland where a Catholic heritage should, in theory, encourage higher birth rates the replacement rates are a mere 1.1 children born to every couple. Apart from the economic decline we are also, in my view, experiencing a much more serious cultural decline, especially in terms of education. Our schooling systems are increasingly failing to teach children to read, write, and reason and our kids are spending far too much time in front of the television while they’re at home – up to 8 hours a day in the States. It’s disgusting. Our children’s attention span has been decimated, making them increasingly incapable of sitting still in the classroom. Big Pharma then comes in and diagnoses them with ADHD and prescribes pills to treat the symptoms without curing the problem. This is a catastrophe brought on by modern Western culture. Gold: What do you see as the root cause of this situation? L.M: Well, I have quite a controversial position on this and I focus on it in my books. It’s the destruction of our cognitive capacity and attention span due to over-exposure to visual and virtual media and insufficient attention to the written tradition. What exercises our attention span is being able to sit still, concentrate and process information in the form of text. When you read a novel or a good story, your brain is producing its own images and engaging your imagination. This is a great gift of the human cognitive system whereby we should be our own internal moviemakers. When we are watching TV, images are being imposed on us and so weaken our capacity to imagine and to concentrate for prolonged periods of time. Overexposing children to TV and computer games not only encourages short attention span but

In America and Europe right now, the middle classes are being systematically bankrupted the international investment, business & finance magazine OF CYPRUS

results in deficiencies in social skills whereby many children – and indeed adults – have now become disconnected from interfacing with real people in a healthy, physical way. Overall we are challenged with a whole spectrum of forces that are impairing our cognitive ability and retarding social development in our children. This is the most serious issue facing our society and, unfortunately, Europe is imitating the US in much the same way that it did with its adoption of junk food. Gold: What’s your position on capitalism? L.M: In my view there are two types of capitalism: one is ethical and produces beneficial results to society whereas the other is predatory. People need to be protected from the predators and that’s where good government is critical. Gold: So what is the best hope for our society and economy to become healthy again? L.M. If you do the sociology you’ll find that most geniuses come from the middle-classes due to a natural regression toward the mean. If you have two elites or highly intelligent people breeding, the chances are that their offspring will be less intelligent whereas two below-average people are more likely to produce children of higher intelligence than themselves. This follows the trend of a normal distribution curve whereby there’s a natural regression back towards the centre of the bell-curve. If you look at the people that have really made a difference in the world you’ll find that 98% of them came from the middle class. So if you want to have real innovators with intelligent people coming through and doing fantastic things and driving the economy, you have to grow the middle class. That’s the garden in which to produce the delectable fruits, i.e. the geniuses whether they be artists, scientists or otherwise. Aristotle states in Politics that the easiest states to govern, the ones that are the most pleasant to live in, are the ones with a strong and healthy middle class. However, what’s happening in America and Europe right now is that the middle classes are being systematically bankrupted. They have been obliged to pay the debts that were incurred by the elites as well as to bear the tax burden for the poor. Property prices are going down while taxes are going up and this is a recipe for catastrophe. The countries which are now growing and prospering are the likes of India and China where the middle classes are thriving. They have purchasing power and positive wealth, rather than the illusion of wealth that we have that’s attained through the servicing of debts. Gold: If you had the power to make everyone in the world read at least one book, which one would it be? L.M. Well that’s a tough question! In terms of a book that gives a prescription for our times I don’t think such a book has yet been written. But something that would come close would be Ayn Rand’s Atlas Shrugged, This is a story of what happens when parasites, looters and people without a strong sense of healthy values take over the world and destroy everything, the end result being that people are reduced to savagery. It really brings home the prospect of losing everything if power is placed in the wrong hands.

the international investment, business & finance magazine OF CYPRUS

Property prices are going down while taxes are going up and this is a recipe for catastrophe

interview

Taking cyprus

on the road

iven the economic challenges presently facing the global economy, it is crucial that a country has a dedicated team of trade ambassadors promoting it to the international business community. Gold spoke to Christos Petsides, Director for Services and Trade at the Cyprus Chamber of Commerce and Industry (CCCI) about the role of the Chamber and its forthcoming trade missions abroad.

Gold: Who are the CCCI’s major partners when it comes to foreign trade missions? Christos Petsides: The Chamber’s business delegations and forums are organized in association with the Cyprus Ministry of Commerce, Industry & Tourism and the corresponding Chambers abroad, with the support of our Trade Centres and Embassies. Gold: What aspects of Cyprus do you promote to overseas business people and general investors? C.P: The island’s solid infrastructure, strategic geographic location and favourable corporate tax regime are all promoted as part of the main motivation for utilising Cyprus as a strategic centre for conducting business. We also organise specialised delegations in cooperation with universities and partners from the medical sector respectively to promote Cyprus as both an educational and a medical tourism destination. Gold: What forthcoming business delegations abroad are you preparing for? C.P: The next delegation will be to Vienna on 17 June and then we will be travelling to Russia between 28 June and 1 July. We’lll be visiting Moscow but also Kazan, the capital city of the oil-rich Republic of Tatarstan. The latter is especially interesting since it is the first time that we will be holding a business forum there and we will have an opportunity to evaluate business interest in Cyprus. We consider our visit to Ukraine on 3-5 July as very important too. President Christofias will personally open the Kiev forum. Gold: How long does it take to organise an overseas forum or delegation? C.P: It normally takes about two months to properly organise and coordinate an overseas event of this kind due to the number of people from both Cyprus and the visiting country that need to be involved.

By K.Ioannides

Gold: Which have proved to be the most difficult foreign Chambers of Commerce to engage with? C.P: There are Chambers whose response is very positive but they are difficult to communicate with due to their heavy schedules. However, it really helps when we have our own Overseas Trade Centres in the region to help with introductions. At the moment we have 10 Overseas Trade Centres in places like New York, London, Berlin, Warsaw, Dubai and Beirut. Gold: Who are you looking to meet and connect with on your travels? C.P: Primarily we tend to meet heads of marketing, bankers, lawyers accountants, business people who might be interested in investing and setting up companies in Cyprus and, generally, entrepreneurs who are interested in exploring new fields and new areas of cooperation. Gold: Which have been the most interesting overseas business forums/delegations you have been on? C.P: It’s a bit difficult to say because there have been so many. Although our trips to China and Russia were very important and extremely eye-opening, I would say that our delegation to Kazakhstan was very interesting because despite its vast natural resources such as oil and gold, the country is virgin territory in terms of its use of overseas international business centres. Gold: Are there still a lot of un-visited countries that you feel have great potential for utilizing Cyprus as a business centre? C.P: I would say that Eurasia has a lot of potential for us; countries such as Uzbekistan and others further afield like India and China.

Gold: Has the deterioration of Greece’s financial problems prompted concern within the CCCI? C.P: Of course. This is a very sensitive point but the main area that has been affected is banking so in terms of our activities it hasn’t really affected us. As a Chamber we set up the Greece-Cyprus Business Association some years ago in order to promote business opportunities between our two countries. As such we are involved in initiatives to try and help the Greek economy by recommending that as Cypriots we do what we can by considering Greece as our first destination of choice for holidaying abroad. the international investment, business & finance magazine of cyprus

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{june 2011}

issue 03

+ BOok reviews

{money}

66 Money in the bank How Bank of Cyprus attracts investors 68 Private Banking with a Strong Personal Touch Eurobank EFGâ&#x20AC;&#x2122;s Private Banking services 72 Company Profile Bonalbo

{business}

72 Leadership and Innovation Innovation Strategy 76 Lean On Me Carlo Scodanibbio on Lean Management 78 The Power of Communication Despo Lefkariti on the challenges facing the local and global advertising industry

82 When Gold Met Gold ACCA President Mark Gold talks about the future of the accountancy profession

{economy}

84 Going to Market Demosthenes Mavrellis discusses how he advises companies wishing to list on regulated, secondary and unregulated markets

{tax&legal}

Money: Free Capital: How 12 private investors made millions in the stock market by Guy Thomas 70 business: Money and Power: How Goldman Sachs Came to Rule the Worldby William D. Cohan 74 Economy: Crisis Economics: A Crash Course in the Future of Finance by Nouriel Roubini 86 tax&legal: Financial Statement Fraud Casebook: Baking the Ledgers and Cooking the Books by Joseph T. Wells by Joseph T. Wells 89 lifestyle: Record Collector Rare Record Price Guide by Ian Shirley (Editor) 97

{lifestyle}

94 Record Prices Old records by the right artists and in the right condition could give you an impressive return on your investment.

88 Forewarned is Forearmed Ten areas requiring good planning when using a Cyprus company the international investment, business & finance magazine of cyprus

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BANKING

interview {money}

Money in the Bank:

How Bank of Cyprus attracts investors We are a conservative commercial bank primarily funded by customer deposits and this has helped us weather the ongoing financial and economic crisis

Institutional investors such as pension providers, hedge funds, insurance companies, mutual funds, investment advisors and banks play a crucial role in the world of investing due to the large amount of capital they have at their disposal. As such, institutional investors are highly sophisticated when it comes to allocating their money and they naturally seek out successful and secure companies that can provide reliable returns. Yiannis Kypri, Deputy CEO of the Bank of Cyprus Group tells Gold how the Group attracts investors. By K. Ioannides

Gold: What is the typical profile of the company or fund looking to invest in Bank of Cyprus?

Yiannis Kypri: We have a very loyal retail investor base which makes up 70% of our total investors. The institutional investors interested in Bank of Cyprus are both long-only funds and hedge funds, attracted by the Bank of Cyprus business story.

Gold: What is the Unique Selling Proposition that the bank offers its investors?

Y.K.: The Bank of Cyprus Group was founded in 1899 and it

Yiannis Kypri, Deputy CEO of the Bank of Cyprus Group

is the leading banking and financial services group in Cyprus, with a dynamic presence in Greece and operations in those Eastern European countries with strong links with Cyprus. In addition to retail and commercial banking, the Groupâ&#x20AC;&#x2122;s activities include finance, factoring, investment banking, brokerage, fund management, private banking, life and general insurance. One of Bank of Cyprusâ&#x20AC;&#x2122;s strengths is its geographical diversification that allows it to grow selectively and this, combined with its conservative management, ensures that growth is balanced with a focus on active and strict risk management. This geographical diversification comprises the bankâ&#x20AC;&#x2122;s strong presence in more mature markets such as Cyprus and its presence in emerging markets that offer significant opportunities for growth such as Eastern Europe and especially Russia.

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finance

brokerage

private banking

retail

investment banking commercial

general insurance

factoring

Bank of Cyprus has one of the best credit ratings in Southeastern Europe

life insurance fund management

Gold: The Group’s business model is also an attractive one. Y.K.: Yes. We are a conservative commercial bank primarily funded by customer deposits and this has helped us weather the ongoing financial and economic crisis. At the same time, the Group is in a strong competitive position with a robust balance sheet, healthy liquidity and capital. Despite the challenging macro environment, the management team has maintained its track record and continues to deliver strong financial results. In addition, Bank of Cyprus has one of the best credit ratings in Southeastern Europe and the current issue of Convertible Enhanced Capital Securities will further strengthen the capital base. Moody’s rates us 1 to 2 notches higher than other Cypriot banks and 4 notches higher than other Greek banks.

Gold: Who are the biggest overseas investors and/or institutional investors holding a major stake in the bank?

Y.K.: Odella Resources owns 9.9% of the share capital of Bank of Cyprus. Other large investors (as at the end of March 2011) include Danske Group, Blackrock Group, USS, large investment banks such as UBS and HSBC and large insurance companies such as Allianz and ING Group.

Gold: How competitive is the market for investors becoming? Y.K.: In our view, institutional investors are always looking for quality companies which will continue to deliver good returns for their funds. Therefore, given our strong investment profile and our ability to continue to deliver good financial results, there will always be interest from investors in Bank of Cyprus.

Gold: Tell us about your investor roadshows. Where do you hold them and who do you meet?

Y.K.: We travel regularly in order to meet potential investors

at roadshows or conferences. It involves going to the offices of potential investors to discuss recent developments with them and to answer any questions they might have. In Europe, we most regularly visit London, Paris and Frankfurt. However, occasionally we travel to other cities such as Milan, Athens, Edinburgh and Amsterdam. In North America we meet investors in New York, in Boston and in Toronto. We also meet with the sell side analysts of the Investment Banks that cover the equity of Bank of Cyprus and, of course, we meet with the buy side analysts and their fund managers who are interested in investing in Bank of Cyprus.

Gold: The Group’s website states: “In an ever-changing world we deliver new ideas to meet the needs and priorities of a new generation.” Can you give us some examples of these new ideas in which the Bank is involved? Y.K.: On the financial side, Bank of Cyprus is currently in the process of issuing Convertible Enhanced Capital Securities, the first issue of its kind for us, following a handful of similar issues by Lloyds, Rabobank and Credit Suisse. The issue by Bank of Cyprus is similar to those of the other banks in that the securities convert to equity if there is a contingent/viability event which requires the Bank to enhance its capital position. However, the issue by Bank of Cyprus has the added characteristic that the holders of the securities also have the option to convert into equity at a predetermined price. The issue reflects the strategic decision of the Group to operate with higher capital ratios in an environment of greater uncertainty and where there is regulatory demand for higher capital ratios. The issue will also offer the Bank further strategic flexibility to capitalise on its strong, well-positioned network and to deploy its liquidity to seize profitable growth opportunities across its various markets. the international investment, business & finance magazine of cyprus

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BANKING

{money}

Private Banking

with a Strong

personal touch The success of Private Banking is based to a large extent on the strong personal relationship between a client and his/her Private Banking advisor. By Antonis Antoniou, Senior Manager Private Banking, Eurobank EFG

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Private Banking clients have complex financial needs which require specialised and innovative financial solution

urobank EFG started its operations in Cyprus in summer 2007 with a strategic plan to concentrate its business efforts on Wholesale Banking. We believe that the Cypriot retail banking sector is very competitive, not to say saturated and we therefore pursued a differentiation strategy, focusing on product innovation and high quality value added services. Eurobank EFG Cyprus now operates mainly in five areas:

1. Corporate Banking for medium-large companies

2. Investment Banking (in cooperation with our Group Investment Banking in Greece)

3. Asset Management (in cooperation with our Group’s Asset Management in Greece)

4. International Business Banking 5. Private Banking for High Net Worth Individuals

Private banking in Cyprus has evolved into an attractive business due to the continued growth in foreign currency deposits, a high savings ratio and a growing client appetite for investment products. Our clients, both local and foreign, use Cyprus as a hub for their international business needs. Because of a lack of personal time and limited expertise in investments, they seek assistance from our Private Banking advisors who are able to help them with their financial needs. The vast majority of Private Banking clients have complex financial needs which naturally require specialised and innovative financial solutions. The philosophy of our Private Banking advisors is to focus primarily on the development and maintenance of strong

client relationships based on trust. I believe that we have a competitive advantage in the experience and expertise of our parent group, Eurobank EFG, in Private Banking as well as our own specialised knowledge, our extensive product platform and our willingness to provide the professional and reliable services that our clients seek. Each Private Banking client is unique, with his/her own unique goals and aspirations. Being able to understanding and then satisfy a client’s banking needs is the essence of Private Banking. The relationship is a dynamic one. Through a detailed personalized process, our Private Bankers evaluate the client’s investment profile and subsequently draw up strategic proposals with him/her for the most rational management of their wealth. Private Bankers closely follow developments in the local and international financial markets in order to provide clients with detailed asset reporting and to examine the possibility of change to their portfolio structure. We also need to be able to identify our investors’ biases so that they do not take irrational decisions. An important part of our work is help our clients recognize and manage their emotions – fear, regret, greed, pride, etc. – so that they do not affect their ability to make rational and profitable investment choices. Eurobank EFG Private Banking also offers its clients a particularly specialized service: Total Wealth Management. As the name suggests, through this service we aim to totally cover a client’s financial needs through innovative products and services. We offer bespoke financing solutions, which cover personal needs, property acquisitions, investment loans and yacht financing, for example.

Through our investment services, we are able to offer clients the benefit of all the knowledge and experience of our research teams as well as access to a full range of investment products and services including local and international stock markets, government and corporate bonds, international mutual funds, structured products, derivatives and alternative investments. This vast range of services and products is achieved through cooperation between the Private Banking division and other Divisions of the Group and through our open product platform policy which has led to strategic collaborations with international financial institutions in the area of mutual funds, such as Franklin Templeton, BNP Paribas, Pictet and Pionner, to name just a few. Our clients may benefit from their Private Banking relationship by opting for one of the following:

• Classic Services For clients who wish to personally select the investment products/securities and to limit the service we provide to the execution of their financial transactions. • Premium Advisory Services For clients who wish to decide on their tactical asset allocation, to select Investment products/securities and to manage their own personal portfolio based on the latest advice of their Private Banker.

• Discretionary Asset Management For clients who wish to outsource their tactical asset allocation decisions and the selection of their investment products to our specialists. Clients specify their financial targets and the desired level of risk and Eurobank EFG Asset Management specialists manage their portfolio. the international investment, business & finance magazine of cyprus

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{money}

BANKING

Clients need advice and services that go far beyond the usual financial and banking products Assessing a client’s risk profile is one of the most important stages in the relationship between a client and his/her Private Banker. A correct assessment will define the success of the relationship which is why, during our first few meetings, the client will be asked to complete the necessary questionnaires and specialized tools will then be used to analyse the information in order to precisely define the investment profile. The most important data to be gathered and analysed concerns the client’s financial position, his/her financial knowledge and experience, target return, investment horizon and income needs. Experience has shown that no single product is suitable for all investors, so part of our job is to recognise which products match which type of client. The success of Private Banking is based to a large extent on the quality of service as well as on the strong personal relationship that develops between the client and his/ her Private Banking advisor; hence we consider our investment in our people to be of great importance. We pay particular attention to our hiring criteria and we ensure that all members of staff undergo continuous training and development. We are very proud that in 2011 our Bank has been voted ‘Best Private Bank in Cyprus’ for the second consecutive year by the internationally renowned magazine Euromoney. This distinction reflects not only the high calibre of services offered to clients who have entrusted their assets to our Private Banking Division but also the successful strategy which Eurobank EFG has implemented for the provision of bespoke products on an open architecture platform. To receive such an award for the second year running, after only three years of operation in Cyprus, confirms the degree of trust that High Net Worth individuals have in the Bank. Additionally, it is a testament to the effectiveness and comprehensiveness of the wealth management services we offer clients and to the added value we provide by utilising the Group’s PB divisions in Greece, London and Luxembourg. 70

Affluent clients often find themselves in need of more extensive family wealth planning and management services as the size and the complexity of their assets increase. Clients with complex, international financial structures need advice and services that go far beyond the usual financial and banking products. Such services include estate and inheritance planning, tax advisory and tax planning, insurance planning, philanthropic services and concierge services, to name just a few. Although some of these services are unrelated to the primary function of wealth management (e.g. concierge services), they are nonetheless extremely valuable to wealthy clients who are relieved of such responsibilities. At Eurobank EFG Private Banking we have acknowledged the need to take Private Banking to the next level through the provision of those products and services that, strictly speaking, fall into the Family Office category and we already offer some unique products/services to our most wealthy clients, such as:

• Art Advisory services through cooperation with a specialised firm that offers clients advice on art buying/selling as well as on shipping, storage and valuation of works of art. • Private Equity investments. For private equity projects in which that the Group acquires a holding stake, we offer the opportunity to selected clients to participate as well.

• Concierge services. • Setting up tailor-made private UCITS III Funds. Such funds hold a European passport which means that they are accepted and recognized in all European countries and in other countries around the world. Obviously, this is just the beginning. However, we are committed to gradually enhancing our products and services in order to provide extra value for our most wealthy clients.

BOOK REVIEW

Free Capital: How 12 private investors made millions in the stock market By Guy Thomas (Harriman House Publishing, 2011)

RRP: £18.99 (£10.89 from Amazon.co.uk)

ased on a series of interviews, the book outlines the investing strategies, wisdom and lifestyles of 12 highly successful private investors. Each of them has accumulated £1m or more – in most cases considerably more – mainly from stock market investment. Some have several academic degrees or strong City backgrounds; others left school with few qualifications and are entirely self-taught as investors. Some invest most of their money in very few shares and hold them for years at a time; others make dozens of trades every day, and hold them for at most a few hours. Some are inveterate networkers, who spend their day talking to managers at companies in which they invest; for others a share is just a symbol on a screen, and a price chart shows most of what they need to know to make their trading decisions. The fact that these 12 investors have all made millions using such very different methods and strategies would seem to lead to the conclusion that the only ‘best’ strategy is the one that’s best for you. A fascinating read.

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Leadership & Innovation

Innovation {business}

Strategy

BOOK REVIEW

By Dimis Michaelides Look for serious answers to this question:

‘What does innovation mean for my organisation?’ Search deep, probe well. This will lead you to your innovation objectives and how to achieve them. Apple, IBM, Microsoft, Amazon, Google, Samsung Electronics, Toyota, Volkswagen, Ford, General Electric, Tata Group, Coca Cola, Virgin, Nintendo, Walt Disney, HSBC and Petrobras all made it into BusinessWeek’s list of the Top 50 Most Innovative Companies in 2010. Quite obviously, though, the type of innovation coming from the Virgin Group is quite different from that of Coca Cola; IBM’s innovation is not the same as that of the Tata Group. Here are three typologies of innovation to help set the scene:

Radical Innovation The innovator sets out to create new products and new markets, where needs have not yet been completely identified or understood. This innovation is usually quite profound, big and groundbreaking. It often involves reaching operators outside conventional businesses to have an impact. The stakes are usually big, too. This is the innovation of Google and Apple and Virgin Galactic today, that of Apple and IBM in the early Eighties micro-computer revolution, or that of NCR and IBM in ATMs in the Seventies.

Differentiation or Business Model Innovation The innovator is out to conquer a slice of an existing market and extend an existing market, by altering substantial parts of the value chain. The product as such is not very new but the way it is delivered and the

way the differentiator operates is markedly different from the incumbents. Think how Body Shop, Swatch and Starbucks started up. Think Southwest Airlines, IKEA and Grameen Bank. Differentiation can be quite small with minor differences over existing products/services or it can be quite deep, where the whole business model is new. Differentiation is much better suited to new entrants rather than corporations already thriving in the business who have a stake in the status quo to defend. This is why innovators of this type are also often called disruptors.

Kaizen The word in Japanese means ‘continuous improvement’. Small and big improvements happen every day in every team, every division, every worksite, in every nook and cranny of the organisation. Compounded, these improvements become powerful and make great progress possible. This is the innovation of Toyota, Honda, HSBC and Gillette. Each type of innovation has its own particularities and limitations. Radical needs major resources, differentiation needs a defined market that it can challenge and no amount of kaizen can save a typewriter from the onslaught of word processors. Leaders must define which type of strategy for innovation they are seeking. Radical innovation is not accessible to all, kaizen is. Indeed the issue for kaizen is not whether companies should practice it or not but whether they should practice only kaizen and how well they can practice it. It is our view that all companies should question their own business model from time to time.

info: Dimis Michaelides is a business consultant, university lecturer and author of The Art of Innovation – Integrating Creativity in Organizations. His workshop of the same title is delivered by certif ied facilitators around the world. He combines his unique experience as a business executive and innovation expert with his talents as a speaker and magician to lead truly inspiring workshops. www.theartofinnovation.net, www.performa.net, www.dimis.org

innovation.indd 74

Money and Power: How Goldman Sachs Came to Rule the World By William D. Cohan (Allen Lane, 2011) RRP: £25.00 (£14.89 from Amazon.co.uk)

his is the inside story of how Goldman Sachs survived the 2008 global financial crisis when so many others collapsed and why it continues to be so profitable and powerful. Cohan shows how Goldman Sachs has continually projected an image of being superior to its competitors but he also reveals the firm as a secretive moneymaking machine that has walked an uneasy line between conflictof-interest and legitimate dealmaking for decades. The author was given unprecedented access to the firm’s inner circle. Every living former CEO of Goldman Sachs has spoken to him, as well as the current one, Lloyd Blankfein. The result is a penetrating study of these larger-than-life characters and their secretive world and the definitive account of an institution whose public claims of virtue look more like ruthlessness when exposed to the light of day. The book shows what makes a strong financial institution but it is also a graphic account of how trading skills and political connections – rather than wealth-creating innovation – can make some people fabulously rich.

the international investment, business & finance magazine OF CYPRUS

6/6/11 10:30:16 AM

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Precious and lasting value, obsessed with perfection and giving emphasis to the smallest detail. Priceless. Unique. Cyta, the leading Integrated Electronic Communications Provider in Cyprus, offers a full range of state-of-the-art services, especially tailored to each companyâ&#x20AC;&#x2122;s specific needs. This is why it has become the one Organisation that is trusted by virtually every large and small-to-medium size enterprise in Cyprus. Tomorrow we could be your partner too. www.cyta.com

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MANAGEMENT

{business}

LEAN ON ME

interview

By Dinos Andreou

In Malta poor service has simply become ‘normal’ and accepted. This is tragic

ean Management, often simply referred to as ‘Lean’, is a practice that considers the expenditure of resources for any goal other than the creation of value for the end customer to be wasteful, and thus a target for elimination. Gold spoke to Carlo Scodanibbio, an independent professional consultant and human resources trainer who runs courses on Lean Management all over the world.

Gold: What is the main premise of Lean Management? Carlo Scodanibbio: Lean is a philosophy and an operational discipline aimed at structuring an organisation (public or private) in a ‘lean’ fashion. In this context, ‘lean’ means maximising the value of a product or service provided to a customer while simultaneously minimising any form of waste present in the process that produces such product or service. Gold: What are the first practical steps to becoming a lean manager? C.S.: Understand Lean, think Lean and practice Lean (first on yourself and in your daily work) and then eat, sleep and preach Lean at 360 degrees! I ran a Lean Management course in India very recently. As I normally do, I asked all the delegates why they had come to the course and what they expected to gain from it. I believe the best answer I have ever received to this question was given to me by a top-level manager at Tata Motors. He answered: “I am here on this course to see if I can find ways of changing myself and become leaner - if I can do that, then I can change and make everyone else in my Organisation leaner too”. Fantastic example!

the international investment, business & finance magazine OF CYPRUS

Gold: You have recently completed a study in Malta, whose economy has many similarities with that of Cyprus. What were your main findings? C.S.: Not brilliant! Let’s take the manufacturing sector. The amount of wasted manpower is still extremely high, plant and machinery breakdowns and malfunctions are still at unacceptable levels, set-up times are still too long, and quality defectiveness, non-conformities and rejects are still extremely far from the zerodefect lean target. Moreover, lead and throughput times are still longer than acceptable to customers, and management-related waste (bureaucracy, meetings, paperwork, bad planning, etc.) is still typical of what we see in any ‘traditional’ enterprise. Gold: Let’s be more specific. What about the project/ construction industry, for instance? C.S.: Things are not much better here. In some ways this industry has not completely shifted from craft to mass production, much less to lean production. On the other hand, the industry has followed the mass production model in its extensive division of labour and hierarchy-based management. The consequences of this are cost overruns, delays to schedules and waste. How often does one hear that a project has been completed on time, within budget and to the total satisfaction of the client? Very seldom. There is so much wasted manpower is in the project/construction industry. Just spend some time observing workmen on any construction site, on a random day, at a random time and you will easily come to the conclusion that around 65% of the manpower is wasted on idling, searching, moving, talking, double and triple handling, preparing, organising, giving directions, making mistakes, reworking mistakes and, anyhow, not adding value to the object of the project.

Lean is vitalfor success - or at least survival in any industrial and business sector

Gold: Cyprus’s economy now depends a great deal on the services industry. What did you see in Malta regarding management in this sector? C.S.: Unfortunately, things were even worse. It would appear that good customer care in Malta is associated only with the individual performance of certain exceptional (and very difficult to find) members of frontline personnel, rather than being part of a systematic and strategic approach. Poor service of the kind provided by insurance companies, health institutions, hospitality establishments and many other service providers in Malta is so common that customers have grown used to it and don’t even notice it anymore: it has simply become ‘normal’ and accepted. This is tragic. Poor customer care and related bad service come in multiple forms (the list could be endless): We can include delays of any nature and duration, mistakes of any sort, or sheer arrogance as reflected in the idea that “we are right you are wrong” which is so diffused in many service establishments, from telephony providers to retailers. Then there is the ‘escalation’ of any form of complaint to higher management because, obviously, frontline personnel cannot deal with astronomical issues like complaints! There are the missed promises to customers (“…I will definitely give you an answer by tomorrow…..”) and, last but not least, being asked “Who are you?” when you call a company and ask for a certain person. In Malta in 2011, “Who are you?” has not yet been replaced by the much more elegant “May I ask who is calling?”

Gold: Cyprus has what most people view as an extremely bloated, inefficient and overpaid public sector. Have Lean practices ever been introduced to the civil service anywhere? C.S.: The public sector tends to be the same in most countries, with very few exceptions. However, I have read several case studies and personally come across sporadic instances of Lean practices deployed in the public sector in Malaysia and, believe it or not, in Italy. However, I stress the words ‘few’ and ‘sporadic’ because they are definitely the exceptions and not the rule. Both instances, like other case studies available online, show that Lean Management is not a generally diffused practice in the public sector. Such cases are simply due to initiatives taken by some very modern and lean managers. My training initiatives in Malta (occasionally attended by a civil servant or semi-public official) have shown that the interest is there: they can see the benefits of Lean and the fantastic results that could be achieved through its systematic deployment. However, most if not all of them, have made comments such as “But how can I implement these principles in practice? Definitely not on my own initiative alone. The entire department/directorate needs to move in that direction….” I reject such excuses. Every public sector manager at any level can and should at least try to implement some lean initiatives in his/her area of control but they are generally too lazy to do anything about it because they want someone else at the top to take the initiative. It’s a vicious circle.

Gold: In Cyprus, these two sectors - services and construction - and to a lesser extent manufacturing are of central importance to the economy. How important is it for lean management to be applied to these sectors? How did Malta score in these areas? C.S.: Lean is vital for success - or at least survival - in any industrial and business sector. Malta, as described above, didn’t score very well. Cyprus, in my opinion, would not score any better. When ‘things have been too good for too long’, the net result is a ‘spoiled’ management mentality at all levels. It would appear that the need to radically change strategies, practices and business style is not seen as urgent. Any turmoil or turbulence in the business environment in Malta and in Cyprus is faced and tackled with the “We shall see what happens….” approach. Valuable time is wasted on spurious exercises such as ‘restructuring’, ‘merging’ and the more traditional ‘cost cutting’. The result is loss of wealth while Lean Management aims to generate wealth.

Gold: Which are the best and worst performing countries when it comes to implementing and adhering to lean management practices? C.S.: It’s not a matter of country or indeed race, colour of skin or language. Lean is so simple that even kids can understand it fast and well. It’s a cultural issue. I have seen Lean practices deployed well in India, Malta, South Africa, Lebanon, Italy, Mauritius and even Cyprus. I have seen a fantastic Lean initiative in Nairobi, Kenya. But of course I find non-Lean practices just about everywhere I go. It’s true that in the USA, Germany and, to a lesser extent, the UK, Italy and France, Lean initiatives are growing and multiplying, especially in the private sector and particularly in the manufacturing industry. It’s not a matter of country, it’s a matter of management and how well top management understands and wants to become lean and how the Lean mentality is spread and diffused, topdown, through an organisation. the international investment, business & finance magazine OF CYPRUS

communications

interview

{business}

power

The

Our market simply cannot sustain the number of TV channels that exist today

hen Despo Lefkariti decided to set up her own marketing and communication company in 1985, it began as a two-woman operation. More than a quarter of a century later, the DeLeMa Group is the largest communications group in Cyprus, employing around 50 people. Despo, Managing Director of the Group, spoke to Gold about the challenges currently faced by the local and global advertising industry.

Gold: Has the local advertising business rebounded from the effects of the global financial crisis?

Despo Lefkariti: The global financial crisis has led to many changes in consumer behaviour. People are now much more careful about what the buy and what they consume. They are more aware and this new behaviour has brought about a new buying culture. It is not yet clear whether or not this new culture will persist once countries move towards growth once again. The Cyprus economy has not yet recovered. In fact, even though the country’s economic figures show an improvement, we are still in a recession. It is the first time in our history, with the exception of the devastating effect of the Turkish invasion in 1974, that we have seen such high unemployment figures. People who have a reduced or no income obviously limit or postpone their purchases of products and services.

Gold: How did the crisis affect companies’ advertising budgets? D.L.: The advertising business is directly affected by sales and, in many cases, communication budgets are calculated as a percentage

the international investment, business & finance magazine OF CYPRUS

By John Vickers of sales. The crisis brought cuts in advertising budgets. Although, in theory, an advertiser should not cut the budget during a recession, I fully understand and respect the decision to reduce the communication budget rather than proceed with further employee redundancies. Unemployment causes negative long-term effects on the economy and on society in my view. So, since sales of most products and services in Cyprus have continued to decline, the advertising business has not yet rebounded. On the contrary, it is still in a slump.

Gold: How was your own business affected by the crisis? D.L.: The advertising industry in general decreased by around 30% in 2009 compared to 2008 and 2010 saw a further decrease of around 10% compared to 2009. As a company we saw a fall in turnover of 17% in 2009 but we remained stable in 2010. This limited reduction in turnover, when compared with the market average, was the result of huge efforts from the whole DeLeMa team to win new business and to increase business from existing clients. What is also important is that we managed to maintain a healthy level of profitability, as a result of streamlining processes, reducing ‘fat’ and increasing productivity.

Gold: In what ways has the advertising industry changed since you started.? D.L.: It is not only the advertising industry that has changed. The way one does business in every sector has changed and the main factor behind this is the Internet. The web shattered physical borders, meaning that anyone can obtain any product or service from anywhere in the world. So the main change to business is that nowadays one does not compete only with other companies in one’s own country but with companies providing similar products or services anywhere in the world. Creativity, knowledge and professionalism are the only areas in which a communications agency such as ours can maintain a competitive edge.

the international investment, business & finance magazine OF CYPRUS

Since sales of most products and services in Cyprus have continued to decline, the advertising business has not yet rebounded Gold: What made you decide to set up DeLeMa? D.L.: Having worked in Petrolina in Greece for eight and a half years, I returned to Cyprus in 1985 and decided to leave the family business and start a company that would offer the marketing and communication services which I, as a manager, expected from an agency. This led me to establish DeLeMa, initially as a marketing and below-the-line consultancy, and it has evolved over the past 25 years into the full service communications group that it is today.

Gold: How did the link with McCann Erickson in 2001 change the company? D.L.: McCann Worldgroup is the largest communications group in the world. It is probably the best network in terms of strategy development, with amazing exclusive tools and an unparalleled training programme. Through McCann we acquire knowledge and tools that help us develop the correct strategy, which then leads to exceptional creativity. Our people have access to all this knowledge and all these exclusive tools. Another important benefit is that McCann has created various cross-border teams that collaborate online for the development of various international projects, such as the identification of new consumer insights, the strategy for a new international pitch and the creative ideas for international clients like Coca-Cola. We participate in such teams and this gives our people the chance to learn as well as to contribute. Gold: Is advertising a manâ&#x20AC;&#x2122;s world? How have you coped? D.L.: Passion and professionalism have no gender. I have never seen my gender as an obstacle in anything I do.

Passion and professionalism have no gender Gold: But as a woman, how do you react to the criticism that advertising is a sector that exploits women as sex objects to sell products? Do you agree with this view? D.L.: Yes I do. We see cases where a woman is used as a sex object - for example, a scene that has nothing to do with the specific scenario - simply to attract attention. The same goes for the use of children or animals, incorporated in an advertisement simply to attract attention, or even men used as sex objects that we have increasingly seen over the last few years. The Code of the newly established Cyprus Self-Regulation Body (FED), a joint initiative of the Advertisersâ&#x20AC;&#x2122; Association, the Communication Agencies Association and the main media,

the international investment, business & finance magazine OF CYPRUS

prohibits such use. I anticipate that with the launch of FED these unorthodox practices will eventually stop. This of course does not mean that we will stop using women, children, animals or men in communication. It simply means that they need to be an integral part of the creative idea. Gold: How do you see the industry progressing over the next decade? D.L.: A few years back, the big international agencies separated their various services into different specialised discipline agencies. They have since realised that this was not effective. It created duplication of expenses, decreased synergies and impacted negatively on the integration of the communication campaign. It also created internal competition among the various disciplines for the clientâ&#x20AC;&#x2122;s budget, as all the specialised companies had their own targets to meet. So they are starting to consolidate the disciplines once again. An advertiser needs an agency-partner who will help develop a total communication strategy for all disciplines - above-the-line advertising, media planning, online, events, PR, promotions, etc. - and implement it in the most effective and economical way. So in the future the successful agencies will be the ones that offer excellence in all disciplines.

Gold: In terms of advertising vehicles (online, TV, press, etc), is Cyprus following the international trend away from traditional media towards new digital/online? D.L.: It is estimated that Internet users currently create over 70% of web content. This basically means that we are living a social revolution where the consumer dictates the rules. The importance of online media is increasing every day, as more and more people use online media (and social networks) as one of their main sources of information. The traditional media have a different role to play. They are no longer the first source via which one is informed of a news story, for example, so they need to discover their new role in order to survive. Gold: Do you foresee a time when newspaper advertising will dry up? D.L.: Our market is very small and it cannot sustain such a large number of print media. Considering the falling circulation of the print media, especially on weekdays, I believe that newspaper advertising will be reduced but will continue mainly at weekends, when circulations are still high. Complementing a newspaper with a digital edition, which carries the entire print edition including the advertising, will help newspapers with sufficient readership or correct target segmentation top maintain a healthy advertising income.

Advertising is a tough and unforgiving industry and to survive in it one needs to love it Gold: Should Cyprus’s many TV stations be worried? D.L.: For TV stations there are two main factors of concern. One, as in the case of the print media, is the size of our market which simply cannot sustain the number of TV channels that exist today. Again, they need to study their viewers and discover which segment to target in order to maintain viewing figures that will justify sufficient advertising. The second factor is the globalisation of TV, through the various digital platforms. People will still watch Cypriot TV channels for local news and local events/shows, so the channels need to develop a programme that will make viewers choose them from the huge choice of viewing that they now have.

Gold: Do most Cypriot companies understand the value of advertising and branding? D.L.: Our market is no different to any other Western market. There is a large number of companies that appreciate the value that advertising adds to their brands and there will always be some companies that don’t.

Gold: Are you still as enthusiastic about the business as you were when you started out? D.L.: Advertising is a demanding business where people work hard, they work long hours; there is a great deal of stress and a lot of strong emotions involved. It is a tough and unforgiving industry and to survive in it one needs to love it. People who stay a long time in the advertising business do so because the satisfaction they get from seeing a great piece of work ‘on air’ is exhilarating and addictive. So, yes, I am still passionate about my work, probably in a more mature way than when I first started out but I am just as ‘crazy’ as I was, maybe even more! Gold: Is advertising a very competitive industry in Cyprus? D.L.: Extremely competitive. There are over 300 so-called advertising agencies in Cyprus, a number that the market can definitely not sustain. And unfortunately, many of these so-called agencies do not compete in strategy or creativity but choose

to compete merely on financial terms. The reason I use the term ‘so-called’ is that in most cases they do not even have the absolutely basic infrastructure to be in the advertising business. For example, only 17 agencies are subscribers to the AGB television audience measurement research and fewer subscribe to print and radio measurement research. Fortunately, the larger or more knowledgeable advertisers in Cyprus prefer to work with those agencies that have the infrastructure to help them achieve their business objectives.

Gold: What has been the secret of DeLeMa’s success? D.L.: We work with values, the main ones being respect and pride. Respect for our clients who place their trust in us and respect for our people. Pride in the work we do, in our effective strategy development tools, in our exceptional creative ability, in our aggressive media negotiations, in our outstanding digital results, as well as in our attention to detail about every event and promotion we create and implement. In order to feel stimulating satisfaction with every piece of work we do, we must feel proud of it. Proud enough to tell our friends and family ‘I did that!’ The biggest challenge I have faced during my career has been to find and keep the right team: people who have the energy and passion to be constantly searching for the right idea and to implement, effective communication campaigns with professionalism.

Gold: Do you have a favourite advertising campaign that you have been involved in?

D.L.: I have many favourites and many campaigns I am proud of but if you ask me which one is the best, my response is ‘the next one’!

Gold: If I were to ask you how you would go about marketing Gold magazine, what sort of strategy would you recommend? D.L.: Wow! Gold is a magazine that has a clear target group and a unique selling proposition. Its communication strategy is crystal clear and I’d love to have the opportunity to discuss it with you in person, not in public, as I do not want you to lose your competitive edge by publicizing it!

the international investment, business & finance magazine OF CYPRUS

communications

{business}

interview

When Gold Met

Interview and photo: K. Ioannides

ACCA President Mark Gold tells us why accountants are now less boring and why Cyprus should look into attracting the film industry.

s one of the premier advisors to the UK’s high-profile entertainment industry, Mark Gold has a client portfolio that is characterised by its diversity. A senior partner at Silver Levene, Gold operates in what is arguably the most glamorous area of accountancy – the film and television industry – with clients who are pleased to tap into his friendly exuberance and leverage his extensive expertise in management consultancy and strategic business planning. He was recently appointed President of the Association of Chartered Certified Accountants (ACCA) in the UK. Gold spoke to the infinitely enthusiastic Mr. Gold to discuss the future of the accountancy profession as well as to glean any tips on how we should go about realising our own secret aspirations for producing a blockbuster movie.

We are now seeing the accountancy profession produce knowledgeable, financially sound and charismatic business leaders Gold: What do you foresee as being the big opportunities for the accounting sector over the next decade? Mark Gold: Since the financial crisis erupted, our profession has really stepped up and proved itself to be the guardian of business. Long gone are the days of traditional book-keeping. According to a recent ACCA survey, whether they are major corporations

the international investment, business & finance magazine OF CYPRUS

or small and medium-sized corporations, businesses now expect their accountants to be the ethical guardians of their brand in addition to playing an increasingly strategic role in their business and financial planning. There are few groups of people outside the ACCA that receive such comprehensive and monitored pre- and post-training to place them in a position to offer exceptional added value to businesses.

Gold: From what you are saying, it seems that the image traditionally evoked by the term ‘accountant’ really has changed! M.G: Absolutely, the traditional accountant’s image, especially at the ACCA level should be consigned to the annals of Monty Python sketches! The days of the ‘boring old accountant’ have gone and whether they’re assuming the role of strategist, CFO or CEO, we are now seeing the accountancy profession produce knowledgeable, financially sound and charismatic business leaders.

Gold: Which sectors do you view as the most promising in terms of a future global economic recovery?

M.G: That really depends on what region or country we’re looking at. The latest data does show, at least in the UK, that things are generally getting better.

Gold: What ‘protective mechanisms’ can be put in place to guard against a future economic crisis? M.G: In my opinion it’s all about people. You have to have the right people, at both the macro and micro level, in place with the proper professional and ethical instruction to guide businesses in the right direction. Whether it’s the ACCA or the AICPA

Our members are trained in such a way as to provide solid and ethical guidance (American Institute of Certified Public Accountants), our members are trained in such a way as to provide solid and ethical guidance. It was the perhaps a lack of ethical leadership and activity that was at the core of the problem that laid the foundations of the recent financial crisis.

Gold: How do you see the skills and competences of the next generation of accountants evolving?

M.G: Many core competences will essentially stay the same, with the addition of having to become increasingly flexible. They must have the flexibility to be able to see into the future and adapt themselves and the business for which they are responsible accordingly. They will need to continuously equip themselves with the necessary knowledge and tools to deal with changes in the regulatory and sustainability landscape and to enable businesses to thrive and compete in tomorrow’s economy. The role of the ACCA is to make sure that our members are as prepared as ever to deal with the challenges that will face businesses in the future.

Gold: Given that Silver Levene’s expertise is in the media sector, what do see as the key opportunities facing the entertainment industry over the next 5-10 years? M.G: There is no doubt a huge appetite for entertainment. People want to be entertained on all kinds of levels and the Internet has completely revolutionised the way in which we consume media, along with the advent of online gaming. The really interesting thing is that wherever there is an entertainment-friendly industry location it really does bring in hard currency to that region. For this reason it can be very beneficial for a country to have a favourable film industry tax rate that encourages international filmmakers and the TV industry to come in and promote the place. A prime example is New Zealand which, after the making of the Lord of the Rings trilogy [largely filmed in New Zealand], saw its tourism industry grow by something like 100%.

Gold: How do you think Cyprus, with its reliably sunny weather, would fare if it were to become an attractive tax destination for international filmmakers? M.G: To be honest I haven’t been here long enough to tell but what I can say is that there are many governments that are not leveraging the power of the international film industry to help promote their countries and, as a by-product, to attract additional visitors and revenue to their local economies. Apart from increased revenue, there is also the feelgood factor that feeds into the local population and helps to further boost the local psyche. If Cyprus followed the example of Malta [a current favoured location of choice for shooting mediaeval-era movies] it could do very well. Don’t forget that Spain was once the favoured location for shooting all those ‘spaghetti westerns’. Gold: Lastly and most importantly, my Chief Editor and I have aspirations to produce our own mediaeval blockbuster epic. Where should we start? M.G: I would advise you to see a qualified accountant with knowledge of the industry to advise you how to put it all together! You have to get your financiers in place and your actors signed up. And of course you will need the killer screenplay to bring it all together. For every 100 that get written, there tends to be one that will go on and do really well, I really think you could be the ones to write that killer screenplay!

Gold: So it all begins and ends with the screenplay? M.G: Absolutely, so now you need to get it written and then bring it to me so I can advise you on how to make it all happen! I think it’s the least I can do since you decided to name your magazine after me. That was an absolutely brilliant idea!

Gold: It is more than evident from this comment that accountants aren’t boring anymore…

the international investment, business & finance magazine OF CYPRUS

interview {economy}

More and more companies registered in Cyprus are seeking to transform themselves into public companies with the help of a small number of local law firms.

Demosthenes Mavrellis

Going to Market

t is becoming increasingly common for companies registered in Cyprus with underlying assets/ownership abroad to seek to list in regulated markets. One of a select group of Cypriot legal firms undertaking to advise and help companies make the transition from private to listed public company is Limassol-based Chrysses Demetriades & Co. LLC. Demosthenes Mavrellis, a partner in the firm since 2007, advised AFI Development PLC ( a major player in the Russian Real Estate sector) on its admission to the premium list of the London Stock Exchange and is an advisor to many companies listing on various other exchanges. He spoke to Gold about how companies go about listing on regulated, secondary and unregulated markets.

Gold: When you are asked to advise a client about a possible listing, what is the basic procedure that has to be followed? Demosthenes Mavrellis: If we have a client who wishes to raise money, we will sit down with them and their team of advisers and look at the best way to do this with the least cost. A typical case would be a Cypriot company that is a holding vehicle for other entities, which in turn control assets which may be in Cyprus or all over the world, for example in Russia. There is, so to speak, a pyramid structure with the issuer on the top. We then look at how the issuer is governed â&#x20AC;&#x201C; if itâ&#x20AC;&#x2122;s one shareholder or more â&#x20AC;&#x201C; and we discuss the involvement of the various financial institutions. Then we will decide how to move and to apply the rules of the market that the client and their advisers wish to list in, in each particular case. If the Issuer wishes to list, taking advantage of the exemptions of the Prospectus Law, the offering will have to be to qualified investors, in other words major corporations, financial professionals or high net worth individuals. These will not be general offerings directed at the public at large. The other 84

the international investment, business & finance magazine OF of CYPRUS cyprus

There is a lot to be gained by transforming a business into a public company big question to consider is whether the Issuer is going to list on a regulated market or a similar, yet officially ‘unregulated’ market like AIM or the secondary market in Frankfurt. These latter types of markets have been developed by various jurisdictions to facilitate the listing of small to medium size businesses with less regulatory requirements.

Gold: There is no question of listing on the Cyprus Stock Exchange, presumably? D.M.: We would always consider that, especially for a company with extensive involvement in the local market. However, at present the Cyprus Stock Exchange (CSE) does not have the liquidity that especially Issuers with underlying assetes abroad require. The CSE Board is currently trying to beef up its image and do what is necessary for the Cyprus Stock Exchange to be considered for these type of listing but a lot needs to be done in terms of liquidity. If you want to go into the market you go somewhere where there’s high liquidity and a lot of interest from investors. So we’re talking about the London Stock Exchange, about the Alternative Investment Market (AIM), about the Warsaw Stock Exchange which is very popular right now and other exchanges such as Frankfurt and Oslo.

Gold: Why Warsaw? D.M.: One reason given by investors and the advising financial institutions is that Polish pension funds can only invest in companies listed on the Warsaw Stock Exchange. Also, people believe that the financial environment there is ideal due to its proximity to the resources and markets of the former Soviet Union. We also have a lot of Norwegian listings while Singapore and Hong Kong are becoming more popular.

Gold: So what are the choices facing a company when planning to go public?

D.M.: If the clients opt for an unregulated market and for qualified investors, they will not have to issue a prospectus, in accordance with the strict requirements of the prospectus law; an offering circular would be enough. If, on the other hand, they wish to list on a regulated market, they would have to draw up a prospectus which has to be approved by a regulator, such as the Cyprus Securities & Exchange Commission (CySec).

Gold: Which Regulator will approve the Prospectus and in which circumstances? D.M.: To issue Global Depository Receipts (GDRs), the mechanism by which there is only one registered shareholder for the offering (the depositor bank) which offers depositary receipts to the shareholders, the Issuer can opt to have its home state as the country in which it is going to list and seek approval of the prospectus from the regulator of that country. If, however, they are issuing shares, the regulator is always CySec. Recently we have been

able to get such prospectuses approved by Cysec and I would like to stress that CySec is very efficient when it comes to helping Cypriot companies with their listing. The people there are extremely responsive when asked to opine on something and they should be congratulated on their positive attitude. Notwithstanding that, it is very diligent and takes its responsibility in protecting investors very seriously.

Gold: And you will recommend that a client should go for the regulated or the unregulated market, depending on what? D.M.: Depending on the size of the offering, the size of the company and its general aims. A company might opt to go to a secondary market, stay there for three years and then go to the more regulated first line market at a later stage. This is what many companies tend to do. We don’t provide ‘one size fits all’ advice. It has to be tailor-made. A lot of local groups of Cypriot companies, such as property developers or people in growth industries such as alternative energy, would be very well advised to explore the possibility of an IPO or a bond issue, to fit their profile rather than seeking financing, or indeed being stuck in an expensive loan, because eventually a successful IPO is a cheaper way of raising money, it will help the company establish transparent corporate governance procedures and grow in profile.

We don’t provide ‘one size fits all’ advice. It has to be tailormade. In considering an IPO, one size never fits all. Each case should be viewed individually. Gold: What is the selling point of secondary markets such as AIM for investors? D.M.: These are qualified investors who also invest in the regulated market but the informal structure of the secondary market gives them an opportunity to buy into smaller companies that may have very high growth potential. In the regulated market one tends to find ‘blue-chip’: companies with established operations. You have a greater chance of making money on the AIM but, of course, there’s a greater chance of losing money too.

Gold: Why would a company choose not to list on a highly regulated market?

D.M.: It all comes down to cost: of the regulator, of the market itself, of the advisors which you have to hire to do the work. Many companies obviously would not have the requisite track record to be able to be admitted to a premium market from the outset. It’s all a gradual approach.

Gold: So why would anyone pay this extra cost in order to list on a regulated exchange?

D.M.: Companies want to list in order to raise capital and very large companies wishing to raise huge amounts of money know that the regulated exchange has the most liquidity. It’s also a huge status symbol and the owners might see it as an incentive to transform the international investment, business & finance magazine of cyprus

their corporate governance to a standard required by the premium list. For example, one company I was involved with, first issued GDRs on the London Stock Exchange and then went to a premium listing and issued shares. It needed the initial capital injection in order to materialize a line of projects that had been already been designed;, subsequently it needed the liquidity that the premium listing entailed.

Gold: What does a company gain by establishing rigid corporate governance rules?.

BOOK REVIEW

D.M.: There is a lot to be gained by transforming a business into a public company which is regulated under more stringent rules. From my point of view, it can sometimes be difficult to tell someone who has built a company from nothing and takes all the decisions that they need to have independent directors, to hold board meetings where everything is documented and done in a certain way and generally to be accountable to the Board of Directors and shareholders. But this is all part of the growing process for a business. Virtually none of the big multi-nantional companies in the world are private. They’re all public companies, they are all accountable to shareholders and stakeholders, so they need to behave like a citizen in the global arena. Overall it’s a process that helps everybody from the major shareholder to the employeess and the community at large.

Gold: What are the obligations of a company following its IPO? D.M.: There are a lot of things that the company needs to be aware of such as its obligations under the Transparency legislation. The company is obliged to file periodic statements with the regulator and to make disclosure of extraordinary events. Furthermore, significant shareholders of the company must disclose variations in their holding. It is suggested that, for this purpose, the company should maintain a strong registry team who will be able to keep track of its obligations.

Gold: What advantage does your firm have over your rivals? D.M.: Advising on these kinds of transactions is a difficult exercise since one needs to have the requisite expertise and the staff that would be able to devote their time specifically to this specific type of law, as it requires great expertise. There are firms in Cyprus that deal with this very successfully and Chrysses Demetriades & Co. is one of this group. We have a track record of advising companies as regards listings of equities and bonds. We have a large team of lawyers who are experts in different fields and who can help the company with all the issues that arise from a listing such as, corporate reorganizsations, real estate matters, employment mattersissues, etc. Because of our size, we have more partners who are dedicated to doing IPO work, on a consistent basis, so it comes naturally to us to engage in these transactions. We also have a great network of advisors abroad who deal with the law of the country where we intend to list or the local implications of the country where the assets are located. I believe that we are a good port of call for someone seeking advice on whether to list or not and how best to achieve that.

Gold: Do you believe that Cyprus can become a regional financial centre? D.M.: Yes, I do, but a lot of infrastructure work is needed first, particularly on the laws in respect of funds. We need to attract foreign funds to register here and further attract talent from other countries in setting up our professional infrastructure. The government machine also needs to run more smoothly and efficiently. As stated earlier, the people at CySec are very receptive to comments and recently they have improved their own procedures greatly. Cyprus is already successful, not only because of the 10% corporate tax rate but because of the quality of the services provided here, our closeness to the English legal system which is world-renowned, and the trust in which our international clients hold us. Malta is a good example of a country trying to emulate Cyprus but it hasn’t been as successful. If we can improve even more we have a good chance of becoming recognised as a regional financial centre. 86

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Crisis Economics: A Crash Course in the Future of Finance By Nouriel Roubini (Penguin, 2011) RRP: £10.99 (£6.81 from Amazon.co.uk)

ouriel Roubini predicted the financial crisis of 2007-9, which made him extremely unusual among macroeconomists. His central premise here is that there is nothing unusual about crisis in the economy. On the contrary, he argues that the recent crisis was eminently predictable precisely because it resembled so many other crises of the past. He begins by offering an historical overview of crises caused by an asset bubble that boiled over into the rest of the economy and he argues that the current generation of economists were fooled by an unusually extended period of relative stability into believing that this was the normal state of the economy. Roubini concludes with an analysis which draws attention to immediate dangers –one or more sovereign debt crises, the possible collapse of the EMU, etc. – and a more insidious problem: that the real lessons have not been learned, so that there is a real danger that the system which generated the crisis will not be reformed, for reasons of political convenience and economic dogmatism. Succinct, lucid and compelling.

PLANNING By George Savvides

{tax&legal}

Forewarned is Forearmed

areas requiring good planning when using a Cyprus company

great deal is said about Cyprus and the undoubted advantages it has to offer regarding international business and tax planning. However, although the island has a fairly simple and straightforward tax system with no frequent changes, without careful planning in certain areas of the tax and legal regime there could be some nasty surprises. Ten of the most important of these areas, and the possible consequences if they are not handled with care and diligence, are outlined on the following pages.

1. Debit Balances with Shareholders The first area concerns the debit balances of Cyprus companies with their shareholders. Such balances can pop up in many different ways, sometimes so plain and part of everyday business life that is hard to realise their accounting and tax effects until the accounts are prepared. The consequences can be significant since a notional interest is calculated for tax purposes on such debit balances. Such interest is based on market terms for corporate shareholders, whereas for individual shareholders it can be even worse since the interest calculated is based on a rate of 9%. This notional interest is then taxed at 10%, either under Corporation Tax or the Special Contribution for Defence.

2. Back-to-Back Loans The interest margin for back-to-back loans applies both to non-interest bearing and interest bearing loans (for the latter the Tax Authorities requesting that the rate be at market terms on both sides of the loan). Another tricky area regarding this kind of

loan arrangement is the six-month period within which funds obtained by a Cyprus company as a loan must be provided as a loan to another party in order for the back- to-back relationship to be satisfied. The Tax Authorities request specific documentation to verify this.

3. Write-off of Loans to Related Parties The write-off of loans to related parties is ignored for tax purposes unless the borrower is going for liquidation/strikeoff/bankruptcy â&#x20AC;&#x201C; in general when it is officially closing down or is unable to repay the debt. Thus, interest (either real or, for tax purposes, notional) will continue being imposed on that loan and taxed accordingly.

4. Taxation of Dividends Received from Abroad There is a widespread perception that dividends received by Cyprus companies from foreign investments are always free of any tax on the island. Although this is true in the majority of cases, there is a chance that such dividends may be caught by the net of the Special Contribution for

Defence. This could happen when both the majority of the income from which the dividend is generated is of an investment nature and the dividend-paying company is subject to tax in its home country at a rate lower than 5%. In such a case, the tax imposed is 15%, although credit relief is available for any tax suffered abroad up to the amount of tax suffered in Cyprus.

5. Transparent Participations Some foreign entities, such as Dutch Close CVs or American LLCs, are considered for tax purposes as not having a separate legal identity. They are known as transparent entities. Distributions by such vehicles to Cyprus companies having an investment in them are not considered as dividends for tax purposes and any income to which the shareholder is entitled is taxed on a different basis.

6. Taxation of Gains on Disposal of Securities Gains on disposal of securities are free from any tax in Cyprus. Despite the fact that the definition of the term â&#x20AC;&#x2DC;securitiesâ&#x20AC;&#x2122; was significantly widened with the issue of two Tax Circulars in 2008 and 2009, there are

info: George Savvides is a Chartered Accountant, a member of the Institute of Chartered Accountants in England and Wales and of the Institute of Certified Public Accountants of Cyprus, and he is a Partner of Fiducenter (Cyprus) Ltd. He is also an Associated Arbitrator member of the Chartered Institute of Arbitrators (CIArb). 88

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still cases where particular instruments, such as Treasury Bills, do not meet this definition.

7. Tax Deducted at Source on Rental Payments As from 1 July 2011, the Special Contribution for Defence on rental charges for immovable property should be deducted at source by tenants when these are companies situated in Cyprus and when the landlord is a resident of Cyprus. If the tax withheld is not paid to the Tax Authorities on time, the tenant will be liable and not the landlord (as the party in possession of the tax withheld).

Dividends received by Cyprus companies from foreign investments may be caught by the net of the Special Contribution for Defence

8. Capital Duty on Share Capital Increases Very often a need arises for the initial investment in a Cyprus company to be increased. Formalising the whole increase in investment as share capital can find the Cyprus company facing a Capital Duty of 0.6%, imposed on increase of authorised share capital.

BOOK REVIEW

9. Keeping Proper Books and Records With the implementation of some new tax laws, as from 2011 time limits are imposed for the issuing of invoices upon provision of goods or services, and for updating books and records after each transaction. These changes reemphasize the need for top quality services in relation to the daily management, record keeping and tax administration and compliance of companies in order to ensure that the new requirements are met and penalties and other unfortunate consequences are avoided.

10. VAT Implications As from 1 January 2010, following the implementation of the new EU VAT Directive, even holding companies can be liable to VAT for services received from abroad if their activities are not restricted to pure holding ones. Not realising this at an early stage can entail significant penalties and interest both for late registration and late filing of the returns but most importantly for not paying any VAT liability.

Financial Statement Fraud Casebook: Baking the Ledgers and Cooking the Books By Joseph T. Wells (John Wiley & Sons, 2011) RRP: ÂŁ65.00 (ÂŁ55.25 from Amazon.co.uk)

t might seem that accounting fraud only occurs in huge-companies such as Enron, Tyco, and WorldCom but, as this eye-opening book reveals, such a view is entirely inaccurate. Dr. Joseph T. Wells, founder and chairman of the Association of Certified Fraud Examiners (ACFE), exposes the shady world of financial statement fraud and its occurrence in companies of all shapes and size. Reflecting the scams that happen in public organisations, private companies, non-profit bodies and even charities, the cases in this book were written by the experts who actually investigated them. Outlining each case, from how the financial statement fraud was engineered to how it was investigated and how the perpetrators were brought to justice, Wellsâ&#x20AC;&#x2122; book not only provides an educational and entertaining picture of this kind of fraud, its destructive impact on organisations, and what you can do to prevent it from starting in your own business, it illuminates the combination of timing, teamwork and vision necessary to understand financial statement fraud and ensure that it will never happen to you.

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advertising feature

Patron of Arts Montblanc presents the 2011 Patron of Arts Limited Editions dedicated to Gaius Cilnius Maecenas

or nearly one hundred years the name Montblanc has stood for the art of writing, while the snow-covered peak of Mont Blanc has symbolised the high quality status of the brand with the distinctive white star. Montblanc’s classic fountain pen – the Meisterstück, first produced in 1924 – has become a cult object, not only because of its timeless design but also because of the unmistakable values which are so characteristic of the entire Montblanc collection: tradition, fine craftsmanship and an appreciation of the need to take time for the essentials - for reflection, feelings, beauty and culture. 20 years ago, Montblanc presented its first Patron of Arts Limited Edition, celebrating the arts by focusing on those individuals who make artistic achievements possible. While artists and performers are often celebrated and awarded prestigious prizes for their artistic excellence, rarely recognized are those individuals who invest time and money to make such artistic moments happen. Montblanc has unconventionally placed the spotlight on those who enable cultural advancement and has celebrated these efforts by awarding a prize unlike

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any other: the Montblanc de la Culture Arts Patronage Award, with the Patron of Art Limited Edition as the symbol of this international accolade. Every year since its creation in 1992, Montblanc has devoted a Limited Edition writing instrument to a historic arts patron. These intricately crafted writing instruments celebrating the very importance of patronage have themselves become sought after works of art. To celebrate the 20th Anniversary of the Montblanc de la Culture Arts Patronage Award, Montblanc pays a fitting tribute to the man who is considered the original patron of the arts. With the launch of a particularly refined and elegant writing instrument, ‘Maecenas’, Montblanc pays tribute to Gaius Cilnius Maecenas, a Roman widely regarded as the founding father of cultural patronage.

Maecenas: The first ‘Patron of the Arts’ Maecenas (70 BC-8 BC) enjoyed immense wealth throughout his life and, as a diplomat and politician, achieved influence as a friend and advisor of Octavian who eventually became Augustus, the first Roman Emperor. He recognized the genius of the poets of that time, including Horace and Virgil,

by giving them full financial support. Thanks to this security, these poets were able to devote their lives to lyrical verse and develop their artistry to push new creative boundaries. As a result, in many languages, his name has now become an eponym for a generous Patron of the Arts or cultural benefactor. It is known that the patronage given by Maecenas was not given out of mere vanity or an insatiable passion for letters. Maecenas saw literature as a powerful way of reconciling men’s minds to the new order of things under Augustus. As a powerful statesman, he recognized his own cultural responsibility to the glory of the state.

Patron of Art Edition Gaius Cilnius Maecenas – Limited Edition 4810 Limited to just 4,810 pieces (the number was chosen to correspond to the height in metres of Mont Blanc), this Patron of Art Limited Edition is a fitting tribute to Maecenas, richly decorated with symbols from his life and greatly influenced by Roman aesthetics. The design of this writing instrument is inspired by the columns of Roman temples; the barrel is a creation in marbled lacquer, reflecting the magnificent architecture of ancient Rome. The first verse of an ode to

Limited Editions

Maecenas, composed by Horace, appears on the cap, crafted, as are its rings, from 925 sterling silver. A finely engraved laurel wreath twines around the top ring. The cap ring bears the inscription ‘Gaius Cilnius Maecenas’ while the base of the cone is graced with an inlaid reproduction of an ancient Roman coin, upon which a likeness of Maecenas is eternalized. The clip’s shape of an ancient Roman sword reflect the man’s military exploits alongside Augustus. A laurel wreath and the Roman numerals MMXI in finest engraving ennoble the rhodium-plated 18K gold nib to illustrate that this unique writing instrument is dedicated to the memory of the spiritual father of patronage and issued in the year 2011.

Patron of Art Edition Gaius Cilnius Maecenas – Limited Edition 888 In keeping with the tradition started in 1995 of an even more exclusive Patron of Art Edition, limited to just 888 pieces, this 750 solid gold fountain pen features a skeletonised cap with the first letters of Horace’s Ode to Maecenas. The barrel of the writing instrument is worked out in origin marble with a distinctive column effect. Because every detail reflects the spirit and identity of the subject being honoured, a replica of an old roman coin featuring the likeness of Maecenas can be found on the bottom of the cone.

The shape of the clip is inspired by an antique sword and a closer look at the 18K gold nib reveals the special engraving unique to this writing instrument – Montblanc, and the year 2011 engraved in Roman numerals, framed by a laurel wreath, Rome’s unmistakable symbol of supremacy and respect.

Montblanc de la Culture Arts Patronage Award: Celebrating Past and Present The Montblanc de la Culture Arts Patronage Award is now presented in 12 countries and represents an exemplary bond forged between past and present which since its inception in 1992, has been directly linked with the Patron of Art Limited Edition. Each year, the new Edition is awarded to those patrons who have made an impact on cultural life in their respective countries and beyond. The prize, therefore, combines a tribute to an historic patron of the arts while acknowledging the role of a contemporary patron. By recognizing the importance of private patronage, the Award emphasizes to the public, the crucial role of patronage role in fostering arts and culture, and preserving artistic legacies for future generations. Each recipient of the Montblanc de la Culture Arts Patronage

Award is chosen by an international jury of artists and receives financial support of €15,000 to be used for a cultural project of the patron’s own choice. Montblanc also presents the honoree and the jury members with the precious Patron of Art Limited Edition. Sought after by collectors around the world, Montblanc’s Patron of Art Limited Editions are writing instruments that will last a lifetime. And like every Montblanc writing instrument, these exceptionally handcrafted fountain pens have been created to the highest level of craftsmanship that has made Montblanc the benchmark for writing culture. It is truly a Limited Edition as the manufacturing tools, specially developed for the making of every Edition, are destroyed at the end of each production run. As a consequence, these intricately handcrafted pens are collector’s items to be preserved alongside the finest works of art. The Patron of Art Limited Edition 2011 will be available at the Montblanc Boutique in Nicosia (18 D, Archbishop Makarios Avenue. Tel: 22817388) from June 2011. For further information, visit www.montblanc.com the international investment, business & finance magazine

investing in records

{lifestyle}

gold records (p) Oldies But Goldies Music

45rpm ÂŠ 2011

Letâ&#x20AC;&#x2122;s Make Some Money (Gates-Soros)

By The Investors

RecordPrices

Old records by the right artists and in the right condition could give you an impressive return on your investment. By John Vickers

the international investment, business & finance magazine of cyprus

If you can find the right records, their value will definitely increase way above inflation

n April 2011, a copy of the album Please Please Me by The Beatles sold for £8,300 (€9,520) on eBay. But before you shout ‘I’ve got that’ and rush off to spend your new-found fortune, read on. Your old Beatles LP may not be as collectible as this news suggests. Welcome to a world of investment in which CD does not mean Certificate of Deposit and LP does not refer to a Limited Partnership. For record collectors, the Compact Disc and more significantly the 12” vinyl Long Player and the 7” single are all about rare and valuable recordings. And like many other areas where items are being bought and sold at extraordinary prices, records are now being offered by established auction houses such as Chris-

tie’s and Sotheby’s as well as on eBay and at record fairs around the world. Whereas 20 years ago it would have been difficult to buy and sell valuable discs (so that the select few who happened to be ‘in the know’ could trade among themselves), today it is a mainstream hobby and interest for hundreds of thousands of people. As a result, where once one might have come across a rarity for the equivalent of €1 at a car boot sale or a fair, the chances of that happening today are extremely small, though not impossible. I recall seeing a mint copy of David Bowie’s The Man Who Sold The World (the version with the artist wearing a dress on the cover) in a shop in Nicosia in 1972. Had I bought it for about CY£2 at the time, I might be boasting now that I had a Bowie album worth €500. I was luckier some years later when BFBS Episkopi sold off the contents of its record library including some rare singles.

The Holy GRAIL The rarer a record is, the more valuable it becomes. Consequently, where only a single copy exists, the sky is the limit when it comes to pricing.  The copy of John Lennon & Yoko Ono’s Double Fantasy, autographed by Lennon for Mark David Chapman five hours before Chapman murdered him in December 1980, was offered for auction in November 2010 for €615,000  In 1958, John Lennon, Paul McCartney and George Harrison recorded two songs at an electrical store in Liverpool with the other two members of The Quarrymen, as they were known at the time. Paul McCartney owns it and is value has been estimated at £100,000 (€115,000). The songs, That’ll Be The Day and In Spite Of All The Danger can be heard on Anthology I.  Music for Supermarkets (Musique pour Supermarché), a 1983 album of instrumental music by French composer Jean-Michel Jarre, is notable for having only a single copy pressed. He decided to sell it at auction for charity and the night before the sale he deliberately destroyed the master tapes and backup materials involved in its creation. It was bought by an anonymous bidder for FF69,000 (€10,500).

the international investment, business & finance magazine of cyprus

investing in records gold

records (p) Oldies But Goldies Music

45rpm 2011

Let’s Make Some Money (Gates-Soros)

By The Investors

{lifestyle}

The 20 1

Most Valuable Records

The Beatles: Yesterday And Today (‘butcher cover’) After receiving complaints about the 28,675 image, Capitol Records replaced the album cover photo for one featuring the group in suits. This price is for mint condition first stereo copies.

€

Frank Wilson: Do I 25,800 Love You (Indeed I Do) Released in 1965, it is the rarest and most sought-after Tamla-Motown 45 of all time. It was not a hit.

€

Bob Dylan: 20,875 Freewheelin’ This version of Bob Dylan’s second album originally contained four songs that were removed at the last minute. Some copies have the corrected sleeve but play the deleted tracks.

€

The Quarrymen: That’ll Be The Day 11,470 Only 25 copies exist of this 1981 reproduction of the 1958 original, made by Paul McCartney for close friends.

matches, pen, ticket, menu, outer card sleeve, scarf and EMI goblets in card box.

John’s Children: Midsummer Night’s Scene This 7” single was recorded in 1967 by a pre-T Rex Marc Bolan but it was withdrawn from release.

The Beatles: Please Please Me The first pressing of the group’s first album in stereo.

€

4.560

€

4.000

€

John Lennon/Yoko Ono: Two Virgins Some copies of this 1968 recording were pressed with no track listing and 3.400 a blurb on the front sleeve. They are the ones to look for.

€

Sex Pistols: God Save The Queen./ No Feelings This version of the band’s 1977 single on the A&M label was withdrawn from sale and only about 300 copies are believed to exist. 9,200

Billy Nicholls: Would You Believe 3.400 The collapse of the Immediate record label meant that only a handful of copies of this 1968 LP reached the shops. Features The Small Faces on backup.

€

The Beatles: The Beatles The value of the double LP known 8.000 as the ‘White Album’ depends on the serial number printed on the sleeve. The lower the number, the better for you.

€

5.750

Queen: Bohemian Rhapsody/I’m In Love With My Car This EMI in-house special edition of the single came with

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€

Tinkerbells Fairydust: Tinkerbells Fairydust An extremely obscure British pop group recorded this album for Decca 3.400 but it was never officially released.

€

The Beatles: Love Me Do 250 demo copies of this 1962 single spelt McCartney as 3.400 ‘McArtney’.

€

3.400

David Bowie: Space Oddity Only two or three copies of this unreleased 7” single in a picture sleeve are known to exist. ron Hargrave: Latch On This rare 1958 single by the writer of High School Confidential has only been seen in sex copies.

The Beatles: Please Please Me The second press- 4.000 ing of the group’s debut LP is identical to the first apart from a publishing credit on the label. Just as valuable.

€ €

The Bread And Beer Band: The Bread And Beer Band Recorded by Elton John back when he was still called Reg Dwight. Decca 2.300 turned it down so the band put it out on their own label.

€

The Rolling Stones: Their Satanic Majesties Request It’s believed that only two copies exist of this padded silk sleeve promotional 2.300 version of the 1967 LP.

€

The Rolling Stones: Promotional 2.300 Album Just 200 copies of this were pressed and sent to radio stations in 1969, 100 each for the UK and the US.

€

Madonna: Erotica This 12” picture disc was issued in 1992 but swiftly withdrawn from sale, allegedly to avoid offending the Duchess Of York with its toe-sucking image.

€

2.300

Even a decade ago, I might have begun such an article by suggesting that the old box of dusty albums and singles in your attic might be worth a fortune. However, now that record collecting (and, by extension, investment) is no longer for the few, I have to be honest and say that the old box of dusty albums and singles in your attic is unlikely to be worth more than a few euros at most. But you never know… First of all, let’s make it clear that most investment in records is in vinyl albums and singles. This does not mean that your CD collection is worthless but it is highly unlikely that anything in it has even maintained its original market value, let alone risen. That said, there are always exceptions. In the US, in particular, early first pressing CDs, especially by Rap artists, have increased enormously in value, some selling from $100-400 each. But realistically, vinyl is what it’s all about. Records released in the ‘60s and ‘70s hold strong values, though ‘80s vinyl is also on the rise. They generally need to be first pressings to gain the most value while mono editions are more collectible if they were released during the mono/stereo crossover period in the ‘60s. If you can find the right records, their value will definitely increase way above inflation.

Where to buy It’s certainly possible to find a valuable record for 50 cents at a flea market or to discover that a few of the records on your shelf are worth a few hundred euros. However, unless you never played them much, they are likely to be in less than mint condition and this has a major effect on value (see below). Seriously engaging in the record collecting business requires a lot of time and effort. It involves keeping up with trends and

A badly-scratched disc with a torn cover will fetch less than a tenth of the value of a topnotch example

The Beatles’ infamous ‘Butcher Cover’ In early 1966, photographer Robert Whittaker took a series of pictures of The Beatles dressed in butcher’s smocks and draped with pieces of meat and body parts from plastic baby dolls. In the US, Capitol Records printed approximately 750,000 copies of Yesterday and Today using the photograph. When Capitol received complaints from some dealers, the record was immediately recalled. However, faced with so many sleeves already printed, the company decided instead to paste a much more conventional cover over the old ones. The new cover, featuring a picture of a less-than-content band posed around an open steamer trunk, had to be trimmed on the open end by about 3 mm because the new sheet, known as a ‘slick’, was not placed exactly square on top of the original cover. Tens of thousands of these so-called ‘Trunk’ covers were sent out. As word of this manoeuvre became known to the public, owners of the altered cover attempted, usually unsuccessfully, to peel off the pasted-over cover, hoping to reveal the original image hidden beneath. Eventually, the soaring value and desirability of unpasted-over ‘Butcher’ covers spurred the development of intricate and complex techniques for peeling the ‘Trunk’ cover off in such a way that only faint horizontal glue lines remained on the original cover.

The old 78s that you inherited from your grandparents may have nothing more than sentimental value

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spending hours scouring through bins of worthless records to find the one that just might be worth something. Records in near mint or excellent condition can also be found online on specialist dealers’ websites while those in less good condition can be found at car boot sales and record fairs. Values can vary greatly from a few euros to hundreds and, with a few very exceptional records, thousands. 78s, 45s and LPs are all collectable but you need to do your research. Vinyl prices have rocketed as collectors snap up elusive treasures and even records that you could have bought for less than €1 a few years ago are now fetching many times this price as different generations buy back their memories. Records are like any other investment in that they are only worth what you can get for them when you decide to sell. The timing of the sale can be crucial but as specific artists move in and out of fashion, you need to be able to manage it properly. For long-term investment (10 years or more), you should obviously try for the best returns while if you are looking at short-term profit, you need to stick to the areas where a good return is virtually guaranteed. So in the long-term, it may be worth buying limited edition Lady Gaga releases, for example, but short-term you need The Beatles, The Rolling Stones, Queen, Elvis Presley, Bob Dylan, Pink Floyd and other major artists with long careers. You will pay more for these, but you are very unlikely to lose your money. Gary Shrum, consignment director and rock ‘n’ roll specialist for the US auction house Heritage reported last month how ‘We just had an auction which featured a sealed Beatles ‘butcher cover’ that went for $25,000. It originally sold for $3.98 – there’s a good investment.’ (See box) That is, of course, an exception but

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Shrum is upbeat: ‘Sales in vinyl last year were the best for over 10 years. That’s because a new generation has discovered that vinyl sounds great and comes with attractive artwork. Original copies of albums by King Crimson, Gene Vincent, Jethro Tull… They’re getting impossible to find in good condition because they’ve been bought by collectors. Hence supply and demand has increased the prices.’

Age The record market is still a relatively new kid on the block compared to more traditional investment areas such as furniture and paintings. It only really became recognised with the birth of rock and roll in the 1950s. However, it wasn’t until the 1980s that vinyl really started to be viewed as collectable. A common misconception is that 78s are more valuable than 45s, because they are older and made of more brittle – and breakable – shellac. The reality is that during the birth of rock and roll in the 1950s there were actually more 78s on the market than 45s. However, in pre-rock genres such as the blues you can pay up to €10,000 for recordings from some of the seminal artists of the 1920s and 1930s, such as Blind Lemon Jefferson, Charlie Patton and Robert Johnson, who paved the way for modern music.

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Just as sectors within the stock market fall in and out of favour, some music genres become inexplicably hot while interest in others cools off. The exception is when an artist dies suddenly but, even then, the effects are likely to be short- term. Classical recordings have never been especially collectable and even the rarest recordings have never reached the prices that pop, rock, blues and jazz ones can. Early punk rock records are now gaining in value because in some cases, only a few hundred copies were pressed. However, the old 78s that you inherited from your grandparents may have nothing more than sentimental value.

Rarity The Rare Record Price Guide, produced by Record Collector magazine, values God Save The Queen, the single by the Sex Pistols prepared for release just before they were dumped by the A&M label in 1977 at £8,000, and a 1975 limited edition blue vinyl disc of Bohemian Rhapsody’by Queen at £5,000. However, these are probably conservative estimates: a copy of God Save The Queen recently hit £12,000 on eBay. Ian Shirley, the editor of the Rare Record Price Guide, points out that rarity, not musical value, is key for the investor. But he warns that it is vital to bone up on the value of vinyl if you are to turn an interest

Most of the time, collecting records is not like collecting stamps: errors do not normally make the records more valuable.(the exception is at No. 14 in the Top 20 Most Valuable Records). What record collectors are looking for are pristine, unblemished copies. However, when a mistake means the release of otherwise unavailable songs, loans might have to be taken out to obtain original pressings. Such is the case with Bob Dylan’s second album. The Freewheelin’ Bob Dylan was released in May 1963. Shortly before this, a decision was made to change the songs on the record. Some copies were pressed with the ‘wrong’ or original songs but they came out with a label that listed the changed titles. If your copy plays the deleted tracks (Rocks and Gravel, Let Me Die In My Footsteps, Gamblin’ Willie’s Dead Man’s Hand and Talkin’ John Birch Blues) it’s worth a lot of money, especially in stereo. into a money-making concern; remember that you are competing with dealers who make a living out of buying and selling vinyl at a profit. If you go into charity shops you will find thousands of records that can be picked up for a few pence – but that doesn’t make them investments,’ says Shirley. ‘It is a question of knowing what to look out for. Pick a niche – whether it is early rock and roll, punk or old blues – and then knuckle down and do your homework.’ This is where books such as the Rare Record Price Guide become invaluable, listing a guide price for British issues and specific disc information. (For American releases, investors should check out the Goldmine Record Album Price Guide and Goldmine Price Guide to 45rpm Records.) The most sought-after vinyl is typically a first pressing. The record company name and issue code on the disc and sleeve can

help to reveal the exact identity but there may be other subtle changes around the disc that require an expert eye. Other considerations include whether the record was a commercial release or promotional, whether it was recorded in stereo or mono and whether it included any freebies or had a picture sleeve. Whether it is a single, album or EP is not the most important consideration – it is the collectable cachet that matters. First pressings are usually the most valuable, as they were often produced in relatively small numbers before the record became a hit. Early demos and limited exports are also sought after among diehard collectors.

Condition The condition of a record is still perhaps the single most important determinant of its value. Good-as-new mint condition is the best investment quality, although near mint is typically the best you will find. An LP in mint condition is worth twice a ‘very good’ example that has a few minor scuffs and surface scratches. Moreover, the album sleeve should be almost perfect too. A badly-scratched disc with a torn cover will fetch less than a tenth of the value of a top-notch example, while even a few surface scratches on a well-loved and looked-after record will usually halve its worth. Near mint, excellent and very good are obviously the best types of records to look out for and this type of quality will usually be found

through a specialist dealer. Not only are the records themselves graded, but also the record sleeves and any word sheets or posters.

The artists However, the condition of a record is just one of many considerations when investing in old vinyl. Other factors include the artist, with bands such as The Beatles, The Rolling Stones and Pink Floyd high on the list of collectables. Then the release date of the album is also important. For example, there are at two releases of the US album Introducing The Beatles. The first pressing contained two songs, which were subsequently replaced because of copyright problems. Consequently, the first pressing, because of its scarcity, is in greater demand and worth more ($30,000 instead of $12,000). The recession has had no apparent effect on the going rate for rare items. In fact, tough economic conditions tend to fuel the market. ‘When times are tough, people often tend to look for things that they can sell,’ says Jerry Osborne, author of more than 150 record price guides. ‘Times like this tend to flush more of these collectibles out into the open where you have plenty of buyers who are not affected by the recession and have the dough and are waiting to gobble those things up. It turns into a buyer’s market, but there are enough buyers to keep the market flush.’

Top Record Sales on eBay (UK) in 2010 gold

➊ The Beatles Please Please Me (Stereo LP, black and gold label, 1963)

records

€10,300

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➋ U2 All I Want Is You (Green vinyl single, 1989)

€10,000

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records (p) Oldies But Goldies Music

➌ The Beatles Please Please Me (One of several that sold for more than €5,000)

€8,988

➍ Robert Johnson Me & The Blues (Vocalion 78rpm single, 1938)

€7465

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➎ Elvis Presley That’s All Right’ (Sun Records 78rpm single, 1954)

€5,120

By The Investors

Record Collector Rare Record Price Guide By Ian Shirley (Editor) (Diamond Publishing, 2011) RRP: £28.95 (£17.62 from Amazon.co.uk)

f the preceding article has reminded you about the box of old records that you still have in the attic and you’re wondering if you might unwittingly own a fortune in the form of some dusty vinyl, this is the only reference book you need to check current values. This 11th edition of the world’s most comprehensive guide to rare and collectable UK releases provides titles, artists, catalogue numbers, release dates and current mint values for every UK single, EP, CD single, LP and CD. It includes over 100,000 entries and covers every musical genre in its 1,400 pages from pop and rock to soul, blues, country, dance, jazz, folk and easy listening as well as specialist areas like punk, indie, metal, new wave, hip-hop, psychedelia, R&B, film soundtracks and more. Unless you were one of a very small number of people to buy an original pressing of an album or single that was not particularly successful at the time, the chances of that box of old records changing your life are poor. But you never know…

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{ the last word }

Feng Shui Lessons

t was with utmost professional confidence that I presented my branding proposal. After all, I had spent many a late, balmy night studying the situation, examining the issues, looking for a solution. I knew my solution was right. And so, it seems, did my audience. This was one of the most successful luxury fashion goods retailers in Hong Kong. A family-run business, owned and managed by an American who had settled in Okinawa after the war and moved to Hong Kong where he met his Chinese wife. They had two children, both involved in the business, each with one foot in the rational West and the other in the mystical East. “Brilliant. Let’s move ahead.” The next day I was in my office, pleased at my success in cracking this difficult puzzle. And that is exactly what strategy is. A puzzle. You deconstruct and reconstruct, piece by piece. And you know you’ve solved it when the pieces fit together well. The phone rang. David, the son, was on the phone. I was not prepared for what I heard next. “Don’t go ahead yet. My mother wants to consult with a Feng Shui specialist.” Feng Shui. You know, the guys who measure Ying and Yang. My protestations fell on sympathetic but ultimately deaf ears. A week later I received the good news... and the bad news. The Feng Shui man loved my ideas. But, he insisted, they were for the Year of the Ox. And this was 1984, the Year of the Rat. The project did not move ahead. I have relayed this story many times. But over the years the story has evolved, from disbelief at how Feng Shui could determine

By Peter Economides marketing to how vital internal alignment is. Successful branding starts from the inside out. And if you can not align your organisation, there is no way that any branding effort, no matter how brilliant it is, will succeed. Because everything communicates. Everything an organisation says and does. Everything it does not say and does not do. EVERYTHING communicates. Think of a bank. Banks spend millions on advertising. But nothing, absolutely nothing, that the bank does influences your perception of that bank as much as the attitude and behaviour of the bank teller who served you last. If the bank teller is not aligned, then all is wasted. Every social organisation relies on alignment. A good marriage is a well-aligned marriage. A soccer team scores goals when its players are aligned. A bank does well when its employees are aligned. A restaurant works efficiently when the kitchen is aligned with the waiters. And a country does well when its population is aligned behind a clearly-communicated vision. The American knew better than I did. He knew better than to resist his wife’s request that my proposal should be scrutinized by a Feng Shui specialist. Because he knew that if his wife was not aligned, my branding efforts would come to nothing. We learn our lessons. Sometimes from Marketing Professors. Sometimes from Feng Shui specialists.

info: Peter Economides is a Brand Strategist and founder of Felix BNI. He is a former Executive Vice President and Worldwide Director of Client Services at global advertising agencies McCann-Erickson Worldwide and TBWA\Worldwide. He has worked on some of the world’s most iconic brands including Coca-Cola, Apple, Absolut, illy, Audi and Nike. In Cyprus, he has been involved in branding projects for Bank of Cyprus, Sigma Television and easy-forex. Peter is based in Athens.

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