Financial Mirror 2015 05 06

FinancialMirror JEAN PISANI-FERRY Re-engineering government to meet new challenges PAGE 16

RICARDO HAUSMANN

Issue No. 1133 €1.00 May 6 - 12 , 2015

The narrative roots of public policy PAGE 19

BRITTLE BRITAIN PAGES 10-11

ANALYSTS EXPECT HUNG PARLIAMENT, BUT NO MAJOR CHANGE TO ECONOMY

Shinzo Abe: Toward an alliance of hope SEE BACK PAGE

PAGE 9

May 6 - 12, 2015

2 | OPINION | financialmirror.com

FinancialMirror Published every Wednesday by Financial Mirror Ltd. www.financialmirror.com

Sunday shopping: no room for compromise, Mr Votsis EDITORIAL

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DIKO, the centrist party that suffers from the Jekyll-and-Hyde syndrome on almost every issue that affects the nation, has once again shot itself in the foot and does not seem to be able to find a way out of the dilemma it faces.

Little did the “as the wind blows” party know that when it joined opposition AKEL in the most stupid of parliamentary decisions to regulate and clamp down on Sunday shopping and working hours, that it was duped into a dead-end that serves no other purpose than the lazy members of the communist party and their trade union. After several weeks of postponing a decision on the new regulation, now that it has been ungracefully removed from the remit of the Labour Minister, the House Labour Committee failed to reach a deal and is left with a compromise – to allow Sunday shopping hours, but to designate areas as ‘tourist’ and ‘non-tourist’ areas.

The two hoteliers’ association, PASYXE and STEK, are dead against this new discrimination that will create two levels of tourist areas, affecting employment, transport and property values.

They rightly say that “the whole of Cyprus is a tourist destination”. And this comes at a time when the Shacolas Group, the biggest retail company on the island, said it plans to build a new Superhome Centre in Larnaca, pumping 8 mln euros into the cash-starved town and creating 100 new jobs.

A number of people were right to take their protest from parliament to the doorstep of Labour

Committee Chairman Angelos Votsis in Limassol who is trying to find a compromise between the government proposal to allow market forces to determine the flow of consumers (locals and tourists alike) and the die-hard Stalinist view that no shops should be allowed to remain open on Sundays and that they abuse labour rights.

As far as we know, there are no sweat shops in Cyprus. No one is forced to work seven days in a row or more than 40 hours a week. Those who do, get compensated, or at least, get to keep their jobs which is no joke at a time of 16% unemployment.

The fact that Mr Votsis has not yet realised that the Old Town of Nicosia is a tourist attraction, just goes to show how many times he has visited the old part of the capital.

Would he be happy to see his own constituents barred from opening their businesses in the Castle area near the Old Port on Sundays? Hardly.

Then again, Mr Votsis hails from a profession (pharmacists) who have steadfastly held on to their closed-shop attitude and refuse to allow a liberal reform of their sector. By not supporting the government proposal and opting for a compromise, DIKO will once again justify those who accuse it of being destructive instead of creative.

Hopefully, Messrs Akinci and Anastasiades will reach a solution sometime soon and locals and tourists alike will be free to shop from wherever they want, and whenever. This includes pharmacies in the north where the same medications are sold at a fraction of their price in the ‘liberalised’ sector of the Republic.

THE FINANCIAL MIRROR THIS WEEK 10 YEARS AGO

EU constitution, investment agency soon Cyprus is expected to ratify the new EU constitution by the end of May, while plans are underway to create and Investment Promotion Agency, according to the Financial Mirror issue 618, on April 27, 2005.

EU constitution: The EU constitutional treaty will be tabled before parliament for ratification before the

20 YEARS AGO

Flexible output, a need to modernise and restructure President Clerides has called for flexible productivity in order to be meet the European challenges ahead, while in a similar tone, employers called for a need to modernize and restructure, according to the Cyprus Financial Mirror issue 109, on May 3, 1995.

Productivity: President Glafcos Clerides said in his address to the Employers Federation (OEV) annual meeting that more specialized and flexible productivity, better marketing and improved

end of the current session at the end of May, said House European Affairs Committee Chairman Nicos Cleanthous.

He added that the House is expected to reach a conclusion on the issue of the British Bases before the ratification.

CIPA framework: Proposals for the final form of the Investment Promotion Agency are to be submitted to the Council of Ministers before summer, as the government tries to speed up processes and provide investors with a single

office to provide assistance. It will replace the Foreign Investors Services Centre at the Ministry of Commerce, that has been operational since 2000, that has been a reactive government service, as opposed to a proactive public agency.

AIM listing: Eastern Mediterranean Resources (EMED), a Cyprus-based precious metals exploration and development company, is paving the way for listings on the London Stock Exchange with its GBP 2.5 mln placement on the AIM market.

Suphire boss: Suphire CEO Yiannos Andronikou was released after a 20 day remand, facing charges of theft and fraud for the CYP 9.2 mln entrusted by the EAC pension fund, that has since vanished.

technology is needed to meet the challenges of the EU accession acquis communautaire. He said that a growth rate of 5% in 1994 and a 5.9% rise in exports must not create illusions as Cyprus has a difficult path of adjustment and harmonisation.

Business awards: OEV Chairman Michalakis Zivanaris said that drastic changes were required in view of the liberalisation of world trade and services, with both the private and public sectors realising their weaknesses and striving to correct them. He added that the rising costs of the civil service must be halted and radical modernisation introduced in all sectors. He presented the annual European Business Awards to Yiannoplast, Christis

Dairies, Biogena Pharmaceuticals, AMI Knitting and Clothing, and Finia Knitwear.

Biggest deal: The friendly takeover by Paneuropean Insurance of Philiki in a deal worth CYP 7.73 mln was the biggest take-over in recent history, said Nicos Shacolas. Shacolas and other investors had secured a 59% stake and an option to buy another 12%.

European passports: All citizens of Cyprus applying for a passport will now get one similar in shape and colour to the smaller European documents, with 200,000 printed.

Kiliaris quits: Stelios Kiliaris resigned as Trade Minister, citing personal reasons, through rumors suggested he had offers from the private sector.

President Clerides swiftly appointed Transport Ministry Director Kyriacos Christophi as the new Minister.

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Contraction to continue, rebound in 2016 EC Spring forecast: Progress on structural reforms promises new steam to a delayed recovery

The recession in Cyprus moderated significantly in 2014 with the second half of the year being weaker than the first, the European Commission said in its Spring 2015 economic forecasts.

Saying that the economy will continue contracting this year maintaining a downward path that began in 2012, the forecast explained that low oil prices are expected to support growth in 2015 but external demand will still be exposed to headwinds from the Russian economy.

“Recent progress on structural reforms should underpin the economic recovery,” it said, adding that “fiscal adjustment is expected to continue.”

The Commission downgraded its forecasts, noting that the Cypriot economy will contract with a rate of 0.5% compared to a 0.4% growth projected in the winter forecasts. Cyprus has been in continuous recession since the third quarter of 2011.

The economy contracted by 5.4% in 2013, followed by a contraction with a rate of 2.3 in 2014. According to the European Commission, Cyprus will contract by 0.5% in 2015, followed by 1.4% in 2016.

“Although available short-term indicators for economic activity in the beginning of 2015 suggest a slowly improving growth momentum, the economy is not expected to

grow before 2016,” the Commission said, noting however that the downside risks remain tilted to the downside owing to high non-performing loans ratios and the recession in Russia that “could have larger negative effects than anticipated.”

It added that general government balance will worsen in 2015, reflecting the prolonged economic recession, impacting mostly on tax revenues, but also other factors, such as location rules regarding VAT for e-commerce services and a decrease in dividend income from the Central Bank of Cyprus.

The Commission noted that in 2016 the gradual deleveraging of both households and corporates should remove impediments to a more balanced growth.

It added that the insolvency and foreclosure framework adopted in April should allow for more effective tools to deal with the high ratio of non-performing loans and will help restore the health of the banking sector, loosen credit supply conditions and support a moderate pick-up in domestic demand.

According to the Commission, public debt will marginally decline to 106.7% in 2015 from the peak of 17.5% in 2014 and will continue its rise again at 108.4% in 2016.

“The ensuing growth momentum is expected to gradually ease unemployment.

HICP inflation is forecast to turn positive in 2016, as energy prices rebound,” the Commission said.

The Commission estimates that

unemployment will rise marginally at 16.2% in 2016 compared to 16.1% in 2014, whereas Harmonised inflation (HICP) will be negative at 0.8% compared to 0.3% in 2014.

May 6 - 12, 2015

4 | CYPRUS | financialmirror.com

Eide: Both leaders committed to resume talks A united Cyprus that would be compatible with EU standards would be to the benefit of both Greek and Turkish Cypriots, the UN Secretary General’s Special Adviser Espen Barth Eide said on Tuesday after a meeting with President Nicos Anastasiades, adding that he is encouraged by the climate created by the leaders of the two communities.

On Monday, he met with Turkish Cypriot leader Mustafa Akinci and will host a dinner for both leaders at the Ledra Palace next Monday, May 11. After that, a date is expected to be announced for the resumption of the stalled peace talks.

“These are two leaders who tell me that they are seriously dedicated and committed to solving the Cyprus problem, that they are ready to resume negotiations without delay, and they both say in almost exactly the same words that this is the moment, it’s a unique opportunity and there is not time to waste”, Eide said. Asked whether Secretary General Ban Ki-moon is planning to invite the leaders in the near future, he revealed that the UN chief will meet with Anastasiades in Moscow in a few days.

Replying to a question about the role Turkish Prime Minister Recep Tayip Erdogan in the process, Eide acknowledged that “there are certain aspects of course which pertain to the three guarantor powers and will also eventually have to be dealt with by all means.”

But then, he pointed out, “there are significant numbers of issues which pertain to Cyprus itself and of course this will be factored into everything we do.”

Asked whether the leaders will begin the talks with confidence building measures, he reiterated that the two leaders “are committed to working very hard together to solve this problem.” That means, he said, “that if they are going to take new initiatives

Finance Ministry issues €150 mln in 13-week T-bills The Finance Ministry’s Public Debt Management Office (PDMO) has accepted tenders for 150 mln euros, with at average yield of 2.47%, during Tuesday’s 13 week Treasury Bills Auction. In all, tenders for a total amount of EUR 204.64 mln were submitted. The accepted yields ranged between 2.40-2.55%.

Maritime security, S&R discussed in Oman Cyprus Defence Minister Christoforos Fokaides and his Omani counterpart Sayyid Badr Bin Saud Bin Hareb Al Busaidi discussed issued of mutual interest in humanitarian missions and search and rescue operations.

Fokaides’ visit to the Sultanate of Oman wrapped up on Tuesday and took place within the framework of initiatives taken by the government to promote the role which Cyprus can play in the broader region.

During the meeting, issues of mutual concern were discussed, such as maritime security, addressing terrorism, new disproportionate threats and the need for cooperation to promote regional stability.

Unemployment down in March Unemployment fell slightly by one percentage point to 16% in March, compared to 16.1% in February, according to Eurostat.

The euro area seasonally-adjusted unemployment rate was 11.3% in March, stable compared with February, but down from 11.7% in March 2014. The EU28 unemployment was 9.8% in March, stable compared with February and down from 10.4% in March 2014. Among the EU member states, the lowest unemployment rate in March was recorded in Germany (4.7%), and the highest in Greece (25.7% in January) and Spain (23.0%).

Compared with a year ago, unemployment in March fell in 22 member states, increased in five and remained stable in Austria. The largest decreases were registered in Ireland (12.0% to 9.8%), Spain (25.1% to 23.0%) and Poland (9.6% to 7.7%). Increases were registered in Croatia (17.3% to 18.2%), Finland (8.4% to 9.1%), Italy (12.4% to 13.0%).

I think it’s appropriate that they will come up with their initiatives.”

The May 11 dinner is the first time the two leaders will meet after Akinci won the leadership elections in the north last month, giving political analysts a mild hope of progress as both men seem willing to negotiate a settlement.

Eide’s will remain on the island until May 12 and will hold meetings with other relevant

interlocutors from the two sides to finalise arrangements for the resumption of fullfledged negotiations.

The Turkish Cypriot leader, whose comments about finding a local solution to the division and occupation were criticised

by Ankara, will see Turkish President Racip Teyep Erdogan on Wednesday.

During his visit to Ankara, Akinci will be accompanied by the newly appointed negotiator Ozdil Nami, who has taken part at various levels of the negotiations during the past 15 years. His appointment was hailed by Turkish Cypriot politicians.

EU Commission President Jean-Claude Juncker sent a congratulatory letter to Akinci stating that the determination to reach a comprehensive agreement in the island is welcomed and emphasised the importance of resumption of negotiations as soon as possible. Juncker stated in the letter that an agreement reached in Cyprus will be for the benefit of both communities in Cyprus, as well as for the European Union and added that European Commission will continue to give full support to the negotiations to be restarted under the auspices of the UN. President Anastasiades is expected to talk to US Vice President Joe Biden over the next few days, and meet with Secretary-General Ban Ki-moon and Russian President Vladimir Putin in Moscow on Saturday, on the sidelines of the Victory Day Parade.

Fitch: Bank of Cyprus, Hellenic upgraded to ‘CCC’ and ‘B-’/Stable Fitch Ratings has upgraded Bank of Cyprus’s (BoC) Long-term Issuer Default Rating (IDR) to ‘CCC’ from ‘CC’ and Hellenic Bank’s (HB) Long-term IDR to ‘B-’, with a Stable Outlook, from ‘CCC’. At the same time, Fitch has upgraded BoC’s Viability Rating (VR) to ‘ccc’ from ‘cc’ and HB’s VR to ‘b-’ from ‘ccc’. HB’s Short-term IDR has also been upgraded to ‘B’ from ‘C’.

These upgrades mainly reflect improved capital buffers following the completion of equity issuances and evidence of better deposit dynamics amid the gradual relaxation of capital controls, which were fully lifted by the authorities in early April 2015, the rating agency said.

It added that BoC’s rating actions also highlight progress made in asset de-leveraging, enabling a reduction of its reliance on central bank funding. However, these banks’ ratings remain deeply sub-investment grade to reflect material failure risk, mainly because of weak loan quality performance and, in the case of BoC, still-high funding imbalances.

At end-2014, group problem loans, taking into account impaired and unimpaired 90 days past due loans, were close to a very high 53% for BoC and 54% for HB of gross loans (excluding suspended interest). Reserves held for these loans, at 41% for BoC and 42% for HB, remained in Fitch’s opinion low in a scenario of collateral stress.

BoC’s and HB’s Support Rating (SR) of ‘5’ and Support Rating Floor (SRF) of ‘No Floor’ reflect Fitch’s expectation that support from the state, while possible, cannot be relied upon despite the two banks’ systemic importance to Cyprus, with deposit market shares of around 25% for BoC and 14% for HB. The announcement follows an earlier statement by Fitch

last week that with public sector debt reaching 110% of GDP this year and later easing off to about 90% by 2022, Cyprus won’t need to cash in on the full EUR 10 bln bailout agreed to in 2013.

“The general government debt to GDP ratio is expected to peak at just over 110% in 2015 and 2016 and will ease to around 90.7% by 2022. The strong budget performance implies the buffers in the programme have grown close to EUR 3 bln (17% of GDP). The underlying trend for public finances has been positive,” the rating agency said, adding that the fiscal deficit in 2014 was 0.2% of GDP (8.8% of GDP including the one-off capital injections to the co-operative sector) compared with Fitch’s forecast of 3.3% in October.

“The over-performance reflects a combination of higher tax revenues and lower than expected expenditure across most items. Fitch expects the fiscal deficits to average 0.8% from 2015 to 2018”.

However it said that the risks to EU-IMF adjustment programme implementation remain elevated and that there is a significant risk that privatisation plans will not be fully implemented, leading to further delays to programme reviews.

Fitch also noted that non-performing loans (NPLs) in the banking sector reached an “exceptionally high” 50%.

The removal of the remaining capital controls in April has led to the Country Ceiling being raised by three notches to ‘BB-’.

“The passing of the insolvency law through parliament on 18 April should trigger the activation of the foreclosure law and pave the way for further official funding. The law should strengthen the foreclosure framework and address the high banking NPL problem,” the rating agency said.

Econ sentiment improves in April, productivity up Business and consumer confidence is improving from the record low in May 2013 after the banking sector meltdown and seem to be reaching levels not seen since late-2008, according to the University of Cyprus research.

The Economic Sentiment

Indicator of the UCy Economic Research Centre (ESI CypERC) improved by four points in April and reached 107.7, up from 103.7 in March, due to an improved business climate in all sectors, as well as an increase in economic confidence by consumers.

The survey said that sectorally, the improvement in services is due to favourable ratings of the economy and an increase in turnover. The climate in the retail sector, construction and manufacturing showed some improvement, but remained in negative territory.

May 6 - 12, 2015

May 6 - 12, 2015

6 | COMMENT | financialmirror.com

Challenges of Iran’s nuclear deal

By Dr Andrestinos Papadopoulos Ambassador a.h.

The framework nuclear agreement concluded on April 2 in Lausanne between the six world powers (USA, Russia, China, UK France and Germany) and Iran was welcomed as a triumph of diplomacy.

Iran’s President Hassan Rouhani, greeting the announcement of the accord, said that it was just the first step towards building a new relationship with the world.

“Some think that we must either fight the world or surrender to world powers. We say, we can have cooperation with the world,” he said. For US President Barack Obama it was a “historic understanding”, although some circles in the US cautioned that hard work lies ahead before a final deal is struck by the deadline of June 30.

The fact remains, however, that the deal marks the most important step towards rapprochement between Iran and the US since the 1979 Iranian revolution, with far reaching consequences in the wider region of the Middle East.

For the Europeans, negotiations went in the right direction. For them, Iran was not part of “an axis of evil” as branded by George W Bush, and their approach was to seek reliable assurances that Iran would never develop a nuclear weapon. Key EU members – the UK, Germany and France – who were engaged in talks with Iran for more than a decade, insisted on diplomacy and their approach has been vindicated.

The Europeans’ willingness to move ahead is easily understood. Lifting sanctions will be more to their benefit and in the short term, Iranian oil exports will keep prices low.

Apart from the economic gains, there are political benefits as they will be able to exercise pressure on Russia, not only in the economic field but also in connection with its Ukrainian policy. In the long term, preventing the further

deterioration of security and stability in the region will benefit the Europeans more than the US. Moreover, lifting the sanctions will open up Iranian markets to the Europeans who will be more favoured than the Americans, who before the Iranian revolution enjoyed near exclusivity in the Iranian market.

Counting on Republicans who control the US Congress for support, Israeli Prime Minister Benjamin Netanyahu reacted strongly against the deal, declaring that it could lead to nuclear proliferation and even his country’s destruction.

He asked the negotiating powers to add a new demand that Iran recognise Israel’s right to exist. In contrast, Saudi Arabia was more cautious in its reaction, although it could not conceal – nor could other Arab states – its concern about a deal that will benefit Iran. It will certainly strengthen Iran’s influence in Iraq, Syria and Yemen against which Saudi Arabia recently launched a bombing campaign.

What prompted Iran to seek a deal on its nuclear programme? Was it its political isolation and economic hardships, or the need for a more active regional role? The answer lies in Iran’s desire to make sure that its nuclear programme is exclusively peaceful, to end its demonisation and finally get closer to its Arab neighbours. For two centuries, Iran has not invaded any country and stands against foreign occupation as it did in Afghanistan, Lebanon and Kuwait.

The nuclear deal still requires experts to work out the details, in which the devil lies, prompting some pessimists to believe that it could still collapse.

The question of lifting the sanctions, which reduced Iran’s oil exports by 60%, is the most difficult. Iran’s firm position is that all sanctions must be lifted at the same time as any final agreement is concluded. These include UN, US

and EU nuclear-related economic sanctions.

This insistence reflects Iran’s lack of confidence in the West, in view of previous experiences. The US position is that sanctions against Iran would be removed gradually. A complicating factor is that President Obama was forced to give Congress a say in any future accord, including the right to veto the lifting of sanctions.

That brings us to the second difficulty: a possible change of hearts. The US and Iran have to sell the deal to skeptical conservatives at home. In the US, President Obama will have to face Congress, controlled by the Republicans. In Iran, the Supreme Leader, Ayatollah Ali Khamenei in remarks apparently meant to keep hardliners happy, said “I neither support nor oppose the deal.” Possibly, this statement aims at strengthening the Iranian negotiating team.

Another problem is whether the parties will live up to the letter and spirit of the agreement. Already different interpretations have emerged over what was agreed in the framework, suggesting that reaching a final accord will be a tough job. In this respect, France recognised the need to have a mechanism to restore sanctions in case of violations. Last but not least is the concern about Iran’s foreign and defence policies in terms of its missile programme and involvement in the region. Russia’s decision to lift the embargo and deliver the S-300 missile system to Iran is a timely example.

In any case, Iran’s stand was explicitly explained by the Supreme Leader who said that “Iran’s military sites cannot be inspected under the excuse of nuclear supervision”, as it is provided in the NPT. The benefits of a final deal, however, are huge. It would create job opportunities, investments and development locally. It would enhance peace and stability in the region, and it would strengthen the hands of those who fight Sunni extremism in the form of the Islamic State.

Dr Andrestinous N Papadopoulos is a former ambassador of the Republic

IT project management matters as the 2010 Wall Street “flash crash” showed

By Marios Theocharides

On April 22, a futures contract trader based in London was arrested after the US authorities accused him of contributing to the 2010 Wall Street “flash crash” that caused a loss of $800 bln.

The technique used is known as spoofing and this incident brings about the importance of systems and controls employed by the Electronic Trading Systems (ETS) to stop these orders prior to submission for execution, as well as the responsibilities of the financial institutions providing such services.

“This is like something out of a thriller - it’s a most remarkable story,” the BBC’s economics editor Robert Peston said.

“The allegation is that he was sending what are known as spoof orders to sell futures contracts on the US stock market.

He would drive the price of the stock down... then withdraw the sell orders, but the price would already have fallen. He would then buy the orders back and guarantee a profit for himself. According to the charge sheet, he did these thousands and thousands of times over many years.

“This is an amazing insight into the way computers have completely transformed the stock market business,” Peston continued.

The trader had made a staggering profit of $40 mln.

This incident raised two main issues for all financial services companies: First, the regulator’s primary concern is to ensure financial stability of the markets and protection of investors by ensuring orderly trading.

Second, the importance of IT Project Management for Financial Services companies and the implementation of the

guidelines pertaining to Systems and Controls.

In today’s financial world, a client’s order to buy or sell a financial instrument will seamlessly flow through several stages and most likely be dealt by different Financial Services companies, each providing a specific service in different parts of the world prior to its execution and final settlement. The European watchdog ESMA has issued guidelines on how the Financial Services companies’ ETS should be organised, as well as allocated responsibilities between them while processing client’s transactions. In a nutshell, these guidelines dictate requirements on: 1. The suitability of trading systems. Systems should be procured based on a formalised governance process. Further to being fit for purpose, systems should embed compliance and risk management principles. Their capacity and reliance should be sized to meet demand, security independently certified, and archive records to the extent of being able to reconstruct any transaction.

2. Fair and orderly trading. Pre- and post-trade controls should be in place to limit access and intervention of transactions, limiting participants of order entry book and minimising operational risk.

3. Preventing market abuse. Known patterns of market abuse such as ping orders, quote stuffing, momentum ignition, layering and spoofing should be detected and restricted.

4. The provision of Direct Market Access. Financial Services companies offering DMA to their clients have the responsibility to monitor the activity of their clients and the authorisation to survey their IT infrastructure as well as intervene on transactions 5. Business continuity. A disaster recovery plan should be in place with specified recovery options and duration, duly tested.

6. Suitable testing methodology. Proper documented test scripts for all stages such as unit, system, user acceptance testing.

Managing an ETS project for a Financial Services company requires a knowledgeable and experienced project

manager that will guide the team through a sound project cycle.

Specifying deliverables, budget and timeframes coupled with good understanding of what is readily available in the market, capabilities and solid understanding of hardware, software and communications are the main characteristics of a good project manager. Last but not least, the project manager should have a thorough understanding of the business model of the Financial Services company and a good insight of product and services to be sold and the target markets.

A project cycle should include the following seven steps: 1. Business analysis. Define the processes that need to be automated.

2. System architecture. High level design of the system including infrastructure, software, networking and integration with internal and external systems.

3. Development of system requirements for each subsystem. Scope and develop detail system requirements specifying expected deliverables.

4. Procurement. Engaging external IT companies for the provision, implementation, training, certification as per requirements 5. Testing. Performing unit, system and user acceptance testing based on scripts developed by the business analysis team to ensure that the functionality is as expected.

6. Rollout. Arranging for taking live the system and monitoring operation.

7. Operation. Day to day operation of the system with exception reporting.

8. Audit. Assessment of the project and its results to deduce whether it met its initial objectives within the timeframe and budget and quality.

Marios Theocharides (MEng, MBA) is the Director of the Consulting Division of GoalTech Ltd (www.goaltech.net), a Sage UK business solutions authorised partner. He is regulated by the Cyprus Securities and Exchange Commission. marios@goaltech.net

May 6 - 12, 2015

financialmirror.com | COMMENT | 7

Juncker: If Greece leaves, Anglo-Saxons will try to break up eurozone

By Georgi Gotev, EurActiv.com Commission President Jean Claude Juncker said that if Greece left the single currency area, the “Anglo-Saxon world” would try everything to break it up.

Speaking at the KUL, the Catholic University of Leuven on Monday on the occasion of the launch of the Wilfred Martens Fund, Juncker made it clear that a ‘Grexit’ was not an option, because it would be an existential threat to the 19-member economic and monetary union.

Juncker, who chose French to deliver his 40-minute speech at the Flemish university, said: “The world wants to know which way we are going. We should make sure that everyone understands that the economic and monetary union is irreversible, that the euro is a currency that is here to stay, which is not going to be abolished or suspended.”

Juncker added that he had discussed the issue the same day with former Greek Prime Minister Antonis Samaras, who was also present at the event.

“Grexit is not an option. If Greece would accept it, if the others would accept it, that the country would exit the zone

of security and prosperity constituted by the eurozone, we would be exposed to huge danger, because the Anglo-Saxon world would do everything to try to decompose, at a regular rhythm, by (the) sale, apartment by apartment, of the eurozone,” he said.

Later, in the Q&A session, Juncker returned to the issue, speaking this time in English.

“We have to know that Greece was misbehaving in the past, that the government of Mr. Samaras was doing the right things, that those who were contesting these right things won the elections. Now they are confronted with their election promises, and we have to deal with that,” he said, referring of the leftist government of Alexis Tsipras.

“My concern is not the Greek government. My concern is the Greek people. We don’t have the right to deal with the Greek people as if they were the neglected part of Europe.

The Greek people have great dignity. This is a great nation, although being from time to time a weak state, and we have to show solidarity with the Greeks. And the [present] Greek government has to know that at the level of the eurozone, we have to deal with 19 democracies, not only with one, not only with Greek democracy,” he said.

One of the questions referred to the UK, and the push of the present government to renegotiate its status in the EU. “I want a fair deal with Britain, but Britain is not in a situation to impose its exclusive agenda to all the other

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member states of Europe”, Juncker said.

“I’m a strong defender of the freedom of movement of workers”, he continued, alluding to the rhetoric against workers from the Eastern European countries in the UK . He added: “This is a basic principle of the EU laid down in the Treaty of Rome. So the British are kindly invited to present a list of their requests, we’ll take this under exam, with friendly attention, and then we will see. I don’t want Britain to leave the EU, but I don’t want the EU to follow an exclusive British commandership.”

May 6 - 12, 2015

8 | COMMENT | financialmirror.com

Something old, something new, something borrowed and something stewed….

We are taking a few days away from our “old mill” in Suffolk to drive back to Kent and Sussex, where we lived before our 21year sojourn in Cyprus and where we still have many friends. So there wasn’t the time to write something “new” this week. But in looking through my archives I found a piece with a “healthy” theme, which is never out of date… and as I haven’t run it for over 21 years, here it is, edited and updated – just like NEW! The photos are more recent!

Patrick Skinner

Increase your pulse rate - it’s good for you Visitors to Cyprus often comment upon the quantity of meat served in a meze, or indeed in most restaurant and taverna meals, and remark that the Cypriots are obviously great meat eaters. It was not always so. I think today’s emphasis on meat is a reaction to the past, the years I call “B.T.”, meaning Before Tourism. Cyprus was a poor country with most people living in villages eking out a meagre living from land that was all too often stricken by drought. Meat was for special occasions, religious festivals, saints days and so on. Church tradition, too, was (and still is) very strong – our former neighbour, the dear Maria, for example, a “woman beyond reproach”, who baked the blessed bread for the Communion at the village church, used to fast for 160 days a year: 50 days before Easter, 40 before Christmas, every Wednesday and Friday, as well as for various anniversaries and memorials.

In consequence, vegetables and pulses figure very strongly in the home cooking of this country. Even when meat is used, for example in the stuffed vine leaves (Koupepia), a little goes a very long way. It is sad that so many people come to Cyprus, pass their holidays eating kebabs, chips and salad, and leave without savouring some of the lovely food that is cooked here. Like many countries, the best Cyprus food is mostly to be found in family homes.

Much home cooking entails soaking white beans or other pulses overnight and then having a long slow simmer to cook them until they are tender. I think canned beans can make things much easier and produce a delicious result. A great favourite in our household is bean and vegetable stew, which is very simply prepared.

Quick Fasolia Ingredients 1 can of Canellini beans 2-3 sticks celery, thinly sliced 2-3 carrots, thinly sliced 2 medium onions, chopped 1-2 cloves of garlic, finely chopped 2 medium-large tomatoes, skins removed and chopped Salt, or one vegetable stock cube and pepper Method • In a medium-sized stewpan, heat the olive oil. When hot, tip in the celery, carrots, onion, skinned and chopped tomatoes and garlic, and stir.

• Keep on high heat, stirring regularly, for five minutes.

• Turn heat to low and cover the pan. Stir every few minutes and simmer gently for about 15 minutes.

• When vegetables are tender, add the can of beans with their juice and carry on cooking slowly. Add salt or crumbled stock cube, and pepper to taste, and stir in.

• Add a little water if necessary. After 15 minutes, your own version of this staple Cyprus dish is ready to serve.

If meat is needed, simply dice some pork, chicken fillet or lountza, and fry for a minute or

two in the olive oil before adding the vegetables.

Quick Houmous Houmous, or as our former neighbour, dear Maria called it, “Hoummi”, is a peasant dish found all over the Middle East and it is a great ‘dip’ with hot pitta bread. You can buy it ready-made, but I like plenty of garlic and lemon and anyway, it’s very easy to make yourself.

Ingredients 1 400gram can of chickpeas 2 tablespoons of tahini paste 2-3 medium-sized cloves of garlic juice of 1 lemon (more if you like) 2 tablespoons of sunflower oil Salt and pepper Method 1. Drain liquid from the chickpeas and set aside.

2. Put the chickpeas in your food processor/blender.

3. Add the tahini, garlic cloves, lemon juice and sunflower oil, and blend.

4. Season to taste and add as much of the chickpea liquid as you want to produce a creamy, not-too-runny ‘dip’.

Chickpeas need a good soak and a long cook, but if you do use the dried variety, remember they never actually get totally soft no matter how long you cook them. I prefer canned, because the liquid greatly helps the flavour of the dish we are making.

Pourgouri Pilaff Pictured right, served with kofta and green beans and tomato, today, this is quite frequently served in the better tavernas. Here’s how they do it: Ingredients 200 grams of coarse Pourgouri 50 grams of very fine noodles (Vermicellini) crushed very small 250ml of tomato juice 750ml of water (a full wine bottle) 1 small onion, sliced very finely 3 tablespoons of oil Juice of half a lemon and salt and pepper to taste Method 1. Heat the oil in a saucepan and fry the onion.

2. When the onion is transparent, add the noodles and fry, stirring constantly until they start to brown. Be careful not to burn them.

3. Add the water, tomato juice and lemon juice and bring to the boil.

4. Put in the Pourgouri, stir, season to taste, reduce heat and simmer very gently with the pan lid on until the liquid is absorbed.

5. Taste to see the Pourgouri is cooked and if it is not, add a little more water.

As a side dish to grills, this Pilaff is delicious. Yogurt or Tzatziki (yogurt mixed with finely chopped cucumber and mint) sit well with it, too.

Send me your news! To be published in Cyprus Gourmet, here and on-line. Email: editor@eastward-ho.com

Who will be Jose Cuervo’s next Don of Tequila?

Cypriot barmen will be among the hundreds of hopefuls from around the world who are vying for the title of Don of Tequila as Jose Cuervo searches for its next master blender.

The competition is already underway with local entrants taking part in the national competition, whose winners at the end of July will go through to the international contest at the Jose Cuervo distillery in La Rojena in Mexico in September.

Budding amateur or professional barmen of any age simply have to upload a photograph of their variant of a Tequila-based cocktail or serving at www.DonsOfTequila.com.

The finalists will undergo further stringent competitions and the winner will be declared the new Don of Jose Cuervo.

The competition and brand are represented by Photos Photiades Distributors.

May 6 - 12, 2015

financialmirror.com | COMMENT | 9

America’s highest-paid female Chief Executives According to a USA TODAY analysis of data from S&P Capital IQ and Bespoke Investment Group, Marissa Mayer is America’s best-paid female chief executive.

The Yahoo boss ranks seventh in terms of overall CEO pay, with her total compensation amounting to $42.1 mln.

Safra Ada Catz of Oracle is the second highest-paid female CEO with $37.7 mln, while Lockheed Martin’s Marillyn Hewson has an annual pay packet of $33.7 mln, the third highest.

Times are certainly good for female chief executives. In fact, they now trump their male counterparts in pay.

During the latest fiscal year, female CEOs in the S&P 500 earned an average of $18.8 mln, exceeding the $12.7 mln average paid to the 455 male CEOs listed.

Can Bill Gross really sense the end of secular bull markets (outside of bonds)?

By Jon C. Ogg Bill Gross may have a new employer in Janus Capital Group Inc. (NYSE: JNS), but he has kept up with his monthly outlook reporting just like he did for years as the bond king for Pimco. Gross always has some financial market humour mixed in with the commentary, and many investors would point out that his observations are him talking about his own investment book.

Others would say that Gross may have an in on bonds, with little value in his opinions in other markets.

So, what does one think when Gross is saying now in his outlook, titled “A Sense of an Ending,” that the bull market supercycle for both stocks and bonds and is winding up?

To give the warning additional bite and resonance, Gross included a Julian Barnes quote: “There is accumulation, there is responsibility; after these, there is unrest — great unrest.” Gross talks about turning 70, having a sense of an ending — “Death frightens me …”

Again, Gross can use analogies and references that may be very real but that have loose ties to financial markets. To requote a full Gross outlook makes little sense, and it offers little value. But to draw out the gems that Gross has pertaining to the markets does make more sense. Here are some of those points: “Stanley Druckenmiller, George Soros, Ray Dalio, Jeremy Grantham, among others warn investors that our 35 year investment supercycle may be exhausted. They don’t necessarily counsel heading for the hills, or liquidating assets for cash, but they do speak to low future returns and the increasingly fat tail possibilities of a “bang” at some future date… Savour this Bull market moment, they seem to be saying in unison. It will not come again for any of us; unrest lies ahead and low asset returns. Perhaps great unrest, if there is a bubble popping.

“Policymakers and asset market bulls, on the other hand speak to the possibility of normalisation – a return to 2% growth and 2% inflation in developed countries which

may not initially be bond market friendly, but certainly fortuitous for jobs, profits, and stock markets worldwide… QE’s and now negative interest rates that bubble all asset markets.

“But for the global economy, which continues to lever as opposed to delever, the path to normalcy seems blocked. Structural elements – the New Normal and secular stagnation, which are the result of aging demographics, high debt/GDP, and technological displacement of labor, are phenomena which appear to have stunted real growth over the past five years and will continue to do so.

“Where can a negative yielding Euroland

bond market go once it reaches (–25) basis points? Minus 50? Perhaps, but then at some point, common sense must acknowledge that savers will no longer be willing to exchange cash Euros for bonds and investment will wither… Once an investor has discounted all future cash flows at 0% nominal and perhaps (–2%) real, the only way to climb up a yet undiscovered Everest is for earnings growth to accelerate above historical norms.

“When does our credit based financial system sputter / break down? When investable assets pose too much risk for too little return. Not immediately, but at the margin, credit and stocks begin to be

exchanged for figurative and sometimes literal money in a mattress.” We are approaching that point now as bond yields, credit spreads and stock prices have brought financial wealth forward to the point of exhaustion. A rational investor must indeed have a sense of an ending, not another Lehman crash, but a crush of perpetual bull market enthusiasm.”

Gross concluded: “The successful portfolio manager for the next 35 years will be one that refocuses on the possibility of periodic negative annual returns and miniscule Sharpe ratios and who employs defensive choices that can be mildly levered to exceed cash returns, if only by 300 to 400 basis points. My recent view of a German Bund short is one such example. At 0%, the cost of carry is just that, and the inevitable return to 1 or 2% yields becomes a high probability, which will lead to a 15% “capital gain” over an uncertain period of time. I wish to still be active in say 2020 to see how this ends. As it is, in 2015, I merely have a sense of an ending, a secular bull market ending with a whimper, not a bang. But if so, like death, only the timing is in doubt. Because of this sense, however, I have unrest, increasingly a great unrest. You should as well.”

Gross is still referred to as the bond king.

As far as how well his views will be on other asset classes and markets, we will leave that verdict or opinion up to you. (Source: 24/7 Wall St.com)

USD softens on trade deficit announcement

By Alex Gurr, Market Analyst at FXTM The USD has softened once again following Tuesday’s trade deficit being announced even wider than expected. As a result, possible revisions are expected to GDP forecasts in the near future.

Prior to the release, the USD was beginning to pick up momentum, but all gains have been erased as a result of the trade balance data.

With the trade deficit putting the US on the back foot and the US fracking sector (oil) struggling, it is likely we will see markets panic if the deficit remains this high in the coming months. Many might even call for a continuation of low interest rates to support capital expenditure and job creation.

The Canadian Trade Balance was also a surprise, with its deficit swelling to a record -3.02B (CAD) as the economy continues to wobble. In the wake of falling oil prices, currency investment in the oil industry has been cut significantly. Although the price of oil has managed to bounce somewhat higher, it is likely we will continue to see the impact over the next few months as investment and job creation both suffer with such depressed prices. With Canada also reliant on the US economy for exports and the US also encountering a slowdown, we could in turn see further economic woes for Canada.

For information, disclaimer note and risk warning visit www.ForexTime.com

May 6 - 12, 2015

10 | BRITAIN VOTES | financialmirror.com

Brittle Britain

By Anatole Kaletsky Which European country faces the greatest risk of political instability and financial turmoil in the year ahead? With less than a day to go before the British general election on May 7, the answer is both obvious and surprising. Once a haven of political and economic stability amid the turmoil of the euro crisis, the United Kingdom is about to become the European Union’s most politically unpredictable member.

Indeed, continuity is the one election outcome that can almost certainly be excluded. Unless opinion polls are inaccurate to a degree unprecedented in British history, the two parties comprising the government coalition, Prime Minister David Cameron’s Conservatives and the Liberal Democrats, have almost no chance of winning a combined parliamentary majority.

One possibility – with a probability slightly above 50% according to the polls – is that Britain, the birthplace of Thatcherism and the EU’s standard-bearer of neoliberal economics, will soon have a Labour-led government committed to the biggest taxraising programme since the 1970s.

Moreover, because of the peculiarities of the British electoral system and the rise of Scottish and Welsh nationalism, a Labour government’s survival would depend on the support of parties with even more radical economic agendas and dedicated to dismantling the UK. Another scenario – almost as probable as a Labour-led coalition – is a weak and unstable Conservative government. To judge by the opinion polls, Cameron’s best hope is to win more parliamentary seats than Labour and try to form a minority government, which could survive as long as the other parties failed to unite against it. This might be possible, because the Liberal Democrats and Scottish Nationalist Party may see benefits in allowing a weak Conservative government to remain in power, at least for

a while.

But a minority Conservative government would create additional uncertainties and risks. Cameron would be more vulnerable than any leader in postwar British history to blackmail by his own party’s dissidents and extremists, who see it as their historic mission to pull Britain out of the EU. And a minority government would be unable to pass any controversial legislation that the Scottish Nationalists opposed.

Moreover, Britain’s political institutions might be unable to cope. The UK’s unwritten constitution is based entirely on tradition and precedent. That arrangement has always presupposed strong governments with clear mandates. The constitution is so poorly adapted to coalitions and minority governments that some legal scholars question whether the Queen should address Parliament on behalf of “her” new government if there is a risk that it will be toppled within a few weeks or months.

And yet, although the electoral arithmetic makes a stable centrist government – one that could maintain Britain’s current policies on taxes, economic management, and Europe – almost impossible to imagine, continuity is the outcome that most international business leaders and politicians seem to expect.

The clearest evidence of this can be seen in financial markets. Although the pound has declined by about 10% from its peak of $1.70 last September, sterling weakness has simply reflected the dollar’s strength. In the same period, sterling has risen almost 10% against the euro, while British share prices have hit all-time highs and government bonds have generated better returns in Britain than in the United States, Germany, or Japan.

What accounts for this apparent indifference – also evident among European politicians – to the looming political risks in Britain?

Many international observers believe that politics simply no longer matters much in Britain, because the economy is fundamentally sound and growing at a fairly healthy pace. But this is a dangerously complacent argument.

Yes, Britain recorded the fastest economic growth among the major OECD countries in 2014 and has an unemployment rate of only

half the EU average. But these favourable indicators obscure a source of enormous risk: one of the world’s largest external deficits, financed last year by foreign-capital inflows totaling $160 bln. The currentaccount gap, at 5.5% of GDP, is by far the highest among the major OECD countries and is at a level long associated – both in the UK and elsewhere – with the onset of financial crises.

As long as Britain was a haven of political stability and tax policies favourable to foreign investors, it had no problem attracting capital inflows. But the impending shifts in Britain’s politics and its EU relations are bound to draw attention to the economy’s extreme dependence on foreign finance.

A Labour government, wielding tax proposals specifically designed to hit private foreign investors, would certainly discourage inflows. But international investors might be equally put off by a weak Conservative government dominated by the party’s Europhobe wing. In either case, GDP growth is likely to slow as business confidence, consumption, and house prices suffer – either from new taxes under Labour or from uncertainties about EU membership under the Conservatives.

Another reason why international observers may be ignoring such obvious risks is that they have been preoccupied with more dramatic events in Greece and Ukraine.

Politicians, financial analysts, and political commentators have limited time and attention. They tend to focus on whatever

seems to be the biggest and most urgent story, and British politics has not been it.

Then again, many apparently sophisticated analysts may simply be in a state of psychological denial. Surveys of business and financial opinion in Britain show clear majorities in these groups expecting a sudden swing toward the Conservatives in the closing days of the election campaign, resulting in a stable coalition government and continuity in economic and political conditions.

Such a last-minute shift in voting intentions is possible, but the time for it is running out. In fact, British public opinion has remained uncannily stable, not only during the official election campaign, but throughout the past 12 months. There are simply no rational grounds for expecting either the Conservatives or Labour to achieve the decisive victory needed to form a stable government.

The upcoming election will therefore mark the beginning, not the end, of a period of uncertainty for British politics, economics, and finance. No amount of lingering faith in stability will change that.

Anatole Kaletsky is Chairman of the Institute for New Economic Thinking and the author of Capitalism 4.0, The Birth of a New Economy. © Project Syndicate, 2015. www.project-syndicate.org

Britain’s hotly contested election is causing a stir

By Oren Laurent President, Banc De Binary

We are currently witnessing the most closely contested election in British politics in over 20 years. The country is now ready to take to the polls and cast its ballots. Amid all the speculation and uncertainty, most analysts can agree on one only fact: there won’t be a strong majority.

Opinion polls indicate that David Cameron and the ruling Conservative party are closely tied with Ed Miliband and the Labour party currently in opposition. If neither party wins an outright majority, as looks likely, one of them will be forced to create a coalition government with a smaller party. The Liberal Democrats, at present in coalition with the Conservatives, could potentially go either way.

More controversially, the Scottish National Party which has risen from almost nothing, is taking centre stage in the election battle. Its fierce leader Nicola Sturgeon has won over the Labour vote across Scotland, but Cameron is warning

that the SNP could team up with Labour and hold the party hostage, only contributing to a majority government if they can push through measures that benefit the Scots and get rid of Trident nuclear deterrent at the expense of the rest of Britain. That’s certainly a very frightening scenario, albeit perhaps a slightly exaggerated one.

The uncertain political outlook is giving rise to economic concern: the markets fear volatility and the two main parties have very different approaches. The Conservatives are trumping the fact that the economy has grown 8.4% since they came to power in 2010. They say that the country is only just beginning to enjoy the sacrifices made and that their efforts are still in progress. A Conservative-led government is likely to cut corporation tax and has promised to halt the rise of income tax, winning it the support of the country’s leading business figures. Over 100 senior executives, including, to Miliband’s embarrassment, five businessmen who previously supported Labour, have said that Conservative economic policies signal that the UK is business-friendly and this will boost the recovery.

Labour, however, argues that most average Britons do not feel the benefit of any economic progress. A Labour-led government is likely to increase minimum wage and public sector wages, and has pledged to slow down the overall pace

of spending cuts.

On top of this debate about economic policy is the possibility of a market-shaking referendum. A Conservative victory could lead to a referendum on staying in the EU. Although Cameron is in favour of the Union, he is keen to quieten the far-right, anti-EU, UKIP voice and give the public their vote. Meanwhile, the SNP, if they form a coalition with Labour, may demand another referendum on Scottish independence.

As the sterling and stock markets come under pressure, shaking at the prospect of political deadlock or dispute, the people of Britain will make their decision. Any outcome is possible. And with such strong emotions and convictions coming from multiple factions of the society, a few may need to remind themselves of the wisdom of Winston Churchill: “Democracy is the worst form of government except all those other forms.”

May 6 - 12, 2015

financialmirror.com | BRITAIN VOTES | 11

Election risks to fiscal adjustment modest

By Giacomo Barisone Less than a day ahead of the general election, the outcome is still uncertain. Opinion polls suggest that the election is likely to result in a hung parliament with no single party having a majority, raising the prospect of a second election before the end of the year.

Neither the Conservatives nor Labour have established a conclusive lead in the opinion polls (both around 33.5% each on average), while the Liberal Democrats have seen their position decline to 8% from 23% in 2010. Moreover, the rising support for the Scottish National Party (SNP) following last year’s independence referendum and for the Euroskeptic Independence Party (UKIP) pose increasing challenges for the main parties, potentially depriving them of key seats in the election. Based on current opinion polls, the SNP looks to become the third largest party in the UK, likely to win up to 56 seats located solely in Scotland. By contrast, despite its visibility in the opinion polls, UKIP could win fewer than five seats.

The decline in support for the three mainstream parties and the rising popularity of the alternative parties makes the outcome less predictable than in 2010. Based on current projections of seats in parliament, DBRS’s current view is that the most likely outcomes are a minority single party government (Conservatives 280 seats or Labour 270 seats) or a minority coalition (Conservatives with the Liberal Democrats 27 seats, or Labour with the Liberal Democrats with external support from the SNP 47 seats). A Labour coalition that included the SNP is currently unlikely, but not impossible as it could contribute to a majority coalition.

However, neither a period of political uncertainty following the elections, nor the composition of the next government would likely affect DBRS’ AAA Stable sovereign ratings on the UK. All three major parties share a consensus in favour of fiscal consolidation, even if the approach and pace differ to some extent. Moreover, the robust fiscal framework in place and the oversight by the independent Office for Budget Responsibility (OBR) create sizeable constraints against fiscal loosening.

Responsibility, which was passed into law in mid-January means that the Conservatives, Labour and Liberal Democrats have similar fiscal targets.

These are: (i) a cyclically adjusted current balance on a rolling three-year horizon and (ii) a falling debt-to-GDP ratio in 2016-2017. These fiscal targets are similar to those of the current coalition and would, if adhered to, be sufficient to put the debt to GDP ratio on a steady downward trend over the medium term.

Parties agree on fiscal consolidation In the 2015 Budget, the OBR estimated that the incumbent coalition’s fiscal plans would tighten policy by 5% of GDP over five years. This would put the debt-to-GDP ratio on a downward trend, falling to 81.4% in 2019-2020 from 88.8% in 2015-2016, and would turn the cyclically adjusted current balance from a deficit of 2.2% of GDP into a surplus of 2.1% of GDP in 2019-2020. These plans are in excess of the Charter for Budget Responsibility (CBR) targets, which only require a zero cyclically adjusted current balance deficit, not a large surplus.

The main difference between the three main parties over fiscal policy would likely rest with the size, the pace of the consolidation and the composition of the expenditure cuts and increases in taxes. The Conservatives have pledged to eliminate the deficit by 2018-2019, largely through departmental spending cuts and welfare spending reductions with no major tax hikes. Labour and the Liberal Democrats have also committed to fiscal consolidation and aim to meet the CBR targets, but not to over-achieve.

Labour, in particular, advocated a fiscally neutral mix of a higher tax burden (imposing a tax on expensive properties, raising the top rate of income tax, and increasing the tax on the banking sector) and additional spending. The Labour plan may translate into a target for a cyclically adjusted current surplus of 0.5% of GDP, consistent with the CBR targets, allowing for extra spending from 2017-2018 onwards versus the Budget plans. As a result, a Labour-led government would need to tighten fiscal policy by 2.5% to 3% of GDP in the first three years after the election (similar to the coalition’s current plans), with a neutral stance thereafter.

Political risks are modest

Increased risk of break-up

A period of moderate uncertainty seems likely following the election if cross-party negotiations are required before a government can be formed and a set of policy priorities agreed upon. From a policy perspective, DBRS does not expect a substantial deviation from the current fiscal policy stance. All three major parties likely to be part of any coalition or minority government remain committed to a multi-year fiscal consolidation programme.

The strong cross-party support for the Charter for Budget

An election outcome that results in a greater role for the SNP in the UK government could well renew concerns about the potential for a break-up of the UK. An increased SNP role could embolden those who favour independence for Scotland. At the same time, it could exacerbate unease in England over the role of Scottish MPs in governing English affairs and the perceived fiscal impact of devolution. Over time, such pressure coming from both sides could put more momentum behind Scottish independence.

Voter turnout in national elections typically underestimated Which countries have the highest rate of turnout for national elections? Ipsos Mori conducted a survey listing the public’s average guess for turnout versus actual turnout.

With the UK general election swiftly approaching, the public guessed that Britain’s voter turnout is 49%. However, in reality, the actual number is 66%. France leads the way with an actual turnout of 80%. The average guess was far lower in the survey - just 57%.

Why is there such a considerable gulf between Britain and France in voter turnout? Some observers believe it is related to timing. Traditionally, the British general election takes place on Thursday, a working day, whereas the French typically vote on a Sunday. Naturally, there are more factors influencing turnout, many of them cultural. Italy also records an impressive turnout with a 21% point difference between the actual number and average guess. Respondents in the United States were spot on when they were asked to guess voter turnout. The public guessed 57% while the actual number is 58%.

Moreover, discussion of EU membership could exacerbate such tensions.

Uncertainty over EU membership A Conservative-led majority government would raise the risk of an eventual departure from the EU because it would be committed to hold a referendum by the end of 2017.

Whether the referendum yields a yes or no vote will crucially depend on how a Conservative-led government manages to renegotiate conditions of the UK’s membership in a number of policy areas prior to the referendum. These include: enhancing competitiveness through less regulation, policy flexibility through opt-out rules, returning power to member states, and immigration policy changes. If renegotiations are successful, the government could present the results to the British electorate and support continued membership of the EU. Over the medium-term, the repercussions for the UK from leaving the EU would partly hinge on what alternative trade agreements the UK could negotiate bilaterally with the EU. With the UK importing more from the EU than it exports, and UK GDP worth 14% of total European GDP, DBRS expects that the UK would succeed in negotiating a new settlement that replicates at least part of current trade arrangements. However, not reaching such a settlement would adversely impact business investment and growth prospects with potentially negative implications for DBRS’ sovereign ratings on the UK. Giacomo Barisone is Senior Vice President, DBRS Sovereign Ratings Group gbarisone@dbrs.com

May 6 - 12, 2015

12 | PROPERTY | financialmirror.com

U.S. home prices rising fastest in Colorado and South Carolina Home prices in the United States rose for the 37th consecutive month in March, and the monthly increase ticked up at a higher rate. Compared with March 2014, home prices rose 5.9%, including the sales of distressed properties. The year-on-year February increase was 5.6%. March home prices rose by 2.0% from February prices, which had risen 1.1% over January prices.

The five states with the largest peak-tocurrent declines, including distressed transactions, were Nevada (34.7%), Florida (31.5%), Rhode Island (29.0%), Arizona (27.4%) and Connecticut (25.5%), according to research firm CoreLogic. Peak home prices occurred in April 2006.

Including sales of distressed properties, the five states posting the largest year-onyear increases in March were Colorado (9.2%), South Carolina (9.1%), Kansas (8.0%), Texas (8.0%) and Nevada (7.6%).

Excluding sales of distressed properties, the five states posting the biggest price increases over the past 12 months were

Kansas (9.5%), Colorado (8.5%), South Carolina (8.2%), Florida (7.9%),and Texas (up 7.6%).

“All signs are pointing toward continued price appreciation throughout 2015. In fact, the strong month-over-month gain in March may be a harbinger of accelerating price

appreciation as we enter the spring selling season,” CoreLogic said in a statement.

It added that tight inventories, job growth and the inexorable impact of demographics and household formation are pushing price levels in many states, and especially large metropolitan areas like Dallas, Denver,

Houston, Seattle, and San Francisco, toward record levels.

CoreLogic has forecast that home prices will rise 0.8% month-on-month in April and rise by 5.1% between March 2015 and April 2016. Both projections include distressed sales.

In its latest report based on a survey of senior loan officers, the Federal Reserve noted that “regarding loans to households, banks reported having eased lending standards for a number of categories of residential mortgage loans over the past three months on net. Most banks reported no change in standards and terms on consumer loans. On the demand side, moderate net fractions of banks reported stronger demand across most categories of home-purchase loans. Similarly, respondents experienced stronger demand for auto and credit card loans on balance.”

Banks are willing to lend and buyers are willing to borrow. Now inventory just has to catch up. (Source: 24/7 Wall St.com)

Natura and old mentalities µy Antonis Loizou Antonis Loizou F.R.I.C.S. is the Director of Antonis Loizou & Associates Ltd., Real Estate & Projects Development Managers

In Cyprus, we unfortunately have the mentality that if an area is classified as a Natura reserve, then there cannot be any development. And yet, the ease with which ‘experts’ designate areas as Natura, contradict the harshness of those who impose restrictions on development.

In a country that is 40% occupied, part of the rest is held by the British Bases, archaeological sites and for other uses, not much remains for development, which is not helped by the foolish low building coefficients, particularly in the coastal areas. The 15-20% coefficient along the coast is the worst of all resulting in our coastal areas being filled with housing that look more like military barracks, particularly in the areas of Larnaca and Polis, as well as other areas which, with the exception of Limassol, have restricted these areas for projects geared only at the rich.

When urbanist Angelos Demetriou suggested the seafront of Protaras be converted to high building coefficients of 160% and 8-10 floors with large open spaces around, it was as if someone had started revolution (which it was) because it upset the existing establishment of an erroneous mentality.

And reviewing the local plan, not only have the coefficient rates not increased, but they have decreased.

When someone visits the popular seaside resorts from America to Europe and Australia, one finds tall buildings with large open spaces around. We here have adopted low

buildings without open spaces, as if we have the vast land areas of Australia. Note that there are new generations that follow who will also have the need for tourism and other land.

But as things change and the building coefficients gradually increase, in an attempt to correct the errors of the past, in the end no one knows how the adjacent piece wil develop and if a two-floor unit suddenly becomes 3 or 4 floors. Those traveling from Larnaca airport can see the “camps” of holiday home developments that are dull and too restrictive for development. Therefore and in addition to increasing coefficients especially in development areas, there certainly should be restrictions imposed in non-development areas. Natura however, is another matter.

Natura, as explained by the European Commission, does not mean a total ban on development but a mild rate of growth within a protected environment. The Commission’s decision to allow a minimum rate of development at the Fontana Amorosa (Photiades) project was the first slap in the face for the so called defenders of the environment, while another decision on the fate of a factory in Hungary within the Natura region, is very interesting.

The expansion of the factory within the Natura area over land of 2,085 donums (208 hectares) was a major concern for the Commission, which concluded that it was more important to consider the new jobs that would be created, as well as the positive impact on the economy and the interests of the state. That decision was identical to other areas including Akamas, since the area has low income levels, without the new job opportunities allowing migration from rural areas.

The new marina project in Ayia Napa almost did not go ahead for environmental reasons, while two proposals for the

construction of a hospital by foreign investors near the old Nicosia airport had the same fate. Now we eagerly await the area to be chosen by the investor for the casino, and what objections will be raised by the wise environmentalists, while we also have the complaint of the Environment Commissioner who reported Cyprus (her employer) for the Limni waterfront golf resort for which Cyprus will have to pay a fine over the next few months.

So, without even considering the investment of 30 mln euros for environmental restoration that the investor pumped into the area, the Environment Commissioner has reported us. Where, then, is the public interest, jobs and other benefits for the area that has a high employment rate?

Natura and environmental protection is for the best, but this should be studied in conjunction with the cost of penalties that the state will have to pay because of the limitations imposed and the higher cost of executing large projects (eg. Akamas, Paralimni Lake, Vrachia on the Ayia Napa-Paralimni road, etc).

But everything is relevant. We should not abolish Natura and destroy the environment just to fill plots and houses, but the plans and decisions should be taken within a practical sense and within the ability of the state, and certainly what is of the utmost importance is the public interest.

I cannot forget when 15 years ago an environmentalist who had been attacking us for our views on development, as soon as his field was designated as ‘residential’, he did not hesitate to cut down the old olive trees dating to the Venetians in order to separate plots on his land, while in time he claimed he resigned from the Environmental Association for reasons of sensitivity. This is who we are. www.aloizou.com.cy

ala-HQ@aloizou.com.cy

Dubai sales may continue to slide by 1-5% in H1, before stabilising in H2 A recent report for Deloitte Financial Advisory reveals that retail property sales in Dubai will continue to rise in 2015. It added that super prime malls will experience further growth in tourist numbers whilst residents will drive demand for convenience retail and non-mall retail concepts.

“The report projects that sales of residential units in Dubai may continue to slide by 1% to 5% in H1 2015, before stabilising in the second half of the year. We are aiming to grow our portfolio to AED 500 mln ($136 mln) by end of 2015 and we are confident of achieving this target,” said Hafeez Abdullah,

Chairman of The H Holding Enterprise.

For many newcomers, the real-estate industry has been giving excellent returns, according to Abdullah. Dubai’s property market has experienced another year of

change, with a leveling off in capital growth, in certain areas, towards the end of the calendar year, said the report.

“Dubai is engaged in upgrading the city’s infrastructure ahead of Expo 2020, which promises to be the best in the history of the Expo. This is being done through infrastructure spending and encouraging foreign investments in various sectors, which will provide market support over the next five years,” said Abdullah.

“The property is yielding the highest returns and we are satisfied with the current scenario in the market in Dubai.”

Deloitte experts believe that residential transactions have slowed to more sustainable levels, reflecting a longer term trend, and predict this level of transactions to continue for the rest of the year.

Tourism also plays a key role, with many big-time developers starting to shift their focus to international tourist footfall.

“The world now knows Dubai as a dream vacation destination. This boosts the demand for hospitality and residential units.

Factors like central location, access to public transport, ease of parking, high quality specifications and wide range of amenities trigger high occupancies,” said Abdullah.

May 6 - 12, 2015

financialmirror.com | PROPERTY | 13

Immovable property tax absurdities Association of Property Owners’ proposals accepted

By George Mouskides

The Cyprus Association of Property Owners (KSIA) has received complaints from its members and others that the values placed on properties for the benchmark 1/1/2013 valuation were unacceptably high.

A lot of people waited to see the new level of the 2015 tax before filing a complaint.

April 25 was the last date for filing an objection and many rushed to do so at the last minute. Better late than never, our suggestions to extend this period until 31/12/2015 were finally accepted.

Despite this, there are still a few issues regarding the Immovable Property Tax (IPT) that need to be resolved: 1. It is already May 2015 and we still do not know if we’ll be paying IPT based on 1/1/1980 values or those of 1/1/2013.

2. The government has accepted that the 1/1/2013 valuations were rushed due to the memorandum deadlines, something which translates to inaccurate valuations. Based on this, why are owners asked to pay high fees to the government just to be able to file an objection? Is this a way to deter objections and take some workload off the shoulders of the government?

3. Why must the IPT be calculated and set around June to July each year and be payable in October? The liability to pay tax lies with whoever was the owner on the first day of January of the same year. Isn’t this strange, especially if someone sells a property during the first months of the year?

It would make more sense to set the IPT from the previous

year.

4. Why does the level of IPT depend on who is the owner of a specific property? This method of taxation only complicates matters, especially if it is based on objections filed and the value of properties changes. It would be much better if the IPT was set at a fixed percentage for all properties so that owners would easily calculate what is due. The present taxation leads to strange phenomena. If, for example, a 4-member family has four properties, owned by the mother, a higher IPT would have to be paid than if each property was owned by each family member separately. This leads to members of the same family transferring ownership to another family member.

5. The IPT is one of three taxes paid by owners based on either the 1/1/1980 or 1/1/2013 valuations. The others are the sewerage fees and the property tax paid to municipalities.

Since we are talking about one and the same property shouldn’t all three be incorporated into one to make life easier both for the state and its citizens?

Also, the level of taxation should be directly connected to the services offered to the property, like the development of green areas, rather than the financial needs of the state, the municipalities and the sewerage boards.

Taking the opportunity of the objections for the 1/1/2013 valuations, there appear to be several absurdities in the taxation of properties.

KSIA has identified several matters that need to be changed in the real estate sector.

The state lacks a taxation strategy and seems to show no respect to its citizens. The strategy should revolve around sensible property taxation levels to make sense for someone financially to buy and own property.

Among other things, taxation should be simple and easy to calculate. It is unacceptable to be liable for 11 different

taxations and fees, payable to six different departments/authorities. It is also unfortunate for anyone not to know the level of tax payable for the running year.

Do the officials believe we are all masochists and wish to punish ourselves?

When politicians decide on something, should they not have the interest of the people and the country as their main criterion?

We appeal to officials to reduce and simplify taxation so that citizens are in a position to easily forecast what they will be paying over the next few years.

George Mouskides is Vice Chairman of Cyprus Association of Property Owners, (KSIA) and General Manager, FOX Smart Estate Agency

May 6 - 12, 2015

14 | WORLD MARKETS | financialmirror.com

China: To QE or not to QE? Marcuard’s Market update

by GaveKal Dragonomics Reports that China’s central bank is preparing to launch quantitative easing may give investors the impression that the People’s Bank of China is about to join the ranks of major central banks that have embraced unconventional monetary policies.

This impression would be false. The PBOC is certainly in easing mode, but its methods have been, and will continue to be, entirely conventional.

With the benchmark deposit rate still at 2.5%, the central bank has plenty of room to cut interest rates before it approaches the zero bound at which other central banks instituted QE. We expect 50bps of rate cuts this year, as well as a sizable reduction in bank reserve requirements. And while the PBOC does look likely to take steps that may superficially resemble the liquidityenhancing measures of central banks elsewhere, any such steps will be aimed specifically at helping China’s local governments to restructure their debt. They will not mean the PBOC is resorting to unconventional policies.

To raise new funds and to refinance maturing debts, China’s local governments are planning to issue RMB1.6 trln in bonds this year, a program that would more than double the value of local government bonds outstanding. So far, however, the program has failed to lift off. Last month, two provinces were forced to delay bond issues

after commercial banks, which will inevitably be the core investors in any successful local government bond program, refused to step up and buy into the proposed issues. To be fair, the banks’ reservations are legitimate.

For one thing, local government issuers are offering only extremely low yields, almost as low as the yield on central government bonds. In addition, there are technical reasons why banks are reluctant to hold local government bonds: the market is illiquid; the risk weighting of local government bonds is higher than for central government or policy bank bonds; and the PBOC doesn’t accept local government bonds as collateral.

To smooth the difficulties, it is likely the PBOC will step in to facilitate the programme of bond issues. The technical objections are easily overcome. The PBOC can tweak its

rules on acceptable collateral so that banks can pledge local government bonds as collateral for central bank funds. The China Banking Regulatory Commission can also lower the risk weighting of local government bond to the same level as central government bonds.

But the most obvious way the central bank could help would be to cut bank reserve requirement ratios more aggressively. Even following this month’s 100bp reduction, the RRR for large institutions still stands at 18.5%. This is surely the highest rate in the world, locking up a vast reservoir of liquidity in the central bank’s vaults. We have argued previously that China needs to cut the RRR by more than 200bps simply to counter the reversal of capital inflows. If the PBOC were to go a step or two further and cut the RRR

by 500bps, it would have some of the effects of quantitative easing in other markets.

Whereas attention has mostly focused on the impact QE has on the asset side of central bank balance sheets, the effect on the liability side is at least as important initially. Just as QE asset purchases elsewhere pushed up central bank liabilities by increasing commercial banks’ excess reserves on deposit at the central bank, so reducing China’s RRR would also raise excess reserves.

In effect this would release a wave of liquidity into the banking system, generating more than enough demand for high quality bonds to absorb the year’s entire local government issuance program.

In short, the PBOC has plenty of conventional tools it can deploy, both to continue to ease monetary policy, and to facilitate the reform of local government finances. It can cut interest rates, it can reduce the reserve requirement ratio in order to inject liquidity into the banking system and it can make technical changes that would have a big impact on the development of the local government bond market. As a result, contrary to what recent reports may have implied, direct asset purchases by China’s central bank are nowhere on the horizon.

Indeed, it is illegal for the PBOC to provide financing directly to the government, and just last week the central bank’s chief economist Ma Jun said in an interview that that the PBOC has no plans to purchase government bonds. There is currently no prospect of quantitative easing in China.

Disney is its own superhero after earnings Walt Disney Co. (NYSE: DIS) reported its fiscal second-quarter financial results before the markets opened Tuesday. The Mouse House had $1.23 in earnings per share (EPS) on $12.46 bln in revenue. That compared to Thomson Reuters consensus estimates of $1.11 in EPS and $12.25 bln in revenue. The same period from last year had $1.11 in EPS on $11.65 in revenue.

On the books, Disney reported $3.75 bln in cash and cash equivalents to end the fiscal second quarter. And it reported free cash flow of $2.87 bln, compared to $2.38 bln in the same quarter of last year.

In terms of its segments, compared to the year earlier, Media Networks increased revenues by 13% to $5.81 bln, Parks and Resorts increased revenues by 6% to $3.76 bln, Studio Entertainment revenues dropped 6% to $1.69 bln, Consumer Products increased revenues by 10% to $971 mln, and Interactive revenues fell 12% to $235 mln.

“The power of this winning combination is once again reflected in the phenomenal worldwide success of Marvel’s “Avengers: Age of Ultron”, which has opened at number one in every market so far,” said Chairman and CEO Robert A. Iger.

Shares of Disney closed Monday up 0.5% at $111.03. After the earnings report came out, shares were up 2% at $113.38 in premarket trading, pushing new highs. The stock has a consensus analyst price target of $110.96 and a 52-week trading range of $78.54 to $111.66.

Light sweet crude oil – Bullish short-term reversal pattern

By Dakis Leontiou FX Prop-trader YESFX Ltd www.yesfx.com.cy Trailing from the bearish movement of the Light Sweet Crude Oil, in a Daily chart, from $90 per barrel as of September 2014, we notice the end of this motion in January. Formation of an inverse Head and Shoulders pattern occurs between the time period of 29 January until 7 April. Left shoulder is formed on 26 February with a low price at $47.80, Head formation on 18 March with a low price

at $42 and the Right shoulder formed on 1 April with a low price at $47.

Sketching our neckline we see a penetration of it and the formation of an uptrend from $52.50 on 14 April. This confirms a bearish reversal trend (uptrend). If the price had started to fall below our neckline then the Head and Shoulders pattern theory would not be valid.

Continuing with our analysis, we set up our expected targets (1st and 2nd target), which is the vertical distance from the head to the neckline, and confirming our values with Fibonacci’s Analysis at the strong points of 50% and 61.8%. The price will reach at some point the value of $63 per barrel and it is expected to rise to $73 $75 per barrel within the coming months.

May 6 - 12, 2015

financialmirror.com | MARKETS | 15

The world’s most crowded trade will settle once MSCI starts to adjusts China’s weight for the reality of a more freely floating currency?

Today, China accounts for 15% of global GDP and about the same share in terms of global equity volume and market capitalisation. Renminbi usage has grown rapidly over the past five years to the point where it is the fifth most used currency in SWIFT settlements. And yet, how many large pension funds, insurance companies, global equity investors, or endowments have 10% of their assets in China today? Or

Marcuard’s Market update

by GaveKal Dragonomics

Markets are made at the margin. As a result, the key driver of prices for a given asset is the question of where the marginal buyer (or seller) comes from. This is why very crowded trades can prove dangerous: by the time every one and their dog is convinced that (i) the euro can only go down (early 2015), (ii) being short long-dated bonds is the single best trade out there (early 2014), (iii) underweighting European equities is the easiest path to outperformance (early 2013) or, (iv) gold will provide good diversifier against widespread currency debasement (early 2012), then the marginal flows start to dry up and asset prices can move rapidly against the consensus. Our point is not to reiterate recent arguments we have made in favour of the euro. It is to state a simple truth that, to rise, markets need a constant stream of new buyers. This reality brings us to what we believe is today’s largest “crowded trade” in most of our clients’ portfolios.

Over the past few years, we have repeatedly highlighted what we believe to be the single most important longterm financial development, namely, the The US dollar is the most crowded trade in the world internationalisation of the renminbi.

This process is now going into overdrive with an especially even 5%? We would venture not more than a handful; and important marker being a vote of the International Monetary this for an obvious reason: China remains an Fund before the end of the year for the renminbi to become inconsequential part of most people’s benchmark. But will a special drawing rights currency. This event draws parallels this still be the case in a few years’ time? to Japan’s currency liberalisation after 1980, when the yen Today, it is fashionable to make fun of China’s roaring was freed-up and made convertible. This led to an upgrade of equity bull market by highlighting that it is driven by retail Japan in most global equity indices. Very quickly, global punters who care little for valuations, business strategies or equity and bond investors were chasing their own tails, management quality. But how much will index funds and pushing up the value of the yen together with Japanese benchmark huggers care about these issues once China’s equity and bond valuations to regular new highs; a decade- true economic and financial importance starts to be seriously long bull market ended once Japan had become 45% of the reflected in the world’s main indices? Such investors helped World MSCI and seven of the top ten companies by market drive Japanese valuations to crazy levels in the mid- to latevalue were Japanese banks.

1980s, despite Japanese corporates hardly being paragons of Fast forward to today and what do we know? On the one value-creation. Much more importantly, back in the 1980s, hand, a recent Citibank survey of the top 72 central banks index funds and other “dumb money” accounted for a showed that by 2025, they plan to move roughly 10% of their relatively small part of the global equity pie. Today, the reserves into renminbi. At current levels of reserves, that is precise opposite is true. roughly $760 bln of bond purchases (to put things in Hence, if China does embrace currency deregulation, and perspective, the current size of the dim-sum bond market is if as a result all index providers are forced to upgrade China’s roughly $110 bln—so the Chinese government better start weight in global indices, the wave of “forced buying” of issuing debt fast!). On the other hand, we also know that Chinese equities could end up being a tidal wave which China is currently 0% of the World MSCI and 1.7% of the sweeps away the very idea of index investing. A distinct MSCI All-Countries index. Who is to say where the number possibility which brings us to the title of this piece: the single

www.marcuardheritage.com

biggest anomaly in the world today is how almost every investor around the world has safely ignored a doubling of the Shanghai stock market over the past year. In essence, outside of a few Chinese retail investors, everyone is “short/massively underweight China”, or at the very least will be once global bond and equity indices start to reflect the reality of a China more open to foreign investment flows.

And not only is this underweight China position the most crowded trade amongst all institutions; but almost no-one realises that they, along with all their friends, have it on!

WORLD CURRENCIES PER US DOLLAR CURRENCY

CODE

RATE

EUROPEAN

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

BYR GBP BGN CZK DKK EEK EUR GEL HUF LVL LTL MTL MDL NOK PLN RON RUB SEK CHF UAH

14320 1.5117 1.765 24.664 6.7372 14.1219 1.1079 2.312 272.38 0.63432 3.1163 0.3875 17.88 7.6599 3.6312 3.9949 51.6412 8.4024 0.9397 20.775

AUD CAD HKD INR JPY KRW NZD SGD

0.7874 1.2113 7.7515 63.405 120.29 1081.51 1.331 1.3375

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

0.3770 7.5765 27993.00 3.8768 0.7079 0.3019 1513.00 0.3849 3.6402 3.7500 12.0559 3.6729

AZN KZT TRY

1.0435 185.76 2.7127

AMERICAS & PACIFIC

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

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.

ASIA

Azerbaijanian Manat Kazakhstan Tenge Turkish Lira

The Financial Markets

Note:

* USD per National Currency

Interest Rates Base Rates

LIBOR rates

CCY USD GBP EUR JPY CHF

0-0.25% 0.50% 0.05% 0-0.10% -0.75%

Swap Rates

CCY/Period

1mth

2mth

3mth

6mth

1yr

CCY/Period

USD GBP EUR JPY CHF

0.18 0.51 -0.06 0.07 -0.82

0.23 0.54 -0.03 0.09 -0.81

0.28 0.57 -0.01 0.10 -0.80

0.41 0.70 0.06 0.14 -0.71

0.72 0.99 0.18 0.25 -0.59

USD GBP EUR JPY CHF

2yr

3yr

4yr

5yr

7yr

10yr

0.85 1.01 0.09 0.14 -0.67

1.18 1.23 0.15 0.16 -0.55

1.44 1.40 0.23 0.21 -0.41

1.65 1.55 0.32 0.27 -0.26

1.95 1.76 0.50 0.40 -0.01

2.22 1.95 0.72 0.58 0.24

Exchange Rates Major Cross Rates

CCY1\CCY2 USD EUR GBP CHF JPY

1 USD

Opening Rates

1 EUR

1 GBP

1 CHF

100 JPY

1.1079

1.5117

1.0642

0.8313

1.3645

0.9605

0.7504

0.7040

0.5499

0.9026 0.6615

0.7329

0.9397

1.0411

1.4205

120.29

133.27

181.84

0.7812 128.01

Weekly movement of USD

CCY\Date

31.03

07.04

21.04

28.04

05.05

CCY

Today

Last Week

USD GBP JPY CHF

1.0742

1.0875

1.0679

1.0820

1.1071

0.7266

0.7302

0.7171

0.7102

0.7324

128.96

129.89

127.39

128.74

132.81

1.0405

1.0399

1.0205

1.0323

1.0349

GBP EUR JPY CHF

1.5117 1.1079 120.29 0.9397

1.5254 1.0894 118.99 0.9548

%Change +0.90 -1.70 +1.09 -1.58

May 6 - 12, 2015

16 | WORLD | financialmirror.com

Putin on parade

By Nina L. Khrushcheva This May’s parade in Moscow to commemorate the 70th anniversary of the end of World War II promises to be the greatest Victory Day celebration since the Soviet Union’s collapse. Some 16,000 soldiers, 200 armoured vehicles, and 150 planes and helicopters are set to pass through and over Red Square. It will be a scene that would easily have been familiar to Soviet leaders like Leonid Brezhnev and Nikita Khrushchev, taking the salute atop Lenin’s tomb.

Yet, though Russia’s WWII allies were from Europe and North America, no Western leaders will attend the commemoration – a reflection of the West’s disapproval of Putin’s invasion of Ukraine and annexation of Crimea. Instead, Russian President Vladimir Putin’s high-profile guests will include the leaders of China, India, and North Korea, underscoring just how few friends Russia has these days.

The surreal nature of this gathering reflects the increasingly bizarre nature of Putin’s regime. Indeed, watching Russia nowadays is like watching the last installment of the X-Men film franchise, “Days of Future Past.” Just as the X-Men join forces with their younger selves to save mankind’s future, today’s Kremlin is harking back to Russia’s Soviet past in what it sees as

a contemporary fight for the country’s survival.

Critical to this strategy is propaganda conflating the West today with the Germans who invaded Russia in 1941, while painting Ukrainian government officials as “fascists” and “neo-Nazis.” The Kremlin has relied on such claims, together with the supposed need to defend Russians abroad, to justify its aggression against Ukraine. In Putin’s speech following the annexation of Crimea, he charged that the West’s refusal “to engage in dialogue” left Russia with no choice. “We are constantly proposing cooperation on all key issues,” he declared. “We want to strengthen our level of trust and for our relations to be equal, open, and fair. But we saw no reciprocal steps.”

A month later, Putin reinforced this image of Russians as the morally superior victims of a cruel and uncompromising West. “We are less pragmatic than other people, less calculating,” he asserted, before adding that Russia’s “greatness” and “vast size” means “we have a more generous heart.”

It is not difficult to see the parallels between Putin’s approach and that of Joseph Stalin, who declared at the start of WWII that the “enemy” aims to destroy Russia’s “national culture,” to “Germanise” its people, and “convert them into slaves.” The difference, of course, is that the Nazi Wehrmacht actually invaded the Soviet Union, whereas Ukraine simply wanted to decide its own future.

Without defending Stalin, one must recognise the immense Soviet contribution –

including the lives of 26 mln citizens – to the Allied victory in WWII. At the time, the military parade in Red Square – featuring almost 35,000 troops, up to 1,900 pieces of military equipment, and a 1,400-man orchestra – was a well-deserved pageant. The Soviet leadership spared no cost in staging its military displays, which, in the absence of an external military threat, became an important vehicle for rallying national unity.

After the Soviet Union’s collapse, Russia, no longer a superpower, put its military spectacles on ice. But in 2005, to commemorate the 60th anniversary of the end of WWII, Putin held a major parade – one that Western leaders, believing that Russia might have a European future, did attend.

The tone of this year’s Victory Day commemorations is far less anticipatory.

How can one celebrate the end of a war at a time when the descendants of those who fought it (undoubtedly driven by the hope that future generations would live in peace) are killing one another in a brutal little war in eastern Ukraine? What is the point of grandiose fireworks displays amid the firing of real howitzers and rockets?

The historian Robert Paxton believed that one could tell much about a country by its parades. His 1966 book ‘Parades and Politics at Vichy’ describes how Philippe Pétain, as Chief of State of Vichy France, used pageantry, reactionary politics, and, of course, a partnership with Adolf Hitler to dupe his defeated country into believing that it still mattered in the world. The Vichy state’s brand of authoritarian traditionalism

lionised family and fatherland, with Pétain, a former military commander, serving as a kind of military king, exalted on the tribune.

The parallels with Putin’s Russia are clear.

Putin views himself as a new czar. His KGB background dictates his leadership style, which includes the abolition of free and fair elections, the persecution of opponents, and the promotion of conservative values that he, like Pétain before him, juxtaposes with the corrupting influence of an “immoral” and “decadent” West.

Relying on this approach, Putin has built alliances with the likes of Syria’s President Bashar al-Assad and Egypt’s military ruler Abdel Fattah el-Sisi. China, the world’s second largest economy, is a useful addition to this collection of friendly anti-democratic states, as it has its own strategic grievances with the West.

Unlike China, however, Russia is not a rising superpower. Putin may try to portray his actions in Ukraine as a fight against fascism. But it is really a fight for relevance – a fight he will never win. No matter how grand the parade, he cannot hide the truth: Russia’s days as a superpower are in the past.

Putin’s patriotism, like Pétain’s, is that of the vanquished.

Nina L. Khrushcheva is a dean at The New School in New York, and a senior fellow at the World Policy Institute, where she directs the Russia Project. © Project Syndicate, 2015. www.project-syndicate.org

Reengineering government

By Jean Pisani-Ferry Since the financial crisis erupted in 2008, governments in advanced countries have been under significant pressure. In many countries, tax receipts abruptly collapsed when the economy contracted, income dwindled, and real-estate transactions came to a halt. The fall in tax revenues was in most cases sudden, deep, and lasting. Governments had no choice but to raise taxes or to adjust to leaner times.

In some countries, the magnitude of the shock was such that a large tax increase could not fill the gap. In Spain, despite tax hikes worth more than 4% of GDP since 2010, the tax-to-GDP ratio was only 38% in 2014, compared to 41% in 2007. In Greece, tax increases amounted to 13% of GDP during the same period, but the tax ratio increased by only six percentage points. Elsewhere, political limits to tax increases were reached before the gap could be filled.

Willingly or not, priority is being given to spending cuts.

Disillusion about future growth adds to the pressure. The productivity record has generally been weak over the last few years, and this suggests that growth in the years ahead could be slower than previously expected. Revenue growth thus looks insufficient to match the surge in age-related public spending on health and pensions.

This is a very different crisis from those experienced in the 1980s and the 1990s. Back then, the main issue was political: the legitimacy and efficiency of public spending was under attack. In the words of US President Ronald Reagan, government was the problem, not the solution. The state, it was loudly proclaimed, had to be rolled back.

By contrast, today’s concerns are economic. Partisan disagreement about the proper scope of government remains, but there is no overall rejection of state intervention. Often, it is not interests or ideologies that make public spending cuts unavoidable – just facts.

How can governments rise to the challenge? The risk they

face is clear enough: absent a profound reengineering, inertial spending – owing to entitlements and civil-service wages – is bound to crowd out spending on new priorities and new policies.

Already, the countries that have been forced to cut the most have generally sacrificed public infrastructure investment. Research is another area at risk. Social investment in programs that pay off over the long term, such as pre-school child care, is suffering from financial constraints. National security is not given the priority it deserves, despite growing threats. Last but not least, makeshift solutions such as protracted wage freezes may eventually erode the quality of public services.

Fortunately, there are a few things governments can do to mitigate the effects of inertial spending. For starters, they can simply systematise evaluations of the efficiency of public money. In most countries, such assessments are still rare and haphazard: Parliaments often enact policies without knowing whether they are worth the money, and it may take a very long time before ineffective or inefficient policies are terminated. That is why enabling legislation for spending programmes should contain sunset clauses, with extensions subject to independent evaluation.

Second, spending reviews, too, should be systematised.

Setting priorities – whether to spend more on education and less on pensions, for example, or whether to invest in infrastructure or in research – entails hard choices that should be made explicit. In an ideal world, these choices would be the focus of electoral debates and parliamentary work. But behind every budget line is a constituency tempting policymakers to eschew hard decisions. That is why structured spending reviews are useful: they force officials to bridge the gap between ends and means and encourage informed democratic decision-making.

Third, governments should equip themselves with a reengineering budget. As private companies know, transformations – deep changes in the way things are done – often cost money before they bring savings. This may be because the changes require investment in new technology, retraining of employees, or simply buying stakeholders’ consent. Money earmarked in the budget for such reengineering of government programs would be a good

investment.

Fourth, governments should promote public-sector innovation. Contrary to popular prejudice, local governments and public agencies do innovate; what is missing is a mechanism to select and disseminate innovations in the same way the market selects new products or cost-saving processes. A better way to deliver a public service may remain unknown for years. That might well change if governments took simple steps like allocating more funding on a project basis and organising contests. For example, schools in disadvantaged neighbourhoods should be allowed to tender for funds for educational innovation.

Last but not least, people should be empowered. Citizens want a more nimble state that tailors its operations to local needs. In the digital age, they want it to meet new standards of speed, reliability, and personalisation. They increasingly challenge the traditional view that efficiency and equality imply less individual choice. And they want the government to be open, to guarantee access to data, and to make its efficiency and effectiveness directly observable.

These are powerful forces for change, and embattled governments should harness them to the goal of achieving the reengineering they so urgently need. The alternative is to accept the deterioration of the quality of public services, which would lead only to a loss of government legitimacy and, with it, a diminishing willingness to pay taxes.

Jean Pisani-Ferry is a professor at the Hertie School of Governance in Berlin, and currently serves as the French government’s Commissioner-General for Policy Planning. © Project Syndicate, 2015. www.project-syndicate.org

May 6 - 12, 2015

financialmirror.com | WORLD | 17

An Asian community can wait

By Koichi Hamada In the world of international finance, conflicting monetary and exchange-rate policies compete for advantage and countries battle for influence over the rules of the game. After all, just as investors compete to maximise their profits, countries compete to ensure that international rules and norms are agreeable to them. That is why agreeing to an international economic regime – say, establishing a fixed exchange rate, or adopting a common currency – is a deeply political decision. And today’s Asia faces many such decisions.

Economic integration is a hot topic in the region. From the negotiation of the mega-regional Trans-Pacific Partnership to the establishment of China-led investment platforms – including the Silk Road Fund and, most recently, the Asian Infrastructure Investment Bank (AIIB) – Asia is becoming more interconnected than ever.

As a result, some observers may find the notion of increased monetary integration – even the establishment of a fixed exchange-rate regime based on, say, the Chinese renminbi or the Japanese yen – highly appealing. But I would argue that the flexible exchange rates that prevail today remain Asia’s best bet for boosting prosperity and protecting it from shocks.

To understand the advantage of maintaining a flexible exchange rate, one needs look no further than the recent growth trajectories of the advanced economies. After the 2008 economic crisis, the United States and the United Kingdom were able to employ unconventional monetary policies to escape recession. Japan adopted similar policies in late 2012 to escape two decades of stagnation.

Members of the eurozone, however, lacked such an option. European Central Bank President Mario Draghi was

eventually able to pursue policies aimed at devaluing the common currency, but not before years of painful austerity, deep recession, social strife, and political instability in many eurozone member countries.

Against this background, it seems anachronistic to consider the possibility of establishing anything like a unified currency in Asia, where institutional disparities are far deeper, and the variety of economic shocks far greater, than in Europe. To hope for a unified currency in Asia seems almost like hoping for the region’s own Greek crisis.

This has important implications for new multilateral institutions like the AIIB. Other developing countries have joined because they believe that the existing international monetary order, underpinned by the International Monetary Fund and the World Bank, is excessively oriented toward the advanced economies. Even the Asian Development Bank, in which Japan enjoys considerable influence, is said not to heed developing-country voices adequately at times.

Moreover, Asian countries recognise that their continued development requires more advanced and reliable infrastructure, which cannot be built without new financing platforms.

The AIIB seems to offer an ideal solution. And, indeed, it does not appeal only to developing Asian countries. France, Germany, Italy and the UK have joined more than 30 other countries as founding members. The US and Japan, however, still have their doubts. Should they join?

To answer this question, US and Japanese policymakers should rely on the “calculus of participation,” which dictates that the first step in choosing whether to join an international initiative or regime is to consider the last step in the process: the outcome. In short, a country’s leaders should ask whether, ultimately, their country would be better or worse off.

This “backward induction” approach may seem obvious, but the AIIB’s members seem to have ignored it. Indeed, beyond the fact that China will be in charge, almost nothing is known about the bank or its financing rules. Given this, it

seems logical for countries like Japan to wait and see before deciding whether to join the AIIB. Of course, there is a counter-argument. Just as talks between the US and Iran, while far from perfect, have helped build mutual understanding and deterred Iran’s quest for nuclear weapons, closer integration among Japan and its Asian neighbours could help to align their actions and interests.

The merits of this “community” approach – which reflects a more Eastern perspective than the backward-induction approach – cannot be overestimated, especially in a highly fraught situation like that with Iran, where the consequences of stubborn silence could be catastrophic. But the potential cost to Japan of delaying participation in the AIIB seems to be quite limited.

There is another strong reason why Japan should wait: macroeconomic stability. As it stands, the misallocation of capital and poor investment decisions in China raise serious risks, which increasingly seem to be on par with those in the US that triggered the 2008 financial crisis. If the AIIB begins with nothing more than vague criteria for monitoring international investment and an implicit Chinese veto, these domestic risks may spread to China’s neighbours, raising the danger of another large-scale international crisis.

European countries may join the AIIB to deepen their business and political ties with China, but their financial stakes in the outcome are limited. The same cannot be said for Japan. Given this, Japan should not join the AIIB until the criteria for monitoring its investments are clear. For now, Japan’s best bet is to make no bet at all.

Koichi Hamada, Special Economic Adviser to Japanese Prime Minister Shinzo Abe, is Professor Emeritus of Economics at Yale University and at the University of Tokyo. © Project Syndicate, 2015. www.project-syndicate.org

Europe versus Gazprom

By Nina L. Khrushcheva For years, Russian President Vladimir Putin has wielded Europe’s dependence on his country’s natural gas as a foreign-policy weapon, without fear of the European Union calling his bluff – until now. With the EU launching an antitrust case against the statecontrolled gas conglomerate Gazprom, Europe has sent a clear signal that Putin’s brutishness is no longer as intimidating as it once was.

The message from the European Commissioner on Competition – that market rules apply to everyone – is one that Putin has dismissed for years. Reliance on economic and legal means to achieve his political goals has long been a hallmark of his rule. More than a decade ago, the Kremlin expropriated Yukos Oil, which at the time produced 20% of Russia’s output, and jailed its founder, Mikhail Khodorkovsky, for ten years on trumped-up tax evasion charges after he dared to oppose Putin.

All major players in Russia’s energycentric economy quickly fell in line politically, enabling Putin to use the country’s oil and gas exports as a geopolitical cudgel. EU countries that he could not intimidate militarily, owing to NATO, were wooed with discounts – or punished with price hikes.

Hungarian Prime Minister Victor Orbán is Putin’s staunchest friend in Europe (though Greek Prime Minister Alexis Tsipras seems to want to change that), while Poland’s leaders have consistently warned that Russia could

become a menace to the continent again. As a result, whereas Hungary pays Gazprom $260 per thousand cubic meters of gas, Poland pays $526 – the highest price in the EU. The Poles have paid a steep price, but they were right. The downing of Malaysian Airlines Flight 17 over eastern Ukraine last July seemed to mark the beginning of the end of Russia’s reputation, such as it is, as a civilised country. And now there is the hearing, currently underway in London, into the murder of Alexander Litvenenko, a dissident ex-KGB officer. Early in that hearing, the barrister acting for Litvenenko’s family claimed that the evidence in the case led to Putin’s door.

Russia’s economy has already been reeling under Western sanctions imposed in response to the Kremlin’s annexation of Crimea and continued aggression in eastern Ukraine. Output is expected to shrink by almost 4% this year, and the country’s credit ratings have been reduced to “junk” or “near junk” status.

And now the European Commission is taking a page from Putin’s playbook. By seeking to punish Gazprom for its manipulation of energy prices, it is aiming a dagger at the heart of Putin’s regime.

Moreover, the EU’s antitrust action seems to be part of a coordinated legal assault. Last summer, the Permanent Court of Arbitration in The Hague ruled that Russia must pay $50 bln to Yukos’s shareholders – a judgment expected to be upheld on appeal. In essence, the decision sent the same message as the EU’s anti-trust action against Gazprom: rules apply to everyone, and stolen property must be returned.

Of course, Europe could not easily

withstand a 30% cut in natural-gas deliveries if Putin ordered Gazprom to stop doing business there. But that is unlikely: Natural resources comprise 70% of Russia’s exports, and transfers from Gazprom’s revenues alone account for at least 5% of the national budget. Over the past decade, rising oil and gas prices fueled rapid GDP growth, securing Putin’s popularity and giving him the resources to reconstruct Russia’s military might, now on display in Ukraine.

In other words, Gazprom (and the Russian government) are less capable of withstanding the loss of the European market than vice versa. Indeed, given the hard bargains that China has been driving during Putin’s desperate search for alternative buyers, threatening to cut exports to Europe has proven to be an exceedingly unwise tactic.

A moment of truth is slowly approaching.

Much of the world is working to reduce its

dependence on volatile or unsavoury energy suppliers by adopting new technologies such as hydraulic fracturing and increasing purchases from places like Australia, Norway, Qatar, and the United States, which has eased restrictions on the export of natural resources.

Whether Putin likes it or not, this trend will force him to become accountable for his actions. The EU may be unable to return Crimea to Ukraine, but its legal actions should put Putin on notice that his strongarm tactics will not work for much longer.

Nina L. Khrushcheva is a dean at The New School in New York, and a senior fellow at the World Policy Institute, where she directs the Russia Project. © Project Syndicate, 2015. www.project-syndicate.org

May 6 - 12, 2015

18 | WORLD | financialmirror.com

Climate change and the Catholic church

By Jeffrey D. Sachs Pope Francis is calling on the world to take action against global warming, and many conservatives in the United States are up in arms. The pope should stick to morality, they say, and not venture into science. But, as the climate debate unfolds this year, most of humanity will find Francis’s message compelling: we need both science and morality to reduce the risk to our planet.

The first point to note is that an overwhelming majority of Americans agree with Francis’s call for climate action.

Unfortunately, their views are not represented in the US Congress, which defends Big Coal and Big Oil, not the American people. The fossil-fuel industry spends heavily on lobbying and the campaigns of congressmen such as Senators Mitch McConnell and James Inhofe. The world’s climate crisis has been aggravated by America’s democratic crisis.

In a survey of Americans conducted in January 2015, an overwhelming majority of respondents (78%) said that, “if nothing is done to reduce global warming,” the future consequences for the US would be “somewhat serious” or “very serious.” Roughly the same proportion (74%) said that if nothing is done to reduce global warming, future generations would be hurt “a moderate amount,” “a lot,” or “a great deal.” Perhaps most tellingly, 66% said that they would be “more likely” to support a candidate who says that climate change is happening and who calls for a shift to renewable energy, while 12% would be “less likely” to support such a candidate.

In March 2015, another survey examined the attitudes of US Christians, who constitute 71% of Americans. The responses were reported for three groups: Catholics, nonEvangelical Protestants, and Evangelicals. These groups’ attitudes mirror those of Americans more generally: 69% of Catholics and 62% of mainline Protestants responded that climate change is happening, with a smaller majority of Evangelicals (51%) agreeing. Majorities in each group also agreed that global warming will harm the natural

environment and future generations, and that reducing global warming would help the environment and future generations.

Which minority of Americans, then, opposes climate action? There are three main groups. The first are freemarket conservatives, who seem to fear government intervention more than climate change. Some have followed their ideology to the point of denying wellestablished science: because government intervention is bad, they tell themselves that the science simply cannot be true.

The second group comprises religious fundamentalists.

They deny climate change because they reject earth science entirely, believing the world to be newly created, contrary to the overwhelming evidence of physics, chemistry, and geology.

But it is the third group that is by far the most powerful politically: oil and coal interests, which contributed hundreds of millions of dollars to the 2014 campaign. David and Charles Koch, America’s biggest campaign financiers, are simply oilmen out to multiply their gargantuan wealth, despite the costs to the rest of humanity. Perhaps they are true climate deniers as well. Then again, as Upton Sinclair famously quipped, “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”

Francis’s right-wing critics perhaps come from all three groups, but they are at least partly funded by the third. When the Pontifical Academies of Sciences and Social Sciences and some of the world’s top earth and social scientists met at the Vatican in April, the libertarian Heartland Institute, supported over the years by the Koch brothers, mounted a fruitless protest outside of St. Peter’s Square. The scientists at the Vatican meeting took extra care to emphasise that climate science and policy reflect fundamental principles of physics, chemistry, geology, astronomy, engineering, economics, and sociology, key parts of which have been well understood for more than 100 years.

Yet the pope’s right-wing critics are as mistaken in their theology as they are in their science. The claim that the pope should stick with morality betrays a basic misunderstanding of Roman Catholicism. The Church champions the marriage of faith and reason. At least since the publication of Thomas

Aquinas’s Summa Theologica (1265-74), natural law and the Golden Rule have been viewed as the fundamental pillars of the Church’s teachings.

Most people know that the Church opposed Galileo’s advocacy of Copernican heliocentrism, for which Pope John Paul II apologised in 1992. But many are unaware of the Church’s support for modern science, including many important contributions to biology, chemistry, and physics by world-leading Catholic clerics. Indeed, the founding of the Pontifical Academy of Sciences traces its origins back more than 400 years, to the Academy of Lynxes (Accademia dei Lincei), which inducted Galileo in 1611.

The Vatican gathering in April included not only worldleading climate scientists and Nobel laureates, but also senior representatives of the Protestant, Hindu, Jewish, Buddhist, and Muslim faiths. Like Francis, religious leaders of all the world’s major religions are urging us to take wisdom from faith and climate science in order to fulfill our moral responsibilities to humanity and to the future of Earth. We should heed their call.

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

The narrative roots of public policy

By Ricardo Hausmann At the recent Summit of the Americas in Panama, Cuban President Raúl Castro chose to break with the agreed protocol. Instead of speaking for eight minutes, he took six times longer to present a political history of his country that was only loosely based on fact. Why? As a card-carrying member of the economics profession, I have been trained to view the world from the perspective of the English philosopher Jeremy Bentham, according to whom the purpose of public policy is to create the greatest happiness for the greatest number of people. Policies that do not abide by some variant of this utilitarian principle (as proposed by, say, John Rawls or Amartya Sen) are bound to be inefficient or unfair.

But recent advances in psychology and neuroscience may suggest that if we want to understand social and political behaviour, or improve policies, we should be reading Hegel more than Bentham. That may sound weird, given that Hegel was an Idealist and would never have expected neuroscience – a material reality independent of Geist (usually translated as Mind or Spirit) – to be relevant to his inquiry.

It is also the autobiographical self – through the narrative that it creates about itself – that makes life something more than what the American writer, artist, and philosopher Elbert Hubbard once called “one damn thing after another.” And our brains are wired to figure out what other selves are thinking and feeling.

I believe that this same structure applies to how we

understand multi-person groups. It is no coincidence, for example, that the law treats corporations as persons. We think of the organisation in which we work as if it was a person with rights, obligations, values, reputation, and temperament, on whose behalf managers regard themselves as acting.

The same applies to nations and states. Our brains need to create a shared sense of self, an “imagined community,” as the political scientist Benedict Anderson put it, on whose behalf collective decisions are made. This community is a “person” that has a past and a future that transcend us as individuals. It has a history and a telos.

For example, according to President Barack Obama’s narrative, the United States has always been about a steady march toward freedom and equality, from the War of Independence to the abolition of slavery and the empowerment of women, minorities, and other previously marginalised groups, such as gays and those with handicaps.

To the extent that this narrative is inaccurate, it is aspirational.

It is the role of politics to create, sustain, and reshape this shared sense of self, of us (and hence of them). It is an illusion, but a socially created illusion. It is how Bavarians and Venetians in the 1860s, for example, became convinced that they were and had always been Germans or Italians.

Likewise, only a new narrative – a new Geist – can persuade the British today that they are really Europeans.

Liberals, as the political scientist Drew Westen has explained, often refrain from the narrative of shared identity, perhaps owing to awareness that great crimes are often committed in its name. Hitler redefined the German Volk as the collective victim of an internal enemy that was tainting its blood – a type of narrative that, whether framed in terms of race, religion, or class, underlies genocide wherever it occurs.

But it was also a national “person” that Abraham Lincoln

invoked in his Gettysburg Address. In just 272 words, Lincoln synthesised America as an ideal based on the proposition that all men are created equal. In this narrative, the Civil War was fought to ensure “that government of the people, by the people, for the people, shall not perish from the earth.”

As the philosopher Alasdair MacIntyre argued in After Virtue, narratives frame individuals’ moral choices. Likewise, narratives frame the choices that governments make. After his brush with Communists in Spain, George Orwell captured the essence of the narrative’s importance in his novel 1984: “Who controls the past controls the future; who controls the present, controls the past.”

Marx’s comparative advantage was to read Hegel and create a narrative in which history is the history of class struggle, with the newly emergent industrial proletariat destined to develop “class consciousness” and overthrow the political and economic order created by the bourgeoisie.

Liberal democracy has been at a disadvantage in the battle for the narrative because it tends to treat the collective self as if it were just a rational median voter in search of a better job.

But that is inadequate. Policies must fit within the prevailing narrative framework, while the great task of politics is to shape the narrative of tomorrow. No wonder, then, that while Obama used his eight minutes in Panama to delineate concrete policy initiatives that would bring happiness to the greatest number, Castro spent 48 minutes reinventing the past.

Ricardo Hausmann, Director of the Center for International Development and Professor of the Practice of Economic Development at the John F. Kennedy School of Government at Harvard University, is a former Venezuelan minister of planning. © Project Syndicate, 2015. www.project-syndicate.org

May 6 - 12, 2015

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SOS: Save our soils

By Barbara Unmuessig The United Nations has declared 2015 to be the International Year of Soils, and April 19-23 marked this year’s Global Soil Week. Such events, though not exactly glamorous, do not receive nearly the amount of attention they deserve.

Intact soils are an invaluable and irreplaceable resource, one that performs myriad functions in achieving the international community’s main development and environmental goals. And now they are in urgent need of protection.

Healthy soils are crucial to human nutrition and the fight against hunger. We rely on them not only for food production, but also to create new drinking water. They help to regulate Earth’s climate, storing more carbon than all of the world’s forests combined (only the oceans are a larger carbon sink), and are essential to maintaining biodiversity: a handful of fertile soil contains more microorganisms than there are humans on the planet. Two-thirds of Earth’s species live beneath its surface.

But erosion and contamination are placing soils under severe stress. Worldwide, 24 billion tons of fertile soil is lost annually, partly owing to the growth of cities and infrastructure. In Germany alone, construction projects claim an average of more than 75 hectares per day.

Inappropriate agricultural practices are also to blame: the liberal use of synthetic fertiliser, for example, decimates organisms inhabiting the soil and changes its structure. It takes millennia for fertile topsoil to form; in many places, a cloudburst is now all it takes to wash it away.

At the same time, global demand for food, fodder, and biomass for fuels is growing, in turn driving up the value of land – a fact that has not escaped international investors’ attention. According to a World Bank estimate, 10-30% of arable land worldwide – land that would be used by millions

of smallholders, pastoralists, and indigenous people – has been affected by large-scale investment.

The struggle to secure land rights for individuals and communities has thus become a matter of survival in much of the world. Access to land is one of the key determinants of hunger, and it is even more unequally distributed than income. Some 20% of households affected by hunger are landless, and 50% of food-stressed households are smallholder families.

In Europe, we have long since outgrown our domestic agricultural land, so now we “import” it on a grand scale from the global South. Just producing the fodder needed to cover the European Union’s meat consumption requires an area of agricultural land in Brazil the size of the United Kingdom. If every human ate as much meat as the average EU citizen, 80% of the world’s arable land would have to be dedicated to producing it, compared to 33% currently. And let us be clear: given that 100 calories of fodder produce at most 30 calories of meat, using fertile land for this purpose is sheer waste.

This trend will be exacerbated to the extent that the “green growth” that many governments are promising relies on biofuels to replace fossil fuels like oil and coal. Biofuels do not benefit the climate nearly as much as wind or solar energy systems, yielding only one-tenth the energy per square metre. As a result, the biofuel requirements contained in the EU’s 2030 Framework for Climate and Energy would need a further 70 million hectares of land – an area larger than France.

Protecting soils need not undermine prosperity. On the contrary, sustainable soil-protection practices can actually boost agricultural yields – especially those of smallholders.

Crop diversification, recycling, and soil cover can all contribute to living, fertile, and active soil capable of optimal water management.

One approach, so-called agro-ecology, is based on small farmers’ traditional knowledge and experience, making it readily adaptable to local conditions. A study of agroecological farming practices by Jules Pretty in 2006 examined 286 sustainable agricultural projects in 57 countries and concluded that yields had increased an average of 79%.

Despite the proven success of such methods, the use of synthetic fertilisers has increased by a factor of more than five over the past 50 years, and many African governments spend up to 60% of their agricultural budgets to subsidize them. Particularly in tropical environments, such products lead to the destruction of the topsoil and biodiversity loss (and the runoff is transported to the oceans, where it damages marine ecosystems). And, though their main component, nitrogen, could be produced biologically and sustainably, that would run counter to the interests of a handful of powerful fertiliser producers and distributors.

Policymakers must address the following question: How can poor people produce enough food to escape hunger and destitution in a manner that protects soils, mitigates climate change, and preserves biodiversity?

Despite the issue’s urgency, approaches like agroecological production are not being promoted to any serious extent anywhere. Events like the International Year of Soils and Global Soil Week offer an opportunity to change that – from the ground up.

Barbara Unmuessig is President of the Heinrich Boll Foundation. © Project Syndicate, 2015. www.project-syndicate.org

Looking beyond Silicon Valley Laura Tyson and Lenny Mendonca Once again, California’s Silicon Valley is confirming its status as a mecca of high-tech entrepreneurship and wealth creation. But it is not a model for job creation and inclusive growth that policymakers and entrepreneurs elsewhere can emulate – at least not without making some fundamental adjustments.

To be sure, what is happening in Silicon Valley today is nothing short of dazzling. Venture capital (VC) investment has reached near-record highs. Overnight millionaires – even billionaires – are proliferating. Twenty-something software coders are commanding six-figure salaries.

The boom has driven California’s economic recovery. And, along with courageous political leadership, it has enabled the state to escape from a seemingly hopeless fiscal crisis.

But the Silicon Valley superstar tech companies and their VC champions populate an isolated island of prosperity.

Indeed, just 100 miles inland, in California’s Central Valley, unemployment rates remain in the double digits (11.2% in Fresno and 10.4% in Modesto), with average family income amounting to less than half of that in Palo Alto, the heart of Silicon Valley. If the venture capitalist Tim Draper had succeeded in his misguided initiative to divide California into six states, Silicon Valley would have become the richest state in the US, and the Central Valley the poorest.

The key question, then, is how to harness Silicon Valley’s entrepreneurial and innovative prowess to the goal of inclusive economic growth in America’s heartland. To some extent, this is already happening, with visionary entrepreneurs in cities like Nashville, Cincinnati, New Orleans, Wichita, and Salt Lake City adapting Silicon Valley’s recipe for success to local conditions and opportunities – and

creating much-needed middle-class jobs in the process. But more can and should be done to support this trend.

The University of Virginia’s Miller Center recently created a commission (of which one of us, Lenny, was a member) to identify strategies to support the creation of middle-class jobs through entrepreneurship. The ideas proposed in the commission’s report include providing training and mentors for prospective entrepreneurs and startups, creating “ecosystems” of supporting infrastructure, and reducing regulatory barriers.

The report also highlights the importance of unlocking capital for “Main Street” entrepreneurs, who struggle to find the funding they need to launch, sustain, or scale up their operations, particularly as the recent recession drove out many of the community banks on which they had traditionally relied for credit. Silicon Valley startups, by contrast, enjoy the generous support of VC funds, having received 30-35% of all venture investment deployed in the US since the 1980s.

Not only is VC investment concentrated in a small part of the country; it has recently tended to support the expansion of later-stage investments, rather than the launch of startups.

In other words, VC funds are not well suited to support new businesses that may generate a large number of jobs and boost prosperity locally, but that are not close to launching a billion-dollar IPO. Main Street entrepreneurs do, however, have two major – and underused – financing options. The first lies in the public sector. In the US, the Community Reinvestment Act (CRA) – created to ensure that banks that gather deposits in low- or middle-income communities reinvest some of their earnings in those communities – supports more than $60 bln in community finance, compared to the $48 bln of VC funding that was deployed last year.

A second key source of capital lies with private and community philanthropic foundations, which are required

by US law to donate at least 5% of their assets to charitable causes annually. In 2012, such foundations distributed about

$52 bln to support their philanthropic missions. They channeled most of the rest of their $715 bln in assets into traditional investments, in order to generate returns that would expand their capital base.

But a growing number of foundations – such as the Bill & Melinda Gates Foundation, the Rockefeller Foundation, and the Kresge Foundation – are increasing the share of assets they direct toward investments that further their philanthropy. Such investments can help to accelerate impact investing, which aims to yield both a social and a financial return. Unfortunately, programme-related spending still represents only 1% of capital deployed by foundations, with just 0.05% of that going toward equity investments.

Public and philanthropic investments in local startup businesses are already paying off, both in terms of creating jobs and generating financial returns. An early leader, the Bay Area Equity Fund, raised $75 mln from banks, insurance companies, pension funds, and individuals; created about 15,000 jobs, 2,218 of which were in low- and moderateincome neighbourhoods; and generated a 24.4% annual return for its investors. The government can do much to promote such investment. For starters, it should refine the rules governing which investments meet CRA requirements.

Likewise, as the US taskforce on impact investing recommended, the authorities should clarify the permissible investment activity of tax-exempt foundations.

Just as Silicon Valley’s dynamism should not be diminished, the rest of the country’s entrepreneurial potential should not be underestimated. With the right incentives and funding from philanthropic sources, jobcreating entrepreneurs could serve as engines of more inclusive growth in communities across the US. Laura Tyson, a former chair of the US President’s Council of Economic Advisers, is a professor at the Haas School of Business at the University of California, Berkeley, and a senior adviser at the Rock Creek Group. Lenny Mendonca is a former director of McKinsey & Company.

May 6 - 12, 2015

20 | BACK PAGE | financialmirror.com

Toward an alliance of hope

By Shinzo Abe PRIME MINISTER OF JAPAN

At World War II’s close in the Pacific, we Japanese, with feelings of deep remorse, embarked on the path of rebuilding and renewing our country. Our predecessors’ actions brought great suffering to Asia’s peoples, and we must never avert our eyes from that. I uphold the views expressed by Japan’s previous prime ministers in this regard.

Given this recognition and remorse, we Japanese have believed for decades that we must do all that we can to contribute to Asia’s development. We must spare no effort in working for the region’s peace and prosperity.

I am proud of the path that we have taken, but we did not walk that path alone. Seventy years ago, Japan had been reduced to ashes, and each and every month, citizens of the United States sent and brought gifts like milk for our children, warm sweaters, and even goats. Yes, 2,036 American goats came to Japan in the years right after the war. Former enemies had become close friends.

And it was Japan that benefited earliest from the postwar international system that the US fostered by opening up its own market and calling for a liberal world economy. From the 1980s onward, we have seen the rise of the Republic of Korea, Taiwan, the ASEAN countries, and, before long, China – all taking the path of economic development enabled by the open world order created by the US. Japan, to be sure, did not stand idly by; it poured in capital and technologies to support these countries’ growth. Both the US and Japan fostered prosperity – the seedbed for peace – in the region. Today, the US and Japan recognise that they must continue to take the lead in fostering a rules-based international economic order – fair, dynamic, and sustainable – within which all countries can flourish, free from the arbitrary intentions of any national government.

In the world’s great growth centre, the Pacific market, we cannot overlook sweatshops or environmental burdens. Nor can we simply allow free riders to weaken intellectual property. Instead, we must spread and nurture our shared values: the rule of law, democracy, and freedom.

That is exactly what the Trans-Pacific Partnership is all about. The TPP’s strategic value extends far beyond the economic benefits it promises. It is also about turning an area that accounts for 40% of the world economy and onethird of global trade into a region of lasting peace and prosperity for our children and theirs. As for US-Japan negotiations, the goal is near. Let us bring the TPP to a successful conclusion through our joint leadership.

I know how difficult this path has been. Twenty years ago, I myself opposed opening Japan’s agricultural market. I even joined farmers’ representatives in a rally in front of Japan’s Diet.

But Japan’s agriculture sector has declined over the last two decades. Our farmers’ average age has increased by ten years, to more than 66. If our agriculture sector is to survive, we must follow through on sweeping reforms, including to our agricultural cooperatives, which have not changed in 60 years. Change is coming to Japanese business, too. Corporate governance in Japan is now fully in line with global standards because we made it stronger. And I am spearheading regulatory overhauls in such sectors as medicine and energy as well.

Moreover, I am determined to do whatever it takes to reverse the decline in Japan’s labour force. We are changing some of our old habits; in particular, we are empowering women to become more actively engaged in all walks of life.

In short, Japan is in the midst of a far-reaching transition to a more open future. We are determined to press ahead with the structural reforms needed to succeed.

But reform requires the continuation of the peace and security that is the bequest of US leadership. My grandfather, Nobusuke Kishi, chose the path of democracy and alliance with the US when he was Prime Minister in the 1950s.

Together with the US and other like-minded democracies, we won the Cold War. I intend to stick to that path; indeed, there is no alternative to it.

Our two countries need to make every effort to strengthen our ties. This is why I support America’s strategic “rebalancing” to enhance peace and security in the AsiaPacific region. Japan will support this effort first, last, and throughout.

Japan is doing so by deepening its strategic relations with Australia and India, and we are enhancing our cooperation with the ASEAN countries and the Republic of Korea. Adding

these partners to the central pillar of the US-Japan alliance will strengthen stability throughout the region. And now Japan will provide up to $2.8 bln dollars to help improve US bases on Guam, which will have even greater strategic significance in the future.

Regarding Asia’s ongoing maritime disputes, let me underscore my government’s three principles. First, states must stake their territorial claims on the basis of international law. Second, they must not use force or coercion to press their claims. And, third, they must settle all disputes by peaceful means.

We must make the vast seas stretching from the Pacific to the Indian Oceans a zone of peace and freedom, where all adhere to the rule of law. For this reason, too, it is our responsibility to fortify the US-Japan alliance.

That is why we are working hard to enhance the legislative foundations of our security. These enhanced legislative foundations should make cooperation between the US military and Japan’s Self-Defense Forces even stronger, and the alliance still more solid, providing credible deterrence in the service of peace in the region. Once these legal changes – the most sweeping in our post-war history – are in place by this summer, Japan will be better able to provide a seamless response for all levels of crisis.

The new Defense Cooperation Guidelines between the US and Japan will serve the same purpose, and help secure peace in the region for years to come.

Finally, Japan is ever more willing to bear its global responsibilities. In the early 1990s, Japan’s Self-Defense Forces removed mines in the Persian Gulf. For ten years in the Indian Ocean, we supported US operations to stop the flow of terrorists and arms. In Cambodia, the Golan Heights, Iraq, Haiti, and South Sudan, members of our Self-Defense Forces provided humanitarian support and participated in peace-keeping operations. Some 50,000 service men and women have participated in those activities thus far.

Japan’s agenda is simple and straightforward: reform at home and proactive contributions to global peace based on the principle of international cooperation. It is an agenda that promises to lead Japan – and Asia – into a more stable and prosperous future. © Project Syndicate, 2015. www.project-syndicate.org

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