Financial Mirror 2015 06 17

FinancialMirror JEFFREY FRANKEL

JEFFREY SACHS

Issue No. 1138 â‚Ź1.00 June 17 - 23 , 2015

The chimera of currency manipulation PAGE 16

The endgame in Greece, as Europe must decide PAGE 6

Limassol port goes to tender for 2016 bids NEW OPERATOR EXPECTED TO BOOST REVENUES, CREATE JOBS -

Cyprus-Israel agree on exploitation of natgas and submarine cable SEE PAGES 10-11

PAGE 4

June 17 - 23, 2015

2 | OPINION | financialmirror.com

FinancialMirror

Path of privatisation begins

Published every Wednesday by Financial Mirror Ltd.

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With the announcement this week that the state will go to tender to seek up to three strategic investors to undertake the management of Limassol port, the process has finally begun for the government to deleverage its assets and implement the “smaller-is-better government” policy.

With the new operators expected to take over the island’s biggest port some time after the first quarter of next year, the Cyprus Ports Authority will become a landlord and regulator, effectively controlling the rates charged for cargo and cruise passenger traffic and ensuring that the state enjoys higher annual revenues than the 20-25 mln euros it earns at present.

With the Vassiliko port already in private hands, handling the cement factory and now supervising the nearby oil storage terminal, and with negotiations expected to conclude this month with the Zenon consortium for the management of Larnaca port and marina, the CPA will cease to have any other role apart from supervising the licensors.

This means that 2016 will be a good year for government revenues, both in terms of license fees, but also because of an anticipated increase in passenger and cargo arrivals, as

well as avoidance of waste, often the case when having to do with inefficient government-operated enterprises.

With efficiencies being introduced and new systems installed for more productive output, as all private operators need a solid return on investment, costs are also expected to come down, making Cyprus ports competitive once again, with greater benefits for the future.

Next is the break-up and privatisation of both telco Cyta and power producer EAC, with the most obvious changes being the separation of the network and grid provider from the consumer services, while other assets are also up for sale as part of the bailout conditions agreed with the Troika of international investors. The Post Office is already on a path of modernisation and other state-owned non-core assets will be sold, as soon as market prices allow.

The casino project has stalled and is taking its time for unknown reasons, and natural gas revenues will not start rolling in until after the end of the decade.

Thus, the “pro-business” administration will have to proceed with all the above changes to prove its mettle and start delivering on promises of reform with a real impact felt by the ordinary people on the street.

THE FINANCIAL MIRROR THIS WEEK joined the ERM2 and after the 0.50% rate cut, with the long-dated bond yields tumbling a whopping 100 bps while the Central Bank was flooded with CYP 575.5 mln worth of bids for CYP 260 mln of securities on tender.

EU budget: Cyprus’ contribution to the EU’s 2005 budget will reach 157 mln euros,

about 3 mln less than initially planned by the European Commission after revisions.

Euro planning: Businesses should start planning for the euro immediately, because it will affect all kinds of operations, from the purely technical to a company’s wider strategy, said Kyriacos Zingas, Senior manager of the Financial Markets and Public Debt Management Division at the Central Bank of Cyprus.

Retirement age: The Cabinet adopted a proposal to extend the retirement ceiling for civil servants to the 63rd year of age.

Tax incentives: The Cabinet decision to amend the Income Tax Law which proposes to lower the taxation rate on company profits and dividends, as well as provide new investments for incentives, was received cautiously by the investing community who, while welcoming the proposal, asked for more time to study them.

COLA wars: The strike action called by the unions in three sectors and the general deadlock

in labour relations mainly on the COLA issue were the main reasons which led the Employers and Industrialists Federation (OEV) to walk out of the International Labour Office meeting in Geneva.

NHS talks: Health Minister Manolis Christofides said that a new round of talks with the medical profession on the topic of the National Health Scheme is expected to resume in June.

He added that the private health plans and medical cover provided by the insurance companies complement the public health service and even upgrade it further. (Ed’s note: 20 years on, we’re still talking… Keep walking!)

Also, the Sheraton will change its name to St Raphael, Capital Intelligence will expend its services and Moody’s announced it will rate Middle East banks from its Limassol office.

10 YEARS AGO

Bond yields fall after ERM2 Bond yields fell 100 basis points (bps) after Cyprus joined the ERM2 “welcome room” prior to euroadoption, with CYP 575 mln worth of bids for CYP 260 mln worth of multiple bonds and after a 0.5% rate cat, according to the Financial Mirror issue 623, on June 8, 2005.

Bond yields: There was a stampede for the week’s multiple bond auctions, the first since Cyprus pound

20 YEARS AGO

EU talks, tax incentives, labour tension The EU decided to start a structured dialogue for membership with Cyprus, tax incentives received muted response and labour tensions grew as OEV walked out of talks, according to the Cyprus Financial Mirror issue 115, on June 14, 1995.

EU accession: Foreign Minister Alecos Michaelides said that neither Turkey nor Turkish Cypriot leader Rauf Denktash can stop Cyprus’ course towards the European Union, following decisions taken in Luxembourg by the EU-Cyprus association council.

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June 17 - 23, 2015

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CTO discovers negative aspects of ‘all inclusive’ packages A study conducted for the Cyprus Tourism Organisation has found that there was a misconception among the tourists who holidayed on ‘all inclusive’ packages that there was nothing on offer outside the hotel that was of interest or value and that local businesses did not have the opportunity to promote themselves to the tourism market.

CTO Director Annita Demetriadou presented a series of actions to minimise those risks, in particular as regards the Paphos district.

Addressing a conference to discuss the findings of a study conducted by Brighton Hospitality Research Group, Demetriadou said that as a result the ‘Destination Pafos’

scheme was launched which is designed to raise awareness amongst tourists of the experiences available to them in Paphos.

In tourist areas where a large number of hotels offers the ‘all inclusive’ option one finds negative economic and social fall-out in related services and in the local society such as restaurants, tours, souvenir shops, kiosks, super markets, etc, Demetriadou said.

Confined in a hotel, she added, the tourist does not have the opportunity to wander around and enjoy the culture and diversity of the country and the true hospitality of its people, elements which greatly enhance our country’s competitive advantage.

Demetriadou said the new actions include the “Ambassador” scheme, the “authentic corner” in a hotel areas, the creation of a logo for “Destination Pafos” which will be granted to businesses fulfilling particular criteria and the preparation of a map with all accredited businesses.

Salli Felton, Chief Executive of the Travel Foundation noted that in Paphos, “there is a need to ensure customers know what the local area has to offer, and to support local businesses to access the tourism market.”

“Collaboration between the different tourism stakeholders in Paphos is key to achieving this and we’re delighted that ten all-inclusive hotels and 30 local businesses, including restaurants, cafes and shops are involved”, she noted.

Tourist arrivals up 5% in May, mostly from UK and Germany Tourist arrivals increased by 4.9% in May, compared to the same month last year, the statistical service Cystat said.

Based on the monthly Passengers Survey, tourist arrivals reached 307,449 in May, compared to 293,181 in May 2014.

An increase of 17.1% was recorded in arrivals from the U.K. (from 106,063 in May 2014 to 124,189 in May 2015), a 4% increase from Sweden (from 15,299 to 15,910), a 55.3% increase from Germany (from 8,564 to 13,297) and a 44.4% increase from Greece (from 9,083

to 13,120 this year). A decrease of 19.6% was recorded in arrivals from Russia (71,137 in May 2015 compared to 88,426 in May 2014).

For the January-May period, tourist arrivals totalled 698,932 compared to 637,617 in the same period of 2014, an increase of 9.6%.

Cystat also said that 87,496 Cyprus residents returned from a trip abroad in May, compared to 89,632 in the same month last year, down 2.4%. There was a decrease of 25.4% on trips to the U.K. (19,030 in May 2015 compared to 25,516 in May 2014).

Gov’t seeks buyer for CAIR logo, tradename The government has invited potential bidders to submit an “expression of interest” for the trademark and tradename of the defunct national carrier, Cyprus Airways.

The majority state-owned company, that is under liquidation having suspended operations and laid of all its 560 staff, sold the logo, representing the “flying moufflon” and the tradename back to the government last December for EUR 1.2 mln.

But the sale hardly makes a dent in the airline’s burden of EUR 100 mln in state aid that it was ordered to return by the European Commission as it was in breach of EU rules on subsidies, subsequently shutting the company in January this year. The company still maintains some assets, such as the last of six aircraft in its fleet, the engineering hangar and operations at Larnaca airport and other commercial licenses.

June 17 - 23, 2015

4 | CYPRUS | financialmirror.com

Limassol port goes to tender Initial interest from bidders, says Transport Minister

The government is going to tender this week to invite bidders for the three services at Limassol port, the island’s main port of call that accounts for 80% of passenger traffic and 70% of all commercial activity.

The House of Representatives approved the much-delayed framework only last week that paved the way for the privatisation of three key services to three operators or a single consortium for all three.

Transport, Communications and Works Minister Marios Demetriades said that the first phase will call for ‘expression of interest’ from prospective operators who will be shortlisted and a final selection made in the first quarter of 2016.

He said that initial interest was received by “some international” operators who were sounded by the Ministry’s consultants Rothschild.

Commercial services at Limassol port, where improvement works are already underway, such as the expansion of the container terminal and the new passenger terminal, will be privatised as part of the government’s obligations to international creditors who bailed out the island with a 10 bln euro programme in 2013.

The aim is to raise about 1.4 bln from the privatisation of state assets or denationalisation of services and utilities, to make the economy more competitive and less reliant on its rigid civil service.

Limassol port, the driving force of the island’s economy in the 1970s, gradually lagged behind other regional rivals and has become most uncompetitive, losing business for shipment and tarns-shipment to the likes of Piraeus, Malta and Haifa, despite the island’s maritime fleet being among the ten biggest in the world and a leader in shipmanagement.

The port, burdened with uncompetitive rates and crews, currently handles a mere 300,000 TEUs, while Piraeus, that has gone to tender this month to sell off the remainder of the state-owned stake, handled ten time as

much last year. Malta Freeport, that underwent a privatisation process of its own some ten years ago, currently handles 2.75 mln TEUs and aims to increase that figure to 4 mln over the next 1-2 years.

“We are strategically located across from the Suez Canal, that, too, is enjoying vast investments and we have to become competitive once again,” said Minister Demetriades.

“We have been left behind and we cannot delay the process even a single day,” he said.

Ministry Director and Chairman of the Ports Authority Alecos Michaelides said that the three services that will be put out to tender are for the container terminal, multiple-use facility (incl. passenger terminal) and marine services, with the first two licences offered for a 25-30 year concession and the third concession for 1020 years.

He said that once the preferred bidder is chosen, negotiations will begin for the final

contract with the winning operator and the CPA working in parallel for the initial period.

“After that, the CPA will become the landlord of the three main commercial ports of Limassol, Larnaca and Vassiliko and its role will change to one of regulator and supervisor,” Michaelides said.

He added that earnings at Limassol port alone are about 20 to 25 mln euros a year, which the new operator is expected to increase to about 4-5 times that amount,

including investments in infrastructure and superstructure upgrades, such as modern equipment, better cranes, berthing of larger vessels, etc.

In his double capacity as CPA Chairman, Michaelides said that all of the Authority’s staff will remain and probably moved to other services, while licensed port workers are negotiating a compensation, as are dockworkers, all of whom may be re-hired by the new operators.

CPA Chairman Alecos Michaelides (left) and Transport Minister Marios Demetriades

Tender for privatisation of Limassol port on e-procurement website The tender document for the privatisation of Limassol Port was published on Tuesday at the government’s e-procurement website www.eprocurement.gov.cy .

The Ministry of Transport, which is the Contracting Authority, has invited potentially interested parties to enter into one or more concessions for each of the three services at Limassol Port or all three.

The deadline for submitting invitations is midnight, August 12.

The contract notice concerns three potential opportunities for a services concession for the Container Terminal, a services concession to provide Marine Services and a services concession in

respect of a Multi-purpose Terminal.

Interested parties may bid for one or all three of these potential opportunities.

The Ministry anticipates that the duration of the services concessions for the Container Terminal and the Multi-purpose Terminal is likely to fall within a range of between 25 to 30 years and for the Marine Services from 10 to 20 years. imassol Port is currently in the process of upgrades which should be completed in 2016.

The Limassol Port Commercialisation Transaction is explained in further detail in the invitation for Expressions of Interest (EoI) document which will be available from June 18 at the Ministry’s website.

June 17 - 23, 2015

financialmirror.com | CYPRUS | 5

DEFA picks natgas bidder for 2016 supply The state-owned Natural Gas Public Company (DEFA) has chosen the supplier of an estimated 0.7-0.95 bln cubic metres a year for use in power generation and it will commence negotiations with the preferred bidder to conclude on a final pricing, possibly by the end of July.

Cyprus’ gas needs have been estimated at 1 bcm a year as the public Electricity Authority of Cyprus seeks cheaper and cleaner alternatives to diesel fuel.

DEFA said its board “examined and completed the evaluation of the latest revised commercial and financial proposals received from bidders earlier this month” in response to an invitation for bids issued in January 2014.

It said it evaluated the proposals and will inform the Minister of Energy, Commerce, Industry and Tourism of the results.

“DEFA is bound by confidentiality agreements and no more information will be released at this stage,” it said.

The call for the tender was initially issued in October 2013 but revised and re-issued in January 2014.

Reports suggested that the front-runners were the Greek consortium M&M as well as the Dutch Vitol Group, co-owner of the 300 mln euro VTT storage terminal in Vassiliko.

The DEFA tender called for the supply of natural gas to the Cypriot market through two delivery routes – one in early 2016 and the other no later than the second half of 2017.

The interim supply is expected to plug a five year gap from current needs to the export of natural gas from the Cyprus offshore gasfield of ‘Aphrodite’ operated by US-based Noble Energy and Israeli partners Delek and Avner.

Delek, a partner in the adjacent Israeli offshore gasfield of Leviathan was also an earlier bidder, as was Azerbaijan’s stateowned Socar.

Cyprus seems to have abandoned plans to build a land-based regassification plant to utilise the output from Noble’s ‘Aphrodite’ gasfield, while the operator is seriously considering a floating terminal on-site from where it will export the gas to Cyprus and probably Egypt.

The gasfield, with estimated reserves of 4.5 tcf, was declared ‘commercially viable’ by Noble last week, while other gasfield operators Total and ENI-Kogas have, for now, halted exploration efforts after initial drills did not justify further investments, particularly in the current environment of crude oil prices in the range of $60 a barrel.

Employment up 0.3% in Q1 vs Q4 The number of persons employed increased by 0.3% in the first quarter of the year, compared with the fourth quarter last year.

Employment rose by 0.1% in the euro area and by 0.3% in the EU28 in the first quarter, according to Eurostat.

In the fourth quarter of 2014, employment had dropped by 0.3% in

Cyprus, increased by 0.1% in the euro area and up 0.2% in the EU28.

Compared with the same quarter of the previous year, employment was steady in Cyprus, increased by 0.8% in the euro area and by 1.1% in the EU28 in the first quarter of 2015 Latvia and Hungary (+1.5%) recorded the highest increases in the

first quarter of 2015 compared with the previous quarter, followed by Estonia (+0.9%), Spain (+0.8%), the Czech Republic, Ireland, Portugal and the United Kingdom (all +0.7%). Greece (0.8%) and Malta (-0.4%) recorded decreases, while employment was stable in Germany, France, Italy and the Netherlands.

Better political, economic ties with Saudi Arabia President Nicos Anastasiades said that his decision to appoint a resident Ambassador to the Kingdom of Saudi Arabia was a step which reflects Cyprus’ desire to deepen political, economic and diplomatic ties with the country.

Receiving the credentials of Saudi Ambassador Essam Ibrahim Bait Almal, he assured him that despite the effect of the economic crisis, the government was determined to continue to work hard to restructure and reform the economy.

He pointed out that Cyprus remains a destination with great potential for investments due to its diversified open-market economy, its strategic location at the crossroad of three continents, its well-developed infrastructure, competitive tax system and highly-qualified human capital. He added that, the potential emanating from the discovery of hydrocarbons in Cyprus’ Exclusive Economic Zone (EEZ), has opened new opportunities and enhanced the role that Cyprus seeks to play in its greater neighbourhood.

“In recent years, our two countries have been working to improve the framework for promoting trade and economic relations. Negotiations for a Double Taxation Agreement began in 2014. The potential between us is considerable and has to be further explored”, stressed the President.

On his part, the new Ambassador said that his government “has great interest in its relations with the Republic of Cyprus, and I have been instructed by the Saudi leadership to spare no efforts in order to develop these relationships to the highest levels.”

June 17 - 23, 2015

6 | COMMENT | financialmirror.com

The endgame in Greece After months of wrangling, the showdown between Greece and its European creditors has come down to a standoff over pensions and taxes. Greece is refusing to acquiesce to demands by its creditors that it cut payments to the elderly and raise the value-added tax on their medicine and electricity.

Europe’s demands – ostensibly aimed at ensuring that Greece can service its foreign debt – are petulant, naive, and fundamentally self-destructive. In rejecting them, the Greeks are not playing games; they are trying to stay alive.

Whatever one might say about Greece’s past economic policies, its uncompetitive economy, its decision to join the eurozone, or the errors that European banks made when they provided its government with excessive credit, the country’s economic plight is stark. Unemployment stands at 25%. Youth unemployment is at 50%.

Greece’s GDP, moreover, has shrunk by 25% since the start of the crisis in 2009. Its government is insolvent. Many of its citizens are hungry.

Conditions in Greece today are reminiscent of those in Germany in 1933. Of course, the European Union need not fear the rise of a Greek Hitler, not only because it could easily crush such a regime, but also – and more important – because Greece’s democracy has proved impressively mature throughout the crisis.

But there is something that the EU should fear: destitution within its borders and the pernicious consequences for the continent’s politics and society.

Unfortunately, the continent remains split along tribal lines. Germans, Finns, Slovaks, and Dutch – among others – have no time for the suffering of Greeks. Their political leaders tend to their own, not to Europe in any true sense.

Relief for Greece is an especially fraught issue in countries where far-right parties are on the rise or centre-right governments face popular left-wing opposition.

To be sure, European politicians are not blind to what is happening in Greece. Nor have they been completely passive.

At the beginning of the crisis, Greece’s European creditors eschewed debt relief and charged punitive interest rates on bailout funds. But, as Greeks’ suffering intensified, policymakers pressed private-sector banks and other bondholders to write off most of their claims. At each stage of the crisis, they have done only what they believed their

By Jeffrey D. Sachs national politics would bear – no more.

In particular, Europe’s politicians are balking at steps that would implicate taxpayers directly. The Greek government has asked Europe to swap existing debts with new debts to lock in low interest rates and long maturities. It has also requested that interest payments be linked to economic growth. (It has notably not asked for cuts in the face value of its debt).

But debt relief of this sort vis-à-vis European governments or the European Central Bank has been kept off the table.

Such measures would likely require parliamentary votes in countries across the eurozone, where many governments would face intense public opposition – no matter how obvious the need.

Rather than confront the political obstacles, Europe’s leaders are hiding behind a mountain of pious, nonsensical rhetoric. Some insist that Greece finish its payment programme, regardless of the humanitarian and economic consequences – not to mention the failure of all previous Greek governments to meet its terms. Others pretend to worry about the moral-hazard implications of debt relief, despite the fact that the country’s private-sector debt has already been written off at EU insistence, and that there are dozens, if not hundreds, of precedents for restructuring the debts of insolvent sovereigns.

Almost a century ago, at World War I’s end, John Maynard Keynes offered a warning that holds great relevance today.

Then, as now, creditor countries (mainly the US) were demanding that deeply indebted countries make good on their debts. Keynes knew that a tragedy was in the making.

“Will the discontented peoples of Europe be willing for a generation to come so to order their lives that an appreciable part of their daily produce may be available to meet a foreign payment?” he asked in The Economic Consequences of the Peace. “In short, I do not believe that any of these tributes will continue to be paid, at the best, for more than a few

RCB Bank seeks to expand in Cyprus, focus on business lending RCB Bank, the Limassol-based private bank that passed the ECB’s stringent stress tests in October 2014, plans to expand its presence on the island by providing more corporate lending.

Speaking during a business event held at the Leventis Gallery in Nicosia where Nobel economics laureate Christoforos Pissarides was the keynote speaker to an audience of 100 corporate executives, the bank’s Chairman Panayiotis Loizides announced RCB’s decision to substantially increase its local lending operations.

“Our prime concern and goal is to support business activity and the economy of Cyprus at large,” said Loizides, the former chief executive of the Cyprus Chamber of Commerce, KEVE. Sotos Zackheos, Executive Director of RCB Bank, said that the bank is a financially strong and trusted, privately-owned Cypriot institution with resources to grant loans. As of March 31, its assets amounted to over EUR 11 bln and owner equity to EUR 500 mln.

“The bank aims to become one of the top players for local lending and the bank of choice for Cypriot businesses. Within this framework, our strategic plan also includes the significant increase of our presence throughout Cyprus,” stated Zackheos who reiterated RCB Bank’s commitment, as a major Cypriot bank, to fulfil its role in supporting the Cyprus economy.

In his key note speech, board member Dr. Christoforos Pissarides conveyed a positive message with regards to the state of the Cyprus economy, saying that “the public finances are on a sound footing and they should continue to improve. The reason behind this improvement lies with the overall better-than-expected performance of the Cyprus economy at large”.

He presented several scenarios stressing that “fast structural reforms in product markets and the legal framework for business” are prerequisites for further economic growth in Cyprus.

Established in 1995, the bank operates branches in Nicosia, Limassol and Luxembourg.

years.”

Several European countries now seem content to force Greece into an outright default and provoke its exit from the euro. They believe that the fallout can be contained without panic or contagion. That is typical wishful thinking among politicians. Indeed, it is the type of heedlessness that led US Treasury Secretary Hank Paulson to let Lehman Brothers fail in September 2008, ostensibly to teach the market a “lesson.”

Some lesson; we are still digging out from Paulson’s monumental mistake.

Similarly, Keynes watched in horror as economic policymakers blundered repeatedly in the years following WWI, through the upheavals of the 1920s, and into the Great Depression of the 1930s. In 1925, Keynes criticised the insouciance of those “who sit in the top tier of the machine.”

He argued “that they are immensely rash in their regardlessness, in their vague optimism and comfortable belief that nothing really serious ever happens. Nine times out of ten, nothing really serious does happen – merely a little distress to individuals or to groups. But we run a risk of the tenth time…”

Today, Greece’s European creditors seem ready to abandon their solemn pledges on the irrevocability of the euro in order to insist on collecting some crumbs from the country’s pensioners. Should they press their demands, forcing Greece to exit, the world will never again trust the euro’s longevity. At a minimum, the eurozone’s weaker members will undergo increased market pressures. In the worst case, they will be hit by a new vicious circle of panic and bank runs, also derailing the incipient European recovery. With Russia testing Europe’s resolve to the east, the timing of Europe’s gamble could not be worse.

The Greek government is right to have drawn the line. It has a responsibility to its citizens. The real choice, after all, lies not with Greece, but with Europe.

Jeffrey D. Sachs, Professor of Sustainable Development, Professor of Health Policy and Management, and Director of the Earth Institute at Columbia University, is also Special Adviser to the United Nations Secretary-General on the Millennium Development Goals. © Project Syndicate, 2015 - www.project-syndicate.org

BOCY uses gov’t bond cash to pay down ELA Bank of Cyprus has lowered its European Central Bank funding after receiving EUR 750 mln from the government towards a EUR 1.9 bln bond held by the bank issued for the recapitalisation of now defunct Laiki Popular which it absorbed in 2013.

BOCY said on Thursday that it has repaid EUR 500 mln of Emergency Liquidity Assistance (ELA) and EUR 260 mln of European Central Bank (ECB) funding with ELA and ECB funding now reduced to 5.9 bln and 500 mln, respectively.

In total, ELA has been reduced by EUR 5.5 bln since its peak of 11.4 bln in April 2013, to-date this year some 1.5 bln of ELA has been repaid, set as a priority of outgoing CEO John Hourican who set his sights on restructuring the unified bank, deleveraging non-core assets and returning to the bank to a path of profitability. The EUR 1.9 bln bond was transferred to Bank of Cyprus in March 2013, following the acquisition of certain assets and liabilities of Laiki and was pledged as collateral with the European Central Bank (ECB).

In its first-quarter results, Bank of Cyprus said it had reduced ELA 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 had said in last week’s 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 nonperforming loans (in arrears form more than 90 days) totaled EUR 12.79 bln and accounted for 53% of gross loans.

June 17 - 23, 2015

financialmirror.com | CYPRUS | 7

What drives the yield of government bonds? media, do not stay constant but are timevarying. Why is that?

First, as the bond moves towards maturity, its price moves closer to the principal amount and therefore the yield will accordingly change. A second reason is a change in the credit quality of the issuer by the credit rating agencies, while a third is a change in the yield on comparable bonds (i.e. of the same credit quality).

By George Theocharides To highlight the second reason, when the credit quality of the Cyprus Cyprus International government was Institute of Management deteriorating prior to the March 2013 events, we had subsequent and multiple government bonds (of Cyprus, as well as downgrades by the rating agencies which other nations around the world). From the increased the yields to levels that were numerous times that we hear this term, one prohibitively high to borrow. I should note can understand that it is very important and here that yields can also change because of can affect substantially our economy’s path, changes in risk level, without any action by but does the average person (and not a the rating agencies.

Furthermore, if you look at what is sophisticated investor) know exactly what this means, or how is decomposed, or what happening now across the Eurozone and yields on comparable bonds, they have been drives its fluctuations?

The purpose of this short article is to going down mainly because of the extremely explain in simple terms the above relevant low base interest rates applied by the European Central Bank (ECB) as well as the questions.

Quantitative Easing (QE) programme of Mario Draghi that began last March. The QE Definition The yield (or return) to maturity is the programme increases the money supply in average annualised rate of return of holding the European economy and thus the the bond until maturity, provided that the demand for financial (or other) products (increasing their price, and lowering their issuer (government in this Due to the current weak economic circumstances that we are experiencing here in Cyprus (as well as other countries in Europe), we are constantly bombarded with various economic and financial terms from the media, most of them unknown to the general public.

One of them is the yield on the

case) does not default (misses an interest payment, or restructures its debt). This return is an outcome of the periodic coupon payments (usually every six months), the capital gain (or loss) when the bond matures or is sold, and the interest income that is generated from the reinvestment of cash flows.

One can think of this return as a summation of the real risk-free rate (i.e. the rate of return on a risk-free security, excluding the impact of inflation), an inflation premium (i.e. a rate of return that accounts for the expected inflation in the economy), as well as risk premiums from other sources of risk (mainly credit and liquidity risk). The real risk-free rate and the inflation premium together constitute the nominal risk-free rate of return.

If we compare the yields on Eurozone government bonds one can observe that the differences in terms of credit and liquidity risk among various countries leads to different levels of prices and yields (the higher the risk, the higher the yield). One should also understand that there is an inverse relationship between prices and yields (i.e. the higher the yield, the lower the price that the bond is traded).

Drivers of yield Yields, as we are often reminded by the

yield). It also has the added effect of sending positive signals to the market that the ECB stands ready to do whatever it takes to preserve the stability of the common currency and assist in bringing back growth to the problematic Eurozone economy.

As pointed out above, changes in yield levels shape and affect the economic prospect of whole nations, thus they are very important. The aim of course from the perspective of the issuer is for them to be as low as possible so that they lower the cost of funding. One effective way of doing that is through fiscal consolidation and the necessary reforms to modernise the economy and make it more competitive.

George Theocharides is an Associate Professor of Finance at Cyprus International Institute of Management (CIIM) and the Director of the MSc in Financial Services.

June 17 - 23, 2015

8 | COMMENT | financialmirror.com

These Steamers Cook Up Great Journeys FOOD, DRINK and OTHER MATTERS with Patrick Skinner Railway locomotives, powered by wood, coal or oil, started freight and passenger services in England for the first time in the 1830s and “railway mania” quickly spread all over the world. In 1905 steam trains, taking goods and people were running up to four times a day between Famagusta and Nicosia. An onwards line extended to the workings of the Cyprus Mines Corporation near Xeros. Though traffic was good, and the system was most useful in both World Wars, the Cyprus Railway never made a profit, and all its working ceased at the end of 1951. If it existed today, it would undoubtedly be an enormous tourist attraction and profitable, too.

I was reminded of this and an excellent book about The Cyprus Government Railway, as it was called, by B. S. Turner, published in 1979, because Mary and I were spending a few days in Wales travelling on the narrow gauge (2 feet or 62 cms) steam railways that thread their way through the beautiful valleys and mountains.

1 large onion, peeled and finely sliced 2-3 smallish courgettes 5 slices of lounza or back bacon, finely sliced 1 cup of grated Cheddar or Cyprus Tilsit cheese 2 tbsp of flour 2 or 3 cups of milk Salt and pepper Several pinches of garlic powder

Method 1.

Roll out the pastry, cut into four pieces, brush with beaten egg or milk and bake in a hot oven (225C) for about 15-20 minutes or until you see that it is cooked through. Remove and keep warm.

2.

Take a slice of butter (about one-eighth of a packet) and melt in your non-stick frying pan until it is sizzling.

3.

Fry the onion and the bacon until they are beginning to brown.

4.

Turn down the heat and add the chopped courgettes. Cook for 4-5 minutes.

5.

Sprinkle the flour over the mixture, stir in and continue frying, stirring all the time.

6.

Slowly pour in the milk, mixing well to form a sauce of a thick, creamy consistency.

Add more milk as necessary.

7.

After a few minutes, put in the chicken chunks.

8.

Grate the cheese and stir into the sauce, and simmer very slowly until it is melted.

9.

Take the four pastry pieces and, with a sharp knife, cut open from the side.

10. Spoon the sauce mixture onto the bottom half of the pastry, cover with the top and bring to the table.

Serve with a chilled dry rosé or a lightly cooled fruity young red wine.

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

Helping a very good cause – news from Orexi Imagine a little railway winding its way through the Troodos forests!

Tireless cook, gastronome, organiser and promoter of good food, Elena of Orexi fame is involved in yet another event. And there could hardly be a better cause for which to raise funds. I shall let the indomitable lady explain:

Sunday 21st June – Fund-raising garden party, Tsada, 12pm to 4pm.

Seventy years separate these two photographs, as well as a distance of more than 2,000 miles. The black and white photograph on the left was taken in 1945, I took the right hand picture a few days ago. The similarity of the locomotives is considerable.

Cyprus Railways Number 11 was built in England, crated and sent to Cyprus by sea. It arrived for service in 1904 and worked hard for more than 40 years. My right hand photo, which I took last week, is a “steamer” working on the Welsh Highlands Railway line, whose income is virtually 100% from tourism. This loco was built in South Africa in 1992.

The Cyprus trains had no restaurant cars or dining facilities. B.S. Turner records that there were plenty of opportunities for passengers between Famagusta and Nicosia to buy food and drink at the various stops (scheduled and unscheduled). In contrast, in Wales, the businesslike railway offered hot and cold drinks, buns, caked and snacks – even small bottles of California wine. Any reader who would like to see more pictures of the Welsh Highlands may tune in to my website www.eastward-ho.com

THIS WEEK’S RECIPE Chicken, Courgette and Ham Pie Whilst on holiday in Wales last week, we had a very good chicken and ham pie at a Delirestaurant of a fine country house, so here is something similar I cooked up a few years back fort a recipe book.

Ingredients for 4 servings 2 cooked chicken breasts, chopped into small chunks 1 340g (12 oz) packet of Jus Rol puff pastry, defrosted and rolled out to approximately four times its area

There’ll be lots of live music, stalls selling interesting crafts and of course Orexi will be there with some of our delicacies for you to buy, have brunch with or snack on! If you have any culinary preferences let me know and we’ll get cooking... It’s a 2 Euro entry fee which is a great bargain for so much entertainment and the proceeds of the door sales will go to the Cancer Patients Support Group and the Hospice Fund.

Monday 22nd June – Trip to the Cheese farm Due to popular demand, we shall be running yet another trip to Koulla’s goat farm on the outskirts of Drousia. The day will begin at 10am with tea, coffee and breakfast at Orexi HQ. We shall then drive down to the farm to watch the goats being milked and see how halloumi and anari are made. You’ll get to try cheesey samples, tour the farm, see where the goats graze and learn about a truly traditional Cypriot gastronomic product.

Halloumi and anari will be available to buy if you would like some to take home with you.

We will head back to Orexi HQ for lunch and a glass of wine at around 2pm. As the lunch menu has not been confirmed, please let me know of any likes, dislikes or intolerances when you book.

The cost of the day is 30 euros which includes breakfast, lunch, cheese and wine, as well as an educational artisan foodie exploration! Space is limited, so please call me right away on 9999 7293.

June 17 - 23, 2015

financialmirror.com | COMMENT | 9

Washington’s most expensive speakers After finishing a long term in public office, many politicians earn healthy amounts of cash through speaking engagements. Indeed, booking one of America’s more recognisable public figures comes with a hefty pricetag. Even though speaking engagements can prove highly lucrative for politicians, they can also be risky. The extortionate prices charged by some speakers have, somewhat unsurprisingly, sometimes led to accusations of greed. So, who are the costliest public speakers in the United States? ABC News took a look at some of the country’s highest speaking fees with Donald Trump coming first by a huge distance.

The billionaire earned an incredible $1.5 mln for each of his 17 speeches (where he was contracted to speak for an hour) at The Learning Annex’s “real estate wealth expos” in 2006 and 2007. According to ABC, The Donald will make a speech for $200,000 and up so his price may not always stretch into the millions. Economist and former Federal Reserve Chairman Ben Bernanke makes up to $400,000 per speaking engagement, placing him second on the list while Bill or Hillary Clinton would cost somewhere around $200,000.

Former Treasury Secretary Tim Geithner would also pick up $200,000 per speaking, engagement while the bill for availing of George W. Bush and Condoleeza Rice’s speaking skills would come to $150,000.

If you intend hiring one of America’s more recognisable public figures for a speech, you should start saving. (Source: Statista)

Longest Toyota parade breaks Danish record A record 744 Toyota cars of all shapes, sizes and age took part in the Toyota Cyprus Car Parade on Sunday, June 7, and broke the record for the longest singlelane convoy, all in aid of charity and to mark the brand’s 50th anniversary in Cyprus.

Dickran Ouzounian, CEO of the Toyota Cyprus dealership, took part in a fully-restored classic Corolla from 1965 and was followed by saloon cars, trucks, vans and jeeps, overtaking the previous record of 426 vehicles set in Denmark.

The aim was to line up “at least” 500 Toyotas, a delighted Ouzounian said, with stalls selling food and drinks before and after the event and proceeds going to the local cancer patients’ charity Pasykaf.

The company is now waiting for official recognition from the Guinness Records organisation.

Other events to mark the anniversary this year include sponsorship of a multi-cultural concert, donation to a local charity and supporting young children in a drawing and painting competition.

Toyota is world’s most valuable motor brand Toyota once again took the top spot as the most valuable automotive brand in the BrandZ Top 100 Most Valuable Global Brands 2015 commissioned by WPP and conducted by Millward Brown Optimor. With a brand value of $28.9 bln (EUR 26.5 bln), it remains the most appreciated brand by consumers. Lexus ranked No. 10, one up from last year thanks to its rejuvenated range of vehicles.

In the ten years since the BrandZ report was first published in 2006, Toyota was crowned brand value leader in the automotive sector eight times.

June 17 - 23, 2015

10 | CYPRUS-ISRAEL | financialmirror.com

Cyprus and Israel to boost Anastasiades-Netanyahu talks focus on joint exploitation of natgas, Cyprus and Israel have agreed to intensify their efforts to conclude an agreement on the joint exploitation of natural gas lying in adjacent offshore blocks in the eastern Mediterranean.

During an official visit to Israel on Sunday and Monday, his second in two years, President Nicos Anastasiades and Prime Minister Benjamin Netanyahu said they will explore how to best utilise their energy resources, while promoting the undersea power cable that can transfer 2,000MW of electricity from Israel to Cyprus and onwards to Greece, before ending up with clients in continental Europe.

The EuroAsia Interconnector, a joint venture between Cyprus-based DEHQuantum Energy and Israel Electric Corp., will run some 1,500 km from Israel’s Hadera point to Crete.

On-site inspections took place of the cable landfall area near Haifa from where the ambitious multi-billion project will be launched, with Cyprus expected to join the grid and receive electricity from the world’s longest sub-sea cable in 2019.

The project, expected to cost about 4 bln euros by its completion in 2022, will also end the energy isolation of outer-lying Greek islands, while Israel will embark on a new era of energy security, as the Interconnector may also allow the import of electricity in times of crisis.

Energy concerns were the focus of a separate meeting on Monday between Energy, Commerce, Industry and Tourism Minister Yiorgos Lakkotrypis and Israel’s Minister of Energy and National

Infrastructures. Yuval Steinitz. Netanyahu asked the two ministers to produce concrete results the soonest possible, urging them to begin discussion on the interconnector as well.

With regard to tourism, the Prime Minister said that Israel intends to attract tourists from the Far East, a project on which it can cooperate with Cyprus. He proposed a ferry connection between Cyprus

and Israel, noting that if this succeeds more countries could join as well.

On his part, President Anastasiades expressed Cyprus’ interest in attracting tourists who visit Israel from the US. During their working lunch, Netanyahu thanked President Anastasiades for the role which Cyprus plays within the EU on issues which concern Israel.

A Cyprus-Greece-Israel trilateral meeting

will probably take place in October and the date is expected to be finalised at the beginning of August when the Greek Prime Minister Alexis Tsipras will visit Israel.

President Anastasiades briefed the Israeli PM of his write to European Council President Donald Tusk to invite Netanyahu to address the Council. In this framework, the President of the Palestinian Authority Mahmoud Abbas may also be invited to

Ambitious interconnection plans could transform Europe

By Ilias Tsagas Europe recently approved studies for energy infrastructure plans that could transform its energy market and boost renewable investments.

Electricity interconnection plans specifically between U.K. and France, and Greece, Cyprus and Israel stand out.

The EU’s Innovation and Networks Executive Agency (INEA) has awarded the first 15 of a total 34 energy infrastructure projects that will receive a cumulative funding of EUR 647 mln to cover expenses for their preliminary studies (e.g. regulatory or environmental studies).

The projects, said the European Commission, aim to upgrade existing and develop new energy transmission infrastructure required to promote Europe’s energy security and “will also support the deployment of large-scale renewable energy”.

All 34 plans are part of the 248 Projects of Common Interest (PCIs) selected by the European Commission to step up the bloc’s internal energy market. PCIs may benefit from accelerated licensing procedures, improved regulatory conditions and access to funding totalling EUR 5.85 bln between 2014 and 2020. The first tranche of financial support (EUR 647 mln) allocated to PCIs

regards the 34 projects is to be awarded by INEA. PCIs are divided into three broad categories: electricity infrastructure, gas infrastructure and smart grids. Of the recently awarded projects, the following two stand out for their ambition and potential effectiveness in the electricity sector.

Linking France to UK ElecLink is one of the first 15 project grants approved by INEA. The project regards the interconnection between Coquelles, France and Folkestone, U.K. and aims to build a 1GW interconnector of 70 km passing through the Channel Tunnel to link the 400kV grids in both countries.

Funding approved by INEA will help “to complete a set of studies required to obtain the permits, authorisations, certain regulatory exemptions and financing that will allow the construction work to begin”, while “furthermore, an Interconnector Access Agreement will be developed and finalised”, said the Commission.

The U.K.’s energy policy specifically has been the subject of heavy criticism for hurrying to establish a capacity market that allocates millions to fossil fuel plants without adequately examining alternative options such as interconnection to neighbouring countries and improvement of the energy demand side.

France’s policy decision to reduce the share of nuclear power in the country’s electricity generation mix from 75% to 50% by 2025 means the ElecLink project will prove beneficial.

Presently, France and the U.K. are connected via an existing 2 GW link.

Greece - Cyprus - Israel interconnection Plans for an electricity grid linking Greece, Cyprus and Israel have been largely discussed in the Greek and Greek Cypriot press, and have been attracting plenty of enthusiasm. In May, INEA approved funding concerning the design, implementation and environmental studies of the EuroAsia Interconnector.

The Interconnector PCI aims to support the building of an approximately 1,518 kmlong 400 kV grid line with a capacity of around 2 GW between Hadera in Israel and the region near Athens in Greece.

The studies approved by INEA will specifically define the technical and technological solution and assess the possible environmental impact of the project. They “will also select the preferred route corridor (among those already predefined) and provide useful results for the cable engineering”, said the European Commission.

The EuroAsia Interconnector is largely ambitious in that it aims to interconnect Europe with Asia, extending the European energy market beyond its borders. It can also be hugely effective for Israel and Cyprus since both countries are energy islands; neither Israel’s nor Cyprus’ electricity networks are linked to neighbouring countries.

The interconnector will also benefit Greece.

The country’s previous administration had fought for the project to be included in the PCIs list saying that it could strengthen it geopolitically and improve the economy, introducing competition in the energy market, and thus reducing the overall electricity costs.

However, Greece’s new government does not seem quite so enthusiastic. The recent INEA decision was ignored by the press office of the Greek energy ministry, which publishes press releases on various minor issues. Greece’s new administration is also very protective of the national electricity incumbent, the PPC/DEH utility, and fights the Commission plans for increasing energy competition.

Currently, the EuroAsia Interconnector seems more politically troubled than technically. But since governments continuously change and Greece specifically appears to have national elections every two years or so, this largely significant plan may likely materialise.

(Source: www.pv-magazine.com)

June 17 - 23, 2015

financialmirror.com | CYPRUS-ISRAEL | 11

energy cable trilateral meeting in October? address the Council, diplomatic sources said.

Press reports suggested that Anastasiades conveyed to Netanyahu a message on the Palestinian issue from the Egyptian President Abdel Fattah al Sisi. Anastasiades is expected to speak with Sisi again soon to convey Netanyahu’s response.

During their working lunch on Monday, Netanyahu talked about the possibility of Cyprus and Israel cooperating in the technological sector, and referred to his recent meetings with the CEOs of Google and Orange.

The two leaders also discussed Iran, terrorism and the situation in Turkey. In the afternoon, the President, who was also accompanied by First Lady Andri Anastasiades, Foreign Minister Ioannis Kasoulides, Government Spokesman Nicos Christodoulides and other senior officials, laid a wreath at the burial site of Theodor Herzl, on Mount Herzl.

Later in the evening addressing the state dinner hosted by President Reuven Rivlin, Anastasiades said that enhancing cooperation between the two countries was not targeted against any third country.

“To the contrary, our goal is to resolve the soonest possible long-standing problems, which threaten the existence of our countries,” he noted. Our struggle is to achieve an enduring solution in Israel but also in Cyprus, on the basis of UN Security Council Resolutions, he added.

“As our economic and business ties develop further, our political will to nurture and cultivate further our bilateral relations grows stronger. Our cooperation extends over a wide range of fields, from tourism, economic exchanges, agriculture, business and high tech industries. Commercial and trade ties have expanded and cultural relations have blossomed,” he noted.

He said that today Cyprus boasts a synagogue and in 2013 the University of Cyprus with the cooperation of the Embassy of Israel in Cyprus, launched a Jewish studies department.

He noted that the discovery of hydrocarbon reserves “has opened new horizons for our bilateral relations and we are working tirelessly and with determination to realise this potential to our mutual benefit.”

With regard to developments on the Cyprus problem, Anastasiades said that they are promising and that he is encouraged by the fact that full-fledged negotiations aiming at a comprehensive, viable and fair settlement of the Cyprus issue have restarted with the new Turkish Cypriot leader Mustafa Akinci.

“We are cautiously optimistic that conditions may soon prevail that may enable substantive progress and eventually a lasting solution,” he added.

On his part, President Rivlin expressed hope that “this visit will take our relationship from being dear neighbours and friends, to feeling, truly, like close family.”

He recalled that during his visit to Israel in June 2013, President Anastasiades spoke of his desire to enhance and develop strategically important bilateral relations.

“You also emphasised our mutual commitment to develop and utilise our cross-border Mediterranean natural gas and oil reserves.

“On the more worrying side of things, you referred to the situation in Syria, and expressed concern that the crisis may spill over into the wider region,” he added.

He noted that “we can firmly agree, that you were right on target; not only with your positive and optimistic hopes, regarding the ‘constructive, creative and effective cooperation’ - as you put it - between our countries; but also unfortunately, with regard to the distressing deterioration in the region around us.”

He referred to the economic discovery of the Mediterranean natural gas reserves, which “is constantly bringing our two islands closer together,” adding that “we have of course, always shared much in common, culturally and historically.”

President Reuven Rivlin welcomes Nicos and Andri Anastasiades

OPINION - HAARETZ

It’s time for Israel to stop neglecting Cyprus

By Gal Luft It may sometimes seem the world is increasingly antagonistic toward Israel, but Cyprus President Nicos Anastasiades’ visit to Jerusalem this week should remind Israelis that there are still allies to be found, even in the Middle East. One of them lies a mere 200 kilometers from the beaches of Haifa.

For decades, Israel has neglected Cyprus, focusing its efforts on becoming more acceptable to its Arab neighbours, as well as to Turkey, Cyprus’ archenemy. But these efforts have stalled in recent years.

Relations with Turkey have soured, the peace with Jordan and Egypt is more or less frozen, and the peace process with the Palestinians is nonexistent.

Among all of these, it is Cyprus, Israel’s only non-majority-Muslim neighbour, that provides a glimmer of hope. With only 10% of Israel’s population and 1% of Turkey’s, the island may seem to be of little strategic importance, but recent geopolitical and economic developments have elevated its value for Israel and vice versa, creating the conditions for a renaissance in IsraelCyprus relations.

An important agenda item of Anastasiades’ visit was energy. Cyprus and Israel share significant natural gas reserves.

The same companies that own Israel’s Leviathan and Tamar gas fields – Noble Energy, Delek Drilling and Avner Oil & Gas Exploration – also own Aphrodite, a 4.5 trillion cubic feet field that lies off the coast of Cyprus.

Cyprus has already signed a memorandum of understanding to supply gas to Egypt but, like Israel, it has yet to figure out how to turn its gas bonanza into cash. There is room to mesh both countries’ efforts to develop their energy resources and collectively embark on a regional energy development plan. But the governments of Israel and Cyprus would be remiss if they focus the dialogue exclusively on gas, as there are other, no less important, strategic opportunities the two countries can advance.

Cyprus is in a unique position to offer Israel a coveted prize: strategic depth. On July 22, 2014, during Operation Protective Edge in Gaza, a Hamas rocket landing near Ben-Gurion Airport led to a four-day shutdown of Israel’s outlet to the world.

This experience ensures that in the next round of fighting, Israel’s airports will be at the top of Hamas’ or Hezbollah’s target list.

Israel should seek an alternative airport – far from the missile range – to enable the flow of passengers and supplies into and out of the country in times of emergency. A mere 40-minute flight or four-hour boat ride away, Cyprus can provide Israel with landing rights on its runways and hence an exit to the world. Such relationships can also extend into agreements to requisition fuel and military equipment should Israeli air force bases be under fire, as well as airspace for training.

Another opportunity has to do with China. The Cyprus-Israel axis can be an important element in China’s Maritime Silk Road, an ambitious strategic initiative aimed to connect Asia and Europe via a

network of maritime trade corridors, pipelines, sea and air ports and undersea fibre optics lines. Israel is a land bridge connecting the Red Sea and the Mediterranean, while Cyprus, an EU member, is a stepping stone to Europe.

With the help of China, the two countries can create a land and maritime passage from the Red Sea to the gates of Europe, one that also happens to traverse one of the largest discoveries of hydrocarbons in recent history. Such trade corridor – an alternative to the Suez Canal – would be an important piece of China’s strategic design, which, if implemented, would be the biggest infrastructure development project in history.

Tapping into China’s Silk Road initiative would also make Israel and Cyprus eligible for project financing from the dedicated financial institutions the Chinese have established, like the Silk Road Fund and the Asian Infrastructure Investment Bank, of which Israel is a founding member.

Cyprus needs Israel no less than Israel needs Cyprus. The island’s economy is recovering from a financial meltdown, and its main trading partner, Greece, is financially ruined. To be eligible for the next package of international bailout, it is obligated to undergo painful reforms, including the privatisation of several of its state-owned enterprises. This provides interesting opportunities for Israeli investors.

Furthermore, with Turkey’s defense budget almost the size of the entire Cypriot economy, the people of Cyprus are as anxious about potential Turkish aggression as Israelis are about potential Iranian aggression. Closer strategic relations with a prosperous and militarily powerful Israel will be a shot in the arm for Cyprus.

None of this should be viewed as a ploy against Ankara. To the contrary, with the Erdogan regime weakened after this month’s election, Israel should seek to improve its relations with Turkey while Cyprus should strive to continue reunification talks. Both countries should act in unison to include Turkey in their East Mediterranean energy development plan.

Israel is often hailed as an island of tranquility amid the storm raging in the Middle East. There is another island just like this. It’s time to explore it.

Gal Luft is co-director of the Washingtonbased Institute for the Analysis of Global Security.

June 17 - 23, 2015

12 | PROPERTY | financialmirror.com

More awards for Coral Beach Hotel, high occupancy The Coral Beach Hotel and Resort in Paphos is re-living recent days of glory with a number of new awards and a high occupancy rate from early June.

TripAdvisor has once again awarded the hotel with the Certificate of Excellence, while words of praise keep on pouring in, especially from travelers, repeat visitors and newly married couples who enjoyed a stay at the Coral Beach.

This hotel, owned and operated by Leptos Calypso Hotels, is located in the scenic area of Peyia near Paphos and occupies a unique location overlooking the sandy beaches and sparkling waters of Coral Bay. The TripAdvisor certificate commended the hotel’s high standard of rooms, friendly staff, amazing food, relaxing terraces, quality service, and a great lobby area.

Tough times ahead for NPLs Following the announcement of the government’s plan to protect the primary home and small business accommodation on June 3, to be monitored by the Cyprus Land Development Organisation, we are witnessing the completion of the legal framework regarding foreclosures and insolvencies.

It is now the time for tough decisions to be made by people with non-performing loans (NPLs).

Why do I say this? Because all those affected must study all the relevant legislation and decide on a course of action.

THE OPTIONS So, then, what are their options?

For starters, they must first try to reach a mutually acceptable solution with their lenders for loan restructuring. If this is not

satisfy the criteria of either the insolvency or the mediation scenario.

By George Mouskides

possible they then must ask the Financial Ombudsman to appoint a mediator in an effort to help the two parties reach an agreement and restructure the loan.

If the mediation procedure fails, then the next option would be the appointment of an insolvency consultant. The consultant will try to establish whether the debtor fulfills the criteria for protection according to any of the schemes included in the relevant laws.

The consultant will also determine whether the debtor can benefit from the primary residence protection scheme. It is clear that a great number of debtors do not

FORECLOSURES The only solution for people who do not meet the criteria is to try and secure a good loan restructuring deal with their banks. Banks will most certainly go ahead with a foreclosure procedure on the mortgaged property, if such a deal is not possible.

Of course it is now clear that the foreclosure and auction procedure will be lengthy. If debtors exhaust all deadlines as set per the legislation, we hardly expect any foreclosure to materialise in less than five years.

Are NPLs, eligible for protection by these rescue schemes, better off with these schemes or with a good restructuring arrangement?

Probably they will be in a better position if they agree to a loan restructuring with their lenders. Securing a sensible restructuring will ensure a better bank-client relationship, interest rates might drop, with lower instalments and what is most important is that costly trips to the courts will b avoided and legal fees and other expenses will be eliminated.

Concluding, I would like to acknowledge that each case is unique and requires a careful study of its particularities. In any case, this is actually the best time for a thorough study of the facts; it is time to properly utilise the independent advisors, so that, non-performing borrowers can take the best decisions.

George Mouskides is Chairman of the Cyprus Association of Property Owners (KSIA) and Director of FOX Smart Estate Agency

KEVE to host President to inaugurate Kalopanayiotis elevator on June 21 President Nicos Anastasiades will inaugurate seminar on the landmark elevator in Kalopanayiotis on June 21, as part of the ceremonies to mark the revival of the traditional centre of the foreclosures Sunday, agrotourism village to attract more visitors.

The elevator project, that is 50% financed by and EU structural and regional funds, was built at a cost of 1.4 mln euros to solve the problem of tourists and locals from the upper insolvencies transporting levels of the village to the traditional centre below, without affecting or damaging the scenic framework and cobbled narrow historic streets.

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 the Land Surveys Dept.

Participation at either event is EUR 35.70 for Chamber members and 47.60 for nonmembers, 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 .

President Anastasiades will inaugurate the elevator at 10.30am and will be the first to officially use it, by descending to the historic part and strolling around that part of the village to review the whole project together with Nicosia District Officer Marios Panayides and community leader Yiannakis Papadouris.

The visit will continue with the inauguration of the ‘Myrianthousa’ health and spa centre of the Casale Panayiotis residences and an official ceremony at the conference centre at noon.

So far, some 10.5 mln euros of public funds have been spent on infrastructure projects in the village and the surrounding areas, in addition to the 20 mln invested by the private sector, such as the Casale Panayiotis, which has become an attraction in itself, luxury apartments, agrotourism units, cafés, natural pathways and cycle paths.

On the opposite embankment lies one of the holiest shrines of Christendom in Cyprus, the Ayios Ioannis (St John) Lampadistis monastery from the 11th century which is a UNESCO World Heritage site with its immaculate Byzantine icons and frescoes, some of which have been restored and placed in the adjacent museum, well worth a visit.

Other attractions in the area include museums, the medieval bridge, the water mill, and more traditional or folk art. Kalopanayiotis used to be famous for its mineral water source and fresh water springs, while thousands of visitors every year will hike or cycle in the

surrounding Marathasa valley, pick fruit or just relax in one of the many picnic sites and parks.

Information for accommodation is available on the community website www.kalopanayiotis.com as well as the Casale Panayiotis http://casalepanayiotis.com

June 17 - 23, 2015

financialmirror.com | PROPERTY | 13

Don’t back down, Mr. Neophytou µy Antonis Loizou Antonis Loizou F.R.I.C.S. is the Director of Antonis Loizou & Associates Ltd., Real Estate & Projects Development Managers

The proposal by DISY President Averoff Neophytou regarding the Environment Committee finds me in total agreement. The proposal briefly suggests that if the applicant seeking planning permission is rejected or subject to conditions related to the environment, then the applicant should be able to resort to a ministerial committee for any differentiation.

Those directly concerned with matters of the environment should first determine if the Department of Environment is effective. The law says that within 30 days the applicant should be given a reply from this department, but as things stand, you should allow at least 2-3 months to be on the safe side and this is just a vague indication.

This department weighs the pros and cons on issues concerning only its own jurisdiction, ie. the environment.

But, if a project is about to create jobs for the unemployed, increase the standard of living, health, etc., and provide a better future for residents of nearby communities, these Nissi beach won a TripAdvisor award from holidaymakers because it combines wise development and caring for the environment economic and social issues are not addressed.

Unfortunately, in most such cases, some presented themselves as being more experts than other professionals Hungary to an extension project of an existing plant spread no concern to them, I simply present the facts that including around the world. One can easily recall the fuss kicked up by out over 2,800 hectares but lying within a Natura area, saying Paralimni Lake within the Natura designated area in order to the “environmentalists” during the construction of the it was more important to maintain communities and protect the water snake will cost the taxpayer several million, Anassa near Polis, and now this luxury hotel is considered a increase employment for the nearby population than an all- while it could have been reserved to a much smaller area of, say 150,000 sq.m., the protection of the rocks along the Ayia jewel for the Cyprus tourism industry and one of the best of out development ban, based on environmental concerns.

So, in Cyprus where we have so many “experts”, the Napa-Paralimni road will set us back a further 5 mln euros, its kind in the Mediterranean. I cannot help but remember the objections raised by the same group of people during Limassol Marina was almost not built (remember the fuss and certainly the Akamas region is costing us more than 150 plans to convert Athalassa Forest into a public park. They over efforts to remove the boulders), the Ayia Napa Marina is mln euros.

Returning to the subtlety with which decisions are taken were against the construction of asphalt roads both for still struggling through a lot of noise, the construction of the pedestrians and cyclists, prams, car parks, etc. And despite all Russian conference centre near Moni almost never got off the by the Environment Committee and other such bodies, the those objections, the forest has been turned into a delightful ground and now all efforts are focused on trying to cancel the whole situation has become a contradiction in terms. On the park for the whole family to enjoy and the number of visitors permits for the development a golf course in the Limni area, one hand, we have President Anastasiades rushing to all parts of the region to attract foreign investors and on the other, we has increased from the initial 10 to 20 a day into the east of Polis.

“So what?”, one may argue, if the surrounding area near have those few with cushy jobs who hinder any progress. hundreds.

And these select few include one high-ranking public So, these environmentalists and various committees are Limni is considered one of the most economic deprived areas the wisest of the wise and hence an obstacle for the of the island? And is it all important that huge mountains of official who was driven to a lavish wedding party in Paphos, development and growth of the economy, as well as carcinogenic and toxic waste tailings from the abandoned where the person in question had no relation to the bride and improving the “social fabric” we recently learned about. The mines decades ago were removed by the developer at no cost groom, while at the same event, the Attorney General fanaticism with which one can describe the so-called to the taxpayer? And what about the vast crater from the appeared having driven from Nicosia on his own and environmentalists and the gross misinterpretation what the open-mining eras which is being converted into a park, with returned home in his own car.

Perhaps it time some people got off their high horses and environment truly is all about is an indication of the 30,000 trees planted, the repair of the damaged landmark pier mentality of these people. The Natura regulations, according built for use by the public, the cleaning of the beaches and stopped lecturing us about how to protect the environment, especially as many of us, and in particular those living in outto them, means halting every form of development, hence the seabed?

Nothing seems to matter to some people and this is the of-way communities that the environmentalists claim to the sorry case of Akamas which after 30 years is still trying to find its way, at the same time that a European Commission reason why I support the proposal by Mr. Neophytou, while protect, probably care and do much more to protect the decision has clearly allowed some form of “mild” the whole matter may also call for serious discussion with EU environment, the wildlife and the natural habitat than development, which is most understandable. There are many officials considering the economic and social situation of anybody else. such EU decisions that place social and community interests Cyprus to what extent the strict protection of the www.aloizou.com.cy far above any environmental protection plan. One recent environment should be considered.

And even if there is a reader who believes that Natura is of example was the Commission giving the go-ahead in ala-HQ@aloizou.com.cy

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June 17 - 23, 2015

14 | WORLD MARKETS | financialmirror.com

More surprises as Netflix stock price soars

By Oren Laurent President, Banc De Binary

This month, Netflix announced its biggest project yet: a $30 mln satirical war film starring Brad Pitt, set to be released on the online streaming service in 2016. But is Netflix biting off more than it can chew?

The company’s stock has been trading at an all-time high this week, peeking above $640, and some analysts are questioning whether traders are setting the stage for the next technology bubble. The fundamental data however, seems to tell another story.

There should be no question that what Netflix is doing is revolutionary. The company has centred its energies around a key trend occurring in the way people consume entertainment. Since the invention of the television, viewers have traditionally subscribed to cable services attached to their home television sets. Yet with the introduction of the Internet, more people are turning online to consume the movies and TV shows they know and love most.

Netflix was the first company to really introduce the model of a subscription-based live media streaming service, and it did it on a big scale. After putting Blockbuster out of business, Netflix continued to jump from strength to strength. In the last couple of years, Netflix invested significant funds in obtaining the rights to a wide selection of films and TV series. Not only that, Netflix began producing its own hit shows, including “Orange is the New Black,” “House of Cards,” “The Unbreakable Kimmy Schmidt,” and many more.

Richard Ross, Evercore ISI’s head of technical analysis, says the stock has further room to climb.

“I think the stock has another $90 of upside,” said Ross.

“That’s why I would still be a buyer today, even with the stock at a fresh all-time high.”

Ross is not the only one bullish on Netflix these days.

Michael Yoshikami, of CNBC, attributes the company’s success to finding a niche, and beating the competition.

“The reason the company is doing so well,” writes Yoshikami, “is that it has established itself as the lead player in a new unbundled, mobile-communication space, focused on consumption of media on a variety of devices. It’s a space that Hulu had claim to, but Hulu simply did not execute.”

The latest statistics reveal that Netflix has approximately 60 mln subscribers in over 40 countries. The service’s success suggests that there is a gold rush of opportunities within this market. Viewers are watching video everywhere nowadays. On the ride to work, or while waiting for meetings, people are finding it easier and more convenient

than ever to stream videos straight from their mobile devices or laptops.

So if you’re watching the stock and not just the shows, remember to consider the public sentiment as much as the technical data.

Johnny Carson once famously said: “If it weren’t for Philo T. Farnsworth, inventor of television, we’d still be eating frozen radio dinners.”

Perhaps if it weren’t for Netflix, we would all still be sitting expectantly in front of our television sets, putting up with commercials.

Gold benefits from weak USD, WTI continues to fall Markets Report b

By Jameel Ahmad, Chief Market Analyst at FXTM

Gold exploited the continual mixed sentiment towards the Dollar on Monday, with the metal rallying around $20 to $1192. The weak USD sentiment is the reason for the Gold rally, although investors may be looking towards safehaven assets as a result of a potential Greek default at the end of the month. However, the most likely reason for the jump in Gold is the weak USD, and traders are currently showing no interest in the major currency despite an imminent FOMC decision. While the chances of the Federal Reserve raising US interest rates are extremely slim, traders might be tempted to buy USD on the outside chance that the Fed might shock the financial markets with a rate rise. It is more likely that the US central bank will finally provide the necessary clarity to investors on when they will be raising interest rates, however Gold bulls are currently discounting the potential for this and enjoying momentum.

Although weak USD sentiment is providing Gold bulls with a boost, one commodity that is failing to receive any benefit is WTI Oil. The price of WTI has dropped by close to $3 in just three days to $58.72, which could be linked to the aftermath of OPEC leaving production levels unchanged just a week ago and that oversupply concerns will continue to be a dominant theme, making buyers hesitant towards the commodity. But the recent International Energy Agency (IEA) report that although demand for the commodity is increasing, OPEC supply is now at its highest level since August 2012, may have also weighed on investor sentiment.

While we have now encountered a significant correlation between declining US oil rigs and reduced weekly inventory surpluses from the United States, increased production from OPEC will outweigh any such reduced supply. Investment in oil production throughout the Middle East is on the rise and it has become clear that OPEC is willing to bypass the depressed oil prices, because this provides an opportunity to begin regaining vital market share. For those economies reliant on commodity prices, indications that they are set to stay low will result in repeated pressure on their commodity-linked

currencies. This is something that will be noticed globally, with this stretching to the New Zealand Dollar, the Malaysia Ringgit and Russian Rouble.

Speaking of Russia, the rouble strengthen against the Dollar on Monday despite the Central Bank of Russia (CBR) cutting interest rates by 100 basis points to 11.5%.

There seems to be some surprise that the USDRUB declined to 54.33 after the interest rate cut, but the CBR cutting rates six months after erratically raising them on several occasions to prevent capital outflows is a positive move. The CBR is clearly more confident and the markets feel positive that lower rates will enable the economy to withstand any downside pressures, with this being the likely reason why the rouble advanced after the rate cut.

In Europe, all attention remained on Greece talks and it will continue to do so since we are now only two weeks away from a possible Greek default. There is no doubting that Athens is desperate for cash and needs a deal to be reached sooner rather than later, although this is unlikely to happen soon and the markets are beginning to factor Greece risks into European stocks. This can’t be said for the Euro though, which appreciated to 1.13 against the USD as a result of the weak Dollar sentiment with this

meaning traders are probably going to enjoy another opportunity to sell-on rallies with the EURUSD currently looking over extended.

Unless there is some serious widespread and lengthy Dollar weakness, there is no justification for the EURUSD to be trading at 1.13. The constant and ongoing Greece risk is enough of a reason to say the currency is vulnerable to downside pressures, however the recent dovish comments from both Angela Merkel and the ECB’s Coeure at the same time the currency pair was previously at this level provides further reason to expect a decline at some point. While the markets are rightly concentrating on Greece risks, the dovish comments from senior leaders suggests that there is some unease around Europe over the prospect of the recent Eurodollar appreciation.

For information, disclaimer and risk warning visit: www.ForexTime.com FXTM is an international forex broker. ForexTime Limited is regulated by the Cyprus Securities and Exchange Commission (CySEC), and FT Global Limited is regulated by the International Financial Services Commission (IFSC)

June 17 - 23, 2015

financialmirror.com | MARKETS | 15

Yen in the hands of foreigners Marcuard’s Market update

by GaveKal Dragonomics Having traded in a tight range since late last year, the Japanese yen made a technical breakout last week, weakening beyond JPY 125 to the dollar for the first time since 2002. While Bank of Japan Governor Haruhiko Kuroda came out to jaw-bone against more falls, higher volatility is a worry for investors who have grown used to making Japanese equity gains in US dollar terms. We would stick with Japanese stocks which continue to benefit from strong earnings and a governance-linked re-rating, but suggest the

programs. On this basis we showed in December that the yen should reach JPY 125 to the dollar by mid-2015.

Sticking with this formula, the yen should fall to JPY 140 to the dollar by the end of 2015. Whether this happens depends if the balance sheet size-currency relationship of the last seven years continues to hold.

This is where Kuroda’s comments come in: the key reason he cites for the yen not falling more is that it is already very cheap. He has a point as the yen looks to be the developed world’s most undervalued currency — both on a purchasing power parity basis and when comparing its real effective exchange rate to both its 10-year average and 10year trend.

There can be no doubt that Japanese firms are again

making bold capital spending decisions and sustaining reflation. Hence the BoJ is likely to continue talking up the yen, but in the event of further moves down, it will probably encourage a rotation toward domestic equities on the grounds that they offer value.

Putting these factors together, it is in Japan’s interest to maintain a relatively stable yen. The swing factor is likely to be the extent to which foreign investors are drawn into the country’s financial markets. In this scenario, maintaining a yen hedge is likely to cost little, while equity exposures should deliver outsize returns. Should foreign investors fail to recognize the Goldilocks situation in Japan of growth that is hot enough to sustain corporate profits, but no so strong as to spur monetary tightening, then the hedge will serve its purpose.

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

adoption of a yen-hedge—this is cheap to buy and has limited downside as there is little chance of a major yen strengthening.

The value of a currency is the price where the supply and demand of cross-border cash flows balance out: price is set according to marginal shifts in the supply and demand of such cash flows, which consist of the trade balance — surplus or deficit — and capital movements.

Since 2008, the focus has shifted from a “carry trade” dynamic — such that economies with the lower real interest rates saw capital outflow to places with higher rates — to one dictated by the relative size of central banks’ balance sheets.

With most developed economies having cut rates to zero, the swing factor has become the relative size of asset purchase

www.marcuardheritage.com

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

15390 1.557 1.738 24.233 6.6281 13.9085 1.1251 2.223 277.88 0.62473 3.0689 0.3816 18.3 7.7794 3.691 3.9893 54.2578 8.1861 0.9318 21.5

AUD CAD HKD INR JPY KRW NZD SGD

0.7732 1.2343 7.7524 64.205 123.54 1118.2 1.4333 1.3457

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

0.3770 7.6063 28690.00 3.8314 0.7080 0.3020 1508.25 0.3850 3.6406 3.7501 12.4512 3.6729

AZN KZT TRY

1.0449 186.11 2.7449

AMERICAS & PACIFIC

super-competitive in global export markets. In addition, Japan is shifting focus so that a top priority for firms is shareholder returns. The result should be that earnings growth is no longer just a function of movements in the currency as has been the historical relationship. Taken together, the combination of better-run companies and a cheap yen mean that Japanese assets are a steal. As a result, capital flows should continue to enter Japan, providing a countervailing force to the devaluation pressure from the BoJ printing JPY 80 trln a year. On this basis, we think the downside to the yen has reasonable limits.

The Japanese government also wants to see a slowdown in the yen’s depreciation as the marginal cost of further declines is starting to exceed the benefits. Official logic runs that a more predictable environment is conducive to firms

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

0.23 0.54 -0.04 0.09 -0.80

0.28 0.57 -0.01 0.10 -0.78

0.45 0.72 0.06 0.14 -0.70

0.79 1.00 0.17 0.25 -0.59

CCY/Period USD GBP EUR JPY CHF

2yr

3yr

4yr

5yr

7yr

10yr

0.96 1.01 0.16 0.14 -0.75

1.30 1.24 0.26 0.17 -0.63

1.58 1.43 0.39 0.23 -0.45

1.80 1.60 0.53 0.30 -0.32

2.12 1.84 0.81 0.45 0.05

2.40 2.08 1.13 0.67 0.37

Exchange Rates Major Cross Rates

CCY1\CCY2 USD EUR GBP CHF JPY

Opening Rates

1 USD 1 EUR 1 GBP

1 CHF

100 JPY

1.1258

1.5581

1.0734

0.8096

1.3840

0.9535

0.7191

0.6889

0.5196

0.8883 0.6418

0.7225

0.9316

1.0488

1.4515

123.52

139.06

192.46

0.7542 132.59

Weekly movement of USD

CCY\Date

19.05

26.05

02.06

09.06

16.06

CCY

Today

Last Week

USD GBP JPY CHF

1.1247

1.0881

1.0883

1.1254

1.1224

0.7185

0.7042

0.7155

0.7333

0.7189

134.78

132.45

135.47

140.04

138.55

GBP EUR JPY

1.0410

1.0300

1.0266

1.0416

1.0424

CHF

1.5581 1.1258 123.52 0.9316

1.5347 1.1254 124.44 0.9255

%Change -1.52 -0.04 -0.74 +0.66

June 17 - 23, 2015

16 | WORLD | financialmirror.com

The chimera of currency manipulation

By Jeffrey Frankel Professor of Capital Formation and Growth at Harvard University US President Barack Obama is still pressing to obtain Trade Promotion Authority and use it to conclude negotiations for the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) with the European Union. But many in the US Congress insist that provisions must be added to the agreements to prevent currency manipulation.

Let’s be clear: If the US were to insist that “strong and enforceable currency disciplines” be part of trade agreements, no deals would be concluded. Other countries would refuse – and they would be right. Linking efforts to prevent currency manipulation to trade agreements has always been a bad idea, and it still is.

True, there are times when particular countries’ currencies can be judged to be undervalued or overvalued, and there are times when their trading partners have a legitimate interest in raising the issue. But even when currency misalignment is relatively clear, trade agreements are not the right way to address it. More suitable venues for resolving exchange-rate issues include the International Monetary Fund, the G-20, the G-7, and bilateral negotiations.

For example the undervalued renminbi was successfully addressed in bilateral China-US discussions from 2004 to 2011. China allowed the currency to appreciate 35% over time. Today it is well within a normal range.

But the fact remains that it is mostly impossible to tell whether a currency is overvalued or undervalued.

Manipulation is not like the existence of a tariff or quota that can be verified by independent observers.

A necessary condition for concluding that a country is manipulating its currency is that its authorities are intervening in the foreign-exchange market. The People’s Bank of China, for example, bought a record quantity of

dollars from 2004 to 2014, thereby preventing the renminbi’s exchange rate from appreciating as fast as it otherwise would have done. But the Chinese are not doing that anymore. If anything, they have been selling dollars over the last year, keeping the renminbi’s value higher than it would otherwise be.

Moreover, there are often legitimate reasons for intervening in foreign-exchange markets. For example, under the Plaza Accord, the US joined with Japan, Germany, and other G-7 countries in 1985 to intervene cooperatively to weaken the dollar. Indeed, a majority of countries pursue either fixed exchange rates, exchange-rate targets, or managed floating, all of which by definition entail buying and selling foreign exchange to moderate or eliminate exchangerate fluctuations.

China is not a party to the TPP, but Japan is, and many congressional critics cite it as the target of their insistence that provisions to prevent currency manipulation be included in the deal. The yen has depreciated sharply over the last year, and some US economic interests, particularly the auto industry, accuse Japan of manipulation to keep the currency undervalued. But the last time the Bank of Japan intervened in the foreign exchange market was in 2011. In 2013, Japan joined other G-7 countries in agreeing to a proposal by the US Treasury to refrain from foreign-exchange intervention.

The euro, too, has depreciated significantly against the dollar over the last year, and some US trade critics want provisions to prevent currency manipulation added to the TTIP. But the European Central Bank has not intervened in the foreign-exchange market since 2000 – and that was to support the euro, not weaken it.

Critics who accuse Japan and other countries of currency manipulation presumably know that they have not been intervening in the foreign-exchange market in recent years.

They generally point instead to recent monetary loosening.

The predictable side effect of quantitative easing (QE) – that is, the purchase of domestic bonds – by the BOJ and the ECB has been the depreciation of the yen and the euro. But central banks can hardly be enjoined from easing monetary policy when domestic economic conditions warrant it, as has obviously been the case in Japan and Europe (and in the US

when the Federal Reserve embraced QE).

If monetary expansion does not merit the charge of currency manipulation, still less do other sorts of economic policies. Some have argued that even though the PBOC has stopped buying US and other foreign assets, China’s sovereign wealth funds still do, and that this, too, counts as manipulation.

But it is perfectly sensible and legitimate for China to put some of its savings abroad. (The US would become worried if China and other countries did not want to buy its assets.)

Every country makes policy decisions of many sorts every week, many of which can be expected to have an indirect effect on the exchange rate in one direction or the other. The mere fact that a particular policy might weaken the currency does not make that country a manipulator.

Finally, provisions that target other central banks could also be applied against the US. This would not be a case of misusing a tool (a frequent occurrence in trade policy when interest groups lobby for protection against foreign competition); rather, it would be a case of using the tool in precisely the intended way. This is worth bearing in mind, given that the Fed’s adoption of QE in 2008 (which it continued to pursue until last year) had the effect of weakening the dollar from 2009 to 2011, prompting the same accusations of “beggar thy neighbour policies” against the US that congressmen now level against others.

Such charges are always on shaky ground, regardless of their origin. Monetary stimulus in one country may even have a beneficial effect on the rest of the world, as its own restored income growth boosts imports from its trading partners. Whether one considers the accusations of currency manipulation against the US in 2010, its trading partners in 2015, or a future defendant, designating some trade agency to rule on them would merely cause trouble.

Jeffrey Frankel is Professor of Capital Formation and Growth at Harvard University. © Project Syndicate, 2015 - www.project-syndicate.org

Western Europe overtakes China, North America in FDIs $305bln invested into the region, 36% year-on-year increase

Foreign direct investments (FDI) into Europe hits a new record with $305 bln attracted into the region in 2014, translating to a 36% year-on-year growth, despite global growth slowdown. Last year alone, 43 European countries – including Russia and Turkey – drew 4,341 projects reaching a 10% growth over 2013 and created 185,583 jobs (+12%).

According to 808 decision-makers polled for EY’s 13th European attractiveness survey, Western Europe attracted 50% of investments worldwide in 2014, up from 45% the previous year, overtaking China as the most attractive investment destination, which saw a 6% decline in projects to 38%.

An increase in North American investment, up from 31% to 39%, placed it in second place and saw China pushed down to third place.

“The improvement in Europe’s relative attractiveness stems not just from economic stabilisation and recovery, but also from the greater uncertainty about the emerging markets and their ability to continue delivering the growth rates achieved over the past decade,” said Marc Lhermitte, EY’s Head of International Location Advisory Services.

“Lower energy prices, a weaker euro and quantitative easing have all added impetus to Europe’s investment appeal and resulted in almost 200,000 new jobs created across the continent which is a very encouraging figure as employment is one of the key drivers of economic growth,” Lhermitte added.

More than half (52%) of FDI projects and 30% of jobs created by investments into Europe were captured by the top three

destinations: the UK, Germany and France.

The UK is still the number one destination in terms of FDI projects and jobs.

Turkey is a new entrant into the top ten countries by FDI projects at the ninth position, replacing Finland. The remaining positions are taken by Spain, Belgium, Netherlands, Poland, Russia and Ireland.

The capability to restore economic growth, competitive edge, the ability to nurture new-age companies and commercialise ideas for changing the lives of millions are a few reasons why European cities attract FDI, with London at the number one position, followed by Paris and Berlin. The top 10 includes three in Germany – Berlin, Frankfurt and Munich – as well as two cities in Spain – Barcelona and Madrid.

Central and eastern Europe, Russia and Turkey account for more than half (52%) of Europe’s total jobs created by FDI – at 96,087 jobs – outpacing western Europe. Slovakia is a new entrant into the top ten countries by FDI jobs creation at the ninth position, replacing Serbia.

The top ten also include the UK, Russia, Poland, France, Germany, Romania, Spain,

Turkey and Ireland.

An economic recovery, a depreciating euro and falling energy prices have all helped revive the appeal of manufacturing in Europe. Taken together, they underpin a 20% surge in FDI manufacturing projects and jobs. Logistics operations, also blue collar, rose 27%, driven by this industrial resurgence and a boom in e-commerce.

Services had a mixed year: software projects (27% increase), financial intermediation (+37%) and back-office operations (+15%) all grow strongly while business services (24% decrease) and research and development (-1%) slide.

Although, European companies account for half (51%) of FDI projects into Europe itself and US multinationals a full quarter (25%), Chinese companies passed

Japanese companies to become the fifthlargest FDI investors into Europe in 2014.

With 210 projects, up by almost 40% from a year ago, Chinese investment into Europe shows the effect of the Chinese Government promoting outward investment as a means to acquire technology, brands and resources overseas to boost domestic high-value manufacturing and services.

The survey reveals 59% of investors are confident about Europe’s prospects in the upcoming three years, but only 32% of executives have plans to establish or expand operations in Europe over the next year, while 64% do not have any plans.

Foreign investors see bureaucracy (20%) and slow economic growth (17%) as the biggest flaws in Europe’s attractiveness, overshadowing the geopolitical uncertainty at Europe’s frontiers (11%) and big deficits (11%). European countries need to further enhance labour market flexibility, simplify regulations and foster business-friendly environments.

June 17 - 23, 2015

financialmirror.com | WORLD | 17

A Greek suicide?

By Anatole Kaletsky The good news is that a Greek default, which has become more likely after Prime Minister Alexis Tsipras’ provocative rejection of what he described as the “absurd” bailout offer by Greece’s creditors, no longer poses a serious threat to the rest of Europe. The bad news is that Tsipras does not seem to understand this.

To judge by Tsipras’s belligerence, he firmly believes that Europe needs Greece as desperately as Greece needs Europe. This is the true “absurdity” in the present negotiations, and Tsipras’ misapprehension of his bargaining power now risks catastrophe for his country, humiliation for his Syriza party, or both.

The most likely outcome is that Tsipras will eat his words and submit to the conditions set by the “troika” (the European Commission, European Central Bank, and the International Monetary Fund) before the end of June.

If not, the ECB will stop supporting the Greek banking system, and the government will run out of money to service foreign debts and, more dramatically, to pay Greek citizens their pensions and wages. Cut off from all external finance, Greece will become an economic pariah – the Argentina of Europe – and public pressure will presumably oust Syriza from power.

This outcome is all the more tragic, given that the economic analysis underlying Syriza’s demand for an easing of austerity was broadly right. Instead of seeking a face-saving compromise on softening the troika programme, Tsipras wasted six months on symbolic battles over economically irrelevant issues such as labour laws, privatisations, even the name of the troika.

This provocative behaviour lost Greece all potential allies in France and Italy. Worse still, the time wasted on political grandstanding destroyed the primary budget surplus, which was Tsipras’s trump card in the early negotiations.

Now Tsipras thinks he holds another trump card: Europe’s fear of a Greek default. But this is a delusion promoted by his finance minister, Yanis Varoufakis. A professor of game theory, Varoufakis recently boasted to the New York Times that “little Greece, in order to survive, [could] bring down the financial world,” and that his media image “as an irrational fool… is doing my work for me” by frightening other EU finance ministers.

Apparently, Varoufakis believes that his “sophisticated grasp of game theory” gives Greece a crucial advantage in “the complicated dynamics” of the negotiations. In fact, the game being played out in Europe is less like chess than like tic-tac-toe, where a draw is the normal outcome, but a wrong move means certain defeat.

The rules of this game are

much simpler than Varoufakis expected because of a momentous event that occurred in the same week as the Greek election. On January 22, the ECB took decisive action to protect the eurozone from a possible Greek default. By announcing a huge program of bond purchases, much bigger relative to the eurozone bond market than the quantitative easing implemented in the United States, Britain, or Japan, ECB President Mario Draghi erected the impenetrable firewall that had long been needed to protect the monetary Union from a Lehman-style financial meltdown.

The ECB’s newfound ability to print money, essentially without limit, to support both banks and governments has reduced Greek contagion to insignificance. That represents a profound change in Europe’s financial environment, which Greek politicians, along with many economic

analysts, still fail to understand.

Before the ECB’s decision, contagion from Greece was a genuine threat. If the Greek government defaulted or tried to abandon the euro, Greece’s banks would collapse, and Greeks who failed to get their

money out of the country would lose their savings, as occurred in Cyprus in 2013. When savers in other indebted euro countries such as Portugal and Spain observed this, they would fear similar losses and move their money to banks in Germany or Austria, as well as sell their holdings of Portuguese or Spanish government bonds.

As a result, the debtor countries’ bond prices would collapse, interest rates would soar, and banks would be threatened with collapse. If the contagion from Greece intensified, the next-weakest country, probably Portugal, would find itself unable to support its banking system or pay its debts.

In extremis, it would abandon the euro, following the Greek example.

Before January, this sequence of events was quite likely, but the ECB’s bond-buying programme put a firebreak at each point of the contagion process. If holders of Portuguese bonds are alarmed by a future Greek default, the ECB will simply increase its bond buying; with no limit to its buying power, it will easily overwhelm any selling pressure.

If savers in Portuguese banks start moving their money to Germany, the ECB will recycle these euros back to Portugal through interbank deposits. Again, there is no limit to how much money the ECB can recycle, provided Portuguese banks remain solvent – which they will, so long as the ECB continues to buy Portuguese government bonds.

In short, the ECB bond-buying programme has transformed the ECB from a passive observer of the euro crisis, paralysed by the outdated legalistic constraints of the Maastricht Treaty, into a proper lender of last resort. With powers to monetize government debts similar to those exercised by the US Federal Reserve, the Bank of Japan, and the Bank of England, the ECB can now guarantee the eurozone against financial contagion.

Unfortunately for Greece, this has been lost on the Tsipras government. Greek politicians who still see the threat of financial contagion as their trump card should note the coincidence of the Greek election and the ECB’s bond-buying program and draw the obvious conclusion. The ECB’s new policy was designed to protect the euro from the consequences of a Greek exit or default.

The latest Greek negotiating strategy is to demand a ransom to desist threatening suicide. Such blackmail might work for a suicide bomber. But Greece is just holding a gun to its own head – and Europe does not need to care very much if it pulls the trigger.

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

June 17 - 23, 2015

18 | WORLD | financialmirror.com

The right food fight

By Kenneth Rogoff To what extent should governments regulate or tax addictive behaviour? This question has long framed public debate about alcohol, tobacco, gambling, and other goods and services in many countries worldwide. And now, in the United States – arguably the mother of global consumer culture – the debate has turned toward the fight against the epidemic of childhood obesity.

It is ironic that in a world where childhood malnutrition plagues many developing countries, childhood obesity has become one of the leading health scourges in advanced economies. The World Bank estimates that over a third of all children in Indonesia, for example, suffer from stunted growth, confronting them with the risk of lifetime effects on fitness and cognitive development. Yet, the plight of malnourished children in the developing world does not make obesity in the advanced countries any less of a problem.

Indeed, though perhaps not on a par with global warming and looming water

shortages, obesity – and especially childhood obesity – nonetheless is on the short list of major public-health challenges facing advanced countries in the twenty-first century, and it is rapidly affecting many emerging-market economies as well. Yet solving it poses much more difficult challenges than the kind of successful public-health interventions of the last century, including near-universal vaccination, fluoridation of drinking water, and motor-vehicle safety rules.

The question is whether it is realistic to hope for success unless the government resorts to far more blunt instruments than it currently seems prepared to wield. Given the huge impact of obesity on health-care costs, life expectancy, and quality of life, it is a topic that merits urgent attention.

The US leads the world in obesity, and is at the cutting edge of the debate. Almost everyone agrees that the first line of defense ought to be better consumer education. First Lady Michelle Obama’s “Let’s Move” educational campaign aspires to eliminate childhood obesity in a generation, though its impact so far remains unclear. Other efforts include appeals by celebrities like the chef Jamie Oliver and attempts to use peer-based learning, such as the Sesame Street-inspired platform Kickin’ Nutrition (full disclosure: the creator is my wife).

Yet, although education is essential to fight obesity, it is far from clear whether it will be enough in a food environment dominated by large corporations with deep pockets and every incentive to cultivate excessive consumption.

Commercial television programmes aimed at children are replete with advertising for processed foods of dubious value to human health. And, for every celebrity who donates time to fighting obesity, there are a dozen who accept large payments to hawk products, such as ultrasugary drinks, that are arguably the tobacco of our generation. It is hard for non-profits to compete with the production values embodied in Beyoncé’s Pepsi commercial or Taylor Swift’s Diet Coke commercial.

The causes of obesity are complex, and the science of understanding human behaviour is embryonic; but it is not hyperbole to call the problem an epidemic.

According to the Centers for Disease Control and Prevention, roughly 18% of children aged 6-11 in the US are not just overweight, but obese.

The risks posed by this epidemic are manifold, but the main one is that childhood obesity begets adult obesity, with significantly increased risks of diabetes and heart disease. Indeed, experts estimate that more than 18% of all adults in the advanced economies are obese. Even more stunning

are estimates that roughly 9% of all Americans – and a similar percentage of adults worldwide – have diabetes.

Yet politicians push back on Big Food at their peril. When the popular former mayor of New York City, Michael Bloomberg, attempted to ban large sugary drinks, public opinion – not to mention the New York State Court of Appeals – rejected the effort, despite support from medical experts. Many commentators, even those sympathetic to Bloomberg’s goal, argued that it was wrong to try to legislate consumer behaviour so bluntly. Yet, when one considers other successful efforts to improve public health over the last five decades – for example, smoking bans, seat-belt laws, and speed limits – one finds that legislation typically supplemented education.

A less intrusive approach to influencing food choices might be to institute a retail tax on all processed foods – not just sugary drinks – and an offsetting subsidy on nonprocessed foods. In the long run, low-income families (which suffer the most from obesity) would be the greatest beneficiaries. And, in the short term, any income effects could be offset by increased transfers. Together with the medical researchers David Ludwig and Dariush Mozaffarian, I have proposed an outline of such an approach.

The right place to start to address it is by creating a better balance between education and commercial disinformation. But food is so addictive, and the environment so skewed toward unhealthy outcomes, that it is time to think about broader government intervention. That should certainly include vastly enhanced expenditures on public education; but I suspect that a long-term solution will have to involve more direct regulation, and it is not too soon to start discussing the modalities.

Kenneth Rogoff, a former chief economist of the IMF, is Professor of Economics and Public Policy at Harvard University. © Project Syndicate, 2015. www.project-syndicate.org

US and UK the least concerned about climate change A new YouGov survey spanning four continents and 15 countries has found that the United States and Britain are the main barriers to tacking climate change.

Countries from across the world are due to meet in Paris in December to formulate a major international agreement on curbing greenhouse gas emissions, the most significant of its kind in history. However, YouGov has found that the US and the UK trail other countries when it comes to general concerns about climate change and strategies to address the problem. 60% of people in China favour a leadership role for their country in reducing global emissions, compared to 44% in the United States and 41% in Britain.

Interestingly, people in the US and UK care the least about climate change; 32% of Americans stated that they think climate change “is not a serious problem”, the highest level of all countries polled.

The UK was slightly behind with 26%. By contrast, just 4% of Chinese respondents think climate change is “not a serious problem”. (Source: Statista)

June 17 - 23, 2015

financialmirror.com | WORLD | 19

G-7 embraces decarbonisation (at last!)

Last week’s G-7 meeting at Schloss Elmau in the Bavarian Alps marked a major breakthrough in climate-change policy.

The seven largest high-income economies (the United States, Japan, Germany, the United Kingdom, France, Italy, and Canada) made the revolutionary decision to decarbonise their economies during this century.

For the first time in history, the major rich economies have agreed on the need to end their dependence on fossil fuels. German Chancellor Angela Merkel, US President Barack Obama, and the other G-7 leaders have risen to the occasion and deserve strong global approbation.

The historic breakthrough is recorded in the final G-7 communiqué. First, the G-7 countries underscored the importance of holding global warming to below 2 Celsius (3.6 Fahrenheit). This means that the Earth’s average temperature should be kept within 2C of the average temperature that prevailed before the start of the Industrial Revolution (roughly before 1800). Yet the global warming to date is already around 0.9C – nearly half way to the upper limit.

Then, the G-7 leaders did something unprecedented. They acknowledged that in order to hold global warming below the 2C limit, the world’s economies must end their dependence on fossil fuels (coal, oil, and natural gas).

Currently, around 80% of worldwide primary energy comes from fossil fuels, the combustion of which emits around 34 billion tons of carbon dioxide. This level of emissions, if continued in future decades, would push temperatures far above the 2C upper limit. Indeed, with rising worldwide energy use, continued dependence on fossil fuels could raise global temperatures by 4-6C, leading to potentially catastrophic consequences for global food production, higher sea levels, mega-droughts, major floods, devastating heat waves, and extreme storms.

The science is clearer than many politicians would like.

For humanity to have a “likely” chance (at least two-thirds) of staying below the 2C threshold, a small reduction in CO2 emissions will not be enough. In fact, emissions will have to fall to zero later this century to stop any further rise in the

By Jeffrey D. Sachs atmospheric concentration of CO2. Simply put, the world economy must be “decarbonised.”

The breakthrough at the G-7 summit was that the seven governments recognised this, declaring that the 2°C limit requires “decarbonisation of the global economy over the course of this century.” The G-7 finally stated clearly what scientists have been urging for years: humanity must not merely reduce, but must end, CO2 emissions from fossil fuels this century.

Decarbonisation is feasible, though by no means easy. It depends on taking three key steps.

First, we must become more energy efficient, for example, through modern building designs that reduce the needs for heating, cooling, and energy-intensive ventilation. Second, we must produce electricity with wind, solar, nuclear, hydroelectric, geothermal, and other non-carbon energy sources, or by capturing and storing the CO2 produced by fossil fuels (a process known as CCS). Third, we must switch from fossil fuels to electricity (or hydrogen produced by zerocarbon electricity) or in some cases (such as aviation) to advanced biofuels.

The hard part is the practical, large-scale implementation of broad concepts in a way that does not disrupt our energydependent world economy and does not cost a fortune to achieve. But as we tally these costs, we need to keep in mind that runaway climate change would impose the greatest costs of all.

To succeed, we will need several decades to convert power stations, infrastructure, and building stock to low-carbon technologies, and we will need to upgrade the low-carbon technologies themselves, whether PV solar cells, or batteries for energy storage, or CCS for safely storing CO2, or nuclear

power plants that win the public’s confidence. The G-7, notably, committed to “developing and deploying innovative technologies striving for a transformation of the energy sectors by 2050” and invited “all countries to join us in this endeavor.”

This global process of decarbonisation will be long and complex, and it will require detailed roadmaps with periodic redesigns as technologies evolve. Here, too, the G-7 made a historic breakthrough by declaring its readiness to “develop long-term national low-carbon strategies” to get to a decarbonised future. The United Nations Sustainable Development Solutions Network (SDSN), which I direct on behalf of UN Secretary-General Ban Ki-moon, has been working on such low-carbon strategies for the main emitting countries in a project called the Deep Decarbonisation Pathways Project.

Of course, the G-7 declaration is only a declaration, and it does not yet include the commitments of many of the world’s largest CO2-emitting countries, including China, India, and Russia. Yet it is a crucial step that will greatly encourage other countries to participate in deep decarbonisation as well, especially in view of the G-7’s commitment to speed the development of improved lowcarbon technologies.

The outcome of the G-7’s meeting augurs well for a strong global agreement on climate change when all 193 UN member states meet in Paris in December to hammer out a truly global climate agreement. The G-7 countries have not yet ensured a successful outcome at the Paris meeting, but they have taken a big step toward that goal.

Jeffrey D. Sachs is Professor of Sustainable Development, Professor of Health Policy and Management, and Director of the Earth Institute at Columbia University. He is also Special Adviser to the United Nations Secretary-General on the Millennium Development Goals. © Project Syndicate, 2015 - www.project-syndicate.org

The climate categorical imperative Nowadays, people are too often forced to choose between doing what is morally right and doing what is economically beneficial.

Indeed, their options sometimes appear to be mutually exclusive, making the decision of which path to take exceedingly challenging.

Sometimes, however, moral rectitude and economic interest merge, presenting an opportunity that must not be missed. That is the case – from the perspectives of this Archbishop and former finance minister – with the world’s response to climate change.

solution. The most important tool the world has for doing the right thing – and reaping vast economic benefits – is a universal climate-change agreement. That is why world leaders must take the opportunity presented by the United Nations Climate Change Conference in Paris this December to develop a single global framework for action.

In fact, world leaders already pledged to do so. The UN Climate Change Conference in 2011 – initiated and hosted by South Africa – produced an agreement to adopt a

By Desmond Tutu universal legal agreement on and Trevor Manuel climate change as soon as possible, no later than this year.

Important progress has eliminate – future generations’ chances to been made since the Durban conference. achieve their development goals. Making Last month, more than 30 countries – every effort to minimise climate change including the European Union’s members, Gabon, Mexico, Norway, Russia, Switzerland, today is, quite simply, the right thing to do.

Fortunately, the economic benefits of and the United States – submitted their postaddressing climate change are also clear. 2020 plans to reduce greenhouse-gas After all, climate change carries significant emissions. In the coming weeks and months, economic costs – for example, those this momentum will continue to build, as associated with more frequent and extreme other countries – including, it is expected, major emerging economies like Brazil, weather events.

Moreover, building a “green” economy, China, and India – submit their based on continued technological commitments as well.

But if the Paris meeting is to be successful innovation, is the smartest and most efficient way to create new engines of – in terms of both fulfilling the moral sustainable growth and job creation for the imperative and capturing the economic benefits of confronting climate change – next generation.

Action at the individual, company, every participating country must submit its municipal, and national levels is crucial. But national contributions for the period the fact is that climate change is a global beginning in 2020 as soon as possible. problem – and thus requires a global Furthermore, the final agreement must The moral imperative is indisputable, as the effects of climate change – including extreme weather, temperature changes, and rising sea levels – are felt most keenly by the global poor, who have also benefited the least from the economic activities that cause it.

Moreover, climate change could accelerate poverty and inequality in the future, meaning that, unless we address it in a timely manner, it will diminish – or even

include an effective and ambitious plan for de-carbonisation over the next 50 years.

The fact is that short- and medium-term commitments alone are simply inadequate to fulfill the pledge, made by the world’s governments in 2009 and reiterated in 2010, to cap the rise in global temperatures at 2 Celsius relative to the pre-industrial era. It is crucial to create – and adhere to – a progressive long-term emissions-reduction strategy that sends a clear signal to capital markets that governments are serious about confronting climate change.

Such a strategy could include, for example, incentives for investment in lowcarbon solutions. With some $90 trln set to be invested in infrastructure globally over the next 15 years, the impact of such an approach could be considerable – if not decisive.

The moral and economic imperatives to act on climate change could not be stronger.

Although the road ahead will be difficult, with new and unexpected challenges arising along the way, we can find inspiration in Nelson Mandela’s famous dictum: “It always seems impossible until it’s done.” We face an unprecedented opportunity to achieve a more sustainable, prosperous, and socially just future. Creating that future must start now.

Desmond Tutu, a Nobel Peace Prize laureate, is Archbishop Emeritus and former Archbishop of Cape Town. Trevor Manuel was South Africa’s finance minister from 1996 to 2009. © Project Syndicate, 2015. www.project-syndicate.org

June 17 - 23, 2015

20 | BACK PAGE | financialmirror.com

A rule of law for sovereign debt

By Martin Gusman and Joseph E. Stiglitz Governments sometimes need to restructure their debts.

Otherwise, a country’s economic and political stability may be threatened. But, in the absence of an international rule of law for resolving sovereign defaults, the world pays a higher price than it should for such restructurings. The result is a poorly functioning sovereign-debt market, marked by unnecessary strife and costly delays in addressing problems when they arise.

We are reminded of this time and again. In Argentina, the authorities’ battles with a small number of “investors” (socalled vulture funds) jeopardised an entire debt restructuring agreed to – voluntarily – by an overwhelming majority of the country’s creditors. In Greece, most of the “rescue” funds in the temporary “assistance” programs are allocated for payments to existing creditors, while the country is forced into austerity policies that have contributed mightily to a 25% decline in GDP and have left its population worse off. In Ukraine, the potential political ramifications of sovereigndebt distress are enormous.

So the question of how to manage sovereign-debt restructuring – to reduce debt to levels that are sustainable – is more pressing than ever. The current system puts excessive faith in the “virtues” of markets. Disputes are generally resolved not on the basis of rules that ensure fair resolution, but by bargaining among unequals, with the rich and powerful usually imposing their will on others. The resulting outcomes are generally not only inequitable, but also inefficient.

Those who claim that the system works well frame cases like Argentina as exceptions. Most of the time, they claim, the system does a good job. What they mean, of course, is that weak countries usually knuckle under. But at what cost to their citizens? How well do the restructurings work? Has the country been put on a sustainable debt path? Too often, because the defenders of the status quo do not ask these questions, one debt crisis is followed by another.

Greece’s debt restructuring in 2012 is a case in point.

The country played according to the “rules” of financial markets and managed to finalise the restructuring rapidly; but the agreement was a bad one and did not help the economy recover. Three years later, Greece is in desperate need of a new restructuring.

Distressed debtors need a fresh start. Excessive penalties lead to negative-sum games, in which the debtor cannot recover and creditors do not benefit from the larger repayment capacity that recovery would entail.

The absence of a rule of law for debt restructuring delays fresh starts and can lead to chaos. That is why no government leaves it to market forces to restructure domestic debts. All have concluded that “contractual remedies” simply do not suffice. Instead, they enact bankruptcy laws to provide the ground rules for creditordebtor bargaining, thereby promoting efficiency and fairness.

Sovereign-debt restructurings are even more complicated than domestic bankruptcy, plagued as they are by problems of multiple jurisdictions, implicit as well as explicit claimants, and ill-defined assets upon which claimants can draw. That is why we find the claim by some – including the US Treasury – that there is no need for an international rule of law so incredible.

To be sure, it may not be possible to establish a full international bankruptcy code; but a consensus could be reached on many issues. For example, a new framework should include clauses providing for stays of litigation while the restructuring is being carried out, thus limiting the scope for disruptive behaviour by vulture funds.

It should also contain provisions for lending into arrears: lenders willing to provide credit to a country going through a restructuring would receive priority treatment. Such lenders would thus have an incentive to provide fresh resources to countries when they need them the most.

A “soft law” framework containing these features, implemented through an oversight commission that acted as a mediator and supervisor of the restructuring process, could resolve some of today’s inefficiencies and inequities. But, if the framework is to be consensual, its implementation should not be based at an institution that is too closely associated with one side of the market or the other.

This means that regulation of sovereign-debt restructuring cannot be based at the International Monetary

Fund, which is too closely affiliated with creditors (and is a creditor itself). To minimise the potential for conflicts of interest, the framework could be implemented by the United Nations, a more representative institution that is taking the lead on the matter, or by a new global institution, as already suggested in the 2009 Stiglitz Report on reforming the international monetary and financial system.

The crisis in Europe is just the latest example of the high costs – for creditors and debtors alike – entailed by the absence of an international rule of law for resolving sovereign-debt crises. Such crises will continue to occur. If globalisation is to work for all countries, the rules of sovereign lending must change. The modest reforms we propose are the right place to start.

Joseph E. Stiglitz, a Nobel laureate in economics, is University Professor at Columbia University. His most recent book, coauthored with Bruce Greenwald, is Creating a Learning Society: A New Approach to Growth, Development, and Social Progress. Martin Guzman, a postdoctoral research fellow at the Department of Economics and Finance at Columbia University Business School, is a co-chair of the Columbia Initiative for Policy Dialogue Taskforce on Debt Restructuring and Sovereign Bankruptcy. © Project Syndicate, 2015 - www.project-syndicate.org

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