Financial Mirror 2015 04 22

FinancialMirror OREN LAURENT

JEFFREY SACHS

You won’t be carrying a wallet for much longer - PAGE 14

ExxonMobil’s dangerous business strategy - PAGE

Issue No. 1131 €1.00 April 22 - 28 , 2015

19

Wilbur Ross: Gazing forward to ‘Bank of Cyprus, 2020’ “A solid foreclosures framework does not necessarily also entail that the weakest segments of society will be left unprotected. This was never our intention.”

INTERVIEW: PAGES 10-11 PAGE 13

Assisted living concept might be here sooner than we think

April 22 - 28, 2015

2 | OPINION | financialmirror.com

FinancialMirror

April is a month for reflection

Published every Wednesday by Financial Mirror Ltd.

EDITORIAL

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April seems to be a good month, for now.

The month started with banks announcing a recovery towards profitability, the EBRD said it was pumping 200 mln euros into projects, the government announced some development plans of its own in an effort to curb unemployment and our Finance Minister, joyful as ever, said Cyprus would return to the markets with two bond issues this year. Best of all was the passage of the foreclosures framework, a simple technocratic deeds that civil servants failed to draft in time and parliamentarians failed to discuss and pass through in time.

Of course, we had some duds of our own, with the oil and gas exploration plans slowing down, and indications of summer tourism arrivals reaching a standstill. With the issue of privatisations looming over many government departments, the only major drag to our economy is the idiotic way stupid parliamentarians want to regulate Sunday shopping hours, despite the boost to employment and the relief offered to consumers.

Perhaps, some people like living in the Dark Ages of the Great Leader Enver Hoxha of Albania, when long hair, cigarettes and bicycles were banned.

Heralding the arrival of Spring, April will also be remembered as the month when the filth in our society came out into the open, with the Attorney General standing by his principles, despite all the

mud thrown in his direction, while President Anastasiades made yet another gaffe by taking sides in an argument which, as a lawyer himself, he should have known not to have gotten involved with in the first place.

This is also the month that the Turkish Cypriots had been looking forward to, with last Sunday’s election in the north resulting in two candidates from extreme poles going to a run-off next Sunday to choose their community leader. Whatever the outcome, whether conservative hardliner Eroglu or moderate Akinci, Ankara will also be keen to get the man they want at the helm, as Turkey too will be going to the polls in June, after which President Erdogan will be declared the absolute ruler with unprecedented powers.

Although tragic, this is also the month when our European brethren woke up to the reality of the seaborne migrants, hundreds of whom were feared drowned a few days ago. Perhaps now, some nations of the north that do not believe in European solidarity, will realise that it is to their benefit if the issue of migrants is dealt with effectively and fundamentally – by trying to tackle the problem from its roots and helping to achieve peace and stability in the Middle and North Africa, from where thousands flee, seeking better fortunes.

So, April should be a month of reckoning, taking account of what went wrong and how we can fix it.

Negativity has no place in Cyprus society, especially at a time when the economy is struggling to restart its engines.

THE FINANCIAL MIRROR THIS WEEK OTEnet, Thunderworx and Teledome, that said that Cyta’s 75% dominant position and reduction of rates from 3.9c a minute to 2.4c was aimed at hurting them. Meanwhile, the regulator also blocked a request by Cyta to hike the monthly rental fee for fixed telephony from CYP 5 to 8, with the final rate probably

ending up at CYP 7.

Bank costs: Data from the European Central Bank showed that banks in Cyprus have the second highest cost rates among the new EU member states, with the cost to income ratio at 76.9% compared to 63.1% for the ten new members and 65% average of the whole

EU. The highest was in Lithuania with 77.7%.

Deposits down: Central Bank data showed that deposits fell by CYP 71.2 mln in February to CYP 13.2 bln, but still at 200% of GDP and mainly in time deposit accounts, meaning the banking system is not yet vulnerable to a big run on deposits if there were a crisis.

Rich List: Seven Cypriots made it into the Sunday Times Rich List – Chris Lazari (GBP 700 mln), Andreas Panayiotou (600 mln), Stelis Hadji-Ioannou (480 mln), Theo Paphitis (135 mln), Antonis Yerolemou (115 mln), and Stephanos and Stelios Stephanou (66 mln). Singer George Michael also made the list at GBP 65 mln.

Oil at $100? Goldman Sachs said the oil market may be in the early stages of a ‘super spke’ which could push crude to $105 a barrel due to global demand and instability in producing countries.

Benchmark Brent was climbed 61c to $54.90.

it has acquired a controlling stake in Philiki in a deal worth CYP 7.5 mln, with the buyout negotiated

by Nicos Shacolas, Chairman of Paneuropean, CTC and FW Woolworth. Having secured the 32% owned by Strongylos, Ellinas and Antoniades, Shacolas secured another deal with Philiki founder Doros Orphanides and partners Petrides and Watts for a further 25% stake.

True lies: Former President George Vassiliou was expected to call a press conference after he publicly accused Finance Minister Christodoulos Christodoulou of giving out false finance figures. A few days earlier President Glafcos Clerides said the

public deficit had been lowered from 5.8% of GDP during 1991-92 when Vassiliou was in office, to 2.2% of GDP that was within Maastricht Treaty deficit guidelines. Vassiliou said that it had actually increased to 3.2% in 1995 from 1.9% in 1992.

‘192’ charges up: Cyta will raise the charge for directory enquiries from 5.2c to 18.2c a call, in order to stop subsidising certain services, said the telco’s Chairman Michalakis Zivanaris.

Denktash trouble: Turkish Cypriot leader Rauf Denktash is expected to win the second round of the ‘presidential elections’ in the north after securing 40% in the first round. But his main rival will be former faces pressure to proceed with peace talks and he could be challenged by former Dervis Eroglu who got 24% of the votes in the first round.

10 YEARS AGO

Telecom rate cuts, bank costs soar State-owned telco Cyta has ignored the regulator’s orders to reverse international call rate cuts, while raising the monthly rental from CYP 5 to 8 has been blocked, and a ECB report found that Cyprus banks have among the highest cost to income rations among new EU member states, according to the Financial Mirror issue 615, on April 6, 2005.

Telecom cuts: Cyhas ignored calls from the telecoms regulator forcing it to reverse the steep price cut in international call rates, saying that it has not been informed of the decision, which followed complaints from alternative providers Areeba,

20 YEARS AGO

Paneuropean takeover, row over financial data Deal-maker Nicos Shacolas is about to be crowned Insurance King after Paneuropean took control of Philiki in a deal worth CYP 7.5 mln, while former President George Vassiliou and Finance Minister Christodoulous Christodoulou are at odds over the financial figures that may be exaggerated, according to the Cyprus Financial Mirror issue 107, on April 19, 1995.

Insurance deal: Paneuropean Insurance said that

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April 22 - 28, 2015

April 22 - 28, 2015

4 | CYPRUS | financialmirror.com

10-yr bond yields drop to 3.83% Ten-year bond yields dropped on Monday to 3.83% from 4.01%, close to the all time low of 3.81% recorded in August 2010, in the wake of the approval of the insolvency framework on Saturday, paving the way for the country to tap into international markets.

The 5-year bond yield dropped to 3.79%.

Excluded from the international capital markets since May 2011, Cyprus issued a EUR 750 mln 5-year bond last June. The issue was oversubscribed by four times garnering offers of up to EUR 2 bln, but the coupon rate was still high at 4.75% with a 4.85% yield.

House prices fall 3% y-o-y in 4Q 2014 House prices in Cyprus fell by 3.0% in the fourth quarter of 2014, rose by 1.1% in the euro area and rose by 2.6% in the whole EU, compared with the last quarter of 2013, according to Eurostat, the statistical office of the European Union.

Compared with the third quarter of 2014, house prices decreased by 3.3% in Cyprus, decreased slightly in the euro area (-0.1%) and remained stable in the EU. Among the EU member states, the highest annual increases in house prices in the fourth quarter of 2014 were recorded in Ireland (+16.3%), Malta (+11.0%), Sweden (+10.4%), Estonia (+10.1%) and the United Kingdom (+10.0%), and the largest falls in Slovenia (4.4%), Cyprus (-3.3%), Latvia (-3.2%) and Italy (2.9%).

The highest quarterly increases were recorded in Malta (+4.6%), Ireland (+3.8%), Slovakia (+2.1%) and Luxembourg (+2.0%), and the largest falls in Latvia (-10.2%), Lithuania (-4.3%) and Cyprus (3.0%).

Inflation down 1.4% Annual inflation was -1.4% in March in Cyprus, down from -0.8% in February, according to Eurostat, the statistical office of the European Union.

Euro area annual inflation was -0.1% in March, up from -0.3% in February. In March 2014 the rate was 0.5%. European Union annual inflation was also -0.1% in March, up from -0.3% in February. A year earlier the rate was 0.6%.

In March, negative annual rates were observed in 12 member states, Eurostat said.

The lowest annual rates were registered in Greece (1.9%), Cyprus (-1.4%), Poland (-1.2%), Bulgaria and Lithuania (both -1.1%). The highest annual rates were recorded in Austria (0.9%), Romania (0.8%) and Sweden (0.7%). Compared with February, inflation fell in 3 member states, remained stable in 3 and rose in 22.

Tourism ‘to pick up’ Despite initial fears that tourist arrivals from Russia would drop by 25-30%, due to the fall of the rouble, early bookings suggest the arrivals will not be that bad, while more holidaymakers are expected from the UK and Germany.

The Director of the Cyprus Hotel Managers, Vasos Kilani, told the Cyprus News Agency that “the situation is far different than what we anticipated earlier this year.”

There is a more positive response from the Russian market over the last two-three weeks with the stabilisation of the market, he said, adding that the fall could be around 15%, but this will only be known at the beginning of May. It seems that the largest Russian tour operator, “Biblio Globus”, has resumed reservations in Cyprus, while it is already scheduled to operate three flights a week.

Kilani said that flights are expected to increase accordingly with the demand which will continue until the end of October.

MPs approve foreclosures bill to help lower NPLs 500 mln QE buying to begin - Troika returns April 26-29 €5 The House of Representatives on Saturday approved by a wide majority a long-overdue bill that determines insolvencies and regulates foreclosures, a requirement that had been demanded by the Troika of international lenders as part of a EUR 10 bln bailout plan introduced in 2013.

A total of 33 MPs from the ruling Democratic Rally (DISY), the centre-right Democratic Party (DIKO) and the socialist EDEK parties voted in favour of the framework that includes five pieces of legislation that aims to ease efforts by banks to recover assets and foreclose on unpaid mortgages.

The rate of non-performing loans (NPLs) has dangerously exceeded the 55% mark of the national banking system’s loan-book, a worrying fact that forced the Troika to demand a reform of the foreclosures framework if it was to grant the bankrupt island the bailout money.

Since last September, when the framework was first introduced, opposition parties had blocked the legislation saying not enough was done to ensure unemployed and lowincome households did not lose the roof over their heads.

Other amendments that were gradually introduced included safeguarding a home-owner if most or all of the mortgage had been repaid, but the contractor or developer had re-mortgaged the property to fund other projects. Also, the issue of loan guarantors seems to have been clarified, with third parties not obliged to pay the balance of a loan that the borrower had failed to settle.

The communist party AKEL, whose five year haphazard administration drove the island’s economy to the brink of default, had been delaying all votes on the foreclosures and insolvencies regulations, and opposed all of the government-introduced legislation, claiming that the bills favoured banks alone.

Finance Minister Haris Georghiades has long argued that passage of the framework would actually ensure vulnerable households retained their primary homes or at least gained time to restructure loans and mortgages, while it also allows banks to finally chase large debtors who have the financial ability to repay loans but refuse to do so.

Bankers, too, have argued in favour of the framework saying they do not want to repossess people’s homes, especially at a time of a property market glut, and that the new legislation would allow them to recover assets, drastically reduce their rate of NPLs and return to profitability at the earliest.

Releasing funds from the banks’ balance sheets, would also allow them to resume lending to small and mediumsized enterprises (SMEs) that are so desperate for cash in order to resume operations and kick start the island’s economy.

Speaking after the vote from Washington, where he was attending the 2015 Spring Meetings of the World Bank and the International Monetary Fund, Georghiades said that this is a very important development that will have both direct and indirect benefit to the Cypriot economy.

The direct benefit has to do with an improved legal framework which will encourage sustainable restructuring of non-performing loans, offering protection and facilities to pay the loan instalments where there should be and compliance measures where necessary.

He described the indirect benefits as equally important, which he said were related to the prospect of Cyprus’

participation in the European Central Bank (ECB) quantitative easing programme and restoration of Cyprus’ funding both from the institutions and mostly the markets.

Regarding the timetable concerning the drafting of a bill by the government, within a month, on property mortgaged by developers, he said that a reasonable and reliable adjustment must be made to a complex issue.

The suspension of the foreclosures framework had also frozen the review of the island’s economic adjustment programme at the time when the European Commission and the European Central Bank had approved funding to Cyprus,

but the IMF halted a tranche of EUR 85 mln, until Cyprus complied with the bailout programme and public sector reform process.

With the programme and review now expected to get back on track, the Cyprus government hopes that it will also be able to tap into the ECB’s quantitative easing programme that was launched last month, with as much as EUR 500 mln of Cypriot bonds to be absorbed, offering liquidity to the island.

Averof Neophytou, President of the ruling DISY party, told MPs during Saturday’s plenary session that the approval of the framework would allow Cyprus to tap into international markets with favourable interest rates, as the Cyprus sovereign is still considered as non-investment grade by the rating agencies Moody’s, Fitch and Standard & Poor’s.

Georghiades has said that he hopes the government would return to markets at least twice in 2015 to issue bonds at favourable rates and roll over its international debt, currently attracting bond yields of just under 4%.

Meanwhile, technical groups from the Troika of international lenders are expected back in Cyprus on April 2629 with a view to completing the fifth review of the country’s economic adjustment programme.

Upon their arrival, the technical groups will examine the compatibility of the insolvency framework approved on Saturday by the House.

The Eurogroup will meet on April 24 in Riga, Latvia, to be briefed on developments and then a date will be set for visit by the Troika’s mission chiefs.

April 22 - 28, 2015

financialmirror.com | CYPRUS | 5

BOCY CEO steps down, returns home in August Bank of Cyprus Public Group Chief Executive Officer, John Hourican, is stepping down at the end of August, having completed nearly two years at the helm of the struggling-to-recovery bank.

The news came as a bombshell as it coincided with the bank’s return to normalcy, having been forced to seize unsecured deposits as part of the “bail in” plan in 2013, then forced to absorbed failed bank Laiki Popular and now facing a mountain of failed mortgages after parliament passed the long-overdue framework on foreclosures and insolvencies.

On a personal level, Hourican also faced a lot of angst and frustration, primarily from depositors who saw their savings disappear into thin air under the previous management, and pre-crisis shareholders who saw their stake diminish to less than half a percent of their original holding.

More recently, one of the cars used by his personal staff, was burned in an arson attack, which both the bank and police tried to play down as being unrelated to the ongoing crisis that is blamed on all bankers in general.

The board announced that “Hourican’s decision to leave the Group is a personal one and he intends to relocate to his home country, Ireland,” adding that it “will discuss in due course issues arising from the resignation, including the issue of succession.”

In a separate announcement, the bank said that Hourican’s decision to leave the bank “is a personal one and

he intends to return to Ireland to spend more time with his young family. He indicated that he is not leaving to take up another role elsewhere.”

Hourican, who was headhunted and took the wheel of the troubled bank in November 2013 with aim of restructuring it (downsizing) and returning it to stability, came on “during an extraordinarily difficult chapter in its history. Today, the bank is much better positioned to serve its customers, to offer opportunity to its employees and to create returns for its shareholders. The bank has a clear strategy. The integration of with Laiki Bank is complete. Good progress has been made in selling and de-risking overseas businesses. The deposit

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base has stabilised and the bank has begun to make progress with its non-performing customers. ELA funding has been dramatically reduced, and, importantly, EUR 1 bln of fresh equity has been raised to ensure that the bank is well capitalised amongst its European peers.

In a memo to the staff Hourican said: “I have been very proud to be part of the Bank of Cyprus family during this period and to have led this chapter in the bank’s rehabilitation.”

Board Chairman Dr. Josef Ackermann praised “the remarkable progress achieved under John Hourican’s leadership. He leaves behind a strong management team and a bank in a steadily improving financial shape, with restored employee, investor and customer confidence. We wish him all the best in his future endeavors and we are looking forward to continuing to work with him in the months ahead.”

Last week, the bank announced the appointment of veteran finance expert Michael (Mikis) Hadjimichael as Senior Advisor to Chairman Ackermann.

For the past four years, Hadjimichael was Deputy Director of Capital Markets and Director of Emerging Markets Policy at the Institute of International Finance (IIF), the worldwide association of financial institutions based in Washington DC and before that he had a 28-year career at the International Monetary Fund, also in Washington DC.

April 22 - 28, 2015

6 | NEWS | financialmirror.com

EU finance ministers asked to set Capital Markets Union priorities The Latvian Presidency of the European Union has called on the EU to set out clear priorities in order to generate momentum for the Capital Markets Union plan to lift growth, the EU news and policy site EurActiv reported.

The CMU project aims to increase the amount of funds raised by stock, bond and other markets for companies to grow. The 28-country bloc relies heavily on banks for funds, which has been difficult since the financial crisis as lenders focus on building up capital defences.

EU financial services chief Jonathan Hill has published a long list of possible ways to build the CMU, sparking concern the plan

could get bogged down in lengthy debate.

The bloc’s finance ministers will discuss Hill’s ideas when they meet in Riga on Friday and Saturday.

“Beyond possible ‘quick wins’, it will be important to seek agreement on which other key actions should be dealt with as a matter of priority in order to create momentum for addressing some of the more difficult, longstanding barriers to the capital markets union in the long run,” EU president Latvia said in a paper prepared for the meeting.

“In which three areas do you see a need for short-term priority action?” the paper added.

The need to set clear priorities is echoed

by Bruegel, an influential EU affairs think tank in Brussels, which has also written a paper for the finance ministers.

Bruegel proposes a staged process to “sustain the policy momentum”, such as by agreeing an early and firm commitment on a limited number of key reforms.

Bruegel recommends possibly delaying a separate, draft EU law on forcing banks to isolate trading activities for markets. Critics say the plans could harm market-making, a key mechanism for companies raising funds.

More controversially, Bruegel says that plans by 11 eurozone countries for a tax on stock, bond and derivatives trades “may act as a brake on investment with detrimental

economic consequences”.

Strengthening the EU’s European Securities and Markets Authority would also boost CMU plans, it said, a step that would raise British hackles.

“European member states should instead focus their energies on harmonised taxation of savings, reforming the tax disadvantage given to equity relative to debt,” Bruegel says in the paper.

It recommends creating a new European Chief Accountant office to stamp out national differences in how accounting rules are applied. Accounts are the basis information investors use when making their decisions.

Limassol port privatisation tender in May New Cyprus-based The government will next month launch a tender for the privatisation of commercial operations at Limassol port, Transport, Communications and Works Minister Marios Demetriades said.

Demetriades began a series of contacts with the island’s political parties, to brief them on the progress of the privatisation process.

“We would like the process to proceed in the next month and to launch the tender,” he said in statements following a meeting with the leader of the European Party, Demetris Syllouris.

He said that the management of the Limassol port’s commercial activities will be assigned to a private company through a concession for a period of 25 to 30 years.

Asked if the privatisation of the port would boost its operation and increase government revenue, Demetriades said the issue does not only concern government revenue but primarily economic activity.

“We believe that through this process our ports will

airline launched

operate more effectively and will increase economic activity in Cyprus,” he said.

Cyprus-based CobaltAir announced its launch later this year as a ‘NewAge’ airline that will operate regionally and throughout Europe, initially to ten destinations using a fleet of Airbus aircraft.

CEO Peter Kelly, who has Qantas/Jetstar and Ansett experience, said that “we see Cyprus as being strategically positioned at the crossroads of the Middle East, Europe (including Russia/CIS) and Africa – and offers a mature market with a qualified and skilled labour force.”

He explained that the ‘New Age’ model takes the best attributes from both the low cost and the full service carriers.

“We will pay great attention to innovative in-flight products, best in breed systems, friendly high service delivery levels (a service culture) and moreover, a wall-towall safety culture.”

CobaltAir has already hired a high calibre executive team that includes Andrew Pyne as COO (ex Avianova, Viva Macau, Cathay Pacific and British Airways) and Michael Hayden as CCO (ex Dobrolet, Avianova, Jazeera Airways and EUJet). The company is currently recruiting locally for a number of positions, even though many have been filled.

The airline has applied formally for an Air Operators Certificate (AOC) and plan to launch services by the end of this year.

EP opposition to TTIP arbitration on the rise Half of the European Parliament’s committees have rejected the Transatlantic Trade and Investment Partnership’s (TTIP) investor-state dispute settlement mechanism (ISDS), casting doubt over the trade deal’s prospects of to passing through Parliament. EurActiv France reported.

MEPs hardened their position on TTIP in the run-up to the ninth round of negotiations between the EU and the United States, which are taking place this week in New York.

On April 14 and 16, six of the 14 parliamentary committees involved in drafting the European Parliament’s resolution on the trade deal passed draft opinions rejecting the arbitration clause that is currently part of the deal.

Opposition to TTIP among the European parliamentarians, particularly to the proposed arbitration system, appears to be strengthening, with criticism crystallising around ISDS. The mechanism is designed to protect investments by giving access to arbitration tribunals in the event of a conflict between a private company and a state. Yannick Jadot, a Green MEP and vice-president of the International Trade Committee, welcomed the fact that “half of the European Parliament Committees that gave their opinion rejected the ISDS mechanism”.

The committees on Economic and Monetary Affairs, Legal Affairs, Employment, Environment, Petitions and Constitutional Affairs all adopted draft opinions opposing the arbitration mechanism, despite the European People’s Party’s (EPP) dominance of the Parliament, and its position in favour of both TTIP and the arbitration clause.

April 22 - 28, 2015

financialmirror.com | CYPRUS | 7

CSE gets market liquidity boost from deal with GXG The Cyprus Stock Exchange (CSE) and GXG Markets (GXG) have struck a deal to promote dual and parallel listings on the GXG Main Quote Market and the ECM Market of the CSE, an agreement that is expected to boost liquidity for the cash-starved Cyprus bourse following the banking fallout in 2013 and the Troika bailout.

The CSE’s unregulated ECM sector has already attracted 21 equity and two fund listings in the last two years, with a total market cap of about 750 mln euros or about a quarter of the whole CSE. Exchange Director Nondas Metaxas said that most of these listings are foreign-owned or Cyprus-based companies with overseas activities, and have preferred to list on the CSE rather than the London Stock Exchange’s AIM market as the costs are lower and the terms are more relaxed.

After the March 2013 bailout imposed on Bank of Cyprus, that used to account for about half of all trades on the CSE, the stock was reinstated in December 2014 and has since helped double daily trades from 307,000 euros last year to an average 645,000 euros to date this year. This bring the total traded to EUR 38.7 mln, far ahead of matching and even exceeding last year’s full year volume of EUR 75.4 mln.

The deal with Denmark-based GXG is expected to open up new opportunities for CSE stocks, as market players on AIM are also active on the GXG, Metaxas said.

At the same time, CSE board chairman Yiorgos Koufaris said that the Exchange is restructuring its index and will now have just two markets – Main and Alternative – with eight and 70 listings, respectively.

A further four sub-sectors will be active as of Monday: public bonds with 41 listings, private bonds with nine, collective funds with 14 and ‘special category’ where 17 stocks will remain for six months until they meet the basic regulations for free float and reporting. After that they will be struck off.

A CSE announcement said that “35 members operate actively at GXG Markets, a considerable number of which is also operating in other markets of the EU such as the London Stock Exchange (LSE), offering significant liquidity in the market. Furthermore, issuers with securities listed on the GXG Main Quote which are interested in dual listing on the Cyprus Stock Exchange, will benefit from the multiple and flexible services that CSE offers at a low cost, as well as a considerable number of local members, remote members, and international custodians.”

The CSE said that the new agreement with GXG “does not affect the close cooperation with the Athens Exchange Group (ATHEX GROUP), with an agreement in the framework of the Common Platform.”

GXG Markets (www.gxgmarkets.com) is owned by the Swedish GXG Global Exchange Group supervised by the Danish Financial Supervisory Authority and the Cyprus Stock Exchange (www.cse.com.cy) is supervised by the Cyprus Securities and Exchange Commission.

April 22 - 28, 2015

8 | COMMENT | financialmirror.com

Why Lebanon should keep an eye on oil & gas hurdles in Israel

By Mona Sukkarieh Since 2010, policymakers in Israel have had to repeatedly intervene in the energy sector to deal with challenges — not just opportunities — presented by the discovery of large gas fields.

In December 2014, Israel’s antitrust commissioner David Gilo revoked a previous agreement that allowed US based Noble Energy and Israeli company Delek to retain ownership of Israel’s biggest offshore field, Leviathan, in return for giving up two small fields, Tanin and Karish. The decision threatens the development of Leviathan, expected by 2018, and risks delaying it for an undetermined period of time.

The decision comes after the results of a report, commissioned by the Public Utilities Authority, were made public on December 18, confirming previous worries, including an ongoing increase in the price of natural gas sold by the Tamar consortium (the Noble and Delek led partners in Tamar, another large field) and anticipating an increase in electricity prices, as a result of “monopolistic contractual demands,” locking Israeli consumers into artificially high and perennially rising prices. The Israel Electric Corporation (IEC) is currently paying around $5.70 per million British Thermal Units (mmBtu), perceived as a reasonable price, but the concern is about future developments and trends. The starting price for IEC’s long term supply agreements was $5/mmBtu but would eventually reach $7.70/mmBtu. The decision, which triggered a clash with the Ministry of Energy, also comes amid a mood of economic populism in Israel, relayed at the highest levels of state institutions (including by certain members of the cabinet and the Knesset), and fueled further by the March 17 national election.

Noble has threatened to freeze “additional exploration or development investments” in Israel until the resolution of this and other regulatory matters. Regulatory uncertainty is perceived as a deterrent for foreign investments in Israel, particularly in the oil and gas sector. Gilo’s decision to renege on a previous agreement is not an isolated event. Since 2010, (i.e. after the discovery of Tamar and Leviathan), Israeli authorities have repeatedly intervened to regulate the sector.

First, through the Sheshinski committee — a special commission whose recommendations, including a major tax increase, were approved by the Knesset in March 2011 — and second, through the Tzemach committee and the decision in 2013 to put a cap on gas exports, upsetting

companies who argue that the Israeli market is too small and exports are needed to justify huge development costs. With such regulatory uncertainty finding a potential buyer for Leviathan might prove to be challenging, although the field retains enough appeal for investors.

Unless a compromise is found — which seems to be a possibility — the Noble–Delek partners will be required to renounce one of their two major fields, Leviathan or Tamar, prompting, by the same token, a lengthy legal battle with the state. A potential compromise could include retaining Tamar and Leviathan, in exchange for selling Tanin and Karish, in addition to a requirement to sell the gas separately, thus creating competition. Another compromise might involve establishing a public company to buy the gas and sell it domestically at ‘reasonable’ prices, or even imposing controversial price controls. The latest plan proposed by Gilo involves breaking up the monopoly into several entities, each of which would sell the gas separately. The plan bars Noble from selling Tamar gas in the domestic market. In Leviathan, each partner would sell its share of the gas separately. In addition, the plan calls for Delek to sell its stakes in Tamar and requires Noble and Delek to sell their stakes in Karish and Tanin. The plan was reportedly rejected by the concerned parties. The Antitrust Authority — which initially said the plan was final and failure to abide by it would lead it to declare that the current ownership structure constitutes a restraint of trade, prompting unilateral action — has delayed its decision until the end of April to allow enough time to reach an agreed solution.

The debate surrounding the way the sector is being managed is so intense and widely backed by the public that a possible change in the institutional framework and the establishment of a regulatory authority cannot be ruled out.

The uncertainty over Leviathan’s ownership and possible development delays might jeopardize gas supply deals currently in discussion, including: - A letter of intent with Britain’s BG, operator of an LNG plant in Idku, Egypt, to supply 7 bcm of natural gas per year over a period of 15 years. The deal is estimated to be worth around $30 bln.

- A preliminary deal with Jordan’s National Electric Company to supply 45 bcm of natural gas over a period of 15 years, for approximately $15 bln.

- A $1.2 bln deal with the Palestine Power Generation Company to supply 4.75 bcm of natural gas over a period of 20 years. The PPGC already declared in early March that the deal will be canceled within 30 days unless regulatory issues are solved.

The US is a firm supporter of these deals, which it

perceives as helping secure regional stability by fostering mutual interests, and has been instrumental in facilitating the negotiations. The Israeli move is therefore perceived by the Americans as an obstacle to the policies they are pursuing in the region. Special Envoy for International Energy Affairs at the Department of State Amos Hochstein, who visited Israel following Gilo’s announcement that he is revoking the deal with Noble and Delek, had two main messages to convey: first, the dispute will have consequences on the investment environment in Israel, and second, gas agreements with potential regional clients are an opportunity that must not be discarded.

Stability and the ability to anticipate the regulatory framework are particularly vital for the energy sector, one that requires major investments at the initial phase with the expectation of a return on investments. Regulatory uncertainty is already affecting the attractiveness of the sector and more difficulties are to be expected if the process drags on. Italy’s Edison, which prequalified for Lebanon’s first licensing round, is now reconsidering its decision to acquire the two small Israeli gas fields close to the Lebanese border, Tanin and Karish. But energy is also a strategic sector. If unchallenged, a monopoly would emerge supplying energy to broad sectors, and any change in future prices would affect the entire economy.

The desire to prevent that is understandable. But adapted measures should have been taken long ago if Israel wanted smooth sailing through the extractive process. The problem is the failure to anticipate any of the developments and always being a step behind: failure to anticipate the possibility of large discoveries and develop an adequate fiscal framework; the lengthy period to make a (first) decision on Noble and Delek forming a possible monopoly; making a decision that failed to address monopoly concerns (forcing them to sell Tanin and Karish, which together hold up to 3 tcf of natural gas, compared to Tamar and Leviathan’s approximately 32 tcf); and finally deciding, a year later, to retract that decision.

Recent developments in Israel are a case in point, demonstrating how important it is to set a policy as early on in the process as possible to avoid regulatory uncertainty.

This is worth pondering in a country like Lebanon where de facto monopolies are tolerated.

Mona Sukkarieh is the cofounder of Middle East Strategic Perspectives, a Beirut based political risk consultancy

(This article was published in the April 2015 edition of Lebanon’s Executive Magazine)

EU to double size of Mediterranean S&R The European Union has agreed to double the size of its Mediterranean search and rescue operations as the first of the estimated 900 bodies from the deadliest known shipwreck of migrants trying to reach Europe were brought ashore in Italy and Malta.

Three other rescue operations were underway near Greece and off Libya to save hundreds more migrants on overloaded vessels making the journey from the north coast of Africa to Europe.

The mass deaths have caused shock in Europe, where a decision to scale back naval operations last year seems to have increased the risks for migrants without reducing their numbers.

Malta’s Prime Minister Joseph Muscat said as many as 900 people may have died in Sunday’s disaster off the coast of Libya when a large boat capsized, making it the highest death toll in recent times among migrants, tens of thousands of which are trafficked in rickety vessels across the Mediterranean.

As 27 survivors of the disaster arrived in Italy on a coast guard vessel late on Monday, authorities said the captain of the migrant boat and his deputy had been arrested on suspicion of people smuggling.

The European Commission presented a ten-point plan to address the crisis, which would include doubling the size and the funding of the EU naval operation “Triton”.

But even that would leave the operation smaller and less well-funded than an Italian mission abandoned last year due to costs and domestic opposition to sea rescues that could attract even more migrants.

Following an investigation launched after hundreds of migrants drowned near the Italian island of Lampedusa in 2013, prosecutors in Palermo on Monday announced they had arrested 24 suspected traffickers suspected of organising the transport of thousands of Ethiopians and Eritreans to Italy. However, it was not yet clear whether they had any connection with the latest disaster.

700 migrants were missing and feared drowned after the boat they were travelling in capsized near Libya on Sunday. A major rescue operation has been underway amid reports there may have been as many as 950 people on board the small wooden boat, with just two dozen rescued.

The stretch of sea between North Africa and Italy is the world’s deadliest migration route and Sunday’s tragedy may prove the worst disaster in living memory.

2,300 migrants died in the Mediterranean in 2011,

the majority of whom were attempting to escape the civil war in Libya. An estimated 1,200 died in 2012 and 2013. The crisis intensified in 2014 when 3,419 people perished trying to flee war-torn countries including Eritrea, Syria and countless others. In 2015, if the numbers from yesterday’s catastrophe are confirmed, an estimated 1,500 people will have already lost their lives attempting the risky crossing - 1,100 of those are likely to have died in the past week alone.

(Source: Statista)

April 22 - 28, 2015

financialmirror.com | COMMENT | 9

A classic case Coq au vin (and apricot tart) “Forming part of the permanent cultural achievement of mankind”. This is one of Webster’s Dictionary’s definitions of the word “Classic”. It is the one I like, because it so perfectly encompasses good food and timeless recipes.

When I taste a perfect Moussaka I opine that it is a classic dish of Cyprus. Alas, as with kebabs, these days it is usually made with pork and not the proper, traditional, lamb or kid, which it should be. And then I found that a proper, good Kleftiko is hard to find in Cyprus, yet it is so easy to make! One such recipe for four uses a half shoulder of lamb, a couple of tomatoes and onions, garlic and herbs of choice (mine is simple: a sprig of rosemary). Into a sealed heavy casserole with half a bottle of red wine and three hours in the oven at 140ºC. What could be simpler? Lovely.

It is to the French kitchen that I suppose one must turn to for the great classics of Western cooking. Many are accessible to every day home cooks, like the Coq au Vin I made the other night from the recipe below. It is a dish that brings back a memory or two.

Once, in London, I attended a PR event at “Boulestin” then a well established and famous French restaurant, where the chef-proprietor, Marcel Boulestin had prepared Coq au Vin with a good but every day red Vin de Table and a second using a good Beaujolais. The attending hacks and would-be gourmets were asked to tell which was which.

About half correctly identified them. So the adage that “a coq au vin is as good as the wine you put in it”, may well not be true. In my experience, the classic recipe I give below is sufficient. I agree with M. de Pomiane when he suggested drinking the same wine as you use in the cooking of the chicken.

One of the best examples of this classic dish I have encountered was at a small hotelrestaurant in northern France. We had telephoned from Paris to book lunch, but on the way our car broke down and by the time we got to the hotel it was past three in the afternoon.

The chef was off duty. “I can offer you some Saucissons”, the patronne told us, “and some Coq au Vin”. When it came, it was superb.

Patrick Skinner

Coq au Vin This recipe is by Edouard de Pomaine, the distinguished gentleman pictured, of whom I wrote last week.

In his introduction to the recipe he advised “leaving most expensive chickens aside and choose (an ordinary one) weighing about 1 1/2kg / 3 lb.

You will also need: 75 g/2 1/2 oz butter 15 g/2 1/2 oz bacon 120 g/ 1/2 lb mushrooms 2 medium-sized onions A sprig of thyme 1 75 cl bottle of inexpensive red Burgundy A small glass of brandy Half a teaspoon of flour Method 1. Joint the chicken and brown the pieces in a heavy casserole in which you have melted the diced bacon in half the butter.

2. Add the onions chopped in four and let them turn golden brown.

3. Salt and pepper lightly.

4. Add the sliced mushrooms and the thyme and pour in the whole bottle of wine.

5. Leave the pot uncovered on a very high heat so that the liquid boils rapidly and reduces in volume; at the same time the wine colours the flesh of the chicken.

6. When you have about a wineglass and a half of liquid remaining, lower the heat, put on the lid and simmer for 20 minutes more.

7. Test the chicken with a fork to see if it is done.

8. Mix the flour into the rest of the butter, thinning it with 2 tablespoons of liquid from the chicken. Stir it into the wine sauce together with the brandy and simmer for 5 minutes more.

9. Taste and correct the seasoning.

10. Carry the casserole to the table and fill your guests’ glasses with the same wine you have used to make the sauce for the coq au vin..

French apricot tart “He resided in Park Street, St James’s, and his dinners there and at Melton were considered to be the best in England. He never invited more than eight people and insisted on having the somewhat expensive luxury of an apricot tart on the sideboard the whole year round.” Reese Howell Granow (19th. Century London gentleman) Unlike Mr. Granow I make this about once a month. Actually, I assemble it, because it is a joint venture of my wife and me – she makes the pastry and the crème pâtissière, whilst I add the apricots and the glaze. It requires a loose-based pie tin of 25 cms diameter, to make a pastry case which is “baked blind”.

Pastry for 6 – 8 servings.

220 g village flour 110 g butter A little water 1. Pre-heat oven to 200°C 2. Sift the flour into a bowl.

3. Cut the butter into small chunks and lightly but quickly rub into the flour until the mixture is like breadcrumbs.

4. Add a few drops of water and mix into flour/butter mixture until a good stiff dough is formed.

5. Roll out to fit a 25 cms round pastry tin, which you have rubbed with a little butter.

6. Cut away surplus pastry.

7. Put a circular piece of grease-proof paper on the pastry and cover with baking beans to present pastry from rising whilst baking.

8. Put pastry tin in centre of oven and bake for 15 minutes 9. Take out the tine and remove the baking beans and grease-proof paper and return pastry to the oven for about another 5 minutes or until it is nicely gold.

10. Decant from the tin and set aside.

Crème Pâtissière 60 cl milk 120 g caster sugar 60 g plain flour 1 level tbsp corn flour 2 large eggs, beaten 50 g unsalted butter 1. Warm the milk on a low heat.

2. In a bowl mix together sugar, corn-flour, the beaten eggs.

3. Stir in the warm milk slowly and mix well.

4. Pour the mixture back into the saucepan and heat over a low heat until it starts to thicken, and comes to boiling point.

5. Take the pan off the stove and stir the butter in well. Add a couple of drops of a good vanilla essence if you wish.

6. Cover the pan and leave it to cool.

The Topping Take 36 – 40 dried apricots, put in a pan and pour boiling water over them. Cover and leave for an hour, when they should be quite tender. Remove from the water and slice in half (slice along the longest side to make two flat halves) .

The Glaze: 3 tbsps apricot jam and one tbsp of lemon juice.

Assembly 1. Spread the Crème Pâtissière evenly in the pastry case.

2. From the outside edge lay the half slices of apricot, cut side upwards, slightly overlapping them.

3. Continue in circles until you have covered the entire area of Crème Pâtissière.

4. Prepare the glaze by putting the apricot jam and lemon juice into a small pan and heat, stirring until bubbling. Keep bubbling and stirring until a little of the glaze put on to a cold plate doesn’t run (but is not too stiff) 5. With a pastry brush, gently apply the glaze evenly across the top of the apricots.

6. Leave the tart to rest for half an hour and then enjoy, with cream or vanilla ice-cream.

April 22 - 28, 2015

10 | INTERVIEW | financialmirror.com

Wilbur Ross: Gazing forward to

A solid foreclosures framework does not necessarily also entail that the weakest segments of society will be left unprotected. This was never our intention We are now able to gaze forward, to plan future moves and to engage in reforming certain aspects of the bank with a view to “Bank of Cyprus, 2020” Our insurance operations remain strong and we are not in any way seeking to minimise their role in the Group A small miracle occurred, largely unnoticed, in the reduction of ELA dependence Ultimately, BOCY will be a comparably good investment to our recent successes with Bank of Ireland and Virgin Money I would not call Cyprus an “emerging market”, but the country is certainly poised to “emerge” further if brave political decisions are taken Just as Ireland is the western gateway to the European Union, Cyprus is its counterpart in the east, looking into fast growing markets that are not yet fully tapped by western business We should focus on sourcing business from new jurisdictions, such as Asia, and reduce the reliance on Eastern Europe We need to look beyond oil and gas. There is impressive room for improvement in tourism (including air travel) as well as other services We need to bring more tourists, extend the tourist season and better utilise the tourism industry’s assets

Billionaire investor Wilbur L. Ross, Jr., who pumped about 400 mln euros into Bank of Cyprus last August and now controls 19% of the island’s biggest lender, is confident that the bank will continue on its recovery path and as it continues to be restructured, it can gaze forward with a view to “Bank of Cyprus, 2020”.

In an interview with the Financial Mirror, Ross said that the foreclosures framework will help the bank “to engage effectively with borrowers and to manage down the high level of problem loans, especially the larger ones and strategic defaulters.”

However, he was also reassuring that the new “framework does not necessarily also entail that the weakest segments of society will be left unprotected. This was never our intention.”

Ross explained that past efforts were focused on deleveraging the bank’s overseas non-core assets and that the insurance operations (Gereal Insurance, EiroLife and 50%-owned CNP Laiki) remain strong and “we are not in any way seeking to minimise their role in the Group.”

He said that a small miracle occurred, largely unnoticed, in the reduction of ELA dependence, which is why he is convinced that the BOCY is a “comparably good investment” in his portfolio which he places at par with his recent successes with Bank of Ireland and Virgin Money.

Looking ahead, Wilbur Ross believes that Cyprus is poised to emerge further if brave political decisions are taken, which is why the country needs to look beyond oil and gas, by boosting tourism and aviation, and focusing on new jurisdictions such as Asia by reducing the reliance on eastern Europe.

The recent results announced for 2014 were a bit disappointing, but also indicated that the bank is struggling to bring in new sources of revenue. Is the biggest problem impeding the bank’s recovery the delay in passing the foreclosures package?

I would not say that the results are disappointing. To the contrary, they show that the bank is progressing at a good pace regarding its Recovery Plan. Of course, the ongoing recession puts a damper on new lending, but we are now in position to say that Bank of Cyprus has reached a point where instead of focusing primarily on managing the fallout from the events of March 2013, it can focus ahead to its next steps. Apart from all the metrics that demonstrate good recovery of confidence – like deposits behaviour - the results also show that we are normalising fast our funding structure. A small miracle occurred, largely unnoticed, in the reduction of ELA dependence as well.

Concerning new sources of revenue, it would be important to note that the Group’s recurring profitability is stabilising and profit before provisions totalled 745 mln euros, up almost 28% from last year. We had been looking forward to the completion of parliamentary discussion and the finalisation of the foreclosures legislation, which will now allow us to engage effectively with borrowers and to manage down the high level of problem loans, especially the larger ones and strategic defaulters.

A solid legal framework, with clarity of rules and predictable and timely legal results,

is necessary for the functioning of any banking system. I will point out, however, that a solid foreclosures framework does not necessarily also entail that the weakest segments of society will be left unprotected.

This was never our intention.

SMEs are still not getting necessary funding to restart their businesses, as many “mom-and-pop shops” are already overly exposed with collateral. But surely, if this sector does not get access to fresh funding, how do we expect them to revive their businesses and restart paying their loans?

Demand for credit from creditworthy businesses remains low, and this is natural under the current conditions in the Cypriot economy. On our part, we have introduced a series of programmes specifically addressed to SMEs and we have already approved some 84 mln euros in SME lending through EIB supported programmes. Beyond the ‘Jeremie’ programmes, which are addressed primarily to micro and small businesses, we are also running a series of EIB loans geared towards larger corporations. Last week, we announced a new 60 mln euro programme that caters to the “middle area” of SMEs, in collaboration with the Cyprus Entrepreneurship Fund.

With this programme, we can now cover all SMEs irrespective of their size.

We are also engaging actively with many customers to find workable solutions to address their borrowing needs through the introduction of viable and sustainable restructuring solution.

April 22 - 28, 2015

financialmirror.com | INTERVIEW | 11

‘Bank of Cyprus, 2020’ Foreclosures: “Never our intention to leave the weakest segments of society unprotected” With the crisis in Russia and Ukraine, business in Cyprus could be affected (services, tourism, agriculture). Are you confident that BOCY will be able to recover, even if such short-medium term or seasonal obstacles remain?

The Russian and Ukrainian economic slowdown does present a significant challenge for the domestic economy and hence the banking sector. Some segments of agriculture have been affected by sanctions imposed by Russia, while tourism appears to be vulnerable to the Russian crisis. We expect this to be offset by more U.K. tourists because of the strength of the pound relative to the euro. The situation, however, remains manageable and the pressure put on the economy and the banks is not as large as was feared. Cyprus has been unlucky in the timing of developments in Russia, which are coming about just at the time when the economy was testing the bottom of the crisis and was about to enter into positive territory regarding GDP growth. The silver lining in this, of course, is that the crisis developed as Bank of Cyprus and the country overall managed to recover much of the confidence lost because of the political decisions of March 2013. This shielded us from the nightmare scenario and I can say that we are well beyond that now.

Cyprus cannot be complacent, however.

Efforts to replace the reduction of demand from Russia must continue. Furthermore, over the medium term we should plan to reduce the reliance on Russia for tourism and services activities and expand in other jurisdictions so as to create a more diversified and sustainable economic activity in the country.

What is the “ranking” of your BOCY investment within your general

investment portfolio? Is it medium-tolong term? Is it a “promising” investment?

Bank of Cyprus is a very promising investment. As I said earlier, a small miracle happened in the bank and it went largely unnoticed. Twelve months ago, the main concern was whether the bank would continue to exist. We are now able to gaze forward, to plan future moves and to engage in reforming certain aspects of the bank with a view to “Bank of Cyprus, 2020”. We are continuing this work, boosting operational profits, increasing future operational capacity and slowly closing the chapter of 2013 with a rationalisation of our liabilities base and seeking new profit sources. This cannot happen overnight, but I’m confident that it will happen, based on the existing capacity inside the bank and the way we are progressing towards achieving targets. We believe that ultimately BOCY will be a comparably good investment to our recent successes with Bank of Ireland and Virgin Money.

Do you see Cyprus as an “emerging” market?

Cyprus is a troubled economy. It survived a tremendous shock and emerged successfully from the darkest of crises.

Although its small size renders local capital markets somewhat weak, we can see from the fiscal side of the crisis that institutions in the country are robust and indeed in most cases, mature.

The potential we see in the country is immense, through its know-how, impressive expertise and a good deal of institutional infrastructure. A lot remains to be done, even for a mature economy, but the crisis is creating immense potential through the displacements it forced on the economy,

Wilbur Ross and board Chairman Dr. Josef Ackermann at the AGM last November from easy sectors like real estate, to more complex business. Cyprus is in many ways a mature economy, and I would not call it an “emerging market”, but the country is certainly poised to “emerge” further if brave political decisions are taken.

What do you believe the new “game changer” for Cyprus could be? Is it still energy and proximity to East Mediterranean oil and gas?

Energy will be an important sector going forward. The prospects of the energy sector are not limited to the possibility of local discoveries - indeed, they go much further than that. Cyprus can become an important energy hub for Europe, providing not only supplies westward, but also auxiliary support in the region. Such support services can be purely technical, or financial. This point should not be lost on us. At the same time, however, we need to look beyond oil and gas.

There is impressive room for improvement in tourism (including air travel) as well as other services.

Just as Ireland is the western gateway to the European Union, Cyprus is its

counterpart in the east, looking into fast growing markets that are not yet fully tapped by western business. We should focus on sourcing business from new jurisdictions such as Asia and reduce the reliance on jurisdictions in Eastern Europe. We also need to bring more tourists on the island, extending the tourism season and better utilising the tourism industry’s assets.

Are you happy with the bank’s noncore insurance businesses? Would you like to see the Laiki investments (CNP Insurance) let go?

The bank continues to deleverage, minimising its exposure to non-core operations and simultaneously boosting its core capacity and profitability. Overall, however, our insurance operations remain strong and we are not in any way seeking to minimise their role in the Group. The main aspects of the bank’s shedding of non-core operations, is abroad. We are becoming a more “Cypriot” bank focusing inside the country and boosting the Cypriot economy rather than “exporting” financial resources to various misadventures.

April 22 - 28, 2015

12 | PROPERTY | financialmirror.com

UK housing asking prices up ahead of elections, due to lack of supply Asking prices for UK homes have risen to a new record high unseen since last June amid growing demand and a shortage of supply of properties, according to the property website Rightmove that said new sellers’ asking prices increased by 1.6%, or GBP 4,381, month-on-month in April to GBP 286,133 on average across England and Wales.

So far, this year’s newly-marketed property numbers are down by 4% compared with the January to April period in 2014. But, demand from prospective buyers is on the rise with Rightmove saying it posted its busiest month in March.

With just weeks to go until the elections, Rightmove said that the challenge to meet the country’s housing needs is greatest in the south of England, including London, the south east, the east of England and the south west.

In these areas, the typical price of property coming to market is up by more than a quarter (27.5%) or GBP 84,874 compared with the time of the 2010 elections.

Severe property shortages in London have pushed prices up by GBP 195,420 or 49% over the last five years, with buyers looking for a home in the capital now facing an average seller asking price of GBP 594,585.

The commuter belt of the south east region has also seen the knock-on-effects of strong price growth in London as

Panikos Livadhiotis is new secretary of the Land and Building Developers Association The Cyprus Land and Building Developers Association elected a new board recently recently where Panikos L. Livadhiotis, one of the owners of the Lefteris Livadhiotis and Sons Group, was appointed Secretary General.

Panikos has been a member of the Association for the past ten years and on the board since 2009.

“We have a tremendous amount of value to add to our economy and people’s lives, and this year will be the year we will lead our economy to recovery,” Livadhiotis said, adding that the construction industry has managed to attract 1 bln euros of international investment during the last two difficult years, and such investments contribute tremendously to the economy’s recovery and the increase of jobs.

The Association is a member of the Cyprus Employers and Industrialists Federation and the International Real Estate Federation (FIABCI). Members of the Association comprise industry professionals who meet strict entry requirements.

A Florida International University graduate with a degree in Hospitality Real Estate and Entrepreneurship, Panikos Livadhiotis has held an executive position in the International Real Estate Federation (FIABCI) for more than six years, and has a real estate broker license from Florida since 2004. In 2010, he became a member of RICS (Royal Institute of Charter Surveyors).

Lefteris Livadhiotis and Sons, operating in Larnaca, is a one of the most successful family enterprises in Cyprus, with Lefteris, Pantelis and Panikos Livadhiotis as the sole partners, receiving over ten international awards within a period of four years, while Livadhiotis City Hotel was voted best hotel in its category By Tripadvisor for three years.

house hunters cast their nets wider for more value, with asking prices there having increased by 20%, or GBP 62,105, over the five-year period.

House prices in northern England sawd a £6,374, or 3.7%, rise over the last five years.

In Wales, new house sellers’ asking prices now stand on average at GBP 176,912, having increased by 3,489, or 2%, over the last five years.

“With low wage inflation, the increasing cost of housing is another burden for many. The problem is especially acute in the south, particularly those areas influenced by the high demand for housing reach within the capital,” said Miles Shipside, director of Rightmove.

The Royal Institution of Chartered Surveyors (RICS) raised concerns last week that it is seeing signs of a “worrying” upward pressure on house prices amid the lack of homes to choose from.

Experts have suggested that some sellers could be awaiting the outcome of the election before putting their home on the market. Buy-to-let investors are also snapping up homes as a longer-term investment - which means properties are coming on the market less frequently, Rightmove said.

Home mortgage arrears drop in US, plummet in Spain US economic growth has lowered arrears in residential mortgaged-backed securities (RMBS), Moody’s Investors Service said in a sector comment. The rating agency considers that GDP growth and servicers’ loss mitigation activities will also support the performance of legacy subprime RMBS in 2015.

In Europe, stabilising unemployment - albeit at high levels in some countries - will help to steady collateral performance, as prime RMBS have seen double-digit decreases in severe arrears of more than 90 days.

Severe arrears in this sector have plunged by over onethird (34.4%) in Spain year-on-year, by 18.8% in the UK, 10.7% in Germany and 16.1% in Portugal.

The rating agency’s research shows that the US (Aaa, stable) strengthening economy will improve the performance of legacy private-label RMBS in 2015. The credit quality of new private-label RMBS will remain strong, and the risk of occasional cash flow disruptions will be lower than in 2014.

In Moody’s opinion, the credit performance of prime jumbo, subprime and Alternative-A RMBS will slightly improve.

In Europe, stable unemployment, low interest rates and rising house prices will underpin performance in 2015. In the euro area, Moody’s forecast GDP will rise by 1.0% in 2015 and 1.5% in 2016, respectively, from 0.8% in 2014. The rating agency anticipates that a strong economic recovery and low interest rates will boost UK RMBS performance, including that of non-conforming deals. Increasing employment will strengthen the financial position of some borrowers in the UK (Aa1, stable), the Netherlands (Aaa, stable) and Germany (Aaa, stable). In Spain, unemployment will decrease, but from a very high level. Spanish collateral performance is stabilising and arrears will continue to decrease.

European regulators are focusing on borrower affordability and leading lenders to maintain underwriting

criteria.

Regulators are restricting the portion of “risky” assets on banks’ balance sheets in the UK and Ireland. In the US, regulatory guidelines and scrutiny will help servicers to improve their processes regarding loan modifications and related borrower contact, in Moody’s view.

Underwriting standards in the UK and the Netherlands are tighter than pre-crisis levels, which will improve asset quality. In the US, servicers’ loss mitigation activities will support legacy subprime RMBS. The credit quality of new US private-label RMBS will remain strong, supported by improved underwriting standards. The credit quality of 2015-vintage US RMBS will also continue to benefit from thorough third-party reviews and from risk retention rules that will come into effect in late October 2015.

In Australia (Aaa, stable), the credit quality of new RMBS collateral will slip, as the underlying loans are being underwritten at historically low interest rates during a period of rapidly rising house prices. However, overall performance will stay strong with low delinquency rates, but persistent underemployment jeopardises performance.

RMBS performance in Japan (A1, stable) also remained steady thanks to low unemployment and tight lending criteria. In Moody’s view, defaults will remain low, following the modest economic recovery. Moody’s expects house prices to rise in 2015 and beyond. The labour market is quite strong and the unemployment rate will remain low at 3.0% to 4.0% in 2015. The combination of these factors will support collateral performance.

Competition among lenders will keep interest rates low, especially with the Bank of Japan’s aggressive quantitative easing. Strong borrower credit profiles and tight lending criteria are helping to curtail performance deterioration.

European hotels to exceed 2007 margin peak on recovery, rising tourism Europe’s growing economy and the rising influx of tourists could strengthen the credit quality of European hotel companies, as the resulting boost to occupancy and average daily rates looks set to push margins beyond pre-crisis levels, Moody’s Investors Service said in a report.

“European hotel margins rediscovered their 2007 peak last year and look set to move higher as occupancy and average daily rates continue to rise on the back of steady but subdued GDP growth in Europe and increasing tourist traffic,” said Maria Maslovsky, author of the report.

Moody’s expects hotels like Whitbread plc (unrated) and InterContinental Hotels Group PLC (unrated) with

significant exposure to higher-growth economies like the UK and US to benefit the most. In addition, the number of visitors to Europe will continue rising by 2.8% a year owing to low oil prices, stronger dollar and weaker euro filling up more rooms at a higher cost. The low interest rates have also reduced funding costs for hotel companies.

Average daily rates in Europe increased to EUR106 in 2014 from EUR95 in 2009 supported by a rise in hotel occupancy to 68.8% in 2014 from 60.5% at the bottom of the cycle in 2009. European hotel companies’ profitability is recovering following the severe and prolonged recession and margins in Europe last year recaptured their 2007 peak.

April 22 - 28, 2015

financialmirror.com | PROPERTY | 13

Homes for the elderly (and not so old) Assisted living concept might be here sooner than we think µy Antonis Loizou Antonis Loizou F.R.I.C.S. is the Director of Antonis Loizou & Associates Ltd., Real Estate & Projects Development Managers

I did not expect much response to a previous article on the subject of homes for the elderly or for retirement. The concept of a couple or an individual renting a dwelling for as many years as one expects to live (even at 60) with all amenities such as cleaning services, live-in maid, health adviser or even a car with driver, surprised many. Even though I wrote that projects like these will appear in the next 10-15 years, it appears from the letters and phone calls we received that the timeframe we set was too big and the need for companionship and abandoning the family tissue seems to be probably a real current phenomenon.

From this point of view and from that of the financial concerns, the article was well accepted. As a reader wrote in, “I have home worth at least worth 300,000 euros and with your suggestion of buying a rental period in an organised complex with all services, such as gym and pool, even a multipurpose hall, for me it sounded very interesting, because with my estimated life expectancy of about 15 years, it will not cost me any more than 80,000 euros, plus my other expenses at about 90,000 means I will get to keep rest and with 130,000 euros I can feel comfortable.”

In another case, five brothers suggested we build such a project with them as the initial investors putting up the land, either their own or in another project in Paphos - that was also the last district I expected to hear such proposals from.

Another wrote in to say that this would probably be the best for his mother who lives alone and that it is not convenient to live in an apartment, despite the maid service that she has.

There are indeed such organised community projects in Cyprus – but not in the way that was suggested in the previous article – where there are old peoples’ homes, offering good quality service for 1,500 euros a month in rooms measuring 4x3m. And although the charge includes meals, common expenses, etc., they do not satisfy the active

segment of retirees for the rest of their lives. Companionship seems to be the basis of the positive response, such as the independence of the elderly parents from their children and of course children where do not have the “burden” or obligation of keeping company to their elder parents. The difference between the availability of the owned unit compared with the rental cost is high (depending on the value of buying the unit) so there is a sense financial independence of the parents from their children and the children from the parents.

It is taken for granted, even by watching our own customers, that after the age of 65-68 who would wants to live alone in a house of two-three bedrooms, with pool and gardens, in a n empty and almost haunted house, in addition to the maintenance costs?

I do not know how a Finnish reader makes ends meet as he wrote in to say that it costs 2,000 euros per person a month to maintain people in nursing homes in Finland and that with our proposal believes that he could even live the rest of his life in a “constant vacation and with less cost.”

Returning to the American model, such projects for retirees or not, regardless of age, could even attract 50 year olds even in a single apartment, would require the following for those developers still remaining in business today to consider: • A minimum number of 30 units to ensure companionship; • One or two bedrooms (adding a bedroom with its own bathroom or two bedrooms for the live-in maid); • A fenced project which is guarded but with free entrance and movement for the tenants. Guests would need the permission of the tenants, as there may be cases where they do not want to be visited; • Small café snack-bar managed by third parties and with regulated prices, while cooking in the apartment or housing unit would naturally be allowed; • Proximity to towns or villages that offer shopping facilities that would also encourage making acquaintances with the locals; • All units to have internet connection, TV and modern means of communication; • An outdoor pool and for the more demanding an indoor heated pool;

• The project’s administration would undertake providing alternative services, such as organising tours within or even outside Cyprus; • Housekeeping and laundry, taxi services and to allow the use of a private car; • The maintenance of the unit will also include day-to-day management issues, such as repairs the television, washing machine, etc.; • A meeting room for coffee, to play cards or other “laid back” activities, such as billiards; • Organising joint events for special occasions such as Christmas, Easter, a birthday or a wedding anniversary, etc.

The way things are at present in the Cyprus property market, instead of new construction projects there are various types of tourist villages or hotel-resorts that can accommodate such projects to the benefit of the owner, hotelier or even banker, if the property is mortgaged for other loans.

Take for example two seaside tourist villages in Paphos, two in Paralimni and elsewhere such as in Mazotos or Larnaca. Assuming that a unit has a value of 150,000 euros per apartment, then for a 20 year rental (purchase) where the amount of 100,000 euros per unit has been prepaid, this would be in the interest of the owner, as well as the bank and of course the retiree client-tenant.

Of course, these numbers may be based on a rough estimation, yet again the idea offers a solution to this clientele of foreigners, as well as locals, and opens up a new investment market either for the hoteliers and developers or for others who will be thus contributing to the local economy. www.aloizou.com.cy ala-HQ@aloizou.com.cy

April 22 - 28, 2015

14 | WORLD MARKETS | financialmirror.com

You won’t be carrying a wallet for any much longer

By Oren Laurent President, Banc De Binary

Many analysts are now talking about the world’s next big trend, the imminent mobile payments revolution that will reinvent how we shop and spend money. News flash: it is already well under way.

Last earnings season, Starbucks announced that 16% of its revenue comes from mobile payments; that figure is ever increasing. But for the most part, heading into the future, Starbucks looks like the exception. Rather than individual shops and boutiques championing their own payment apps, the tech giants are invading this space and acquiring companies that specialise in mobile wallets in order to compete to provide a one-size-fits-all solution for the customer. Apple launched Apple Pay, Samsung bought LoopPay, PayPal picked up Paydiant, and Google acquired SoftCard.

These corporations are hungry to get ahead in the race to dominate our purchases, and they are splashing out big time in order to be the most innovative and effective.

The key challenge will to be to offer a solution that is both secure and easy.

What to expect from Verizon and AT&T earnings The country’s two largest wireless carriers are reporting first-quarter results this week, with Verizon Communications Inc. (NYSE: VZ) coming first, ahead of Tuesday’s opening bell. AT&T Inc. (NYSE: T) announces its results Wednesday after markets close.

Analysts have a consensus earnings per share (EPS) call for Verizon of $0.95, on revenues of $32.27 bln. That is about 13% more on EPS and 4.7% more in revenues than Verizon posted in the first quarter of 2014. The difference is at least partly due to the acquisition of all of Verizon Wireless, which was completed in February of 2014.

However, Verizon has disappointed analysts for the past two quarters, posting EPS a penny below estimates in both quarters. Verizon may or may not be rolling out a new streaming digital video package that represents a seismic shift in how content owners license their products. Verizon is signing up customers for the new packages, but Walt Disney Co.’s (NYSE: DIS) ESPN sports network has said that the offer may violate the agreement the network has with Verizon.

The consensus price target on Verizon stock is $51.54, and the 52-week trading range is $45.09 to $53.66.

AT&T, which was recently replaced by Apple Inc. (NASDAQ: AAPL) in the 30 stocks that make up the Dow Jones Industrial Average, is forecast to report EPS of $0.63 and revenues of $32.8 bln. As with Verizon, analysts have been within a penny of actual EPS in the past two quarters, one where the company beat the estimate and one where it did not. Just last week an analyst at Credit Suisse reiterated the firm’s Outperform rating on AT&T’s stock and $38 per share price target.

The consensus price target on AT&T is around $34.00 per share, and the 52-week range is $32.07 to $37.48.

There are a few headwinds for both telecom giants however. Analysts at Wells Fargo are projecting the T-Mobile US Inc. (NYSE: TMUS) added more handset subscribers in the first quarter of 2015 than either Verizon or AT&T — or Sprint Corp. (NYSE: S), for that matter. The analysts expect T-Mobile to add 1.03 mln postpaid (contract) subscribers in the first quarter, compared with around just 50,000 for Sprint. AT&T has already said it expects to add around 400,000 and Verizon is expected to add 620,000 postpaid customers, but most new subscribers at both companies are expected to add tablets not handsets. (24/7 Wall St.com)

Customers aren’t going to give financial details away to a company whose security systems are questionable, and they aren’t going to give them every time they want to make a payment. That means that wallets must take your credit card info once and then work automatically and seamlessly, just as when you pay for an Uber taxi or download a new book to your Amazon Kindle.

Reports last week indicated that Apple is currently in talks with the biggest Canadian banks, and hopes to expand Apple Pay outside of the US by the end of year. However, it is precisely the security versus simplicity debate that is complicating talks. Canadian banks want additional measures to prevent those using stolen credit cards from taking advantage of Apple Pay; Apple wants to safeguard its minimalistic approach that customers expect. The companies will also need to agree on terms and what percentage cut of purchases they each take.

There are also mobile money systems which bypass the need for a credit card completely. Take M-PESA for example, launched in Kenya back in 2007. It now processes over $2 bln per month and allows users to buy groceries, pay bills and purchase tickets from their mobile money account. Companies like Vodafone are at the forefront of this industry which has taken off in the developing world.

Incredibly, in 16 developing countries there are now more mobile money accounts than bank accounts.

The mobile payments revolution is

now becoming a serious business; it’s most definitely not a new trend. Visa and MasterCard will only dominate for as long as mobile systems don’t. Why would anyone carry around a wallet if they don’t have to?

Analyst sees large upside in Facebook ahead of earnings

By Chris Lange Facebook, Inc. (NASDAQ: FB) will report its first-quarter results Wednesday after the market close. Thomson Reuters has consensus estimates of $0.40 in EPS on $3.56 bln in revenue. The same period from the previous year had $0.34 in EPS on $2.50 bln.

Just a couple of days before Facebook reports earnings, Oppenheimer released a report saying that it expects strong first quarter results, driven by higher mobile engagement and strong monetisation.

The firm forecasts currency hurting the first and second quarter revenues by 7% and 9% versus 5% previously.

Street estimates appear conservative for expense growth, as the 2014 fourth quarter’s headcount increased “only” 45% compared to a 55% estimate for the first quarter.

Oppenheimer maintained an Outperform rating and set $100 as its price target, implying an upside of nearly 21% from current prices.

Oppenheimer’s channel checks suggested that social ad budgets were flattish sequentially versus a mid-single digit quarter-over-quarter decline last year. Currently audience targeting is better identifying “intended impressions,” driving meaningfully higher click-through rates.

Meanwhile, Facebook is gaining a higher market share of the mobile Internet and at the same time its increase in advertisers suggests that there are more impressions at higher rates. The firm believes that Facebook shares have

lagged since fourth quarter earnings due to the company’s 50% to 65% year over year guidance for expense growth.

While the first quarter revenue/EBITDA is in line with the Street (with non-GAAP expense of +55% year over year), this could prove overly conservative given FX and fourth quarter headcount (+45% year over year).

The Street is forecasting slowing ad revenue through the year, even with new ad products being rolled out. The

Facebook Audience Network (FAN) and Atlas launched globally in the fourth quarter.

A few other firms took the chance to weigh in on Facebook ahead of its earnings: SunTrust had a Buy rating and set its price target at $90; Brean Capital reiterated a Buy rating and set its price target at $96; Citigroup had a Buy rating and moved its price target up to $97 from $91.

Shares of Facebook were up 2.4% at $82.74 on Monday.

The stock has a consensus analyst price target of $92.77.

April 22 - 28, 2015

financialmirror.com | MARKETS | 15

Towards a real Japanese shake-up Marcuard’s Market update

by GaveKal Dragonomics International investors, otherwise disposed to embrace Japan’s re-rating story, face a real dilemma. Almost 30 months after Shinzo Abe launched his bold reflationary experiment, Japan’s equity market has more than doubled in value and the yen (on a trade-weighted basis) has devalued by -30%. And yet, throughout this period, economic growth has continued to disappoint. With two significant reforms in the offing, we reckon that could be about to change.

Given that Japan has a shrinking workforce and a highly indebted government, there was never any real prospect of a swift return to growth. What was needed was radical structural reform, of the type hyped up by Abe at the outset of his term as a “third arrow”. Absent an economic crisis, this proved hard to achieve and Japan has consequently muddled along without ever grasping the nettle of change envisaged in Abe’s grand revitalisation plan. A potential gamechanger is the likely imminent agreement on the US-led Trans-Pacific Partnership (TPP) trade deal. With Congress having granted President Obama trade promotion authority, it seems increasingly likely that Abe will be able to secure an agreement in time for his US visit which takes place this weekend.

The importance of the TPP to Abe’s broad recovery plan cannot be overstated. Its significance lies in being able to break down barriers to trade in services and related investment.

As with any mature economy, Japan’s best growth opportunities lie in services, which also happens to be the most protected and least efficient part of its economy. A TPP deal could unlock much needed productivity gains across great swathes of fusty crusty Japan: one domestic think tank estimates the impact of TPP on increased foreign direct investment, higher service productivity and stronger exports will result in annual GDP growth rising by 0.5-0.7pp.

The good news is that the stakes are every bit as high for the US. A setback will be a major blow to its weakened foreign posture in Asia. Despite an avowed pivot to the region, most regional actors see a nation that is predisposed to disengage rather than lead. Washington’s rather petulant objection to the Beijing-led Asian Infrastructure Investment Bank seemed to confirm China’s status as the leading player in the region.

As such, Washington has a huge incentive to make a deal stick which would draw Japan and a broad group of Asian

www.marcuardheritage.com

nations into a multilateral system where it has disproportionate influence over rules of trade and investment.

The other big positive is governance reforms at Japanese firms, which are themselves partly the result of the TPP negotiations and Japan’s attempt to prepare itself. The change in behaviour in Japanese boardrooms for once looks to be real—last year saw companies increase dividends by 19%, while share buybacks rose by 55%. Such initiatives may

genuinely manage in the interest of shareholders.

It is too early to judge whether plans to reduce cash holdings will translate into increased spending and investment. However, we find it encouraging that corporate cash declined in 1Q15 for the first time in more than two years. If Japan can sustain both structural reform, via trade liberalisation, and ongoing governance improvements it is possible that the combined effect of these measures morphs into a beneficial cycle of rising wages and improved investment. As such, we could finally see the original promise of the Abenomics programme being delivered.

WORLD CURRENCIES PER US DOLLAR CURRENCY

CODE

RATE

EUROPEAN

not have an immediately beneficial impact on productivity, but the pursuit of higher returns on capital, and horror of horrors, shareholder value, augurs well for improved capital allocation. Ultimately, such a virtuous circle of reform leading to increased ROE is one way to break out of the deflationary trap.

In this regard, Japan has long paid a high macroeconomic cost for corporates hoarding cash. Over the last decade, listed companies’ cash-on-hand averaged a remarkable 40% of their market value. That is a full 13pp higher than even thrifty German firms, which rank next among G7 countries. New boardroom behaviour is being driven by reforms such as the recommendation for companies to have at least two outside directors.

Another powerful tool to change behavior has been the launch of the JPX-Nikkei 400 index, where companies are screened on the basis of ROE and other metrics conducive to improved shareholder returns. Agencies such as the Government Pension Fund are using this index as a tool for stock purchases and now private sector life insurers are following suit, which ups the incentive for companies to

Disclaimer: This information may not be construed as advice and in particular not as investment, legal or tax advice. Depending on your particular circumstances you must obtain advice from your respective professional advisors. Investment involves risk. The value of investments may go down as well as up. Past performance is no guarantee for future performance.

Investments in foreign currencies are subject to exchange rate fluctuations.

Marcuard Cyprus Ltd is regulated by the Cyprus Securities and Exchange Commission (CySec) under License no. 131/11.

Belarussian Ruble British Pound * Bulgarian Lev Czech Koruna Danish Krone Estonian Kroon Euro * Georgian Lari Hungarian Forint Latvian Lats Lithuanian Litas Maltese Pound * Moldavan Leu Norwegian Krone Polish Zloty Romanian Leu Russian Rouble Swedish Krona Swiss Franc Ukrainian Hryvnia

14150 1.487 1.8275 25.6264 6.9728 14.6194 1.0699 2.24 278.49 0.65667 3.2261 0.4011 18.275 7.8993 3.7228 4.1426 53.2924 8.7226 0.9591 22.45

AUD CAD HKD INR JPY KRW NZD SGD

0.7692 1.2263 7.75 62.98 119.51 1083.04 1.3071 1.3525

BHD EGP IRR ILS JOD KWD LBP OMR QAR SAR ZAR AED

0.3770 7.6272 27993.00 3.9440 0.7079 0.3021 1505.00 0.3850 3.6404 3.7500 12.1600 3.6729

AZN KZT TRY

1.0471 185.79 2.7061

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Australian Dollar * Canadian Dollar Hong Kong Dollar Indian Rupee Japanese Yen Korean Won New Zeland Dollar * Singapore Dollar MIDDLE EAST & AFRICA

Bahrain Dinar Egyptian Pound Iranian Rial Israeli Shekel Jordanian Dinar Kuwait Dinar Lebanese Pound Omani Rial Qatar Rial Saudi Arabian Riyal South African Rand U.A.E. Dirham ASIA

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The Financial Markets

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0.18 0.51 -0.05 0.07 -0.86

0.23 0.54 -0.02 0.09 -0.85

0.28 0.57 0.00 0.09 -0.83

0.41 0.69 0.06 0.14 -0.74

0.70 0.97 0.18 0.26 -0.63

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0.79 0.91 0.07 0.13 -0.77

1.08 1.09 0.10 0.15 -0.66

1.30 1.23 0.14 0.18 -0.53

1.48 1.34 0.19 0.23 -0.40

1.73 1.51 0.30 0.33 -0.19

1.97 1.67 0.45 0.51 0.02

Exchange Rates Major Cross Rates CCY1\CCY2 USD EUR GBP CHF JPY

1 USD 0.9347 0.6725 0.9591 119.51

Opening Rates

1 EUR

1 GBP

1 CHF

100 JPY

1.0699

1.4870 1.3898

1.0426 0.9745 0.7012

0.8368 0.7821 0.5627 0.8025

0.7195 1.0261 127.86

1.4262 177.71

124.61

Weekly movement of USD

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USD GBP JPY CHF

1.0507 0.7087 127.43 1.0583

1.0876 0.7279 129.98 1.0509

1.0742 0.7266 128.96 1.0405

1.0875 0.7302 129.89 1.0399

1.0679 0.7171 127.39 1.0205

GBP EUR JPY CHF

1.4870 1.0699 119.51 0.9591

1.4782 1.0655 119.40 0.9723

%Change +0.60 +0.41 +0.09 -1.36

April 22 - 28, 2015

16 | WORLD | financialmirror.com

Obama’s failed Afghan peace strategy

By Brahma Chellaney Since toppling the Taliban regime in Afghanistan 14 years ago, the United States has been waging a non-stop battle against its foot soldiers. Locked in a war that has already cost nearly $1 trln, the US has now shifted its focus to making peace with the enemy. It will not work.

Months after President Barack Obama declared that America’s “combat role” in Afghanistan was over, the US and its allies continue to carry out airstrikes on Taliban positions regularly, while American special operations forces continue to raid suspected insurgent hideouts. In fact, beyond an increased role for Afghan forces in the fighting, the situation in the country has changed little since “Operation Enduring Freedom” was renamed “Operation Resolute Support.”

Obama’s premature declaration will be remembered much like his predecessor George W. Bush’s 2003 “Mission Accomplished” speech, which proclaimed the end of major combat operations in Iraq long before they actually ended. Indeed, the overwhelming majority of casualties in Iraq were yet to occur.

Nor is this the first time that Obama has jumped the gun. In October 2011, he announced that he was bringing “the long war in Iraq” to an end by withdrawing all US troops. Yet, last year, the US was back at war in Iraq, this time in an effort to rein in the Islamic State, with Obama relying on the same congressional authorization that Bush secured for military action there a decade before.

In Afghanistan, the Obama

administration has already missed the 2014 deadline, set in 2011, for withdrawing US forces. And it has rescinded another selfimposed deadline, having scrapped its plan to halve the number of US troops still deployed in Afghanistan – currently around 10,000 – by the end of this year.

So, America’s military intervention in Afghanistan is now open-ended – and the fighting is not subsiding. On the contrary, the recent escalation of Taliban attacks indicates that the approaching summer fighting season will be among the most intense since the war began.

The Taliban has already inflicted far more casualties among US and allied forces than Al Qaeda and the Islamic State combined. A total of 2,215 American troops have been killed in Afghanistan, and another 20,000 wounded, since 2001. The United Nations documented a record-breaking 10,548 conflict-related civilian casualties just last year.

Yet Obama has refused to designate the Taliban as a terrorist organisation, leaving it off the list of terrorist networks mentioned, for example, in his recent joint statement with Indian Prime Minister Narendra Modi.

Instead, his administration has sought to

portray the Taliban as a moderate force that can be accommodated within Afghanistan’s political system.

Moreover, in 2013, Obama allowed the Taliban to establish what was essentially an embassy in exile in Doha, Qatar, complete with a flag and other diplomatic trappings.

And, last year, the US released five top Taliban leaders – including Mohammad Fazl and Mullah Nori, who are suspected of carrying out massacres of Sunni Tajiks and Shia Hazaras in Afghanistan – from the Guantánamo Bay detention center.

With these concessions, the US has revealed to the Taliban – and the world – its desperation to achieve a face-saving settlement that would enable it, at long last, to escape the Afghan quagmire. It is no wonder that the Taliban chief, Mullah Muhammad Omar, hailed the release of his five comrades as evidence that his militia is “closer to the harbour of victory.”

The Obama administration’s desperation is similarly apparent in the generous aid that it has provided to Pakistan, including an imminent arms deal worth almost $1 bln, in an effort to secure the country’s cooperation on counter-terrorism. Yet the Pakistani military continues to shelter the top

leadership of the Taliban, which it regards as an invaluable asset for gaining “strategic depth” in Afghanistan against India.

America’s success or failure in Afghanistan now hinges on a single limited issue: whether it can prevent the Taliban from marching into Kabul. By highlighting its desperate search for an exit, the US has given the Taliban the upper hand, letting the militia’s leaders know that they can simply wait it out.

Delaying a further drawdown of US forces will be inadequate to convince the Taliban otherwise. With its top leadership ensconced in Pakistan and its field commanders in Afghanistan becoming increasingly autonomous, the Taliban no longer has a centralised command. And, fearing desertions to the Islamic State, it knows that giving Obama what he wants – a peace deal that enables him to declare victory before his term ends in January 2017 – would be its death knell.

America’s faltering Afghan strategy should serve as a cautionary tale of how not to make peace with an enemy. It is time for Obama to recognise that a political settlement with the Taliban is simply wishful thinking. Instead, he should focus on bolstering Afghanistan’s security forces and identifying ways to eliminate the Taliban militia’s sanctuaries in Pakistan. After all, terrorists are not in the business of making peace; America should not think otherwise.

Brahma Chellaney, Professor of Strategic Studies at the New Delhi-based Center for Policy Research, is the author of Asian Juggernaut, Water: Asia’s New Battleground, and Water, Peace, and War: Confronting the Global Water Crisis. © Project Syndicate, 2015 www.project-syndicate.org

What the West owes Ukraine Ukraine may not be grabbing as many headlines now as it did a year ago, but the crisis there is far from over. The latest ceasefire agreement, concluded in Minsk in February, has contained, but not stopped, Russian military aggression.

And, though the stabilisation programme that Ukraine agreed with the International Monetary Fund last month is superior to last year’s deal – this one includes both more financing from the IMF and a more credible economicreform plan from the government – it will be insufficient to repair the country’s economy. What Ukraine really needs is to escape the old Soviet order – and, for that, it needs the West’s help.

Ukraine never managed to recast its state after the Soviet Union’s collapse. Instead, the old Soviet elites held onto power – and most of the country’s wealth – through corrupt practices that became entrenched in the country’s economy and political system. Reforming both will be a major challenge – one that Ukraine’s leaders have lately committed themselves to meeting.

Since February of last year, when the parliament voted then-President Viktor Yanukovych out of power by more than a two-thirds majority, Ukraine has held fresh elections for both institutions. Hundreds of top officials have been replaced by young, Western-educated professionals, and the government is now working feverishly to implement deep and comprehensive reforms, including a new law on public procurement and a package of anti-corruption legislation.

Dozens of superfluous inspection agencies have been abolished, significantly reducing the regulatory burden. Just last month, President Petro Poroshenko sacked the governor of the Dnipropetrovsk region, the billionaire tycoon Igor Kolomoisky More recently, the authorities have been working to reform the energy sector – a hub of corruption. On April 1,

By Anders Aslund household gas prices were quadrupled, taking them to half the market price, with offsetting compensation provided to the poor. And the parliament has enacted a law that harmonises energy standards with those of the European Union, thereby delineating clearly the state’s role and opening the gas market to investors.

But Ukraine still has a long way to go. The good news is that the public largely understands and supports the government’s reform efforts. The bad news is that Ukraine still faces considerable destabilising threats – beginning with a renewed Russian military offensive.

A Russian attack on, say, Mariupol, eastern Ukraine’s second-largest port (accounting for roughly one-third of the country’s exports), would devastate an economy that is already tanking. Though several factors – including Western sanctions, a lack of public support for war in Ukraine, and the Russian economy’s rapid decline – should discourage the Kremlin from taking such a step, they may not be enough.

After all, Russia’s leaders have shown themselves to be unpredictable.

Even absent further Russian aggression, Ukraine’s economic woes could prevent further progress on reform.

The economy contracted by 6.8% year on year in 2014, and output has plunged by 15% in each of the two last quarters.

Moreover, at the end of February, with the country running low on reserves, Ukraine’s currency, the hryvnia, lost half its value; as a result, annualised inflation surged to 45% in March. A full-scale financial meltdown was avoided only when the IMF provided an early disbursement that doubled

Ukraine’s reserves, to $9.9 bln; by the end of the month, the exchange rate more or less recovered.

Nonetheless, the international financing that Ukraine has received, though invaluable, remains insufficient to support genuine recovery and reform. The latest bailout programme foresees about $40 bln in funding, nearly half of which will come from the IMF, over the next four years. That means that, this year, Ukraine will receive only $10 bln – not enough to enable the country to replenish its reserves and service its debts. Indeed, given Ukraine’s large bond debts, many of which will mature in the next two years, there is a $15.3 bln funding gap in the bailout package, which the IMF and Ukraine’s government hope to plug with a debt restructuring. But, even if they succeed, Ukraine would need more funding than it is getting.

Europe’s leaders argue that the central focus of their policy toward Ukraine must be to support its economic recovery. But here, too, Europe is doing too little, offering paltry credits of EUR 1.8 bln ($1.9 bln) this year, when EUR 10 bln would be more appropriate. If the United States then met Europe halfway (at least), Ukraine’s financial crisis could finally be contained.

On April 28, Ukraine’s government will host a donor conference in Kyiv. At a time when the country’s leaders and public are more committed than ever to combating corruption, building a welfare-creating economy, and becoming a normal liberal democracy, Europe should be eager to support it. It is time for Western politicians to remember their ideals – and stand up for them.

Anders Aslund, a senior fellow at the Petersen Institute, is the author of Ukraine: What Went Wrong and How to Fix It.

© Project Syndicate, 2015. www.project-syndicate.org

April 22 - 28, 2015

financialmirror.com | WORLD | 17

The problem with secular stagnation Arvind Subramanian In a recent exchange between former US Federal Reserve Chairman Ben Bernanke and former US Treasury Secretary Larry Summers on the plausibility of secular stagnation, one point of agreement was the need for a global perspective. But from that perspective, the hypothesis of secular stagnation in the period leading up to the 2008 global financial crisis is at odds with a central fact: global growth averaged more than 4% – the highest rate on record.

The same problem haunts Bernanke’s hypothesis that slow growth reflected a “global savings glut.” From a Keynesian perspective, an increase in savings cannot explain the surge in activity that the world witnessed in the early 2000s.

Supporters of the secular-stagnation hypothesis, it seems, have identified the wrong problem. From a truly secular and global perspective, the difficulty lies in explaining the precrisis boom. More precisely, it lies in explaining the conjunction of three major global developments: a surge in growth (not stagnation), a decline in inflation, and a reduction in real (inflation-adjusted) interest rates. Any persuasive explanation of these three developments must deemphasise a pure aggregate-demand framework and focus on the rise of emerging markets, especially China.

Essentially, the world witnessed a large positive productivity shock emanating from the emerging markets, which accelerated world growth while reinforcing disinflationary pressures that had already been set in motion by the so-called Great Moderation in business-cycle volatility.

This key development helps to reconcile two of the three major global developments: faster growth and lower inflation.

The real puzzle, then, is to square rising global productivity growth with declining real interest rates.

Bernanke correctly emphasised that long-term real interest rates are determined by real growth. So the positive productivity shock should have raised the return to capital and, hence, equilibrium real interest rates. Moreover, this tendency should have been accentuated by the fact that the productivity shock reflected a decline in the global capital-tolabour ratio implied by the integration of Chinese and Indian workers into the global economy. But this did not happen: instead, global real interest rates declined.

Central to understanding this puzzle are two distinctive features of the emerging-market productivity shock: it was resource-intensive and mercantilist in origin and consequence. Both features increased global savings.

For starters, because relatively poor but large countries – India and especially China – were the engines of global growth, and were resource-hungry, world oil prices soared.

This redistributed global income toward countries with a higher propensity to save: the oil-exporting countries.

Even more important were mercantilist policies. China and other emerging-market countries pursued an economic strategy that defied the standard tenets of growth and development theory. Mercantilist growth was based on – and to some extent required – pushing capital out rather than attracting it. By limiting foreign inflows and keeping domestic interest rates low, China was able to maintain a relatively weaker currency, which served to sustain its exportled growth model. This led to massive current-account surpluses (more than 10% of GDP at one point), which sent capital flowing to the rest of the world.

Recognising the significance of this strategy exposes a common fallacy whereby the global savings glut is attributed to emerging-market countries’ desire to insure themselves against financial turmoil by acquiring dollar reserves. That may have been true in the immediate aftermath of the Asian financial crisis of the late 1990s, but it was quickly overtaken by the growth imperative. In other words, the self-insurance motive might explain China’s first trillion dollars of reserve holdings, but it has nothing to do with the subsequent three trillion.

Further contributing to the savings glut was growth itself.

As incomes rose, already-prudent Asians became even more

prudent, and profitable companies became even more profitable. This endogenous response to rapid productivity growth was a key factor contributing to the savings glut. Old development verities that savings drive growth had to be reassessed, because, to some extent, emerging-market growth drove savings.

Here lies the explanation of the interest-rate puzzle. As savings (and hence the global supply of loanable funds) increased, real rates came under downward pressure. Low rates, in turn, provided the lubrication needed to finance the asset bubble in the US and elsewhere. According to Summers, high savings caused weak growth; under the alternative explanation offered here, it was primarily rapid growth – and its distinctive features – that drove high savings.

Today, as world growth decelerates, secular stagnation seems plausible once again. But secular stagnation is an ailment of countries at the economic frontier. For the rest of the developing world, the real worry is not a shortfall of demand; it is the need to sustain high rates of productivity growth so that they can catch up with the advanced economies. As policymakers gather in Washington for their ritual conversations this week, they should not lose sight of that key distinction.

Arvind Subramanian is Chief Economic Adviser at India’s finance ministry. © Project Syndicate, 2015. www.project-syndicate.org

With one eye on the evolution of monetary policy The changes in monetary policy and how they affect the forex industry

By Andrei Dashin In my 20 years in the financial world, I have witnessed radical changes generated by a series of events that shook the world. I began my career in Russia just a couple of years after the collapse of the Soviet Union, and developed with it during its recovery.

With the global economy still striving to recover from the economic crisis, each central bank has different issues to address and find solutions that will lead to growth.

The world is still plagued by high public and private debt, remarkably increased unemployment rates (with technological advancements reducing the number of available jobs and lowering salaries), limited investment, and a slack in real-estate

markets such as the US. As a result, central banks have adopted ‘unconventional’ monetary policies.

Subsequent fears that an injection on that scale of global liquidity would lead to hyperinflation, higher gold prices, and the eventual demise of fiat currencies (a currency which derives its value from government regulation or law) have been unfounded. The latest and most relevant example of ‘unconventional’ monetary policies is that enacted by the European Central Bank, with its quantitative easing (QE) programme worth 1.1 trln euros. As part of the programme, which was announced in January, the ECB started buying government debt on March 9 with the newly created money.

The QE programme comes after the harsh austerity measures that have been implemented in the Eurozone in the wake of the crisis. Austerity has led to low inflation or deflation – which has pushed up real interest rates and forced businesses,

households and governments to cut spending in order to keep their debt from rising. However, massive buying of government bonds through QE coupled with forward guidance (FG) are powerful signals of a central bank’s determination to bolster growth and keep inflation on target.

Nonetheless, the EU and other countries’ easing is now being met by ‘tightening’ measures being implemented by the US Federal Reserve, and there is a very real possibility that such incompatible policies may trigger market volatility.

Many feel that we are entering a new era in monetary history, as central banks are taking a more active – even though unconventional – role in dealing with the economic challenges in their effort to be successful in reducing financial volatility.

The fact that foreign exchange trading has become such a globalised activity means that national central banks play an even greater role in forex than ever before. Forex traders should be aware of these economic trends

and events to make informed decisions.

During this time, traders need to be extra careful, manage their risk and to carefully consider entering into new trades near the time of such announcements.

Perspectives change, needs change. But we need to remind ourselves that those changes need not be taken in a negative way.

We need to leverage them. Being unconventional will eventually become conventional. Evolution comes naturally – one way or another – but it can be within our control.

Andrey Dashin is the founder of ForexTime Ltd (FXTM), Chairman of the Board of Directors and shareholder of the Alpari brand.

The content in this article comprises personal opinions and ideas and should not be taken or misunderstood as investment advice.

April 22 - 28, 2015

18 | WORLD | financialmirror.com

Sustainable energy now

By Anita George The world has never been closer to achieving the dream of a more sustainable and secure energy future. Renewable energy from the wind and sun is becoming competitive with fossil-fuel-based power generation, and oil prices are hitting lows not seen for years. These developments put us at the edge of a global energy transformation – as long as we get the next steps right.

Countries are already seizing the moment. With the oil-price drop that started in mid-2014, the first priority became clear: reform fossil-fuel subsidies before prices go back up. These subsidies have sapped government budgets, encouraged wasteful energy use, and increased pollution and carbon-dioxide emissions. India has lifted controls on the price of diesel. Indonesia has moved away from gasoline subsidies. Others are following suit. Money saved from ending subsidies can be better used to create safety nets that protect the poor when energy prices rise.

But phasing out fossil-fuel subsidies, while critical, is only a first step in the right direction. By taking advantage of new technologies, now widely available at affordable prices, countries can finally move toward long-term energy security and away from the inherent volatility of oil markets.

For low-income countries, this means reducing the use of imported oil to produce electricity. Kenya, for example, depends on heavy fuel oil and diesel for 21% of its

electricity; the comparable figure in Senegal is a whopping 85%; and some island states use imported diesel for all of their electricity needs.

For some countries, this is currently the only viable option, but over the long run this dependence can mean higher energy costs and vulnerability to price volatility and supply shocks. With the right policies and international support, these countries can invest in the infrastructure needed to achieve a more diversified energy mix.

For many countries, the next step will be preparing electricity grids to integrate high levels of variable renewable energy like solar and wind. Thanks to the drop in the cost of solar panels and wind turbines, both are expanding at a faster pace than ever expected. According to a new World Bank report, as of 2014, 144 countries had established national plans to expand renewable energy, and almost 100 had set specific targets and incentives. In just seven years, from 2006 to 2013, the world’s installed capacity for wind power quadrupled, while use of photovoltaic systems grew almost 20-fold. And all signs indicate that the pace of adoption is accelerating.

Old concerns about integrating wind and solar into traditional electricity systems are dropping away. In Mexico, ambitious and frequently remote renewable-energy projects – hydropower, solar, and wind – are being connected to the grid. China, which has the world’s largest installed capacity for renewable energy, is studying the requirements and costs of upgrading the grid to bring in higher levels of distributed solar power.

As the World Bank report shows, with the right investments and policies, countries can

now meet a large share of their electricity needs from variable renewable energy without compromising the reliability of the grid or the affordability of electricity. These investments include energy storage, improved forecasting systems, and smart grids – all of which have benefited from breakthroughs in technology and falling prices.

Perhaps most important, energy markets must be opened to new players. For poorer rural areas, this means creating a fertile environment for entrepreneurs and small power producers to develop mini-grids – generally powered by solar, small hydro, or solar-diesel hybrids – that can bring electricity to communities that would otherwise wait for years for grid connections.

In Tanzania, small power producers are now able to sell to customers without going through a lengthy licensing process. In India, remote cellular towers, which would otherwise have to be powered by diesel generators, are serving as “anchor

customers” for new mini-grids.

The terms “sustainable energy” and “renewable energy” are often used interchangeably. But perhaps a broader definition is needed. Truly sustainable energy is not only clean, with a minimal impact on pollution and CO2 emissions. It is also affordable for governments and citizens alike; it is reliable, drawing on sources upon which we can depend for decades to come; and it contributes to shared prosperity, by bringing services and benefits to all members of society.

Thanks to lower oil prices, innovation, and economies of scale in the renewableenergy sector, that vision can now be turned into reality.

Anita George is Senior Director of the World Bank’s Energy and Extractives Global Practice. © Project Syndicate, 2015. www.project-syndicate.org

Last taxi to Europe

By Alberto Heimler The contrast between Europe’s resistance to Uber and America’s warmer reception for the ride-sharing service highlights once again how European regulatory structures, in principle designed to protect consumers, end up protecting entrenched suppliers and stifling innovation. This contrast can also point us to the ways Europe’s governments should amend their rules, encouraging entrepreneurs to develop cutting-edge business models at home rather than being forced to accept innovations only after they have become best practices abroad.

Anti-Uber protests by cab drivers are part of a long tradition of established suppliers challenging new technologies that could cost them their jobs. But when, say, the Luddites of the early nineteenth century protested against newly developed textile machinery by smashing it, the authorities did not intervene to limit new technologies.

As a result, the Industrial Revolution ultimately led to an unprecedented increase in living standards around the world.

But, by the time supermarkets started to enter the retail sector in the second half of the twentieth century, European governments’ approach had changed. Many countries enacted regulations in the early 1970s to protect existing small shops against competition; as a result, the development of more modern distribution systems was delayed. A generation later, these restrictions were lifted in response to consumer pressure.

But, as the response to Uber shows, Europe’s governments have not learned their lesson – and the European economy suffers as a result. The problem is that entry into any market depends on the perceived

opportunities for profit from new initiatives at a particular point in time. Regulations can delay market entry, but technology cannot be stopped forever; new entrants eventually will break through. However, their business models may no longer be profitable, or may be less profitable than they would have been.

Indeed first-mover advantages are common in many industries, owing to economies of scale, or because they lock in a customer base, or simply as a result of sunk costs.

Especially for “platform” markets, where companies exploit earlier investment to ensure entry elsewhere, this means that delays caused by unjustified regulatory restrictions can have a more profound negative effect, preventing potentially successful companies from entering the market.

For example, Italy, which liberalised its retail sector only in 1998, has far fewer grocery chains today than France, Germany, and the United Kingdom. Indeed, these countries’ chains, forged in the fires of competition at home, now dominate emerging markets in Europe and elsewhere. In Italy, the limitations on large stores created market power at home for those few that nonetheless managed to emerge and grow, but left them too weak to expand abroad.

In the same way, Europe’s restrictions in the car-service market are preventing the continent’s entrepreneurs from developing services like Uber. Like a supermarket chain, Uber depends on economies of scale to allow its platform to work efficiently. And, like any platform, Uber started small, covering its fixed costs through step-by-step expansion. Now that it has achieved the minimum efficient scale, new entrants cannot easily use competitive pressure to squeeze Uber’s margins.

When Uber started in San Francisco in 2009, its market entry was neither challenged nor subjected to a difficult authorisation process. Thus, Uber could test its new business model – based at the time on providing luxury cars – and grow, first in San Francisco and then in other US cities, eventually expanding to other countries (as well as using its platform to push into other services).

In Italy, by contrast, even the provision of luxury car services via a smartphone application would have been prohibited. Under Italian law, for-hire car services are strictly defined as those that start from the garage where the car is parked, and they must be booked in advance. Because Uber’s app mimics taxi services, it would have been outlawed; Uber would never have been able even to start developing its platform.

If Europe is to prosper, it must ease market entry for innovators, so that platforms will begin to develop indigenously, rather than moving in after they have been perfected elsewhere. We should value the innovation brought by new market entrants more than we value the protection of existing market participants.

This can be achieved by adopting an outcome-based regulation aimed at the protection of consumers, not producers. Though in some cases this may mean simply changing the way existing rules are interpreted and applied, very often the regulations themselves will have to be changed.

New entrants could still change the competitive structure of mature platform markets – not just taxis, but tourism, consumer credit, and many other services. And if an outcome-based regulation is adopted, innovative entrants may well influence the competitive structure of other platform markets that remain underdeveloped, such as health care, real estate, and professional services.

In all markets, when innovators can enter easily and are not blocked by unjustified regulations, everyone stands to benefit – eventually even those whose occupations are disrupted or displaced. Just ask any professional, universityeducated descendant of a nineteenth-century textile artisan.

Alberto Heimler is Professor of Economics at Scuola nazionale dell’Amministrazione in Rome. © Project Syndicate, 2015. www.project-syndicate.org

April 22 - 28, 2015

financialmirror.com | WORLD | 19

ExxonMobil’s dangerous business strategy

By Jeffrey D. Sachs ExxonMobil’s current business strategy is a danger to its shareholders and the world. We were reminded of this once again in a report of the National Petroleum Council’s Arctic Committee, chaired by ExxonMobil CEO Rex Tillerson. The report calls on the US government to proceed with Arctic drilling for oil and gas – without mentioning the consequences for climate change.

While other oil companies are starting to speak straightforwardly about climate change, ExxonMobil’s business model continues to deny reality. That approach is not only morally wrong; it is also doomed financially.

The year 2014 was the hottest on instrument record, a grim reminder of the planetary stakes of this year’s global climate negotiations, which will culminate in Paris in December. The world’s governments have agreed to keep human-induced warming to below 2 Celsius (3.6 Fahrenheit). Yet the current trajectory implies warming far beyond this limit, possibly 4-6 Celsius by the end of this century. The answer, of course, is to shift from fossil fuels to low-carbon energy like wind and solar power, and to electric vehicles powered by low-carbon electricity.

Many of the world’s biggest oil firms are beginning to acknowledge this truth. Companies like Total, ENI, Statoil, and Shell are advocating for a carbon price (such as a tax or permit system) to hasten the transition to low-carbon energy and are beginning to prepare internally for it. Shell has stepped up its investments in carbon capture and sequestration (CCS) technology, to test whether fossil-fuel use can be made safe by capturing the CO2 that would otherwise go into the atmosphere.

This is not to say that all is agreed with these companies; they have promised to state their climate positions and policies in advance of this year’s climate summit. Yet at least they are talking about climate change and beginning to face up to the new long-term market conditions. ExxonMobil, alas, is different.

The company’s management, blinded by its own vast political power, behaves with a willful disregard for changing global realities. It lives in a cocoon of Washington lobbyists and political advisers who have convinced the company’s leaders that because the US Senate is currently in Republican hands, the business risks of climate change have somehow been nullified, and that the world will not change without or despite them.

At the same time, ExxonMobil is not some marginal actor in the planetary drama. It is one of the central protagonists.

According to a 2013 study, ExxonMobil ranks second among the world’s companies, just behind Chevron, in total contributions of CO2 emissions. Indeed, the study finds that this single company has contributed more than 3% of the world’s total emissions since the start of the fossil-fuel age!

So what does ExxonMobil say about the new climate realities? How does it reconcile its corporate policies with planetary needs?

Unfortunately, the company basically ducks the issue.

When asked by independent analysts such as Carbon Tracker how it plans to square its relentless oil drilling with the planetary limits on fossil-fuel use necessary to stay below the 2C climate-change threshold, it ignores the limits. It blithely believes that the world’s governments simply will not honor their commitments (or that it can lobby its way out of fulfilling them).

And so we come to the recent Arctic report. The Department of Energy asked the National Petroleum Council, an industry group, for its advice on Arctic drilling. What it received from Tillerson’s committee is an exercise in misdirection. The development of the Arctic’s oil and gas resources would contribute to warming far above the 2C limit. The Arctic itself is warming far faster than the planetary average, potentially causing massive, global-scale climate disruptions – which may include the extreme weather patterns recently observed in the US mid-latitudes.

For these reasons, the best recent science, including an important study published in Nature this year, provides a clear and unequivocal message: Keep the Arctic oil in the ground and beneath the deep seas; there is no safe place in the climate system for it.

The world has more than enough oil and gas reserves already; we now need to shift to low-carbon energy, stranding much of the proven reserves, rather than developing them and further threatening the planet. As the Nature study puts it: “Development of resources in the Arctic and any increase in unconventional oil production are incommensurate with efforts to limit average global warming to 2 C.” This would have been a fitting topic for the National Petroleum Council’s Arctic study. But the report never takes up the issue of whether Arctic oil and gas resources are compatible with climate safety.

ExxonMobil’s brazenness should be deeply troubling for its shareholders. The company’s management is planning to spend vast sums – perhaps tens of billions of dollars – to develop Arctic oil and gas reserves that cannot safely be used.

Just as the global shift toward renewable energy has already contributed to a massive drop in oil prices, climate policies that will be adopted in future years will render new Arctic drilling a huge waste of resources.

Pension funds, universities, insurance pools, and sovereign wealth funds worldwide are grappling with the increasing risks, both moral and financial, of owning shares in oil, gas, and coal companies. As Lisa Sachs and I recently explained, responsible investors must urgently query these companies about their business plans to comply with the 2C

limit on warming.

Business plans that include investments in the Arctic, the ultra-deep sea, and the oil sands of Canada have no place in a climate-safe world. ExxonMobil’s investors must urgently query the company’s management on a business strategy that contradicts global needs and policy agreements. If ExxonMobil persists in its dangerous business strategy, the company’s investors should quickly conclude that the time has come to pull up stakes and move on.

Jeffrey D. Sachs is Professor of Sustainable Development, Professor of Health Policy and Management, and Director of the Earth Institute at Columbia University. He is also Special Adviser to the United Nations Secretary-General on the Millennium Development Goals.

© Project Syndicate, 2015. www.project-syndicate.org

April 22 - 28, 2015

20 | BACK PAGE | financialmirror.com

How to reform the IMF now

By Hector R Torres and Paulo Noueira Batista Jr More than four years have passed since an overwhelming majority of the membership of the International Monetary Fund agreed to a package of reforms that would double the organisation’s resources and reorganise its governing structure in favour of developing countries. But adopting the reforms requires approval by the IMF’s member countries; and, though the United States was among those that voted in favor of the measure, President Barack Obama has been unable to secure Congressional approval. The time has come to consider alternative methods for moving the reforms forward.

The delay by the US represents a huge setback for the IMF. It stands in the way of a restructuring of its decision-making process that would better reflect developing countries’ growing importance and dynamism. Furthermore, with the reforms in limbo, the IMF has been forced to depend largely on loans from its members, rather than the permanent resources called for by the new measures. These loans, meant as a temporary bridge before the reforms entered into effect, need to be reaffirmed every six months.

In our view, the best way forward would be to decouple the part of the reforms that requires ratification by the US Congress from the rest of the package. Only one major element – the decision to move toward an all-elected Executive Board – requires an amendment to the IMF’s Articles of Agreement and thus congressional approval.

The other major element of the reform package is an increase and rebalancing of the quotas that determine each country’s voting power and financial obligation. This change would double the IMF’s resources and provide greater voting power to developing countries. Congress would still need to ratify the measure before the US’s own quota increased, but its approval would not be required for this part of the reform package to take effect for other countries.

The connection between the two parts of the reforms has

always been unnecessary; the measures are independent, require different approval processes, and can be delivered separately. Removing the link between them would require the support of the US administration, but not ratification by Congress.

This separation could be implemented smoothly. A simple majority of the IMF’s Executive Board would recommend it to the Board of Governors, where a resolution separating the reforms into two parts would require 85% of the votes. In 2010, the reform package passed with more than 95% of the votes.

The changes to the quotas could then quickly become effective. The quotas for each member country have already been agreed, so there would be no need for further complex and time-consuming negotiations. Countries that are willing and able to pay their quota increases would be allowed to do so, increasing the IMF’s resources and boosting their relative voting power.

The key obstacle to this proposal is the requirement of congressional approval to increase America’s quota share.

This opens the possibility that the US’s voting power could temporarily fall below the 15% threshold needed to veto decisions that require the support of 85% of IMF members’ votes.

In order to secure US support, the Board of Governors could commit not to consider any draft decision requiring 85% backing without America’s consent. This guarantee could be included in the resolution dividing the reform package into two parts. It would remain valid until the US was in a position to increase its quota and recover its voting share. The Executive Board could approve an analogous commitment and request the IMF’s managing director to refrain from submitting any draft decision requiring an 85% majority without first obtaining US support.

The US administration might face criticism from Congress for accepting a measure that would temporarily cut the country’s voting share and for relying on a political agreement to preserve its veto power. But the agreement could also act as an incentive for ratifying the reforms. The power to reinstate the US’s formal veto power would lie entirely in the hands of Congress – making it unlikely that another four years would pass before the matter is finally resolved.

Paulo Nogueira Batista, Jr., is Executive Director of the IMF. Hector R. Torres is former Alternate Executive Director of the IMF.

© Project Syndicate, 2015. www.project-syndicate.org

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