Financial Mirror 2015 06 10

FinancialMirror OREN LAURENT The dollar is back, up 19% against the euro PAGE 14

MOHAMED EL-ERIAN

Issue No. 1137 €1.00 June 10 - 16 , 2015

The quiet financial revolution begins PAGE 17

Varoufakis’ Great Game BUSINESS CLIMATE WORSENS AS GREECE RUNS OUT OF CASH -

Settlement prospects hiked to 35%, as confidence builds SEE PAGE 3

PAGES 10-11

June 10 - 16, 2015

2 | OPINION | financialmirror.com

FinancialMirror Published every Wednesday by Financial Mirror Ltd.

CySEC needs more power to build solid reputation for Cyprus

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Many see the securities watchdog CySEC as an ogre, ever so meddling in the affairs of investment or forex companies, that are supposed to be the new bread and butter of the Cyprus economic recovery.

Admittedly, these companies, that have mainly mushroomed in the past decade, have provided job opportunities and a steady revenue stream for the state at a time when the government is having trouble collecting taxes and fees to get the fiscal budget on track again. They have also been feeding business to the support services, such as audit firms, lawyers, market makers and promoters, driving a parallel sector that now relies on the investments sector.

But with more than 200 already operating on the island, surely by now we must have learnt from the mistakes of the past (poor banking regulation) so as not to repeat them, that would subsequently sink the financial services sector again.

The Securities and Exchange Commission is doing the best that it can with the little that it has, to regulate and monitor the investment sector, and to separate the serious players from the charlatans. But from what we have heard, just two people have been left in charge to tackle the mountain of complaints about dubious instructions by forex traders or non-payment by fraudster firms playing hard ball.

From the 58 professionals and admin staff that CySEC currently employs, experts say that it needs almost three times as many, or about 160, in order to be able to follow every lead, investigate every complaint and probe into the activities of every single approved investment company (KEPEY) or their clients.

With binary trading an area where the Cypriot authorities showed patience and professionality, this sector has propelled CySEC to the forefront of the handful around the world who have expertise (if any) to regulate and monitor this high-risk investment tool. As a result, our reputation has partly regained its old glamour, having been tarnished by the incompetent bankers in charge of everyone’s savings that gave us the meltdown of 2013, initiated by the haphazard purchase of toxic Greek government bonds back in 2011.

For Cyprus to retain its position as a serious financial services centre, where proper regulation is synonymous with reputation management, then the government and the House of Representatives should stock dragging their feet and help CySEC any way they can. First, by fast-tracking the “emergency” hirings that need to take place over the next few months, and then apportion a spending budget equal to the earnings that the regulator brings in, both in the form of fees and fines (that go straight into the government coffers), but also in the form of promoting Cyprus as a reliable, reputable, solid and transparent financial services centre.

THE FINANCIAL MIRROR THIS WEEK 10 YEARS AGO

Cyprus: one year after accession The EU’s enlargement chief, Olli Rehn, was in Nicosia to mark the first anniversary of Cyprus joining the Union, where he said that “the current status quo does not correspond to European norms”, according to the Financial Mirror issue 622, on June 1, 2005. (Ed’d note: If only Mr Rehn would actually believe in what he said at the time…)

EU accession: In a speech in Nicosia, Olli Rehn said that the “sound economic record was justly

rewarded by the decision of the EU to let Cyprus join the second phase of the Exchange Rate Mechanism which paves the way for a successful entry to the Eurozone.

He highlighted some progress in the peace process, emphasised the package for the Turkish Cypriots, praised the success of the Green Line regulation and concluded that “there is no doubt that Turkey will play a key role in a solution to the Cyprus problem.”

North properties: A number of Greek Cypriots, mainly living abroad but also in the government controlled areas, are alleged to have sold their

properties in the north, according to a parliamentary hearing, driven by the influx of tourists and a property boom on the Turkish side, where 240,000 Greek Cypriots visited in the last 12 months.

Turkey EU hopes: Contrasting views were expressed on Turkey’s EU accession hopes during an international seminar hosted by Intercollege in Nicosia, with arguments differing about the predicted outcomes of Turkey’s accession while it was also held that Ankara’s membership would be a negative development for the future of the EU. Internet slump: While three quarters of Europe’s youth use the Internet, Eurostat found that Cyprus is at the lowest level of internet use by enterprises.

In advertising, Mercedes Benz was selling its CLK Coupe for CYP 27,000 and OTEnet was promoting retail and business fixed telephony and broadband.

start implementing the provisions of the new GATT accord for lower duties and liberalisation of trade as from the beginning of the new year, six months later than planned. Parliament was expected to pass the relevant bills just as Cyprus joins the WTO at the end of the month.

Tourism on track: The CTO responded to criticism that there was

drop in tourist arrivals from Germany and said that all indications suggested that targets would be met, just as Cyprus Airways chairman Vassilis Rologis was concerned about the huge drop in arrivals from the U.K. Stocks soar: The stock market soared to a new record high, maintaining its gains of the past six months and showing the required momentum to keep on adding to these gains. The upmove followed the spectacular gains of the two cement companies and KEO with year-to-date gains for the market now at 26%.

Property deals: Real estate sales to foreigners rose 13.5% to a record high in 1994 and reached CYP 18.8 mln, representing 66% of all property sales in the year.

20 YEARS AGO

GATT in new year, tourism on right track The government said that the GATT deal for lower tariffs would be introduced in the new year (1996), while the CTO insisted that its policy of diversification was on the right track and tourist arrivals from Germany were not down, according to the Cyprus Financial Mirror issue 114, on June 7, 1995.

GATT deal: The Trade Ministry said that it will

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June 10 - 16, 2015

financialmirror.com | CYPRUS | 3

Settlement prospects hiked to 35% Anastasiades and Akinci ‘at home’ in Limassol for theatre

Similar to the mood of confidence in the financial sector, where rating agencies have revised upward the Cyprus sovereign and bank ratings, the Sapienta Country Analysis monthly report has revised up the prospects of a Cyprus settlement to 35%, encouraged by the efforts of the two community leaders.

“We have revised up our assessment of the prospects of a Cyprus settlement to 35%, from 30% in April and 20% while the negotiations were suspended between October 2014 to March 2015,” the report said, that follows proposals for ‘confidence building measures’ from both sides in recent weeks, while the two leaders continue their “coffeediplomacy” trying to rekindle hopes of a settlement.

After a meeting with UN Secretary General Ban Ki-moon last week, Turkish Cypriot leader Mustafa Akinci said that he expected substantial progress “within months, not years” of the suspended talks.

President Nicos Anastasiades hosted Akinci to their joint home town of Limassol on Monday night for a performance of a Turkish Cypriot play at the Rialto theatre.

After the play performed by the Turkish Cypriot municipal theatre, entitled “Cyprus: Bittered in Greek, Wounded in Turkish,” Akinci told reporters that “many years ago, when I was Mayor (of northern Nicosia) back in 1987, 28 years ago, the very same theatre group performed a play of Aristophanes called ‘Irini’; it was in the Greek Cypriot side when there was no communication at all, when there weren’t any crossings at all.”

“Tonight I am here with dear friend Nicos and we watched another play which gave us another strong message, that there is no one without any guilt, without any fault. On this island we committed mistakes, both Greeks and Turkish Cypriots. The point is to derive lessons from these past

mistakes and build a better future for younger generations,” Akinci said.

Anastasiades told reporters that “the message we received from the play is a strong message. We have to work hard in order to bring peace, and I am committed to do so and Mustafa is committed to do so, and I believe that our people as well are looking for peace.”

Asked if he intends to visit the north to watch a similar play, he replied “yes, it is within my plans. The northern part is a piece of our country, my country and the southern part is a piece of Mustafa’s (country) and every Cypriot’s, therefore I intend to do so.”

The two leaders later were hosted to dinner by Limassol Mayor Andreas Christou.

Talks between Anastasiades and Akinci, have been going well since their first dinner on May 11, the Sapienta Country Analysis said, adding that Anastasiades clearly believes that Akinci is “a man he can do business with” and both sides have made efforts to improve the atmosphere with various gestures.

Two days after Akinci’s election on April 26, Anastasiades announced the transfer of control of certain religious sites to the Evkaf (the centuries-old foundation that traditionally looks after Islamic sites); pledged to hand over the maps of landmines laid in the Pentadaktylos range before the division in 1974; and to employ Turkish-speakers at citizen’s service centres.

During the leaders’ first formal meeting on May 15, Akinci announced that anyone crossing to the north would no longer be required to fill out a visa form.

During their second formal meeting on May 28, the two leaders announced five more CBMs: to increase the number of crossing points (there are currently seven), starting with

Lefka in the west and Deryneia in the east; to interconnect the electricity grids; to prevent radio frequency interferences among radio stations; and agreed “on the desirability” of mobile telephone interoperability.

They also agreed to establish a committee on gender equality.

Both sides have played down talk of the “big” CBMs, namely the handover of the uninhabited district of Varosha, the opening of Famagusta port and Ercan/Tymbou airport to international traffic and the lifting by Turkey of embargoes on Republic of Cyprus flagged aircraft and vessels.

“The atmosphere is currently more positive even than at the beginning of the talks between Demetris Christofias and Mehmet Ali Talat in 2008,” the Sapienta report said.

“However, there remain a number of risks to resolving the Cyprus problem. Given the high levels of mistrust on each side, any misstep could quickly turn the mood sour.

Moreover, the mainstream media are still in a generally hardline mode,” it concluded.

June 10 - 16, 2015

4 | CYPRUS | financialmirror.com

Gov’t to repay €750m of ex-Laiki bond held by Bank of Cyprus The Ministry of Finance has notified the Bank of Cyprus that the government will repay EUR 750 mln towards a EUR 1.9 bln bond held by the bank issued for the recapitalisation of Laiki Popular Bank that was transferred to Bank of Cyprus in March 2013, following the acquisition of certain assets and liabilities of Laiki.

The bond is pledged as collateral with the European Central Bank (ECB).

Part of the amount repaid will be used to reduce ECB and ELA funding, as has been recent practice by the current administration.

In its first-quarter results report, Bank of Cyprus said it had reduced the emergency liquidity assistance (ELA) from a peak of EUR 11.4 bln in April 2013 to 6.9 bln, while post-results, it said it further lowered the facility to EUR 6.4 bln by the end of May. “With the bond transferred to the bank at fair value at the acquisition date, there will be an accounting profit of about EUR 33 mln resulting from this transaction,” Bank of Cyprus said in an announcement, adding that, “the net interest income of the bank going forward will be negatively affected by the early repayment of the bond, primarily driven by the upfront recognition of the accounting gain.”

The bank said that the remaining amount of the bond of EUR 340 mln will be replaced on its maturity on July 1 by a new bond for the same nominal amount, with pricing based on the Cyprus government yields prevailing at the time.

The government’s repayment follows the recent offering of a EUR 1 bln bond at a coupon of 3.875% and yield of 4% maturing in 2022.

Last year, the government had initially repaid EUR 950 mln of the ex-Laiki bond on July 1, 2014.

As at the end of the first quarter, the Bank of Cyprus Group’s total assets amounted to EUR 26.7 bln and total equity was EUR 3.5 bln. It’s first quarter results saw after-tax profits of EUR 29 mln, a turnaround from a loss of EUR 337 mln in the last quarter of 2014, but non-performing loans (in arrears form more than 90 days) totaled EUR 12.79 bln and accounted for 53% of gross loans.

DBRS confirms Cyprus at B (low) Progress on NPLs, privatisation and foreign investment could provide support to the ratings DBRS, Inc. has confirmed the long-term foreign and local currency issuer ratings for the Republic of Cyprus at B (low). The rating agency has also confirmed the short-term foreign and local currency issuer ratings at R-5, with the trend on all ratings remains Stable.

DBRS said that “at B (low), the ratings reflect the depth of Cyprus’ challenges and continued heavy reliance on external funding. Fiscal performance has exceeded expectations, and authorities have successfully reformed domestic bankruptcy and foreclosure laws. This has enabled a material improvement in the debt profile and the government’s liquidity position, which benefits from ECB policies. However, parliamentary opposition has resulted in delays in enacting critical reforms.”

“Effective restructuring of non-performing loans, now 157% of GDP, is crucial. A deep decline in property prices from current levels could pose significant challenges for the banks.

Initial signs of economic stabilisation are emerging, but the recovery remains reliant on external demand.”

Continued strong economic and fiscal performance could lead to an upgrade, DBRS said.

Accelerating progress on NPL resolution, privatisation and efforts to encourage foreign investment could also provide support to the ratings. Additional efforts to extend the debt maturity profile and limit gross financing needs in the postprogramme period are also likely to have a positive impact.

On the other hand, the rating agency warned that a prolonged period of weak growth, particularly if combined with fiscal policy slippages or additional bank support costs, could result in downward pressure on the ratings.

“External factors, including political developments between Cyprus and Turkey and between the EU and Russia, could also have an impact on creditworthiness,” it said, adding that though direct financial linkages have been significantly reduced, developments in Greece could also have an impact.

DBRS echoed opinion expressed by other rating agencies that “given the Republic’s strong performance under the 10 bln Eurogroup/IMF programme thus far, Cyprus is unlikely to need the full amount of support available under its existing programme.”

The low tax environment remains attractive to foreign corporations and although Cyprus’ advantages are not unique and could be eroded by external competitors or by regulatory changes in creditor countries, DBRS expects the business services sector to remain an important source of employment and income for the Cypriot economy.

Cyprus’ geographic location makes the island a relatively convenient summer tourist destination for Europeans. Rising household incomes in Eastern Europe should continue to provide a stable source of growth in tourist arrivals. The declining rouble and Russian recession have had a significant impact on overall tourism receipts, but this has been partially offset by increased tourism from the UK and other countries.

Within the next decade, exploitation of offshore natural gas deposits could provide a major new source of income for the island economy. The government estimates that current proven reserves are likely to bring in net revenue of close to EUR 20 bln over the next 20 years (over 110% of 2013 GDP).

“If managed prudently, the associated financial inflows could help to significantly reduce Cyprus’ vulnerability to shocks,” DBRS said, adding that “related investment and lower domestic energy costs could have ancillary benefits for the Cypriot economy. The pace of development of the gas sector could nonetheless be affected by relations with Turkey.”

However, the rating agency warned that “in spite of these strengths, Cyprus faces several near-term challenges. General government debt is expected to peak at 108% of GDP next year.

Although the fiscal adjustment appears largely complete at this stage, continued fiscal discipline and stronger economic growth will be essential to bring debt down to more manageable levels over time. Gross financing requirements through mid-2016 should be comfortably met through official financing, and the government hopes to take advantage of lower market interest rates to extend debt maturities and minimise financing needs in the post-programme period (2016-18).”

Private sector debt ratios are also at historically high levels and suggest that growth will be constrained by further deleveraging. Real estate prices are still declining and the ultimate impact of the decline on household wealth, domestic savings, and bank solvency is not yet clear.

DBRS concluded that it “expects only gradual improvements from efforts to extend the tourist season and remains concerned that competition from other Mediterranean locations may dampen growth in the sector. If growth in tourism and business registrations slows significantly, the economy could face gradually declining output for years to come as the domestic deleveraging process continues. Russian demand is particularly important, though additional shocks from Europe could also have negative effects on Cyprus.”

Aphrodite gasfield is “commercially viable”, as Egypt pipeline also seen as an option The three partners in the first natural gas offshore field south of Cyprus have declared the 8 bcm a year project as “commercially viable”, ending speculation of the size of reserves discovered and moving on to the next stage of exploitation, possibly through a pipeline to Egypt, after the island shelved its plans for a land-based liquefaction plant.

The Ministry of Energy, Commerce, Industry and Tourism announced that Noble Energy International Ltd, Delek Drilling Limited Partnership and Avner Oil Exploration Limited Partnership, holders of the license for the exploration of hydrocarbons in Block 12 of the Cyprus Exclusive Economic Zone (EEZ), have declared commerciality of the “Aphrodite” natural gas field.

The Ministry said it welcomes the said declaration of commerciality, while Energy Minister Georgios Lakkotrypis said this was a “significant step towards exploitation.”

A submission to the Cypriot government of a development and production plan for the

“Aphrodite” field will follow.

The ministry added that this “constitutes a significant milestone to Cyprus’ transition from the hydrocarbons exploration phase to that of exploitation … and the monetisation of the indigenous natural gas reserves, both for domestic electricity generation and other uses, as well as exports via direct subsea pipelines to neighbouring countries.”

Noble Energy said it is preparing a field development plan for submission to the government, which is the next step towards reaching a final investment decision including technical engineering design work and procurement planning, as well as identifying buyers for the resources.

“The Aphrodite field has the potential to supply the Cyprus domestic market and help meet strong regional demand,” Noble said.

News reports suggested that the Aphrodite field will have an output of 8 billion cubic metres (300 mln trillion cubic feet) a year of natural gas and will probably be shipped via pipeline to Egypt.

June 10 - 16, 2015

financialmirror.com | CYPRUS | 5

The corrupted spirit of laissez-faire authorities THE RISK WATCH COLUMN

By Dr Alan Waring When President Anastassiades came to power in 2013, he made numerous public statements to the effect that his administration would, for the first time in the Republic’s history, tackle corruption head-on, go after major whitecollar criminals and rein in the laissez-faire culture of indolence, inefficiency and entitlement that had infected the state sector for so long.

Some impressive headway has been made in pursuing some of the ‘big fish’ and their various collaborators engaged in fraud and/or bribery and corruption, thanks to the dogged investigation and pursuit of alleged wrongdoers by the Auditor General and the police. These cases all involve alleged significant criminal activity. But, what about the other things that Anastassiades and others have complained of in relation to the culture of inefficiency, laziness, self-serving behaviour and entitlement that has bedevilled the Cyprus civil and public sector for so long? That too is a form of corruption - a corruption of the spirit, which is just as damaging to the national economy and public interest.

Two recent instances serve to illustrate how pernicious low-grade malfeasance, one way or another, eats away at the fabric of society and brings added risks.

Mr Dead is Alive!

Mr Z ran a business under the name of his Cyprus registered company. In 2004, Mr A bought Mr Z’s private residence. He moved out of the property and Mr A moved in, eventually getting his title deeds. Sometime in 2007/8, Mr A received an e-mail from Mr Z’s wife informing him that her husband had just died. Sad, Mr A thought, but did not dwell on the matter.

Suddenly, in February 2015, Mr A received at his home address (the same property he had bought from Mr Z) two notices from the Cyprus Registrar of Companies regarding Mr Z’s company. The second even included a set of HE4 company registration documents, all duly stamped by the Registrar, and clearly showing the registered address as Mr A’s. Moreover, the papers included the application for registration, which had been done by a registration services company in Polis and dated in February 2015. These were clearly made in Mr Z’s name and even included his name in several signature boxes! Yes, miraculously, a person dead some 8 years had come alive and even signed his name to prove it!

Mr A e-mailed the Company Registrar twice to notify him that (a) Mr Z had relinquished all rights to and connection with Mr A’s private residential address in 2004, (b) Mr A had never, at any time, whether expressly or implied, authorised the use of his private address for any person to use as the registered address of their company, and (c) Mr A had been notified of Mr Z’s death in 2007/8. He requested the Registrar’s immediate corrective action.

Mr A felt sure that the Company Registrar would act immediately. After all, he had been provided with evidence of false registration of a company in the name of a dead person, false and unauthorised registered address and apparent forgery of a dead person’s signature. As Mr A noted, if the issue is one of Mr Z’s existence, it is not his job to provide the Registrar with proof of Mr Z’s death; it is the Registrar’s responsibility to demand ‘proof of life’ either from Mr Z himself

or from his registration agent. Mr A assumed that either way, dead or alive, no one can use another person’s address without the owner’s authorisation. Who knows what unlawful activities, such as tax evasion, may have motivated this dodgy registration after so many years? Imagine his shock when his lawyers advised that it is not unlawful to use in such registrations someone else’s address without their permission! And, only the directors of the registered company can, if they wish, choose to alter the registered address.

However, beyond Mr A’s indignation at the cheek of those involved, and the laid-back attitude of the Registrar, this case has exposed a much graver risk to Cyprus in two areas: international money laundering and the parking of funds for terrorism. If, as is apparent, it is so easy in Cyprus for anyone (even a dead person) to get a company registered in their name and at someone else’s address without their approval or consent, then one can be pretty sure that criminals and terrorists are already exploiting this weakness. For example, the on-going criminal trial in India of the former Telecommunications Minister Mr A. Raja on multiple counts of bribery, corruption, fraud and money laundering involving about EUR 479 mln, has heard prosecution evidence alleging that the accused channelled millions in bribe money via a set of 32 dummy companies registered in Cyprus and then onward to accounts in the Maldives and Seychelles. The Cyprus authorities are aware of this case but appear to have turned a blind eye.

The Self-Styled Professionals Mr B sent a preliminary enquiry by e-mail to a civil engineering consultancy listed on one of the government’s lists of registered specialists. To save their embarrassment, let’s call them by the fictitious name Icarus Consultants. He stated the square metres and other basic details and made it clear that it was a preliminary enquiry seeking the answers to two basic questions before deciding whether or not to proceed further, namely (1) the basis of the firm’s charges for work and an indicative costing, and (2) whether or not a certain condition in the relevant regulations would apply. Mr B had already approached others on the list and they had obliged with the requested information. After all, there was nothing complicated about the questions or the required answers and Mr B was not asking them to do any unpaid work. Icarus was not being asked to divulge commercially or intellectually valuable information or give a professional opinion.

The response Mr B received from Icarus was simply a request to phone and set up a meeting and did not include

the requested answers. So, he advised the Icarus boss that perhaps he had misunderstood that it was an initial enquiry that did not warrant a meeting, only simple answers to two very simple questions. After receiving no further response, Mr B sent a reminder. This time he received an incredibly vitriolic e-mail accusing him of refusing a meeting offered by a ‘qualified professional’ (sic). Icarus were refusing pointblank to divulge anything, even the basis of their charges, without a face-to-face meeting. Further, the e-mail contained threats of legal action if Mr B should report his appalling experience at their hands to anyone else!

Unsurprisingly, Mr B immediately dropped Icarus from his list of potential consultants. Market forces won the day and the reputation of Icarus now goes well and truly before them.

However, there is a wider issue. Typically, a professional body’s code of conduct includes requirements such as ‘…members should do nothing that in any way could diminish the high standing of the profession. This includes any aspect of a member’s personal conduct which could have a negative impact on the profession’ (Institution of Civil Engineers). Was the rude, aggressive, and threatening outpouring from Icarus professional? What criteria does the relevant government department use to appoint such appalling people to approved lists? Simply receipt of an application form and the fee? There is no evidence of proper due diligence checks, otherwise inadequate self-styled ‘professionals’ like Icarus would be blocked.

Conclusions The two reports above share a common theme: lack of due diligence by the competent authorities, leading to increased risk exposures for the public. They just don’t care. It relates to the President’s ‘clean-up’ message and smacks of what Polis Polyviou complained about in his Mari-Vassilikos Inquiry Report about a state ‘whose primary purpose is to facilitate the lives…. of public officials’ (page 590) and which there is ‘a reduced perception of duty and a selected observance of morality and legality’ (page 591). Or, in other words, a corrupted spirit. Ten out of ten, Mr President, for tackling white collar criminals but zero for cleaning up the corrupted spirit among public officials.

Dr Alan Waring is an international risk management consultant with extensive experience in Europe, Asia and the Middle East with industrial, commercial and governmental clients. His latest book Corporate Risk and Governance is at www.gowerpublishing.com/isbn/9781409448365. Contact waringa@cytanet.com.cy. ©2015 Alan Waring

June 10 - 16, 2015

6 | CYPRUS | financialmirror.com

Bids re-open for old port 10-year lease The Cyprus Ports Authority, the state owner and operator of the island’s main commercial harbours, is re-inviting tenders for the Limassol Old Port facilities, that had only received one bidder last August for the ten-year deal worth EUR 26 mln.

A Cypriot expatriate with business interests in the U.S. was the sole bidder, clinching the ten-year tender for an annual lease of EUR 2.6 mln, 300,000 euros more than the minimum offer. But government sources said that the investor had soon backed out of the bid.

The Cyprus Ports Authority had given out to tender the ground facilities of the old port in June 2014, which was renovated in recent years at a cost of EUR 17.8 mln, more than double the initial cost of 8 mln that was planned in 2010. The new tender is available at www.cpa.gov.cy .

The old port, that includes 18 new buildings and two that were recently renovated, cover a commercial space of 5,800 sq.m. and was offered in an open tender for a ten-year lease upwards of EUR 2.3 mln a year, with an option to renew for a further ten years.

The new investor was expected to undertake to rent out the facilities to third parties, but also to maintain and repair the buildings.

One of the two renovated buildings will house a winery and the other will be used for exhibition purposes. The 18 new buildings will house four restaurants, bars and cafés, three tavernas, three snack bars, 17 shops and seven floors of office space.

The old port project also includes a building that houses the Fisheries Department, as well as a fishermen’s cove as the facility will continue to operate as a fishing harbour and fish market. The Fisheries Dept. will be responsible for the anchorage of the fishing and other vessels.

The project area also includes a piazza-square, parking

Bounced cheques decline in 5M to €800,000

The value of bounced cheques has declined significantly year-on-year to EUR 798,907 in the first five moths of the year, down from EUR 1,247,949 in the corresponding period last year, the Central Bank of Cyprus said.

In May alone, the amount of bounced cheques reached EUR 89,037, the lowest monthly level in 12 years when the central bank started publishing records.

The number of bounced cheques issued dropped from 1,100 in January-May last year to 707 in the same period this year, with 436 individuals and companies registered on the black0list, down from 572 in the same five months last year. The total value of bounced cheques last year reached EUR 3,361,113, down from EUR 5,673,450 in 2013, and EUR 7,759,687 in 2012.

Paphos to get projects worth €60 mln

Paphos will benefit from new projects worth 60 mln euros, President Nicos Anastasiades said while visiting the town on Monday.

President Anastasiades said that projects will include the transformation of the traditional commercial centre and the Kennedy square and are set to begin next November. Revamp work will take place at 28th of October square, Kostis Palamas square and Dionysios Solomos square which surround the town hall. The works will begin in the latest the first quarter of 2016.

Works will also take place for the expansion of the District Police Department and the District Court. Other projects will take place for the reduction of solid waste, restoration of various archaeological sites and improvement works for the promenade.

The government, he said, has also decided to contribute an additional amount beyond the 5 mln it is already contributing for the promotion of Paphos as the Cultural Capital of Europe for 2017.

The President also announced other projects for Yeroskipou municipality such as the construction of the road connecting the centre with the tourist area, additional breakwaters and the construction of a health centre.

Projects will also take place at Polis such as the restoration of the coastal front.

spaces and a deck and public bridge from where pedestrians can look onto the harbour area, as well as the adjacent newly built Limassol Marina.

Meanwhile, the Ministry of Communications and Works has submitted to parliament a revised tender document for approval, to develop the commercial operations of Limassol port, the biggest in Cyprus and part of the government’s privatisation plan that needs to raise EUR 1.4 bln in four years. Netherlands-based APM Terminals and Dubai’s DP World were said to have shown interest, with the government abandoning earlier plans for privatisations, and now opting between a licensing agreement and concession.

Transport Minister Marios Demetriades, who handles the portfolios of both transport and maritime, had initially said that the procedure for privatisation of the commercial services at Limassol Port would get underway by the end of April, a deadline later moved to end-May and now pending

before parliament.

Already, consultants Rothschild have embarked on a market sounding process in a bid to assess market interest.

Demetriades said that prominent corporations in port and cargo terminals management have expressed interest for the services at Limassol port.

“I believe the investor will be selected by the end of the year and the process will be completed by the first quarter of 2016,” Demetriades said.

He said the Ministry’s advisors are currently examining the legal framework for privatisation, noting that the options under consideration are either a license contract or a concession agreement for a period of 25 years. Global advisors Pinsent Masons LLP had been selected earlier in 2015 to provide legal services to the government, aimed at the successful completion of the process of licensing of all or part of the commercial operations of the Limassol Port.

Economy back on track, 1.6% growth in Q1 Seasonally adjusted GDP rose by 1.6% during the first quarter of 2015, compared to the previous quarter, while in both the euro area and the EU28 GDP rose by 0.4% during the same period, according to Eurostat.

In the fourth quarter of 2014, GDP also grew by 0.4% in the euro area and the EU28, while in Cyprus it dropped 0.4%. Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 1.0% in the euro area and by 1.5% in the EU28 in the first quarter of 2015 and by 0.2% in Cyprus.

Two weeks ago, the Finance Ministry said the the Cypriot economy returned to positive growth after 14 quarters of contraction. Based on seasonally adjusted data, GDP growth rate in real terms is estimated at 0.2%, compared with -1.8% in the fourth quarter of 2014 on an annual basis.

The GDP growth rate in real terms during the first quarter of 2015 is positive and estimated at 0.4% over the corresponding quarter of 2014.

Positive growth rates were recorded in trade, hotels and restaurants, communication, electricity as well as the legal and accounting activities. ¡egative growth rates were recorded by the secondary sector of the economy, mining, manufacturing and construction.

According to the Ministry’s Public Debt Management Office, the business environment shows signs of stabilisation and gradual improvement given that lending to non-financial corporations is marginally positive and interest rates are in decline.

The economic sentiment indicator

by University of Cyprus Economic Research Centre (CypERC) increased by 4 points in April from the previous

month. This increase is due to the improvement in the business climate in all sectors covered by the survey, as well to the strengthening of the consumer economic confidence.

Exports increased by 45.5% in January-March compared to JanuaryMarch 2014.

In January-April tourist arrivals increased by 13.7% compared to same period last year. An increase of 84.7% was recorded in tourist arrivals from Israel, 14.3% from Germany, 15.8% from the UK and a 39.4% increase from Greece. On the other hand a 16.2% decrease was recorded in arrivals from Russia. Inflation (HICP) for April was 1.7% compared to -1.4% in March and for 2015 so far it stands at -1.2%.

The Labour Force Survey (LFS) on unemployment, in monthly seasonally adjusted terms, decreased from 16.2% in March 2014 to 16% in March 2015.

Etihad opens new office in Nicosia Etihad Airways, the national airline of the United Arab Emirates that operates five flights a week to Cyprus, opened its new offices in Nicosia, inaugurated by Energy, Commerce and Tourism Minister Yiorgos Lakkotrypis.

Also present at the ribbon-cutting ceremony were Etihad’s Vice President Europe, Joost den Hartog, the UAE Embassy’s Attaché Ammar Omar Al Breiki, government officials and businessmen.

The minister praised the airline, that has been flying to Cyprus for the past six years, adding that the national airline of the UAE chose to invest in the Cypriot economy at a critical time, greatly supporting the growth of business and leisure traffic, not only between Cyprus and the UAE, but also between Cyprus and a wide range of destinations around the world.

The airline’s Cyprus commercial team, which has been operating from offices in Larnaca for the past six years, will now move to the new offices, strategically located in the

centre of the capital.

Etihad’s Joost den Hartog said: “The launch of the new offices and the relocation of our commercial team to Nicosia makes sound business sense. It will bring us closer to our corporate customers and travel trade partners while also reflecting our commitment to growing our operations in Cyprus.”

June 10 - 16, 2015

financialmirror.com | CYPRUS | 7

Primary homes ‘safe’ from foreclosure up to €250,000 The Council of Ministers has appointed the state-owned Cyprus Land Development Corporation (CLDC) to undertake the management of mortgages for low-income families with debts of up to 250,000 euros and small companies with turnover of the same amount and has declared that primary homes or primary assets are safe from foreclosure.

The CLDC will subsidise the interest on mortgages that have defaulted, in order to avoid foreclosure with a cap set at 4% and a two-year plan, renewable for another two years (2+2).

“We hope that after the lapse of this two-plus-two years, the economy will have recovered and the subsidy will no longer be necessary,” said Interior Minister Socratis Hasikos.

He added that the basic requirement for a person or an SME to qualify for this programme is a voluntary induction into the insolvency scheme and the conclusion of the restructuring of loans or repayment programme, as per the Central Bank of Cyprus directives for the management of delayed loan repayments, by resorting to a mediator of the

Financial Ombudsman.

The primary home of a borrower or a company that has mortgaged the principal’s primary home is considered any property with at least six months residency per year. It must also have been mortgaged with a financial institution approved by the Central Bank, the minimum residence in the primary home must have been at least five years, the applicant must be a permanent resident of Cyprus and living here for the past ten years.

Finally, the mortgaged property must not exceed 250,000 euros, plus VAT and the total outstanding loan must not exceed 300,000 euros. In addition, the total value of all properties, excluding the primary home, must not exceed 100,000 euros. If the applicant has also resorted to the Welfare Office for the Guaranteed Minimum Income (EEE) and includes an amount to cover the interest on the defaulted mortgage, then the total amount of subsidy will be calculated so that the assistance does not exceed the maximum 4% interest on the loan.

Meritkapital adds ‘underwriting of instruments’ to service line-up MeritKapital Ltd., a Limassol-based licensed investment firm, has received an investment service extension from CySEC for the provision of ‘Underwriting of financial instruments’ for both a firm and soft commitment capability.

The fourth quarter of 2014, as well as the first two quarters of 2015, have proven to be economically challenging for Cyprus-based financial services firms that have an international sales focus, since the general industry is highly

dependent on the Russian economy. The western sanctions that have been imposed on certain Russian state-owned companies and politically linked individuals as well as the decline of commodity and, specifically, oil prices have inadvertently affected the Russian economy.

In effect, Cyprus-based financial services firms, including Meritkapital, have moved proactively to widen their geographical markets and respective

rendered services.

MeritKapital’s investment service extension to underwriting is an example of one such service diversification pursuit.

In turn, CySEC has been encouraging its regulated investment firms to build stronger business models by growing their respective client pools and product offerings.

This will better shield firms’ sales streams from such unforeseen economic and geopolitical events.

Petros Florides appointed President of CISI in Cyprus Petros Florides, Chartered FCSI, has been appointed President of the Chartered Institute for Securities and Investment (CISI) in Cyprus.

Petros has worked as a finance professional within the securities and investments industry for over 20 years in the areas of private banking, fund management, stockbroking, private equity and principal trading.

For the past ten years, he has been on the board of a number of micro-finance institutions in eastern Europe and is currently employed as a Regional Governance Advisor for World Vision International - one of the world’s largest humanitarian aid and assistance organisations.

Together with outgoing President Charles Charalambous, Petros co-founded CISI’s Cyprus National Advisory Council (NAC).

“CISI is now recognised as an important contributor to high standards of professionalism, excellence and integrity in the Cyprus securities and investments industry.

Together with my fellow members of the NAC I hope to build on this legacy further,” Florides said.

Petros is a member of the Institute of Directors and a Certificant of the Institute of Risk Management. He sits on the Ethics & Risk and Human Resource & Training Committees of the Cyprus Investment Funds Association (CIFA).

“We will continue to promote the importance of attaining qualifications and maintaining continuing professional development for those working in financial services in Cyprus,” said Kevin Moore, CISI Director of Global Business Development.

June 10 - 16, 2015

8 | COMMENT | financialmirror.com

An old chap goes west … in England… (and the sun shone)

Last week, I wrote of a magnificent building erected by man to the glory of God – the Great Mosque of Damascus. This week, Mary and I have been in another magnificent structure erected in His praise, the Christian Cathedral in the English Midlands city of Peterborough.

As we entered, the first thing we noted was that all the seats for worshippers had been removed and in their place were about fifty round tables, each with ten chairs and settings for a banquet.

“It’s the 900th anniversary of the Cathedral this year”, a guide told us, “and we are having a fund-raising dinner. The guest speaker is Lord Archer”.

He would not estimate how much this “Blue Plate” would raise, but with the great and good of the area attending it would be many thousands of pounds.

“Lord Archer”, of course, is Jeffrey Archer, the British Conservative politician who was involved in a sordid relationship with a prostitute and lied about it in court.

He was imprisoned for some months for perjury. Before that, he had written a number of best-selling action packed novels, and continued to do so during and after his incarceration.

I think my picture shows what a beautiful building it is. I hope it was a good dinner.

A long-time resident of Cyprus visiting Britain would be impressed by our history and our many fine old buildings. However, unless he or she had a great deal of money, I think amazement would be their reaction to our every day food. Menus in “pubs”, and restaurants frequently are identical or very similar and so is the food because it is “ready made” and comes in packets, simply to be heated and served. It is difficult to find local food and a chef preparing it. At one fine country house, open to the public, we did.

Near Telford in Shropshire, not far from the border with Wales, is Weston House and Park, the former ancestral seat of the Earls of Bradford, notable for a wonderful art collection and one thousand acres of land sculpted by the 17th century landscape designer “Capability” Brown. As well as superb walks, there is a miniature railway, children’s playgrounds, and some excellent food in a Deli/Café and a restaurant.

Patrick Skinner

Close to our hotel is the little town of Ironbridge, a considerable tourist attraction because of its “Iron Bridge”.

The first structure in the world to be made of cast iron (smelted in the town) which was opened in 1779.

Last Sunday evening, we strolled the streets empty of tourists, looking for a place to eat. How strange this would have been to a Cypriot! All the eating places were closed except for a grubby Thai restaurant, a small hotel and a Pub. We opted for the latter and enjoyed a “Ready Meal”, nicely heated up by the chef.

A half mile away from the iron bridge is a facsimile Victorian town, with streets of shops, businesses and industry as it all was in 1900. Fresh bread and cakes, pies, fish and chips… . All were readily available. Even an “old” branch of Lloyds Bank, where you could exchange the current British money for “old” Pounds, Shillings and Pence, which could be used for purchases in the “old” shops. This is a wonderful trip into the past a glimpse of what life was like 120 years ago. … and so Wales and 150 year old steam trains! More next week!

Charalambides-Kristis traditional ravioles win ‘Grocery Retail Award’ The dairy-to-pasta company CharalambidesKristis has received the top prize among all foodstuff in its category during the Grocery Retail Awards for its ‘ravioles’ made from the traditional Pissouri halloumi cheese and part of the company’s new ‘Spitikes Gevseis’ (Home Tastes) range of products.

Ravioles, the Cypriot version of the Venetian ‘ravioli’, are made almost the same way as the Italian pasta, usually served either in chicken broth

or with a pasta sauce, and almost always topped with grated halloumi cheese. Just as the traditional food in the Italian cuisine, ravioli are square semicircular.

“Innovation and the quality standards we have introduced, primarily due to our own Pissourkotiko Halloumi, are the main ingredients in the preparation of the ravioles,” said the company’s Frozen Foods Manager Anthimos Anthimou.

June 10 - 16, 2015

financialmirror.com | COMMENT | 9

World’s top countries for high-skilled employment Which countries have the largest share of people in high-skilled employment? According to the World Economic Forum and International Labour Organisation statistics, Luxembourg is in first position. Just under 60% of the small European country’s workers are employed in occupations with tertiary education requirements. This is largely thanks to a small, open economy with a burgeoning financial sector, dependent on a well educated workforce.

Singapore, another small country, has the highest proportion of high-skilled workers in Asia. An impressive 54.7% of its workforce is classified as high-skilled, the second highest globally.

Switzerland rounds off the top three with 51.3%.

Israel and Iceland come fourth and fifth with 49.7 and 49.2%, respectively. (Source: Statista)

US tops competitiveness ranking, Asia sees mixed results The United States remained at the top of the annual world competitiveness ranking conducted by the leading business school IMD, with the report saying this achievement was a result of the strong business efficiency and financial sector in the U.S., its innovation drive and the effectiveness of its infrastructure. Hong Kong (2) and Singapore (3) moved up in the rankings of 61 surveyed economies overtaking Switzerland, which dropped to fourth place. Canada (5), Norway (7), Denmark (8), Sweden (9) and Germany (10) remained in the top ten.

Luxembourg moved to the top (6) from 11th place in 2014.

Results for Asia were mixed. Malaysia (12 to 14), Japan (21 to 27), Thailand (29 to 30) and Indonesia (37 to 42) moved down, while Taiwan (13 to 11), Republic of Korea (26 to 25) and the Philippines (42 to 41) slightly rose in the ranking. Most Asian economies in decline have seen a drop in their domestic economies and are impacted by weakening/aging infrastructure.

Eastern E u r o p e experienced a mixture of results as well.

Poland (36 to 33), the Czech Republic (33 to 29) and Slovenia (55 to 49) moved up in the ranking.

In the Baltic States, Estonia (30 to 31) and Latvia (35 to 43) ranked lower than last year, although, Lithuania gained (34 to 28). Elsewhere in the region, current events in Russia (38 to 45) and Ukraine (49 to 60) highlight the negative impact that armed conflict and the accompanying higher market volatility have on competitiveness in an increasingly interconnected international economy.

Among large emerging economies, Brazil (54 to 56) and South Africa (52 to 53) slightly dropped, China (23 to 22) and Mexico (41 to 39) experienced improvements while India remained at the same spot (44). This trend shows the difficulty in grouping emerging markets in one category, as the issues impacting their competitiveness differ. China’s slight increase stems from improvements in education and public expenditure, whereas Brazil suffers from a drop in domestic economy and less optimistic executive opinions.

June 10 - 16, 2015

10 | GREECE | financialmirror.com

Business climate worsens As negotiations between the Greek government and the EU/IMF have reached a stalemate following Athens’s outright dismissal of a new bailout offer from its creditors, time is running out for a much needed agreement in order to stave off bankruptcy. A situation which has worsened following a decision by Prime Minister Alexis Tsipras not to go ahead with a EUR 335 mln payment to the International Monetary Fund due last Friday (June 5). Instead, Greece invoked a little used option, last taken by

that the country was heading for early elections and an uncharted political landscape.

But growing political and economic uncertainty, and lack of liquidity in the banking sector have pushed private companies to their limits as most of them are trying to preserve cash and are constantly postponing key management decisions. This has brought business activity to a standstill as cash flows have dwindled with many companies unable to pay salaries and social insurance due at the end of the month. A climate of acute uncertainty and despair is evident among most companies, mainly affecting the industrial and services sectors, while those active in tourism and agriculture appear to be slightly better off. The country seems to be at the mercy of public sector trade unions which until now have dissuaded a succession of Greek governments from implementing much needed reforms in the pension system, public administration and the energy market. With many Syriza MPs coming from trade unions, the government looks determined to protect the current system to the detriment of the private sector which has suffered 1.3 mln job losses over the last five years, while public sector employees – nearly 700,000 of them – are immune to any form of redundancy or loss of employment.

With a fast contracting private sector and more than 6,000 enterprises having closed down since January, economic growth in Greece will amount to no more than an anaemic 0.1% this year, according to the Organisation for Economic Cooperation and Development (OECD) which in its latest report has revised its forecast for the Greek economy down from 2.3% six months ago.

However, even that marginal growth, warned the OECD, depends on Greece reaching an agreement with its creditors, as the lack of a satisfactory deal would lead to “further significant contraction of output and income of households”. The big challenge for the Greek economy remains the implementation of reforms, and any failure will lead to a contraction in gross domestic product. The forecasts issued on June 3 are much lower than those published in November, when OECD anticipated 2.3% growth for this year

By Costis Stambolis Zambia in the 1970s, to defer that payment and three others totalling EUR 1.6 bln until the end of the month.

But according to reliable banking sources in Athens it is believed that the Greek Treasury will not have enough money at the end of June to pay both the IMF and state employees’ salaries and pensions, thus bringing the country closer to bankruptcy, a situation which now seems very real as the far left Syriza-led coalition government steadfastly refuses to agree to a new set of economic and administrative reforms, which, however, is conditional for the EU/IMF to extend the present agreement and unlock EUR 7.2 bln of bailout funds that Greece desperately needs.

Although Greek government sources claim that the non-payment of the 300 mln IMF tranche was a political decision, as the money was available, and it should be seen more as a negotiating tactic, markets interpreted this move as a step closer towards the imposition of capital controls, exactly as it happened in Cyprus in March 2013, and hence sent stocks tumbling on the Athens Exchange. Even worse off are the banks which are fast running out of cash as depositors are withdrawing money out of their accounts on a daily basis. So far, the Greek banking system has remained afloat thanks to generous ELA transfers from the European Central Bank (ECB). According to banking sources, more than EUR 3.0 bln have been withdrawn by nervous clients over the last two weeks with total deposits now standing at record low of EUR 128 bln, with 20 bln alone having been withdrawn since January this year. Bank of Greece figures show that this is the lowest level of deposits the country has seen in 11 years. The capital flight started last October, when deposits stood at EUR 164 bln, when it became clear

By HansWerner Sinn Game theorists know that a Plan A is never enough. One must also develop and put forward a credible Plan B – the implied threat that drives forward negotiations on Plan A. Greece’s finance minister, Yanis Varoufakis, knows this very well. As the Greek government’s anointed “heavy”, he is working Plan B (a potential exit from the Eurozone), while Prime Minister Alexis Tsipras makes himself available for Plan A (an extension on Greece’s loan agreement, and a renegotiation of the terms of its

and a 3.3% expansion in 2016. Now, it expects the 2015 GDP to grow just 0.1% before the economy expands 2.3% next year.

It is clear, note OECD sources, that the targets for investment and strengthening consumption have been undetermined by the credit conditions and the low confidence in the economy, while the benefits from the increase in competitiveness are not big enough to push exports forward unless they are accompanied by no-nonsense structural reforms in order to lift the barriers to commerce and investments.

Meanwhile, the cash-strapped Syriza government has halted payments to all companies involved in public procurement projects but also to individuals, i.e. tax returns, thus draining the economy of any liquidity. This includes payments for a number of European Commissionsubsidised projects in Greece which have been severely delayed in recent months during the crucial period just before their completion, according to the Association of Greek Construction Companies (SATE).

The payment delays have hit major projects such as highway concessions all the way down to smaller public works including the construction of sewage networks and

schools. “State projects around the country are failing apart as they see work stop one after another due to the financial constraints of constructions firms,” a SATE statement warned on Monday.

As the present cash crisis is reaching a climax, it has started affecting otherwise financially sound companies.

Senior managers of enterprises involved in export oriented industries, such as tourism, oil and minerals, which appear to have suffered the least from an ever worsening recessionary climate, point out that Greek risk is acting as a strong disincentive for customers abroad, let alone investors, who do not show much appetite for doing business with Greek companies.

“At times, there is a feeling of utmost despair as the country’s financial and liquidity problem is constantly raising barriers all around and prevents us from carrying out much needed investments, thus draining our resources and undermining our long term growth prospects,” said a senior manager in one of Greece’s major oil companies.

Costis Stambolis is a Financial Mirror correspondent, based in Athens.

Ifo Viewpoint: Varoufakis’s bailout). In a sense, they are playing the classic game of “good cop/bad cop” – and, so far, to great effect.

Plan B comprises two key elements.

First, there is simple provocation, aimed at riling up Greek citizens and thus escalating tensions between the country and its creditors. Greece’s citizens must believe that they are escaping grave injustice if they are to continue to trust their government during the difficult period that would follow an exit from the Eurozone.

Second, the Greek government is driving up the costs of Plan B for the other side, by allowing capital flight by its citizens. If it so chose, the government could contain this trend with a more conciliatory approach, or

stop it outright with the introduction of capital controls. But doing so would weaken its negotiating position, and that is not an option.

Capital flight does not mean that capital is moving abroad in net terms, but rather that private capital is being turned into public capital. Basically, Greek citizens take out loans from local banks, funded largely by the Greek central bank, which acquires funds through the European Central Bank’s emergency liquidity assistance (ELA) scheme. They then transfer the money to other countries to purchase foreign assets (or redeem their debts), draining liquidity from their country’s banks.

Other Eurozone central banks are thus

forced to create new money to fulfil the payment orders for the Greek citizens, effectively giving the Greek central bank an overdraft credit, as measured by the socalled Target liabilities. In January and February, Greece’s Target debts increased by almost one billion euros per day, owing to capital flight by Greek citizens and foreign investors.

At the end of April, those debts amounted to 99 bln euros.

A Greek exit would not damage the accounts that its citizens have set up in other Eurozone countries – let alone cause Greeks to lose the assets they have purchased with those accounts. But it would leave those countries’ central banks

June 10 - 16, 2015

financialmirror.com | GREECE | 11

Europe’s last act?

By Joseph E. Stiglitz European Union leaders continue to play a game of brinkmanship with the Greek government. Greece has met its creditors’ demands far more than halfway. Yet Germany and Greece’s other creditors continue to demand that the country sign on to a programme that has proven to be a failure, and that few economists ever thought could, would, or should be implemented.

The swing in Greece’s fiscal position from a large primary deficit to a surplus was almost unprecedented, but the demand that the country achieve a primary surplus of 4.5% of GDP was unconscionable.

Unfortunately, at the time that the “troika” – the European Commission, the European Central Bank, and the International Monetary Fund – first included this irresponsible demand in the international financial programme for Greece, the country’s authorities had no choice but to accede to it.

The folly of continuing to pursue this programme is particularly acute now, given the 25% decline in GDP that Greece has endured since the beginning of the crisis.

The troika badly misjudged the macroeconomic effects of the programme that they imposed. According to their published forecasts, they believed that, by cutting wages and accepting other austerity measures, Greek exports would increase and the economy would quickly return to growth. They also believed that the first debt restructuring would lead to debt sustainability.

The troika’s forecasts have been wrong, and repeatedly so. And not by a little, but by an enormous amount. Greece’s voters were right to demand a change in course, and their government is right to refuse to sign on to a deeply flawed programme.

Having said that, there is room for a deal: Greece has made clear its willingness to engage in continued reforms, and has welcomed Europe’s help in implementing some of them. A dose of reality on the part of Greece’s creditors – about what is achievable, and about the macroeconomic consequences of different fiscal and structural reforms – could provide the basis of an agreement that would be good not only for Greece, but for all of Europe.

Finance Minister Yanis Varoufakis spoke at an event of the Hans-Boeckler-Foundation on ‘The Future of Greece in the EU’ at the French Dome in Berlin, on Monday. Varoufakis, who had a meeting with German Finance Minister Wolfgang Schaeuble earlier in the day, described the oneto-one meeting with his most resolute opponent Schaeuble, as ‘productive.’ The Greek debt crisis has also loomed over the G7 Summit held in the Bavarian Alpine resort of Schloss Elmau, with Athens urgently trying to reach a deal with its creditors to unlock fresh bailout funds in exchange for tough reforms.

Some in Europe, especially in Germany, seem nonchalant about a Greek exit from the eurozone. The market has, they claim, already “priced in” such a rupture. Some even suggest that it would be good for the monetary union.

I believe that such views significantly underestimate both the current and future risks involved. A similar degree of complacency was evident in the United States before the collapse of Lehman Brothers in September 2008. The fragility of America’s banks had been known for a long time – at least since the bankruptcy of Bear Stearns the previous March. Yet, given the lack of transparency (owing in part to weak regulation), both markets and policymakers did not fully appreciate the linkages among financial institutions.

Indeed, the world’s financial system is still feeling the aftershocks of the Lehman collapse. And banks remain non-transparent, and thus at risk. We still don’t know the full extent of linkages among financial institutions, including those arising from non-transparent derivatives and credit default swaps.

In Europe, we can already see some of the consequences of inadequate regulation and the flawed design of the eurozone itself. We know that the structure of the eurozone encourages divergence, not convergence: as capital and talented people leave crisis-hit economies, these countries become less able to repay their debts. As markets grasp that a vicious downward spiral is structurally

embedded in the euro, the consequences for the next crisis become profound. And another crisis in inevitable: it is in the very nature of capitalism.

ECB President Mario Draghi’s confidence trick, in the form of his declaration in 2012 that the monetary authorities would do “whatever it takes” to preserve the euro, has worked so far. But the knowledge that the euro is not a binding commitment among its members will make it far less likely to work the next time. Bond yields could spike, and no amount of reassurance by the ECB and Europe’s leaders would suffice to bring them down from stratospheric levels, because the world now knows that they will not do “whatever it takes.” As the example of Greece has shown, they will do only what shortsighted electoral politics demands.

The most important consequence, I fear, is the weakening of European solidarity. The euro was supposed to strengthen it. Instead, it has had the opposite effect.

It is not in the interest of Europe – or the world – to have a country on Europe’s periphery alienated from its neighbours, especially now, when geopolitical instability is already so evident. The neighboring Middle East is in turmoil; the West is attempting to contain a newly aggressive Russia; and China, already the world’s largest source of savings, the largest trading country, and the largest overall economy (in terms of purchasing power parity), is confronting the West with new economic and strategic realities. This is no time for European

disunion.

Europe’s leaders viewed themselves as visionaries when they created the euro. They thought they were looking beyond the shortterm demands that usually preoccupy political leaders.

Unfortunately, their understanding of economics fell short of their ambition; and the politics of the moment did not permit the creation of the institutional framework that might have enabled the euro to work as intended. Although the single currency was supposed to bring unprecedented prosperity, it is difficult to detect a significant positive effect for the eurozone as a whole in the period before the crisis. In the period since, the adverse effects have been enormous.

The future of Europe and the euro now depends on whether the eurozone’s political leaders can combine a modicum of economic understanding with a visionary sense of, and concern for, European solidarity. We are likely to begin finding out the answer to that existential question in the next few weeks.

resulting in a net loss for the monetary union’s remaining members.

All of this strengthens the Greek government’s negotiating position considerably. Small wonder, then, that Varoufakis and Tsipras are playing for time, refusing to submit a list of meaningful reform proposals.

The ECB bears considerable responsibility for this situation. By failing to produce the two-thirds majority in the ECB Council needed to limit the Greek central bank’s self-serving strategy, it has allowed the creation of 81 bln euros in emergency liquidity by now, which exceeds the Greek central bank’s 41 bln euros in recoverable assets. With Greece’s banks guaranteed the

needed funds, the government has been spared from having to introduce capital controls.

Rumour has it that the ECB is poised to adjust its approach – and soon. It knows that its argument that the ELA loans are collateralised is wearing thin, given that, in many cases, the collateral has a rating below BBB–, thus falling short of investment grade.

If the ECB finally acknowledges that this will not do, and removes Greece’s liquidity safety net, the Greek government would be forced to start negotiating seriously, because waiting would no longer do it any good. But, with the stock of money sent abroad and held in cash having already ballooned to 79% of GDP, its position would remain very strong.

In other words, thanks largely to the

ECB, the Greek government would be able to secure a far more favourable outcome – including increased financial assistance and reduced reform requirements – than it could have gained at any point in the past. And if Greece exits, a large share of the acquired resources measured by the Target balances and the cash that has been printed would turn into an endowment gift for an independent future.

Many people in Europe seem to believe that Varoufakis, an experienced game theorist but a political neophyte, does not know how to play the cards that Greece has been dealt. They should think again – before Greece walks away with the pot.

Great Game stuck with euro-denominated Target claims vis-à-vis Greece’s central bank, which would have assets denominated only in a restored drachma. Given the new currency’s inevitable devaluation, together with the fact that the Greek government does not have to backstop its central bank’s debt, a default depriving the other central banks of their claims would be all but certain.

A similar situation arises when Greek citizens withdraw cash from their accounts and hoard it in suitcases or take it abroad. If Greece abandoned the euro, a substantial share of these funds – which totalled 43 bln euros at the end of April – would flow into the rest of the Eurozone, both to purchase goods and assets and to pay off debts,

Joseph E. Stiglitz, a Nobel laureate in economics, is University Professor at Columbia University. His most recent book, co-authored with Bruce Greenwald, is Creating a Learning Society: A New Approach to Growth, Development, and Social Progress. © Project Syndicate, 2015. www.project-syndicate.org

Hans-Werner Sinn is Professor of Economics and Public Finance and President of the Ifo Institute

June 10 - 16, 2015

12 | PROPERTY | financialmirror.com

Spanish mortgage foreclosures will decrease, easing losses in RMBS deals, says Moody’s Spanish RMBS performance will benefit from the stabilisation in mortgage foreclosures, Moody’s Investors Service said in a new report.

“We believe that downward pressure on the performance of residential mortgages is easing, which is credit positive for Spanish RMBS transactions,” observed Alberto Barbachano, author of the report.

“The foreclosure rate has dropped by almost 14% since the peak of the crisis in 2010. We expect that a lower number of

foreclosures will be accompanied by a shortening of time to process individual foreclosures, which will benefit transaction performance because the accrual of interest during the foreclosure period affects the severity of note-level losses,” he continued.

Despite the decrease in foreclosures, banks are avoiding selling the assets at a loss, as they are waiting for market conditions to improve. The number of foreclosed mortgages has declined year-on-year in the past two years; by 2.3% in 2014 and by 9.76%

in 2013. The autonomous regions of Cantabria, Galicia and Madrid recorded the highest drop in foreclosure cases in 2014.

Valencia, Extremadura and Murcia reported a significant increase in the number of foreclosures in 2014, after a drop in 2013.

The Bank of Spain’s data show that Spanish banks’ holdings of repossessed real estate assets increased to EUR 83.4 billion as of the end of 2014. Therefore, a delay in selling properties may expose Spanish securitisation funds to higher loss severities.

The build-up of arrears has slowed down in Spanish residential mortgage-backed securities (RMBS). Delinquencies for more than 90 days decreased to 1.37% in December 2014 from 2.17% in December 2013. Low interest rates and slight economic improvements are driving down delinquencies. New arrears are now building up at a slower pace than old arrears are turning into defaults. We consider that slight improvements in the economy will be supportive of this trend going forward.

Secret Valley wins Tripadvisor Certificate of Excellence The “Secret Valley Golf Club” at the Venus Rock Beachfront Golf Resort was recognised as a top performing golf club, as reviewed by travellers on the world’s largest travel site.

“Winning the TripAdvisor Certificate of Excellence is a true source of pride for the entire team at Secret Valley, and Aristo Developers would like to thank all of its past guests who took the time to complete a review on TripAdvisor,” said Theodoros Aristodemou, CEO and Managing Director of Aristo Developers, owners and operators of the golf course and resort.

“There is no greater seal of approval than being recognised by one’s customers. With the TripAdvisor Certificate of Excellence based on customer reviews, the accolade is a remarkable vote of confidence to our business and our continued commitment to excellence.”

“TripAdvisor is pleased to honour exceptional hospitality businesses that have received consistent praise and recognition by travellers on the site,” said Marc Charron President, TripAdvisor for Business.

U.S. home prices rise fastest in South Carolina, Colorado Home prices in the United States rose for the 38th consecutive month in April, and the monthly increase ticked up at a higher rate. Compared with April of 2014, home prices rose 6.8%, including the sales of distressed properties. The year-over-year March increase was 5.9%.

Month over month, April home prices rose by 2.7% from March prices, which had risen 2% over February prices.

Including sales of distressed properties, the five states posting the largest year-over-year price increases in April were South Carolina (11.4%), Colorado (9.7%), Washington (9.1%), Florida (9.0%) and Texas (8.3%).

Excluding sales of distressed properties, the five states posting the biggest price increases over the past 12 months were South Carolina (10.0%), Florida (9.5%), Colorado (9.3%), Washington (8.7%) and Texas (up 8.2%).

The states with the largest peak-to-current declines, including distressed transactions, were Nevada (33.9%), Florida (29.3%), Rhode Island (28.2%), Arizona (26.2%) and Connecticut (24.8%). The data were released by research firm CoreLogic. Peak home prices occurred in April 2006.

CoreLogic’s CEO said: “Old fashion supply and demand, fueled by historically low mortgage rates and improving consumer finances and confidence, continue to push home prices up. We expect continued appreciation throughout 2015 and into next year. Over the longer term, household formation, u by more than one million over the past year alone, will drive down vacancy rates and create tighter housing markets in many metropolitan areas. This should provide the necessary underpinning for rising prices for the foreseeable future.”

CoreLogic has forecast that home prices will rise 1.1% month over month in May and rise by 5.3% between April 2015 and April 2016. Both projections include distressed sales.

Property Gallery presentation of new projects Property Gallery Developers & Constructors recently hosted a reception at the Four Seasons in Limassol where Managing Director Lyra Amvrosidou presented the new projects underway, both for residential and commercial use, primarily in Limassol.

Since 2002, Property Gallery has built up a reputation of

premium construction projects aimed mainly at international buyers, utilising new construction and aesthetic techniques, functionality, energy saving and unique concept architecture.

This is why in the past six years, the company has collected a total of 27 international awards.

Directors Lyra Amvrosidou (3rd from right) and Panayiotis Georgakis with the Property Gallery team

June 10 - 16, 2015

financialmirror.com | PROPERTY | 13

Common expenses: the curse of the property market µy Antonis Loizou Antonis Loizou F.R.I.C.S. is the Director of Antonis Loizou & Associates Ltd., Real Estate & Projects Development Managers

By describing common expenses as a ‘curse’, I am simply emphasising the seriousness of the problem related to unpaid common expenses. There is an obscure law governing these payments and it is doubtful if it can ever be applied properly.

The question raised is whether it is necessary or not for the management committee of a project or building to registered at the Land Registry. The law says this is a must, the Land Registry says it is not necessary and that only a general assembly with 50%+ of votes applies. The administrator should not be paid, the law says. Who, then, will undertake this arduous task that requires extra time and causes unnecessary friction among cohabitants in a building?

The law says that for those who do not pay the charges, their debts should be paid by the rest of the (consistent) residents who should then undertake legal proceedings to recover the amount. That means the consistent resident is burdened with the unpaid common expenses, as well as legal and court fees, the hassle of appearing in Court and by the very end, the debtor probably disappears (if the unit is sold to a third party, or has a tenant who does not pay) or even the Court awards partial payment by instalments of 10-20 euros a month. When a simple court case costs around 2,000 euros, it is clear when and if this debt will ever be received.

It is inconceivable that a buyer of a unit at a cost of at least EUR 200,000-300,000 would not be interested to pay common expenses which could amount to EUR 500 a year, and thus maintain the value of the investment, use services such as cleaning and elevator maintenance, and of course maintain a level of safety. The problem gets much bigger in the case of holiday homes where there is a lack of understanding among the residents with the presence of foreign, local or seasonal buyers or tenants, the outcome of which we see every day with empty swimming pools, wild grass and weeds growing all over the place and projecting a sense of abandonment.

There are also those who protest at everything who refuse to pay for sharing such common services simply because they have a bone to pick with the developer, and often resort to the excuse of “if the other tenant does not pay, why should I?” or “I’m not happy with the cleanliness and thus will not pay,” and other silly pretexts where these tenants mainly punish the consistent residents and even themselves, thus degrading the value of their own property and certainly of others.

Nevertheless and despite our constant efforts to diversify the law on common expenses, the issue has been stuck at the House of Representatives and awaits discussion for the last 15 years! The matter is simple – the Minister of Interior should insist on the provision that there must be registered

maintenance charges exists among all financial and professional circles. Let’s take, for example, the management of an apartment building with an average value of EUR 500,000 and the otherwise well-todo tenants owe back pay in common expenses, as a result of which there is no proper maintenance and the whole project starts to crumble.

Then we have another building where 12 residents are consistent and despite the 24-year age of the building, it remains in excellent condition, both because of consistent maintenance and due to continuous upgrading, thereby raising the value of the units.

The situation of non-payment of common expenses is tragic and is a matter of poor mentality, something that unfortunately a lot of foreign buyers are also following. In one such case where our office undertook the collection of common expenses, we took legal recourse case for the demolition of illegal constructions by Proper maintenance of public areas also helps raise the value of the property one owner, the others tenants paid EUR 2,500 in lawyers’ fees and other expenses. management committee, the outstanding fees must the So, now we will have to chase the accused tenant for the responsibility of the shared ownership of the unit and upon collection of the 2,500. any future transfer, mortgage, sale, etc. of that, all dues must Is this any way for calm cohabitation and good be settled. It is not the management committee that should neighbourly manners? chase the debtor tenant, but the other way around, that the The “social fabric” (we learned this new cliché from our inconsistent resident should chase the Administrative very wise MPs) was “rescued” by our deputies who Committee if he believes he has been wronged. supposedly worked so hard, day and night, to save the shop In respect of the tenancy agreements, there remains the hours farce. Where, then, is that same “social fabric” when a other serious problem of maintenance of the roof. This is a 69 year old lady with a heart problem, can not climb the common area, unless a certain unit has exclusive right of use stairs for three floors, while her neighbour has to carry her of that roof, which is common in holiday homes and bags of shopping because the elevator is not working caused duplexes. In the case of shared roofs, suppliers and others by the non-payment of common expenses and the lack of often place various equipment such, as the air conditioners, proper maintenance) of the lift. satellite dishes, additional water tanks, solar panels, etc.)

Unfortunately, this is who we are. Everyone trying to which these suppliers and their technicians will not hesitate make ends meet, while both the governments of the day and to drill or damage the roof-top insulation and this raises the our House of Representatives failed to do anything because other question of who is responsible for the water leakages, they are too busy regulating shop hours or the “urgent etc., since it is not clear which of the say, ten tenants hired matters” of water sports. the suppliers who caused damage to the roof.

Unfortunately this behaviour of non-payment of www.aloizou.com.cy ala-HQ@aloizou.com.cy

KEVE seminar on foreclosures and insolvencies The Cyprus Chamber of Commerce and Industry (KEVE) is organising two consecutive seminars on the hot topic of foreclosures and the insolvencies framework in Nicosia on Tuesday, June 23 and in Limassol on June 30.

The presentations will be by people involved in the working group for the Insolvencies Framework and from

COMMERCIAL BUILDING PLOT FOR SALE IN NICOSIA Suitable for retail/office construction. Located in a very desirable location, opposite Marks & Spencer and within 50 mtrs of Acropolis Park.

Plot Area: 556 sq.m.

Max. Building Cover: 50% Max. Building Height: 24 meters Max. No. of Floors: 6 Road Frontage: Approx. 24 meters Price: €650,000 For more info please contact us at: 99317468

the Land Surveys Dept.

Participation at either event is EUR 35.70 for Chamber members and 47.60 for non-members, with registration for the Nicosia event at the KEVE Bldg. by June 19 and at the Limassol Chamber Bldg. by June 26.

For information call Anna Tsangari on 22889754 or by email annac@ccci.org.cy .

June 10 - 16, 2015

14 | WORLD MARKETS | financialmirror.com

The dollar is back!

By Oren Laurent President, Banc De Binary

In the world of macroeconomics, the rise of the US dollar is as game changing as a penalty in the last minute of a closely tied football match. In just one year, the US dollar has leapt up in value over 19% against the Euro. It’s back and stronger than ever, at high levels that we haven’t seen in over a decade. So central is the dollar to the world’s geo-politics, that its movements are having a knock-on effect on a range of businesses, foreign economies and other assets.

What’s causing the climb?

In simple terms, the strengthening dollar is a reflection of the growing American economy. It is rising in comparison to other major currencies just as the US economy fares relatively better than the rest of the world.

The reverberating effects of this trend are wide reaching.

It has damped investor appetite for gold, traditionally viewed as a stable alternative in times of currency lows and market volatility. And the precious metal could fall even lower in the coming months. The strong dollar has also contributed to the decline in value of the world’s most traded commodity: oil is currently in abundance due to high production levels, and given that its price is denominated in dollars, the pressure on its value is making it even cheaper for buyers.

Among American businesses, the strong dollar is a mixed blessing. It makes the goods of US manufacturers more expensive and therefore harder to sell. Yet for the increasing number of firms that are opening branches abroad and outsourcing work, the expensive dollar makes foreign labour more financially appealing and accessible. It’s a benefit for businesses, albeit not for local employment.

For American consumers, imported goods are now cheaper. That’s an advantage for them and for the foreign businesses and countries that are able to export their goods more economically. And as foreign money comes into the US

Boeing downplays 777 production cut At a briefing last week in advance of the Paris Air Show, Boeing Co. (NYSE: BA) admitted — sort of — that the company will have to cut production of the current version of its 777 passenger plane in 2018 as it transitions to building the new 777X, which is due for delivery to customers in 2020. Previously, the company had maintained that no changes were planned to the current build schedule of 8.3 planes per month (100 per year) until the 777X entered service. This is a big deal because the 777 is one of the most profitable, if not the most, of Boeing’s commercial planes. A 777-300ER carries a list price of $330 mln and probably sells for around $165 mln.

The Boeing executive running the 777 programme said at the briefing that the company “will feather in some blanks” as 777X production ramps up. What that means is that Boeing will leave holes (“blanks”) in its 777 production line to accommodate the transition to the new 777X. Those blanks give workers some extra time to adjust to building the new model. Those blanks also mean that Boeing will not be selling current versions of the 777. That translates to less revenue, less profit and, perhaps most important, reduced cash flow.

The company has persuaded analysts and investors to focus on cash flow, so any threat to cash flow is not a good sign. Full-year operating cash flow before pension contributions in 2014 totaled $9.64 bln, down slightly from $9.72 bln in 2013. Free cash flow rose from $6.08 bln in 2013 to $6.62 bln in 2014. The company projects operating cash flow for 2015 at more than $9 bln. Adding blanks to the 777 assembly line will not happen for a while yet, but Boeing’s explanation has left experienced analysts wondering what the company is trying to say.

Boeing also has figured out a way to add 14 seats to the 386 typically available in the 777-300ER. The company has also reduced the weight by 1,200 pounds, according to a report at Bloomberg, and made other changes that are expected to boost the 777-300ER’s fuel economy by about 5%. The upgrades are expected to be available next year.

due to the favourable exchange rates, the value of American stocks and bonds is increasing.

Traders should keep in mind the brilliance of economics before presuming that the current trend will continue indefinitely: the pressure that the dollar is exerting on local American manufacturers, and the smaller companies that have less oversees infrastructure and sales, is estimated to cut a third of a point off US economic growth this year. That in turn will help to keep the dollar in check. Think of it as a self-acting balancing mechanism that protects society’s various economic factions.

Conscious of this, the Federal Reserve is torn about whether to keep interest rates low or raise them in response

to the robust dollar. It is, of course, their responsibility to support national interests. However, now more than ever, they must remember that they have a global influence. Their every move will be tightly scrutinised by commodity traders, global businesses and exporters, and the other central banks.

US and European airlines challenge subsidies to Mideast carriers

By Paul Ausick In a clash that has been brewing for months, air carriers get a chance this week to battle head-on at the International Air Transport Association (IATA) annual meeting in Miami.

The issue is framed differently by the combatants and there are more than a few unexpected alliances.

The general issue results from open skies agreements among the U.S. and European carriers and their Middle Eastern competitors: Etihad, Emirates and Qatar Airways, collectively called the “Middle East 3” or ME3. Under these agreements, the developed countries typically allow carriers from developing countries to operate under six so-called freedoms. The contentious freedoms are the fifth and sixth, which allow the carriers to transfer traffic from any of its aircraft to any other of its aircraft at any point on the route (that is number 5) and to serve points behind any point in its territory with or without an aircraft change (that is a shortened version of number 6).

U.S. legacy carriers United Continental Holdings Inc. (NYSE: UAL), American Airlines Group Inc. (NASDAQ: AAL) and Delta Air Lines Co. (NYSE: DAL), as well as European carriers Lufthansa and Air France-KLM, have cried “Foul!” because they claim government subsidies to the ME3 enable the foreign carriers to charge lower fares and compete unfairly with the legacy carriers.

In early June, Etihad responded to the U.S. carriers that it has received $14.3 bln in capitalisation — $9.1 bln as shareholder equity and $5.2 bln in shareholder loans — from the Abu Dhabi government. According to a report in The Wall Street Journal, Etihad claims that state-ownership of an airline is not prohibited under the open skies agreement.

Airbus and Boeing Co. (NYSE: BA) are quite satisfied with the rise of the ME3. These airlines have ordered hundreds of

planes from these two makers. Boeing, for example, has received orders for 230 new planes from Emirates since 2010 and has delivered 53 in the same period (some from prior orders). Emirates placed an order for 150 of Boeing’s 777X airplanes last July, and the airline’s CEO is trying to persuade Airbus to upgrade the A380, the world’s largest passenger jet.

At the end of May, Airbus had delivered 60 of the A380s to Emirates and had outstanding orders for 80 more.

In a jab at the legacy carriers, Akbar Al Baker, CEO of Qatar Airways, told the IATA meeting on Monday that protectionism is a threat to commercial aviation. The legacy carriers are pressing the U.S. government to consult with the UAE and Qatar governments. They also want the new access to the U.S. market temporarily suspended until the open skies situation is resolved.

United Airlines shares were down nearly 5% at noon on Monday, trading at $51.43 in a 52-week range of $36.65 to $74.52. The company’s rating was cut from Strong Buy to Outperform at Raymond James earlier in the day and the price target was cut from $82 to $69 per share.

Delta traded down nearly 4.5%, at $41.04 in a 52-week range of $30.12 to $51.06. Raymond James also downgraded the airline, from Strong Buy to Outperform, with a price target cut from $60 to $53.

American Airlines traded down 5.3% to $39.50, in a 52week range of $28.10 to $56.20. The stock was cut from Outperform to Market Perform. (Source: 24/7 Wall St.com)

June 10 - 16, 2015

financialmirror.com | MARKETS | 15

Thinking big about China Marcuard’s Market update

by GaveKal Dragonomics There are two big facts about China today. One: its economy is slowing, and will almost certainly continue to do so for the next couple of years. Two: under its forceful president Xi Jinping, it is making a big push on many fronts to increase its influence around the world. The question is which of these facts deserves more attention.

For those used to treating China as an economic growth story, the slowdown seems obviously more important. GDP is growing at its most sluggish rate since the late 1990s and is clearly headed lower.

Leverage continues to rise; getting it under control will mean even slower growth. The heavy industrial sectors that have led the economy since the early 2000s are mired in excess capacity, and producer price deflation is entrenched.

Clearly, the boom times are over, and much more pain lies ahead.

For workers in Chinese heavy industry, and for the countries that profited by selling commodities to China, this story is indeed bad news. For the rest of the world, China’s bid for greater global power is far more consequential.

China’s outward push has two major components. One is the “Belt and Road Initiative,” which aims to create Chinese-financed transport infrastructure links across Central Asia to Europe via a “Silk Road Economic Belt”, and across Southeast Asia to the Middle East and Africa via a “Maritime Silk Road.” The other is the promotion of the renminbi as a major global currency.

Both moves will have a larger impact over the next decade than can be calculated today. The Belt and Road programme could greatly enlarge the economic ecosystem within which China operates, creating investment and trade opportunities well beyond the initial infrastructure projects. It is a rival to the Trans-Pacific Partnership trade and investment agreement that the US hopes to complete — without China — later this year. Western economists tend to assume that trade liberalisation produces more economic benefit than infrastructure, so their assessments of the Belt and Road have been mainly skeptical. Skepticism is fully warranted if we confine ourselves to narrow questions such as whether

www.marcuardheritage.com

demand from Asian infrastructure projects can soak up the excess capacity in China’s steel industry (It can’t). Yet, good transport and communications infrastructure does the same thing that good trade agreements do: it lowers the cost of moving goods, people and ideas around. This boosts economic activity. It also turns smaller countries into clients of the central power that built it. China’s political goal is to exploit infrastructure to become the centre of a regional economy, just as the US exploited the power of trade to put itself at the centre of the global economy.

Renminbi internationalisation serves the same goals, and is also tied to domestic economic restructuring. If China can finance its trade and outward investments in its own currency, it can gain a taste of the “exorbitant privilege” that

controls erode, China’s index weight will rise toward Japan’s (7.7%), and foreign inflows will swell accordingly. Having a big, buoyant stock market is as much a part of Beijing’s master plan as the roads, ports and pipelines of the New Silk Road. It is easy to be skeptical. Yet prophecies of doom for China’s idiosyncratic economy and authoritarian state have a dismal record. Last Thursday’s anniversary — 26 years since the bloody suppression of citizen demonstrations in Tiananmen Square — reminds us first of the enduring values gap between China and the capitalist democracies, but also of the Chinese system’s extraordinary resilience. Our bet is that this resilience will continue.

In the coming decade the world will have to reckon with China not as a fast-growing trading economy, but as a burgeoning geopolitical and financial power.

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

the US has long enjoyed. And since an international currency requires a more open financial system than China now has, the international renminbi policy provides an argument for domestic financial reform armoured with solid nationalist credentials.

Renminbi policy and financial reform help explain why China’s economic slowdown has been accompanied by an epic stock market run-up that shows no sign of flagging.

Domestic investors know the days of easy money in property are over, and are moving their spare cash to the stock market. They feel safer doing so in the belief that capital account opening will bring in a flood of foreign money, and that financial reforms will eventually improve capital allocation, stabilising growth and pushing up equity prices.

Foreign portfolio investors, meanwhile, barely figure.

Capital controls constrain their investments, and China’s weight in the MSCI All Country World Index is just 2.7%, less than Switzerland. Over the next several years, as capital

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

15460 1.5318 1.7334 24.259 6.6131 13.8706 1.128 2.2523 276.88 0.62303 3.0607 0.3809 18.1 7.7968 3.6963 3.9611 55.8678 8.2922 0.9275 21.18

AUD CAD HKD INR JPY KRW NZD SGD

0.7704 1.2359 7.7521 63.92 123.97 1118.55 1.3971 1.3489

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

0.3770 7.6076 28690.00 3.8250 0.7083 0.3021 1509.00 0.3850 3.6405 3.7502 12.4338 3.6729

AZN KZT TRY

1.0444 185.95 2.7365

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

USD GBP EUR JPY CHF

0.19 0.51 -0.07 0.06 -0.82

0.24 0.53 -0.04 0.09 -0.80

0.28 0.57 -0.02 0.10 -0.78

0.43 0.71 0.06 0.14 -0.70

0.77 1.00 0.17 0.25 -0.58

CCY/Period USD GBP EUR JPY CHF

2yr

3yr

4yr

5yr

7yr

10yr

0.94 0.99 0.15 0.15 -0.66

1.30 1.23 0.25 0.17 -0.53

1.59 1.44 0.39 0.21 -0.37

1.82 1.61 0.54 0.28 -0.19

2.15 1.87 0.84 0.42 0.13

2.45 2.10 1.19 0.63 0.43

Exchange Rates Major Cross Rates

CCY1\CCY2 USD EUR GBP CHF JPY

Opening Rates

1 USD 1 EUR 1 GBP

1 CHF

100 JPY

1.1280

1.5318

1.0782

0.8066

1.3580

0.9558

0.7151

0.7039

0.5266

0.8865 0.6528

0.7364

0.9275

1.0462

1.4207

123.97

139.84

189.90

0.7482 133.66

Weekly movement of USD

CCY\Date

12.05

19.05

26.05

02.06

09.06

CCY

Today

Last Week

USD GBP JPY CHF

1.1115

1.1247

1.0881

1.0883

1.1254

0.7135

0.7185

0.7042

0.7155

0.7333

133.44

134.78

132.45

135.47

140.04

GBP EUR JPY

1.0360

1.0410

1.0300

1.0266

1.0416

CHF

1.5318 1.1280 123.97 0.9275

1.5210 1.0883 124.4785 0.9433

%Change -0.71 -3.65 -0.41 -1.68

June 10 - 16, 2015

16 | WORLD | financialmirror.com

The impunity trap

By Jeffrey D. Sachs Ours is a world of impunity. Allegations of corruption swarmed around FIFA for decades, culminating in mass indictments of FIFA officials last week. Yet FIFA President Sepp Blatter was re-elected four times, including after the indictments were filed.

Yes, Blatter has finally resigned, but only after he and dozens of Federation members once again showed their scorn for honesty and the law.

We see this kind of behaviour all over the world. Consider Wall Street. In 2013 and 2014, JPMorgan Chase paid more than $20 bln in fines for financial malfeasance; yet the CEO took home $20 mln in compensation in both 2014 and 2015. Or consider corruption scandals in Brazil, Spain, and many other countries, where governments remain in power even after high-level corruption within the ruling party has been exposed.

The ability of those who wield great public and private power to flout the law and ethical norms for personal gain is one of the more glaring manifestations of inequality. The poor get life sentences for petty crimes, while bankers who fleece the public of billions get invitations to White House state dinners. A famous ditty from medieval England shows that this is not a new phenomenon: The law locks up the man or woman Who steals the goose off the common But leaves the greater villain loose Who steals the common from the goose.

Today’s greatest thieves are those who are stealing the modern commons – raiding government budgets, defiling the natural environment, and preying on the public trust.

When the indictments against the 14 FIFA officials were filed, the cast of

characters included not only miscreants from the sports world, but also some familiar players: secret Swiss bank accounts, Cayman Islands tax havens, shell corporations – all of the financial appurtenances that are literally designed to shield the rich from scrutiny and the law.

In this case, the FBI and US Justice Department have done their jobs. But they did so, in part, by penetrating the murky worlds of financial secrecy created and protected by the US Treasury, the Internal Revenue Service, and the US Congress (everprotective of Caribbean tax havens).

In some societies and economic sectors, impunity is now so pervasive that it is viewed as inevitable. When unethical behaviour by political and business leaders becomes widely viewed as “normal,” it then goes unpunished by public opinion, and is reinforced as normal – creating an “impunity trap.” For example, with politicians in the United States now so flagrantly and relentlessly on the take from wealthy donors, much of the public accepts new revelations of financial impropriety (such as the Clinton Foundation’s morally dubious financial dealings) with a cynical yawn.

The situation in the global banking sector is especially alarming. A recent careful study of ethical attitudes in the financial-services industry in the US and the United Kingdom showed that unethical and illegal behaviour is indeed now viewed as pervasive. Some 47% of respondents said that it is “likely that their competitors have engaged in unethical and illegal activity,” and 23% believed that their fellow employees have engaged in such activities.

The younger generation has learned the lesson: 32% of respondents employed in the financial industry for less than ten years said that, “they would likely engage in insider trading to make $10 mln if there was no chance of being arrested.” The chance of being arrested for such malfeasance is, alas, probably very low.

Yet not all societies or sectors are caught in an impunity trap. Some societies, most notably in Scandinavia, maintain the expectation that their public officials and business leaders should and will act ethically and honestly. In these countries, ministers are forced to resign for petty infractions that would seem trivial in other countries.

Convincing American, Russian, Nigerian, or Chinese citizens that corruption can indeed be controlled might seem to be a futile task. But the goal is certainly worth embracing, because the evidence is overwhelming: impunity is not only morally noxious; it is also economically costly and deeply corrosive to wellbeing.

Recent studies have shown that when “generalised trust” in society is high, economic performance is improved and life satisfaction is higher. Among other reasons, commercial agreements are more easily reached and efficiently implemented. It is no coincidence that the Scandinavian countries rank among the world’s happiest and most prosperous year after year.

So what can be done to overcome an impunity trap? Part of the answer is of course law enforcement (such as the FIFA indictments) and protection for whistleblowers. Yet law enforcement is not sufficient; public attitudes also play a major role.

If the public expresses contempt and revulsion for bankers who cheat their clients, oil executives who wreck the climate, FIFA officials who countenance kickbacks, and politicians who cozy up to all of them in exchange for campaign funds and bribes, illegality for the few cannot become the norm. Public scorn might not end corruption immediately, but it can make life far less pleasant for those who are stealing the commons from the rest of us.

One candidate for US President in 2016, former Maryland Governor Martin O’Malley,

recently launched his campaign by asking why not a single Wall Street CEO was convicted of a financial crime in the wake of the 2008 financial meltdown. It is a good question, the kind that can help the US to overcome its impunity trap.

Yet we can ask an even simpler question.

Why are those same bankers still fêted by President Barack Obama, invited to glittering state dinners, and reverently interviewed by the media? The first thing any society can and should do is deny respectability to political and business leaders who willfully abuse the public trust.

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

FIFA film earns ... $607 in US World soccer’s governing body, FIFA, has taken quite a beating in recent weeks. Over the past weekend it took a beating at the box office, where “United Passions” opened in the United States to a box office total of $607 in ticket sales, according to Rentrak.

The film, which was completed before the corruption charges against FIFA officials were brought, stars Tim Roth as FIFA head Sepp Blatter and Gerard Depardieu as FIFA’s founder Jules Rimet, opened on just 10 U.S. screens. At the FilmBar theater in Phoenix, gross receipts totaled $9, the cost of a single ticket, according to a report at The Hollywood Reporter. Here is all the bad news: On Friday, United Passions grossed just $319 from ten theatres in New York, Los Angeles, Washington, D.C., Phoenix, Kansas City, Miami, Minneapolis, Houston, Dallas and Philadelphia, followed by an even worse $288 on Saturday. The top-performing theatre, as it were, was Laemmle’s NoHo 7 in North Hollywood ($164), followed by the Shirlington 7 in Hagerstown outside of Washington, D.C. ($161). New York City’s Cinema Village 3 reported $112 in ticket sales.

The budget for the movie was estimated at $25-32 mln, of which FIFA itself (with the now former-president Blatter in charge) is said to have ponied up 75% of the cost. The BBC said that “the hagiography of football’s [soccer to Americans] governing body has had damning reviews.” The somewhat-good news for the filmmakers is that the movie was distributed for video-on-demand last Friday, but so far no rental or sales figures are available.

Is a $1,000 opening weekend still possible?

The weekend’s top-grossing film, by the way, was Melissa McCarthy’s new comedy, “Spy,” which took in $30 mln. (Source: 24/7 Wall St.com)

FIFA’s extraordinary revenue figures Seven senior FIFA officials were arrested by Swiss police last month in a raid in Zurich on corruption charges. The suspects allegedly accepted bribes worth $100 mln over the past 20 years, though Sepp Blatter, FIFA’s outgoing president, was not among them. He was re-elected to a fifth term last week, but later decided to step down.

The arrests have been made on behalf of authorities in the

United States and the individuals now face extradition. In all, 14 officials have been charged. FIFA has managed to weather numerous storms of corruption in the past but these arrests in Zurich are certain to plunge the organisation into further turmoil.

FIFA certainly generates an astonishing amount of revenue. The tax exempt non-profit organisation, buoyed by success of the 2014 World Cup, generated a record $2 bln in revenue last year. Compared to just ten years ago, FIFA’s revenue figures are extraordinary. In 2006, when Germany hosted the World Cup, revenue “only” amounted to $749 mln. (Source: Statista)

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The other reason to avoid Turkey vulnerability is especially acute if we focus on its external financial position. Even though Turkey is a major oil importer which has benefited from the -43% decline in oil prices over the last 12 months, its current account deficit—at 6% of GDP in 2014, and 7.5% in 4Q2014—remains among the biggest in the emerging market universe.

ANALYSIS by GaveKal Dragonomics On the capital account side, Turkey’s banking system is heavily dependent on foreign inflows. Since the financial price in was the risk that the AKP could fail crisis, Turkish commercial banks have even to win a simple majority. In the event, ceased to balance their foreign exchange that is exactly what happened, leaving positions, allowing foreign currency Turkey facing the arduous — even liabilities to climb to 20% of their balance impossible — task of cobbling together a sheet. From a relatively well-managed coalition government involving at least one position in 2007, Turkey’s banking system of three fractious opposition parties. In now has the worst foreign exchange response to the heightened uncertainty, mismatch in the emerging market universe.

Turkey’s benchmark stock index fell -5% on If the economy of Korea, a net foreign Monday, while the lira slumped -3% against creditor, suffered from a run-up in foreign the US dollar to leave it down -15% over the currency borrowing by local banks in 2008, how much greater is the damage likely to be year to date.

Erdogan’s failure to capture a simple inflicted on Turkey?

Much of this foreign currency borrowing parliamentary majority is not all bad.

International investors are likely to cheer the has been channelled into strong consumer burial — at least for the time being — of his credit growth, with domestic credit authoritarian constitutional ambitions. And expanding at more than 20% YoY so far in they will certainly be relieved to see the end 2015, far in advance of domestic deposit of his attempts to undermine the growth. In other words, banks have independence of Turkey’s central bank. But borrowed abroad to fund domestic even if Turkey can manage to form a consumption, which leaves the resilience of government over the next six weeks, Turkey’s domestic demand looking largely dampening short term uncertainties, there illusory.

In theory, the situation is not beyond will still be solid reasons why, despite superficially attractive valuations, investors redemption. With a decisive central bank, in 2013 India hiked interest rates to halt its should steer well clear of Turkish assets.

According to the latest available data, currency devaluation, while restricting gold Turkey still shows up very clearly as a “weak imports to reverse its deteriorating current link” on our in-house Emerging Market account. Meanwhile, the government won Vulnerability Index, ranking in the bottom over foreign investors by committing to third of 18 major emerging markets by 12 structural reforms. But the turnaround different measures. What’s more, Turkey’s required strong and proactive government, Investors had long priced in the risk that the ruling AK Party of Turkey’s Recep Tayyip Erdogan could win a two-thirds majority in last Sunday’s parliamentary election, a result that would have allowed the president to reinforce his constitutional powers at the expense of parliament. What they failed to

which Turkey lacks after Sunday’s indecisive election. If the lira were to fall further, another potential way out for Turkey could be through stronger exports, as with Korea in 2008. However, Turkey’s weak export base means any immediate boost to shipments from lira undervaluation would be limited.

As a result, Turkey’s asset prices and

growth outlook are both extremely vulnerable to capital outflows. To overcome the vulnerability and end the vicious cycle of outflows, Turkey has little option but to endure the pain of a contraction in both domestic credit and economic growth in order to steer its current account balance onto a more sustainable trajectory.

The quiet financial revolution begins Steadily and indisputably, the financial services industry – with which we all interact, whether as borrowers, savers, investors, or regulators – has embarked on a multiyear transformation. This process, slow at first, has been driven by the combined impact of two sets of durable forces.

On one hand, top-down factors – regulatory change, unusual pricing, and what Nouriel Roubini has cleverly termed the “liquidity paradox” – are at work. Then there are disruptive influences that percolate up from below: changing customer preferences and, even more important, outside visionaries seeking to transform and modernise the industry.

Beginning at the top, the regulatory pendulum is still swinging toward tighter supervision of traditional financial institutions, particularly large banks and insurance companies deemed “systemically important.” Moreover, redesigned regulatory frameworks, phased implementation, and stepped-up supervision will gradually extend to other segments, including asset management. This will contribute to further generalised de-risking within the regulated sectors, as part of a broader financial-sector movement toward a “utilities model” that emphasizes larger capital cushions, less leverage, greater disclosure, stricter operational guidelines, and a lot more oversight.

The pricing environment compounds the impact of tighter regulation. Like utilities, established financial institutions are facing external constraints on their pricing power, though not of the traditional form. Rather than being subjected to explicit price regulations and guidelines, these institutions operate in a “financial repression” regime in which key benchmark interest rates have been held at levels below what would otherwise prevail. This erodes net interest margins, puts pressure on certain fee structures, and makes certain providers more cautious about entering into longterm financial relationships.

As a result of these two factors, established institutions – particularly the large banks – will be inclined to do fewer

By Mohamed A. El-Erian Αuthor of When Markets Collide

things for fewer people, despite being flush with liquidity provided by central banks (the “liquidity paradox”). And banks and broker-dealers can be expected to provide only limited liquidity to their clients if a large number of them suddenly seek to realign their financial positioning at the same time. But this is not just about them. The fact is that providers of all long-term financial products, particularly life insurance and pensions, have no choice these days but to streamline their offerings, including a reduction of those that still provide longer-term guarantees to clients looking for greater financial security.

The impact on the financial-services industry of these topdown factors will gradually amplify the importance of the bottom-up forces. Over time, this second set of factors will fuel more direct and efficient provision of services to a broader set of consumers, contributing to a reconfiguration of the industry as a whole.

For starters, customer expectations will evolve as the millennial generation increasingly accounts for a larger portion of earning, spending, borrowing, saving, and investing. With many of these newer clients favoring “selfdirected” lives, providers of financial services will be pressed to switch from a product-push mindset to offering more holistic solutions that allow for greater individual customisation. Market-communication functions will also be forced to modernise as more clients expect more credible and substantive “any place, any time, and any way” interactions.

Then there is the influence of outside disruptors. Jamie

Dimon, the CEO of JPMorgan Chase, expressed it well in his 2015 shareholder letter, observing that “Silicon Valley” is coming. These new entrants want to apply more advanced technological solutions and insights from behavioural science to an industry that is profitable but has tended to under-serve its clients.

Airbnb and Uber have demonstrated that disruption from another industry is particularly powerful, because it involves enabling efficiency-enhancing structural changes that draw on core competencies and strategies that the incumbent firms lack. Many other companies (for example, Rent the Runway, which provides short-term rentals of higher-end fashion) are in the process of doing the same thing. Be it peer-to-peer platforms or crowd-funding, outside disruptors already are having an impact at the margin of finance, particularly in serving those who were previously marginalised by traditional firms or had lost trust in them.

The end result will be an industry that serves people via a larger menu of customisable solutions. Though traditional firms will seek to adjust to maintain their dominance, many will be challenged to “self-disrupt” their thinking and operational approach. And, while emerging firms will offer better services, they will not find it easy to overcome immediately and decisively the institutional and regulatory inertia that anchors traditional firms’ market position. As a result, a proliferation of financial providers is likely, with particularly bright prospects for institutional partnerships that combine the more agile existing platforms with exciting new content and approaches.

Mohamed A. El-Erian, Chief Economic Adviser at Allianz and a member of its International Executive Committee, is Chairman of US President Barack Obama’s Global Development Council and the author, most recently, of When Markets Collide. © Project Syndicate, 2015 - www.project-syndicate.org

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One Earth, one ocean The ocean and the atmosphere are linked in ways that are only just beginning to be fully understood. Like siblings, the sky above us and the waters around us share many characteristics – most notably these days a need to be protected. We are siblings working on a shared agenda to defend both – an agenda that will define the future for many millions of brothers, sisters, fathers, mothers, friends, and neighbours, as well as life-forms on the land and in the seas, now and for generations to come.

Fortunately, governments around the world are beginning to understand the challenge, and are expected to deliver – or at least make progress toward – two important agreements this year: a new global treaty to protect marine life in international waters, and a climate-change accord to safeguard the atmosphere. Together with a suite of Sustainable Development Goals, these agreements will serve as crucial road signs indicating the path to be followed by the world’s national economies over the next 15 years and beyond.

The planned accords come amid extraordinary efforts by countries, cities, companies, and citizens to protect the climate and the ocean. Investments in renewable energy are running at well over $250 bln a year, and many countries are spending as much on green forms of energy production as they do on fossil fuels.

Our native Costa Rica, for example, now gets 80% of its energy from renewable sources. In China, renewables are expanding rapidly, and coal consumption fell by 2.9%

By Christiana Figueres and Jose Maria Figueres

year on year in 2014. Meanwhile, offshore, the need for more marine reserves and sustainable fishing is being recognised and, in some cases, met, with technological breakthroughs strengthening officials’ ability to monitor and track illegal catches.

Scientists studying climate change have shown how the problem can be tackled by adopting a clear path with progressive milestones. We must bring global emissions to a peak in the next decade, drive them down rapidly thereafter, and establish a balance between emissions and the planet’s natural absorptive capacity by the second half of the century.

The ocean has historically played an important role in achieving that balance. As a natural carbon sink, it absorbs approximately 25% of all the carbon dioxide emitted by human activity annually. But we are overtaxing its absorptive capacity. The carbon dissolved in the ocean has altered its chemistry, driving up acidity by 30% since the beginning of the Industrial Revolution.

The rate of change is, to the best of our knowledge, many times faster than at any time in the last 65 mln years, and possibly the last 300 mln years.

If CO2 emissions are not brought under

control, the rate of acidification will continue to accelerate – with deadly effects on the ocean’s inhabitants. As CO2 from the atmosphere is churned into the world’s waters, it reduces the availability of carbonate ions needed by many marine animals and plants to build their shells and skeletons. If CO2 levels continue to rise at their current rates, scientists estimate that around 10% of the Arctic Ocean will be corrosive enough to dissolve the shells of sea creatures by 2018. Many other oceanic bodies face a similar future.

International agreements succeed best when the political, economic, and social trends of the time align, as they have now, to give rise to a new vision of the future and a new relationship between humanity and the planet we share. Realising this vision will involve multiple generations. Both the ocean and the climate are in need of global, credible, measurable, actionable plans to provide for their protection. Our scattered, fully protected marine reserves must be expanded from the 1% of the ocean they currently protect to form a truly global network.

Last month, 13 Caribbean heads of state and government called for an effective global

agreement, citing current and emerging impacts. It is an alarming list: “more frequent extreme events, more intense and changing rainfall patterns, more ocean acidification and ocean warming, coral bleaching, rising sea levels, coastal erosion, salinisation of aquifers, the greatly accelerated emergence of new communicable diseases, reduced agricultural productivity, and a disruption of fishing traditions.”

Such threats are proof of the urgent need to expand the international rules providing for the conservation and sustainable management of the climate and marine life.

The climate-change agreement expected to be reached in Paris in December will not solve the problem at the stroke of a pen, just as no agreement to protect marine life will, on its own, lead to a healthier ocean. But it is essential that we establish the policy pathways needed to ensure that all countries play their part in protecting the planet, while assisting the vulnerable to adapt to the effects of environmental degradation already underway.

Christiana Figueres is Executive Secretary of the United Nations Framework Convention on Climate Change (UNFCCC). José María Figueres, Co-Chair of the Global Ocean Commission, is a former president of Costa Rica. © Project Syndicate, 2015. www.project-syndicate.org

Drones for development

By JM Ledgard and Scott MacMillan Unmanned aerial vehicles have populated both the imagination and nightmares of people around the world in recent years. In April, the United States Navy announced an experimental programme called LOCUST (Low-Cost UAV Swarming Technology), which officials promise will “autonomously overwhelm an adversary” and thus “provide Sailors and Marines a decisive tactical advantage.” With a name and a mission like that – and given the spotty ethical track record of drone warfare – it is little wonder that many are queasy about the continued proliferation of flying robots.

But the industrial use of the lower sky is here to stay. More than 3 mln humans are in the air daily. Every large human settlement on our planet is connected to another by air transport. DJI, a Chinese UAV manufacturer, is seeking a $10 bln valuation. Cargo drones will grow into an even larger industry in the coming years, simply because, unencumbered by the weight of humans and their lifesupport systems, they will fly more cheaply but be just as fast and safe.

In rich countries, early interest in cargo drones has focused on the so-called last mile – a tub of sorbet onto a suburban lawn. But the bigger opportunities are in flying the middle mile in poorer countries. Some 800 mln people around the world have limited access to emergency services, and that will not change in the foreseeable future, because there will not be enough money to build roads to connect them. By flying medium-size loads middling distances to many of these isolated communities, cargo drones can save lives and create jobs.

Cargo drones embody what Jim Yong Kim, the president of the World Bank, calls the “science of delivery.” We know what we need to deliver: the solutions to many of our most pressing problems already exist. The question is how.

Answering that question is why humanitarians, roboticists, architects, logisticians, and others have joined

together in a new initiative called Red Line, a Swiss-based consortium to accelerate development of emergency cargo drones and build the world’s first droneports – in Africa.

It sounds techno-utopian – or at least like a huge waste of resources. After all, the experience of the most successful development organisations suggests that we should be skeptical about advanced technology’s power to bring about meaningful change for the poor. Yes, the falling cost of processing power creates new efficiencies, particularly in smartphones and related sky-fi connectivity. But gadgets are mostly blinking bling. It is boring stuff like low-cost teacher training, community health care, and apprenticeships that produces results for the poor.

That is why many development experts favour “frugal innovation” over technology. The Bangladesh-based BRAC, the world’s largest development NGO, has 1.3 mln children enrolled in one-room schools – and hardly a laptop in sight.

So why be optimistic about cargo drones? Silicon Valley speaks the bulldozer language of “disruption,” but one

reason to favour cargo drones is precisely that they are not disruptive at all. Instead, they can augment existing distribution networks in remote regions of Africa, Asia, and Latin America where poverty and disease are pervasive, distances are great, and roads will never be built.

Cargo drones are particularly well suited to the so-called localagent delivery model. Companies and organisations have shown that in hard-to-reach places in Africa and South Asia, women trained as micro-entrepreneurs are often best positioned to deliver essential goods and services to their villages, even if they have limited literacy and formal education. BRAC’s community health workers, for example, work entirely on a microfranchising basis, making their money from margins on sales of basic commodities like deworming medication, anti-malarial drugs, and contraceptives.

Though cargo drones will never replace ground transport, they can ensure that vital goods and services get to where they are needed. Mobile phones took off in Africa because the technology was so much cheaper than investment in landline infrastructure. The same can be said today about Africa’s roads. Like the mobile phone, the cargo drone can prove to be the rarest of creatures: a gadget that works for those who need it most.

J.M. Ledgard, Director of Red Line, is a former Africa correspondent for The Economist and the author, most recently, of the novel Submergence. Scott MacMillan is a senior writer at BRAC. © Project Syndicate, 2015 - www.project-syndicate.org

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Managing the age of disruption Bold predictions based on intuition are rarely a good idea. Margaret Thatcher, as Education Secretary in 1973, famously asserted that the United Kingdom would not have a woman prime minister in her lifetime.

IBM’s president, Thomas J. Watson, declared in 1943 that there was “a world market for perhaps five computers.” And, when movies with sound made their debut in 1927, Warner Brothers’ Harry Warner asked, “Who the hell wants to hear actors talk?”

At a time when four powerful forces are disrupting the global economy, upending most of our assumptions, such pronouncements on the future, shaped by intuitions based on the past, are even more likely to be wrong. Each of these four “great disruptions” is transformational on its own, and all are amplifying the effects of the others, producing fundamental and unpredictable changes on a scale the world has never seen – and that will prove our intuitions wrong.

The first great disruption is the shift of economic activity to emerging-market cities.

As recently as 2000, 95% of the Fortune Global 500 was headquartered in developed economies. By 2025, nearly half of the Fortune Global 500 companies will be based in emerging economies, with China home to more of them than the United States or Europe.

Cities are at the vanguard of this shift.

Nearly half of global GDP growth from 2010 to 2025 will come from 440 emergingmarket cities, many of which Western executives may not even know exist. They are places like Tianjin, a city southeast of Beijing with a GDP that is practically on par with Stockholm’s today – and could equal all of Sweden’s by 2025.

The second great disruption is the

By Richard Dobbs, James Manyika and Jonathan Woetzel acceleration of technological change. While technology has always been transformative, its impact is now ubiquitous, with digital and mobile technologies being adopted at an unprecedented rate. It took more than 50 years after the telephone was invented for half of American homes to have one, but only 20 years for cellphones to spread from less than 3% of the world’s population to more than two-thirds. Facebook had 6 mln users in 2006; today, it has 1.4 bln.

The mobile Internet offers the promise of economic progress for billions of emergingeconomy citizens at a speed that would otherwise be unimaginable. And it gives entrepreneurial upstarts a greater chance of competing with established firms. But technological change also carries risks, especially for workers who lose their jobs to automation or lack the skills to work in higher-tech fields.

The third disruption is demographic. For the first time in centuries, our population could plateau in most of the world. Indeed, population aging, which has been evident in the developed world for some time, is now spreading to China and soon will reach Latin America.

Thirty years ago, only a few countries, home to a small share of the global population, had fertility rates substantially below the replacement rate of 2.1 children per woman. In 2013, about 60% of the world’s population lived in countries with sub-replacement fertility rates. As the elderly

increasingly outnumber working-age people, pressure is building on the labour force, and tax revenues, needed to service government debt and fund public services and pension systems, are diminishing.

The final disruption is the world’s increasing interconnectedness, with goods, capital, people, and information flowing ever more easily across borders. Not long ago, international links existed primarily among major trading hubs in Europe and North America; now, the web is intricate and sprawling. Capital flows among emerging economies have doubled in just ten years, and more than one billion people crossed borders in 2009, over five times the figure in 1980.

The resulting challenges – a host of new and unexpected competitors, volatility stemming from faraway places, and the disappearance of local jobs – are already overwhelming workers and companies. Of course, this interconnectedness also offers important opportunities; but an implicit bias toward the familiar is impeding the ability of workers, firms, and even governments to take full advantage of them.

This is especially true for companies.

According to McKinsey research, from 1990 to 2005, US companies almost always allocated resources on the basis of past, rather than future, opportunities. Firms that succumb to such inertia will probably sink, rather than swim, in the new global economy.

Some firms, however, will adapt, taking advantage of unprecedented opportunities to remain agile. Instead of, say, building a new headquarters, renting a storefront, or purchasing a restaurant – traditional requirements that demanded large amounts of up-front capital – they can open a satellite sales office, create an online store, or launch a food truck. Flexibility and responsiveness will enable such firms to thrive.

The pace and scale of the current economic transformation is undoubtedly daunting. But there is plenty of reason for optimism. Inequality may be on the rise within countries, but it has dropped dramatically among them. Nearly a billion people were lifted out of extreme poverty from 1990 to 2010; another 3 bln will join the global middle class in the next two decades.

In 1930, at the height of the Great Depression, John Maynard Keynes declared that the standard of living in “progressive economies” would increase 4-8 times over the subsequent 100 years. His prediction, which was regarded as hopelessly Pollyannaish at the time, has turned out to be correct, with the improvement likely to be at the top of his projected range.

Keynes, unlike many of his contemporaries, recognised the forces at work in the economy, adjusted his thinking, and, crucially, was not afraid to be optimistic. We must do the same.

Richard Dobbs, James Manyika, and Jonathan Woetzel are directors of the McKinsey Global Institute and co-authors of No Ordinary Disruption: The Four Global Forces Breaking All the Trends. © Project Syndicate, 2015 www.project-syndicate.org

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Educating Lebanon’s Syrian refugees

By Gordon Brown

On a recent visit to Beirut, I met a girl and a boy who struggled through a year filled with dread. Both of them are 14-year-old Syrian refugees in Lebanon, eager for an education, but unable to go to school.

Their stories show what is at stake in the next few months, as Lebanon struggles to raise funds for an ambitious effort to provide education for its resident refugee population. This year should have been the Year of the Child – the deadline for the Millennium Development Goal of providing all children with primary education. Instead, for hundreds of thousands of young people, it has become what some are describing as the Year of Fear.

The girl – Dilan – fled Syria with her mother when she was ten. The two of them found work in Lebanon in a garlic factory. Dilan spent her 11th birthday peeling garlic cloves, earning only the right to the roof over her head. For the last 18 months, she has been out of school; the closest she has gotten to a real classroom is a day centre where she has studied Arabic. Even though she is now fluent, her goal of attending school remains elusive; she has no money with which to pay the necessary fees. All she wants, she says, is to train to be a teacher – “to help remove the sadness from children’s hearts.”

Ahmad, the boy, has not attended school for a year. He wants to become a doctor, but first he must undergo a different kind of healing: dealing with the memory of his last day in school, when armed men entered his classroom and forced everyone to flee. Ahmad’s deep anxiety is that he will not be able to complete his education. When I spoke to him in Beirut, he told me: “What are we out-of-school Syrians going to be in the future? We will be illiterate, and it will be like we turned back time to decades or centuries ago. We need education to become better people.”

It is said that “you can survive 40 days without food, eight days without water, and eight minutes without air, but not for a second without hope.” Like many of the young refugees

in Lebanon, Dilan and Ahmad are losing hope that they will ever be able to attend school again.

Providing the refugees with an education would cost around $500 a year – less than $10 a week – per pupil. That is a small price to pay for hope.

Until now, however, the international community has failed to do enough to help.

Lebanon is one of the world’s weakest, least-stable countries, riven by factionalism and riddled with violent extremist groups. And yet it has found the resources to house 1.1 mln Syrian exiles – equivalent to nearly a quarter of its population – and lead an international endeavour to ensure that refugee children are provided access to education.

Education Minister Elias Bou Saab has cut through red tape and sectarian disputes to introduce a double-shift system in the country’s schools, beginning in September. In the morning, Lebanese children will be educated in French and English. In the late afternoon and early evenings, some 500,000 Syrian children will be taught in Arabic.

The programme – at a cost of $263 mln – is set to be the largest education humanitarian effort ever mounted during an emergency. And yet, so far the urgency of the appeals has been matched only by the slowness of the response. With just three months until the beginning of the next academic year, only $100 mln has been raised.

Usually, in an emergency situation, there are no buildings in which to hold classes and no staff able to teach them. This gives donors an easy excuse: they would have helped, if only there was the capacity to do so. In Lebanon, however, with schools ready and teachers available, there is only one stumbling block: the will of the international community. If each international aid agency gave no more than an extra $10

mln, a half-million children in Lebanon could begin the new school term in September.

The uncertain fate of programmes such as Lebanon’s underscores why it is a tragedy that education receives only 2% of humanitarian aid – and why it is so important to establish a permanent fund for education in emergencies.

Why should refugee children have to wait for months while the begging bowl is passed around?

Dilan and Ahmad illustrate the stark choice that all of us must confront: either we properly educate a future doctor and teacher, or we abandon them. If we choose the latter, we should be clear about what that means: a lost generation, at risk of abuse or trafficking – or, worse, a permanent source of fuel for radicalisation and ongoing violence.

Gordon Brown, Prime Minister of the United Kingdom (20072010), is United Nations Special Envoy for Global Education. © Project Syndicate, 2015 - www.project-syndicate.org

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