Financial Mirror 2015 08 05

FinancialMirror JEAN PISANI-FERRY

KENNETH ROGOFF

Issue No. 1145 €1.00 August 5 - 11, 2015

Can the Euro be repaired? PAGE 16

A new deal for debt overhangs PAGE 9

Reinventing Mr. Tsipras MOHAMED EL-ERIAN - “IN DEFENSE OF VAROUFAKIS” - PAGES 10-11

Holiday homes and income tax - a lethal combination?

SEE PAGE 13

August 5-11, 2015

2 | OPINION | financialmirror.com

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

Maritime academy a first step, but more is needed

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The private sector initiative to set up a dedicated Maritime Academy is the first step in the right direction to place Cyprus on the international shipping map once again.

The fact that the University of Nicosia/Intercollege has joined forces with regional institutions, at a time when the eastern Mediterranean is becoming ever more popular to international trade traffic, also heralds a new era for the maritime education sector, that has been limping ever since past governments foolishly shut down the once-reputable marine engineering school at the HTI. Since then, universities and colleges have developed individual courses, but these were designed merely to attract student enrolment and boost revenues, and not aimed at enhancing our shipping sector.

Instead of breeding engineers, captains and other professional seamen, with the Cyprusbased shipping industry begging for local hires, Cyprus followed the directionless path of manufacturing lawyers, accountants, teachers and doctors, with the aim of securing jobs in the services sector. Ironically, despite such as plethora of human resources, Cyprus is

gradually losing its grip on the service sector and becoming uncompetitive.

Instead of looking at our short-term needs, we should have been investing in long-term wants, chief among them to support the sectors of energy, shipping and transport, where we will soon discover that there are no local talents.

There is no education strategy on this island, as opposed to other nations where industry and academics get together to determine the future direction of their schools and universities and develop new courses to meet the future needs of those economies.

If we want the maritime sector to boom in the future, then we need to invest in education. The same applies to other sectors where Cyprus has or can have a niche position.

But in order to do that, it is high time our state and private academics put aside their personal ambitions, rivalries and their bloated egos and work towards a concerted effort to create a unified platform whereby all universities, private or state, complement each other, but produce the “best of the best” in shipping.

The maritime sector is a global industry and the relevant schools can become world leaders.

If only we want to.

THE FINANCIAL MIRROR THIS WEEK 10 YEARS AGO

Push for airports deal, airline rip-offs The government will go ahead with the deal with the Hermes Consortium to push for the new airports to be ready by 2009, while separately, travelers were being ripped off by a CYP 12.50 surcharge imposed by airlines, according to the Financial Mirror issue 627, on July 6, 2005.

Airports deal: Communications and Works Minister Haris Thrasou said the government will

20 YEARS AGO

Cyta to open up Internet, Major wins in UK Cyta has bowed under pressure and announced it will allow Internet access commercially, as only the University of Cyprus is currently linked to the world wide web, according to the Cyprus Financial Mirror issue 118, on July 5, 1995.

Cyta on Net: Cyta said it will allow Cypriots to have access to the Internet by the middle of August, charging about 3.1c a minute and aiming to become a leading access provider as other also join the market. The aim is to provide the service through

proceed to sign the operator deal for the two airports with Hermes, headed by the Shacolas Group, despite objections from Alterra and J&P. Thrasou said that the new tender process could take four years, with four more to build them, setting the new airports back to 2013. The current cost of the project is set at CYP 500 mln.

Travel rip-off: Airlines are overcharging on Greek fares, with hundreds of thousands of passengers paying CYP 12.50 in hidden charges, according to Akis Kelepeshis of the travel agents’ association ACTA. He said while airport tax at Larnaca is CYP 9 per

person and 20.50 at Spata (Athens), airlines here are charging CYP 41.50 per person.

FDI tops EUR 360 mln: Foreign direct investments in the past five years has totalled EUR 360 mln, with the international business sector contributing 6% to GDP nad employing 3,100 locals.

International Business Association (CIBA) President Chris Koufaris also said that the Ministry of Commerce is planning to create a one-stop-shop to help non-EU skilled workers secure work permits .

Arab Bank dispute: The labour dispute between Arab Bank and the workers union ETYK over the redundancy of 68 employees will go to Ministry of Labour arbitration. The bank has already shut a number of branches citing a severe drop in business.

Cyta’s Public Switched Telephone Network (PSTN) and not the Cytapac platform.

Andreas Eleftheriades, Director of the Cyprus College, was critical of the delay and said that he had spearheaded a campaign since 1987 to connect Cyprus to the Internet.

Major wins: UK Prime Minister John Major won the Conservative leadership race outright, challenged only former Welsh Secretary John Redwood.

Sanctions busting: The Central Bank responded to allegations of harbouring financing despite the

controls imposed on former Yugoslavia, saying that only one of 138 allegations against sanctions busting was substantiated. Also, regarding the influx of funds from Russia, the Central Bank said the total of all foreign deposits was $3.5 bln.

Limassol-Paphos: The construction of the new Limassol-Paphos highway is expected to be completed by 1999. The project will include a 900m tunnel, while Britain is contributing CYP 7.5 mln towards the cost as it will alleviate pressure from traffic going through the base in Episkopi.

Low-cost loans: The state-owned Housing Finance Corporation said that it lowered interest rates by 0.5% and raised the cap for low-income household loans to CYP 40,000 for the purchase of a first home.

So far, CYP 13 mln had been issued in housing loans.

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August 5-11, 2015

financialmirror.com | CYPRUS | 3

Cyprus aims to become EU-Iran bridge Two landmark events this week have paved the way to boost trade and cooperation with Iran, while Cyprus officials have also stated that the island could become a bridge to the EU for Iran.

The Cyprus-Iranian Business Association was established on Tuesday with 75 enterprises signed up as members, the same day as an agreement on the Avoidance of Double Taxation was signed in Nicosia, the 58th so far for Cyprus.

Addressing an event Cyprus Chamber of Commerce and Industry (KEVE), Finance Minister Harris Georgiades said that the new relationship with Iran “is promising and important”.

He said that “the timing for this step could not have been better”, as the Iran nuclear agreement was reached three weeks ago, creating the conditions to rebuild trust between Iran and the international community.

Georgiades said that Cyprus is recovering from its recent economic difficulties and “as such, is well suited to act as a bridge between Iran and the European and global markets”.

Iran’s deputy Finance Minister Ali Asgari, who signed the agreement, said that “the potential economic capacities of Iran in different sectors forms a suitable platform for the development of commercial relations with countries of the world” and could create suitable opportunities for the development of commercial relationships between the two countries.

Cyprus-Iran Business Association Chairman Marios Gregoriades, a director at KPMG, said that the aim is

primarily to promote trade and business relations between the two countries by bringing Cypriot and Iranian businessmen closer, communicating with the ministries and the chambers of the two countries.

Former KEVE President Manthos Mavrommatis noted that “the lifting of restrictive measures opens up the large Iranian market and creates an abundance of opportunities in the areas of trade, business cooperation and investments”.

He said that there are “huge prospects for cooperation between Cyprus and Iran and great margins for improvement of the existing trade that amounted to just 3.5 mln euros in 2014”.

Association Deputy Chairman Yiannos Athiainitis said that “this historic agreement opens a channel for investments from Iran to Cyprus”.

He noted that Iran has the largest tanker fleet in the world and that the Cyprus flag could benefit from this fleet. He also said that the agreement opens up new horizons for Cypriot companies in the emerging market of Iran.

“The agreement on Iran’s nuclear programme and the gradual lifting of the sanctions surely increase these prospects further, as the country’s revenue is expected to increase from the exports of oil and natural gas,” Association Chairman Gregoriades said.

Apart from investments, Gregoriades believes that prospects form increased trade ties include the involvement of Iranian companies in the field of natural gas and air transport.

Moreover, he said there are prospects for the operation of Cypriot companies in Iran, for the provision of technical knowledge in fields of desalination and pharmaceuticals.

Earlier, Iran’s Ambassador to Cyprus Dr. Reza Zabib, had said that “the Agreement for the Prevention of Double Taxation will pave the way for business to strengthen economic ties between the two countries”.

Dr. Zabib recalled that the two countries have already signed an Agreement on mutual Support of Investment that is being implemented today and that the Chambers of Commerce of Iran and Cyprus have signed a Memorandum of Understanding.

He recalled that Energy and Trade Minister George Lakkotrypis visited Iran four months ago and agreed with the Iranian Minister of Oil to a new cooperation.

August 5-11, 2015

4 | CYPRUS | financialmirror.com

ERC sees growth at 1.1% in 2015 and 2016 The University of Cyprus Economic Research Centre (ERC) said it expects the economy to grow 1.1% both this year and the next.

“Economic activity is forecast to pick up further in the following quarters of 2015 and in 2016. Real GDP growth for 2015 is projected at 1.1%. Real output is estimated to expand (y-o-y) by 0.5% in the second quarter of 2015 and by about 1.8% in the second half of the year. The projected growth rates for the second half of 2015 reflect the low levels of GDP reached during the corresponding period in 2014,” the ERC said in its monthly Economic Outlook for August.

“Economic recovery is projected to be rather slow as real GDP growth in 2016 is also forecast at 1.1%,” the Centre added.

According to ERC figures, the Consumer Price Index inflation is projected at -1.7% and 0.7% for 2015 and 2016, respectively. “The negative inflation projection for 2015 is driven by the lower international oil prices combined with sluggish domestic demand. Low inflation is expected in 2016 as domestic demand and oil prices are anticipated to rise”.

The turnaround in domestic real economic activity and employment in the first quarter of 2015 which was followed by further improvements in a number of domestic leading indicators in the second quarter, is one of the main drivers of the projected recovery, cited by the ERC.

€100 mln T-bills yields 2.08% The Finance Ministry’s Public Debt Management Office issued 13-week treasury bills for the amount of EUR 100 mln, which was oversubscribed almost 1.5 times.

During Monday’s auction, tenders for a total amount of EUR 143.7 mln were submitted, out of which EUR 100 mln total nominal value were accepted with a weighted average yield of 2.08%, the Office said.

The accepted yields ranged between 2.00% and 2.15%.

UCY’s FOSS to study future of electricity grid The FOSS Research Centre for Sustainable Energy of the University of Cyprus has been contracted by the Joint Research Centre (JRC) of the European Commission to undertake a study on the future electricity grid of Cyprus.

The University said in a statement that the study involves technical aspects related to the future power grid and the electricity market in Cyprus based on the objectives set by Europe for 2030.

The JRC was requested to conduct a study on the power grid system and the electricity market of Cyprus in order to shape a national strategy which meets the targets set for 2030. In addition to the EU strategy for 2030, this study will take into consideration the results of the study entitled “Renewable Energy Roadmap for the Republic of Cyprus”, conducted by the International Renewable Energy Agency (IRENA), on behalf of the Cypriot government.

The JRC issued a European tender and FOSS was selected as the most qualified partner to prepare the above very demanding study.

This latest JRC-FOSS partnership will support Cyprus on technical issues related to the energy grid and the electricity market and will be a significant contribution to Cyprus, the press release ends.

Major projects by year end Transport Minister Marios Demetriades said that a significant number of development projects will be awarded by the end of the year, which will in turn lead to economic growth. In statements in Paphos, Demetriades recalled that the projects announced by President Nicos Anastasiades are over half a billion euros while in Paphos alone they are worth EUR 60 mln.

As regards tourist traffic and flights to and from Cyprus, Demetriades said that at present the number of flights is up 3.5% despite a drop in tourist arrivals from Russia. The increase, he estimated, will continue until the end of the year. In Paphos, flights have increased by 20%, he said.

Referring to the efforts underway by the Ministry of Energy, Commerce, Industry and Tourism, he expressed the hope that hotels will remain open during the winter season.

It added that the expansion of output in the EU and the euro area in the first quarter of 2015 creates a less adverse external environment for Cyprus.

In addition, lower international oil prices, in spite of the depreciation of the euro against the US dollar, as well as low inflation in the EU, leads to higher real incomes and stronger external demand.

According to the ERC, the faster weakening of the euro against the British pound in the first half of 2015 is expected to boost domestic activity in the following quarters through tourism services, whereas the slowdown of the Russian rouble depreciation against the euro in the second quarter has created less favourable conditions for foreign demand in Cyprus.

Recent reductions in domestic lending interest rates amid conditions of weak demand and elevated unemployment are found to facilitate economic recovery, whereas the return of domestic economic confidence to pre-crisis levels is estimated to boost growth in subsequent quarters, the Centre noted.

The ERC noted that downside risks to the growth projections are associated with the high level of nonperforming loans, ineffective implementation of the new insolvency and foreclosure legal framework and bottlenecks in the introduction of legislation for the sale of loans and lack

of progress with structural reforms agreed in the economic adjustment programme (e.g. public administration, privatisations, health system).

“The recent economic developments in Greece, which have worsened the outlook for the Greek economy, could have a direct negative impact on the domestic economy, but could also cause adverse effects on Cyprus’s sovereign bond yields through heightened market uncertainty,” the ERC said, adding that “the recession in the Russian economy and rouble depreciation against the euro are likely to affect the outlook especially for 2015”.

It said that “upside risks to the outlook relate to stronger growth in the euro area, solid growth in the UK combined with the weakening of the euro against the British pound and a better than expected economic performance in Russia.

Moreover, the negative impact of developments in Greece on the Cypriot economy could be short-lived as the connection between the financial systems of the two countries was limited in 2013”.

Progress with the implementation of the adjustment programme in Cyprus provides access to the ECB’s monetary stimulus programme (expanded asset purchase programme) safeguarding the liquidity of the domestic banking system, and decouples markets’ sovereign risk assessments for Cyprus from those for Greece, the ERC noted.

Heat wave pushes up electricity demand, cost to drop for businesses Electricity demand on Tuesday was at a similar level to Monday’s, which was the highest of the year at 1020 MW, according to the Director of the Transmission System Operator (TSO) Christos Christodoulides who said that overall production capacity is at around 1180 MW. “There is sufficient supply to cover demand, provided that no major faults will affect the electricity system and in particular the production units,” the TSO Director said.

The weather office noted that temperatures reached 42 degrees Celsius inland and around 32 degrees Celsius on the highest mountains, with the warning level remaining at ‘yellow’, meaning potentially dangerous.

At the same time, the water authorities said that supply remained at satisfactory levels, with reservoirs half-full at 50% of their capacity, compared to 38% this time last year.

Monday’s electricity demand reached around 965MW higher than last year’s level of 910MW. “There is sufficient power supply, provided we will not have any unexpected damage that could affect power plants,” the TSO’s Christodoulides said.

Meanwhile, the monthly cost of electricity for consumers – industrial and commercial – will be reduced by 0.57% in August compared to the bills in July.

EAC spokeswoman Christina Papadopoulou said that the drop of the electricity cost is due to the recent decrease in crude oil prices.

Despite the decrease for businesses, household consumers will see an increase of 2.54% in their two-monthly bills for August due to the green tax which is paid for the reusable

energy sources fund and due to the previous increase of fuel prices by 1.76%.

The reduction of electricity cost by 0.57% for the households will be included in the next bill.

Guaranteed Minimum Income (GMI) welfare recipients will be included in the electricity authority’s special tariff category applied for various vulnerable groups.

The EAC spokeswoman said that to date, some 15,000 domestic consumers benefited from the special tariff, which provides for a 20% discount. This category includes around 7,000 GMI recipients.

Tourism revenue down 3.1% Tourism revenue fell by 3.1% in May according to statistical service Cystat, despite arrivals having increased by 4.9%.

On the basis of the results of the monthly Passenger Survey, revenue from tourism reached EUR 217.1 mln in May compared to EUR 224.1 mln in the same month last year, recording a decrease of 3.1%.

For the January-May period, revenue from tourism is estimated at EUR 471.9 mln compared to EUR 475.5 mln in the corresponding period of 2014, a drop of 0.8%.

The Cystat data showed that the number of arrivals from Russia in May reached 71,137 compared to 88,426 in May 2014 and the average expenditure per person was

EUR 726 compared to EUR 874 last year.

On the other hand, arrivals from the U.K. were significantly up, at 124,189 in May compared to 106,063 in the same month of last year. Expenditure per person was marginally up at EUR 756 compared to EUR 750 last year.

Arrivals from Germany were also on the rise, at 13,297 this May compared to 8,564 last May. However, average spending per person saw a significant drop to EUR 740 from EUR 902 last year.

Arrivals from Greece in May were also up, at 13,120 compared to 9,038 in May 2014. Expenditure per head came to EUR 394 instead of EUR 411 last year.

August 5-11, 2015

financialmirror.com | CYPRUS | 5

Banks get green light for sale of distressed loans The Cabinet has approved a bill now headed to parliament that will safeguard the rights of borrowers, but also allow banks to sell their portfolios of distressed loans of up to EUR 1 mln to high-risk investors.

The legislation was submitted to the House on Friday.

This had been one of the final outstanding prior actions as set out in the memorandum with the Troika of international lenders, following the delayed approval by the House of the framework for insolvencies and foreclosures.

The bill ensures that the rights of the borrowers and mortgage holders of nonperforming loans, presently accounting for more than 50% of the banking system’s loanbook, will be transferred to the new investors.

The bill, drafted by the Central bank of Cyprus and approved by the Legal Services,

was submitted by Finance Minister Haris Georghiades who hopes deputies will study it immediately and approve a final version by the end of September.

Loans of up to EUR 1 mln representing about 96% of all loans in Cyprus and will be able to be sold to portfolio investors that must Cyprus or EU-registered and approved financial entities.

This way, banks will be able to rid themselves of distressed loans and avoid creating a “bad bank” to undertake or guarantee this responsibility. Banks have already started calling in long-overdue loans, some of which are not serviceable as the collateral is worth far less than the loan itself.

On the other hand, borrowers were reluctant to surrender assets, which had sent the bank’s NPLs to soaring levels, forcing them to constant revise their provisions upwards.

Unemployment up in June The rate of unemployment rose in June to 16.2%, from 16.0% the previous month, but remained unchanged from a year earlier.

According to Eurostat, the euro area seasonally-adjusted unemployment rate was 11.1% in June, stable compared to May, and down from 11.6% in June 2014. The EU28 unemployment rate was 9.6% in June, also unchanged in May and down from 10.2% in June last year.

Among the EU member states, the lowest unemployment rates in June were in

Germany (4.7%) and the Czech Republic (4.9%), and the highest in Greece (25.6% in April) and Spain (22.5%).

Compared to a year ago, the unemployment rate in June fell in 21 EU states, increased in five and remained stable in France and Cyprus. The largest decreases were seen in Lithuania (10.9% to 8.5%), Spain (24.5% to 22.5%) and Portugal (14.3% to 12.4%). Increases were registered in Belgium (8.4% to 8.6%), Romania (6.8% to 7.0%), Italy (12.4% to 12.7%), Austria (5.7% to 6.0%) and Finland (8.6% to 9.5%).

Over €8 mln already paid in income tax self assessment Citizens using the new tax self assessment procedure for 2014 have already paid over EUR 8 mln to the government.

Senior Tax Department Officer Klelia Papadopoulou said that until July 17 a total of EUR 8.18 mln had been paid by 11,483 taxpayers who used the new self assessment procedure.

The deadline was June 30 for both electronic and printed self assessments.

Papadopoulou said that a total of 55,750 taxpayers have submitted their tax returns

Ayia Napa statue recalls farming heritage Agriculture and Natural Resources Minister Nicos Kouyialis and Mayor Yiannis Karousos will inaugurate a 2.1m tall statue in Ayia Napa on Friday, commemorating the region’s farming heritage, during the EKA farmers’ union cultural festival.

The copper statue, “Agrotissa” (countrywoman), was commissioned by the holiday town’s municipality and is the creation of Angelos Gerakaris from Kerkyra (Corfu). It has been placed on the small roundabout between Kryo Nero Avanue and Makarios III.

electronically through the Taxisnet system while the deadline for submissions was last Friday.

About 200,000 tax returns are submitted every year in both electronic and print form so it is estimated that the rest will be submitted in print.

Papadopoulou that all those who should have filed their tax returns and did not do so will be fined EUR 100. Taxpayers are obliged to submit a tax return if their annual income is over EUR 19,500.

August 5-11, 2015

6 | CYPRUS | financialmirror.com

Budget watchdog to monitor €500 mln projects President Nicos Anastasiades said on Friday that at its next meeting, the Cabinet will set up a new mechanism to monitor the EUR 517.5 mln in public projects announced so far this year and ensure they do not get embroiled in red tape.

President Anastasiades called on local authorities, which will mainly oversee the implementation of the projects in all districts, to be alert and coordinate with the competent minister on possible irregularities or delays.

He said that “the fact that these development projects are announced two and a half years after the country was on the brink of a disorderly default, confirms that the decisions taken during this time were in the right direction and that sacrifices made by citizens were not in

vain but resulted in the stabilisation of the economy.”

“The announcement of these projects marks a new era for our country, which now enters a phase of creativity and growth,” he said.

As a result of putting the state finances in order, the President said the economy recorded a primary surplus for the first time in 2014, whilst in the first quarter of 2015 Cyprus exited recession after four years and had a positive growth rate and predictions for the next six months are even more encouraging.

Cyprus, he noted, as a result of fiscal consolidation and being able to borrow from the markets, was able to service its public debt more effectively, which also led to the government making savings.

Larnaca port tender to be re-issued by end-2016 The Larnaca marina and port privatisation will go out to tender again by the end of next year, after previous bidder Zenon Consortium failed to find the necessary funds for the project.

The facilities will now remain in state hands and the government has yet decided what to do next, as the deadlock has thrown a spanner in the works of the privatisation plans which is an obligation as part of the EUR 10 bln bailout plan agreed with the Troika of international lenders.

Limassol port has already gone to tender with several promising bidders for the management of all commercial operations.

The state Ports Authority will remain the landlord, which means the government has to proceed with the privatisation of other assets, such as telco Cyta, in order to meet the EUR 1.4 bln target.

In Larnaca, President Anastasiades announced a series of new infrastructure and development projects worth EUR 64 mln for the town and the district last Thursday.

The projects include the construction of new elementary schools and medical centres, a municipal market, a multicultural and sports centre, improvement works on main roads, works for the protection of the beaches, construction of flood barriers, improvement works for the Larnaca fishing shelter, and other projects in the framework of the Solid Waste Management programme.

He recalled that since he assumed office in 2013 a series of projects worth EUR 36.5 mln have already been completed, while other development projects, which began before or during 2015, worth EUR 70 mln, are under way.

The President also said that the oil and gas storage facilities will be moved from the Dhekelia road by the end of 2017.

He stressed that the government remains committed to the development of the port and the marina of Larnaca so that it includes facilities that serve the tourist and commercial needs of the port and lead to the construction of an ultra modern marina.

“It is these savings in combination with getting improved co-financing terms from EU funds that have allowed me to announce the implementation of certain projects which will contribute to growth, create new jobs and improve the quality of life for the citizens”, he adds.

District Officers in each district are responsible to monitor the progress of the projects, he said.

Last Thursday, Anastasiades announced new projects worth EUR 64 mln for Larnaca District and 95 mln for Famagusta District.

In early July, he announced development projects worth EUR 147 mln for Limassol District, and in June projects worth 60 mln for Paphos District and 174 mln for Nicosia.

Famagusta district to get projects worth €95 mln President Nicos Anastasiades announced infrastructure projects worth EUR 95 mln for the government-controlled area of Famagusta, during a meeting at Paralimni town hall, attended by members of his Cabinet, mayors and local government representatives.

The projects include utility works related to water supply in the area (EUR 17 mln) and solid waste management (EUR 6.5 mln).

They also include road works and the construction of new police HQ in Paralimni, at an estimated cost of EUR 4.3 mln. Efforts are also being made to secure funds for the construction of a new Famagusta District Court worth EUR 6 mln.

Ayia Napa will see a revamp of its beachfront at a cost of EUR 6.5 mln, work to improve the cycle paths on Nissi Avenue worth EUR 300,000, and restoration of the medieval monastery, work for the

improvement of access to Ayia Napa’s centre and the construction of a multipurpose park at a total cost of EUR 3.5 mln.

Dherynia will get a new home for the elderly worth EUR 900,000 and improvement of the road network in the area worth EUR 500,000.

Anastasiades also announced projects for the nearby communities of Sotira, Avgorou and Liopetri. He stressed that “the amount of EUR 94.95 mln to be allocated for the government-controlled area of Famagusta reflects the interest of the government to give a new impetus to the development of the area.”

He noted that despite the economic difficulties which Cyprus faces, projects worth EUR 25.4 mln were completed in the area since his government assumed office in 2013. He added that currently, projects worth EUR 55 mln are already underway.

€35 mln in aid for animal farms after halloumi PDO Agriculture and Environment Minister Nicos Kouyialis said that EUR 35 mln in aid will be provided to the animal husbandry sector of the next three years, to help improve dairy farming following the publication in the journal of the European Union, of Cyprus’ application to register the traditional ‘halloumi’ cheese as a Protected Designation of Origin (PDO).

Kouyialis said that the new measures focused on four pillars: improving productivity, increasing livestock, increasing the amount of milk channelled to industries and other additional measures.

He noted that the Rural Development Programmes, with a total budget of EUR 25 mln, would contribute significantly to help improve productivity and increase livestock, adding that with the contribution of the private sector the amount to be spent on sheep and goat farming would exceed EUR

40 mln.

“Considering that halloumi is our main export product, the registration of the product as a PDO enhances our rural economy, but also the country’s economy in general,” the Minister said.

He pointed out that the publication of Cyprus’ application by the European Commission was the result of the commitment and dedication of the government to safeguard the product as a PDO and noted that it was achieved “after coordinated action and hard work, overlooking private interests and third party interventions.”

According to the Minister, halloumi as a PDO was expected to become a product of high commercial value that could easily penetrate international markets.

It would also be protected from imitation and international competition to the benefit of Cypriot

producers and the Cyprus economy.

He explained that from the beginning, the Ministry’s decision provided for the registration of the product by the Greek name “Halloumi” and its Turkish name “Hellim” and included as a geographical area for halloumi production the whole of Cyprus, so that both the Greek Cypriot and Turkish Cypriot producers could benefit from the registration.

He expressed confidence that the registration of halloumi opened new horizons in the fields of agriculture, livestock and cheese production, stressing that the registration would strengthen regional development through the creation of new small businesses and thus new jobs.

He said there was a six-month delay in the PDO decision because of the involvement of the Turkish lobby, adding that “we managed to overcome these obstacles with the involvement of Mr. Juncker and President Anastasiades.”

August 5-11, 2015

financialmirror.com | CYPRUS | 7

Maritime Academy to open its doors in Larnaca in September The University of Nicosia and strategic partners have established the Maritime Academy that will open its doors in Larnaca in September, by offering dedicated maritime and shipping courses.

The course will be taught in English and include Shipping & Logistics Management, Maritime Transport, Marine Engineering and Marine Electrical Technology.

The Academy was inaugurated during a signing ceremony in Larnaca, between the University of Nicosia, the Arab Academy of Sciences, Technology and Maritime Transport and the Eastern Mediterranean Institute of Maritime Affairs, with the support of Intercollege Larnaca, which will house the academy at its seafront facilities.

Transport Minister Marios Demetriades said the agreement “marks an important milestone in our roadmap towards what has been the vision for the last twenty years.”

“In the last decade the shipping industry has on several occasions warned against an impending shortage of qualified labour on board Cyprus-flagged ships,” he said.

“The availability of skilled human resources is at the very core of economic growth and employment in the maritime cluster as more and more of the maritime activities become ‘knowledge dependent’,” he said, adding that “access to high quality maritime education and training should be at the top of the national agendas of all maritime nations.”

Demetriades said that maritime education has been non-existent, although Cyprus is one of the largest maritime clusters worldwide. Universities were only established in Cyprus during the last two decades and maritime technology and transportation studies need to be integrated in their programmes.

Defence Minister Christoforos Fokaides said that launching the Academy is “an achievement that is indicative of the long standing ties of friendship, trust and mutual respect that Cyprus and Egypt share.”

An achievement, he added, “that reflects the high importance that both our countries

attach to the promotion of stability, development and prosperity in our region of the eastern Mediterranean.”

Intercollege and Maritime Academy Executive Director Stylianos Mavromoustakos said that the Academy will also offer security courses in accordance with STCW, courses on safety for the hydrocarbons industry (OPITO), courses for cooking on board vessels, port management and for captains of small vessels.

The event was also addressed by the President of the Arab Academy of Sciences, Technology and Maritime Transport Ismail Abdel Ghafar.

UCy to set up oil & gas research centre in Larnaca The University of Cyprus plans to establish a Hydrocarbons Research Institute and a Department of Chemical Engineering of Hydrocarbons in Larnaca, with the aim to support the oil and gas industry in the eastern Mediterranean and to promote service providers to the oil industry.

The university said in an announcement that the Submarine Archaeology Centre and the Oceanographic Centre will also move to Larnaca.

University Rector, Professor Constantinos Christofides and Council President Manthos Mavrommatis have welcomed the recent announcements by President Nicos Anastasiades for a number of projects in Larnaca and the Cabinet decision to approve a university request to use the state-owned land of the abandoned leper colony to house the Institute of Hydrocarbons, the Centre of Submarine Archaeology, the Oceanographic Centre and the Department of Chemical Engineering and Hydrocarbons.

According to the Rector, this decision creates a promising prospect for Larnaca.

August 5-11, 2015

8 | COMMENT | financialmirror.com

Where’s the (local) beef?

Local fillet steak is very good, but you seldom see it in restaurants. Reasons given to me usually run like this: “Local is OK, but the sizes of the pieces are often different. You can’t rely on it”. The restaurateur doesn’t add that it’s easier to keep frozen imported steaks of uniform size in his freezer. When I have suggested that dishes like Boeuf Stroganoff (below) use little slices and not big pieces, a shrug of the shoulders is a frequent response. I would much prefer “odd” slices of fresh local fillet to great chunks of de-frosted New Zealand, Australian or Argentinean, which are short on flavour.

So, save money this week. Eat your “Bon Filet” at home and support the local meat industry. Of all beef steak recipes, in my view, Boeuf Stroganoff is one of the best. It isn’t difficult either. It is said to have been invented in the mid-1800s by one Count Paul Stroganoff, a Russian diplomat. It is also recorded that an 1861 Russian cook book called “A Gift to Young Housewives” was published, including the recipe called “Beef à la Stroganov, with mustard”. This called for lightly floured beef cubes (not strips) sautéed, sauced with prepared mustard and bouillon, and finished with a small amount of sour cream. Note there were no onions, or mushrooms.

After the fall of Tsarist Russia, the dish seems to have migrated eastwards, to be found in the hotels and restaurants of China before the start of World War II, presumably for the foreign community. A further migration in the 1940s and 1950s took it to the United States, where it evolved into the “classic” international favourite, consisting strips of beef filet with a mushroom, onion, and sour cream sauce, and is served with rice or pasta.

Anyway, “Boeuf Stroganoff” has a lovely sound to it and if in fact it was invented by a genuine Russian Count, then all praise to him. Whoever he was, his name lives on.

Boeuf Stroganoff

FOOD, DRINK and OTHER MATTERS with Patrick Skinner thinly sliced sweet pickled cucumbers (German are recommended) at stage (9).

Either way, this is delicious!

Now, for a simple steak dish which brings out the full flavour of the meat. You’ll need a bunch or two of the large spring onions (scallions).

Steak with Spring Onions (serves 3-4) Ingredients 500 grams fillet steak (more if you’ve got hungry folk).

2 bunches large spring, onions, most of green removed.

Several good knobs of butter.

Salt and pepper.

Parsley.

Method 1. Cut steak into portions (thick slices) 2. Heat heavy non-stick frying pan 3. Add butter knob and over a high heat, sauté meat quickly on both sides, removing when cooked how you like it.

4. Melt another butter knob and fry spring onions for a few minutes until cooked through 5. Pour onions over steak and serve

A novel accompaniment is potatoes cooked with spring onions: Ingredients for four servings 1medium potato for each person, peeled and diced.

8 medium spring onions, chopped.

2 knobs butter and 1 tbsp oil.

Salt and pepper.

Method 1. In a non-stick pan gently sauté the diced potatoes, turning regularly until they are golden brown all over.

2. Season to taste.

3. Add chopped spring onions, stir and cook for 2-3 minutes.

4. Serve with a nice fresh lettuce salad

Ingredients for four servings 500 grams beef fillet.

1 medium-large onion, skinned and thinly sliced.

8 medium sized button mushrooms, sliced thinly.

1 carton soured cream (“Smetana” is OK).

2 teaspoons tomato purée.

2 teaspoons paprika.

A few drops of Worcestershire Sauce.

A couple of knobs of butter.

1 tablespoon of light frying oil.

Salt and pepper.

Wine match

Method 1. Warm oven to 100C. 2. Sauté the mushrooms gently in a knob of butter, turning once until done.

3. Remove from pan.

4. Fry onions, turning regularly until transparent.

5. Remove from pan.

6. Slice fillet into slivers, 5cms (2”) long x 6mm (Quarter inch) wide.

7. In oil and butter at high heat quickly stir-fry fillet strips to seal.

8. Remove from the pan.

9. Put tomato puree in warm pan, along with the cooked mushrooms, onion, Worcestershire Sauce and freshly ground black pepper.

10. Turn over and cook for 1-2 minutes.

11. Add cooked fillet and turn well.

12. Add sour cream, turn well and simmer for a minute or two.

13. Serve at once with plain boiled rice and a green salad.

Variations on the theme: Substitute the Worcestershire sauce and tomato purée with some mixed Colman’s mustard (two teaspoons of mustard powder) and two teaspoons of sugar – top up the mix to a generous half cup and use in the recipe at stage (9). This is my preference.

If you prefer, use ordinary cream instead of the sour variety, in which case you may add

Stroganoff needs a red, I think. But a jolly, fruity one, rather than austere and “posh”. So I will pick a grape, rather than one particular wine. And it is Pinot Noir. The grape of Burgundy (and thus, my favourite) was a slower and more reluctant global traveller, even in its native France, than Cabernet Sauvignon, but it has settled well in Chile, California, Washington State, South Africa and, especially, New Zealand.

Once upon a time I grew Pinot Noir in England and harvested enough for about 200 bottles (Burgundy it wasn’t, but we enjoyed it!)

For around 15 Euros you can find several good Pinots in Cyprus. Burgundy Pinot can be quite heavy, though if you can find a Savigny-lesBeaunes, I think you will find it most pleasing. New Zealand Pinot, perhaps, is the most appealing in the low to mid-price category. In England, at the moment, I am enjoying a modestly priced Pays d’Oc 100% Pinot, “Villa Blanche”, which I alternate with South African Pinotage, the hybrid which has retained a lot of Pinot’s fruit and roundness. If you want a true French Burgundy, wine stores like Oenoforos, La Maison du Vin and Spectus have excellent selections to suit pockets from medium depth to very deep (you can buy on-line, if you wish, too).

Go to www.eastward-ho for more recipes, food and wine news and notes.

Bra and SlowFood to host Cheese 2015 The tenth edition of Cheese, the international biennial event organised by the Città di Bra and Slow Food, will be held in Bra, Italy, from Friday, September 18 to Monday, September 21. Dedicated to milk in all its shapes and forms, the event has led to the formation of an international network of cheesemakers and dairy artisans, who come together every two years to present their products, meet the public and debate the challenges they face and new critical issues in the dairy world.

This year’s theme is “A journey to mountain pastures”, with a specific focus on the role of mountains and highlands, and will feature accounts from those who have chosen to live and work on mountain pastures and the

cheeses they produce, where they preserve an extraordinary biodiversity.

Cheese 2015 http://cheese.slowfood.it/en/ will gather thousands of Italian and foreign producers from all over the world who will describe the dairy situation in their countries and the challenges they face. The event will be used as a platform to denounce critical issues that today influence and limit the small-scale supply chain of food and its commercialisation.

In the last edition of Cheese, which took place in 2013, the Cheese Market comprised 188 stands (136 Italian and 52 foreign), 43 Slow Food Italian Presidia and 17 Slow Food International Presidia. There were 250,000 visitors.

August 5-11, 2015

financialmirror.com | COMMENT | 9

A new deal for debt overhangs?

By Kenneth Rogoff The International Monetary Fund’s acknowledgement that Greece’s debt is unsustainable could prove to be a watershed moment for the global financial system.

Clearly, heterodox policies to deal with high debt burdens need to be taken more seriously, even in some advanced countries.

Ever since the onset of the Greek crisis, there have been basically three schools of thought. First, there is the view of the socalled troika (the European Commission, the European Central Bank, and the IMF), which holds that the eurozone’s debt-distressed periphery (Greece, Ireland, Portugal, and Spain) requires strong policy discipline to prevent a short-term liquidity crisis from morphing into a long-term insolvency problem.

The orthodox policy prescription was to extend conventional bridge loans to these countries, thereby giving them time to fix their budget problems and undertake structural reforms aimed at enhancing their long-term growth potential. This approach has “worked” in Spain, Ireland, and Portugal, but at the cost of epic recessions. Moreover, there is a high risk of relapse in the event of a significant downturn in the global economy. The troika policy has, however, failed to stabilize, much less revive, Greece’s economy.

A second school of thought also portrays the crisis as a pure liquidity problem, but views long-term insolvency as an outside risk at worst. The problem is not that the debt of countries on the eurozone’s periphery is too high, but that it has not been allowed to rise nearly high enough.

This anti-austerity camp believes that even when private markets totally lost confidence in Europe’s periphery, northern Europe could easily have solved the problem by co-signing periphery debt, perhaps under the umbrella of Eurobonds backed ultimately by all (especially German) eurozone taxpayers. The periphery countries should then have been permitted not only to roll over their debt, but also to engage in full-on countercyclical fiscal policy for as long as their national governments deemed necessary.

In other words, for “anti-austerians,” the eurozone suffered a crisis of competence, not a crisis of confidence. Never mind that the eurozone has no centralised fiscal authority and only an incomplete banking union.

Never mind moral-hazard problems or insolvency. And never mind growthenhancing structural reforms. All of the debtors will be good for the money in the future, even if they have not always been reliable in the past. In any case, faster GDP growth will pay for everything, thanks to high fiscal multipliers. Europe passed up a free lunch.

This is a fully coherent viewpoint, but naive in its unqualified confidence (for example, in the polemical writings of the Nobel laureate economist Paul Krugman). As a result, the anti-austerian view masks

strong assumptions and risks. In fact, piling loans atop already-high debt burdens in the eurozone’s periphery entailed a significant gamble, particularly as the crisis erupted.

Political corruption, exemplified by the revolving door between Spain’s government and financial sector, was endemic. Dual labor markets and product-market monopolies still hobble growth, and oligarchs have disproportionate power to protect their interests. In reality, Germany could not have underwritten all of the European periphery’s debt without risking its own solvency and creditworthiness, particularly in the absence of a functioning system of eurozone-wide checks and balances. Expansive and openended guarantees might have worked, but if they didn’t, the economic rot from the periphery could have spread to the centre.

A third point of view is that, given the massive financial crisis, Europe’s debt problem should have been diagnosed as an insolvency problem from the start, and treated with debt restructuring and forgiveness, aided by moderately elevated inflation and structural reform. This has been my viewpoint since the crisis began.

In Ireland and Spain, private bondholders, not Irish and Spanish taxpayers, should have taken the hit from bank failures. In Greece, there should have been faster and larger debt write-downs.

Of course, national governments would have had to use taxpayer funds to recapitalise northern European banks – especially in France and Germany – that lent too much to the periphery. And transfers would have been needed to recapitalise the periphery banks.

But at least then the public would have

understood the reality of the situation, while restructured and recapitalised banks would have been in a position to start lending again.

Unfortunately, too many policymakers in advanced economies allowed themselves to believe that such heterodox policies are only for emerging markets. In fact, advanced countries have resorted to heterodox policies to reduce debt overhangs on many occasions. Debt restructuring would have given Europe the reset it needed. Yes, there would have been risks, as IMF chief economist Olivier Blanchard has pointed out, but running those risks would have been well worth it.

So what is the way forward? Deeper European integration, stricter equity requirements for banks, and deeper but homegrown structural reforms are certainly key elements of any solution. Further aid to the European periphery is still badly needed.

But, beyond that, Europe’s experience ought to spur a full rethink of the global system for administering sovereign bankruptcies. That could mean bringing back older IMF proposals for a sovereign bankruptcy mechanism, or finding ways to institutionalise the Fund’s recent stance on Greek debt. There is no free lunch in Europe, and there never was; but there are much better ways to deal with unsustainable debt.

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

Europe: Moving towards clarity Greece’s political and financial roller-coaster ride over whether to accept tighter conditions for a third bailout programme of up to EUR 86 bln finally came to an end during a weekend summit that ran into the business hours of Monday, July 13, underlining how close a Grexit was.

As the ‘last chance’ deadline of July 20 approached, failure to reimburse maturing Greek bonds would have left the ECB with little choice but to stop its Emergency Liquidity Assistance (ELA) for Greek banks, triggering a collapse of the Greek economy. Against this background, a broad national unity front in the Greek parliament acknowledged economic reality and the will of the Greek people to stay in the eurozone by countering the ‘No’ vote of the July 5 referendum and accepting the tougher conditionality of the proposed ESM programme.

Delivering the first reform steps by passing the laws it was required by Greece’s creditors was a constructive first step. It permitted negotiations on the ESM programme and bridge financing to progress. The ECB facilitated the reopening of Greek banks with two EUR 0.9 bln increases in the ELA facility.

The roadmap for fast tracking delivery of a third bailout package is now being followed. But is this the end of the Greek saga? We don’t think so. First of all, the devil is in the detail. For example, the International Monetary Fund reiterated its request for more debt restructuring, and Greece has a bond due for repayment on August 20. Secondly, even after the approval of a third bailout package, political and economic instability could over the coming months still trigger a downward spiral in Greece – and result in a Grexit – although we believe this is now less likely.

Also less likely, in our view, is a scenario whereby Greece would continue to captivate financial markets as it has in recent months, because the potential channels of contagion are shrinking. There is a clear will to keep Greece in the eurozone and to support the country. But even if Greece was

ANALYSIS

not to meet the new conditions or modernise its economy, there would be a ‘plan B’. The writing is on the wall, the euro summit having replaced uncertainty with some clarity. As a result, European equities bounced back, peripheral spreads narrowed substantially, and the pressure on German Bund yields was muted. The EUR is currently moving in a range of 1.08 – 1.12 against the USD. Better visibility on Greece’s situation is also reducing the threat of risk-off market sentiment contagion being channelled more broadly across the eurozone. The real eurozone economy has barely reacted to the negative media hype around Greece – indeed, underlying growth in the

eurozone has, in our view, strengthened and become less vulnerable to shocks.

Spain in particular has entered a solid growth trajectory (unemployment in Q2 fell by 1.4 percentage points to 22.4%, the lowest level since Q3 2011), and data for Italy also points towards a return to an upward trend. The eurozone composite sentiment PMI has fallen slightly so far during July, from 54.2 to 53.7 and is pointing to a pace of growth in the eurozone at the start of H2 2015 similar to that achieved in H1. Further strengthening of investment and/or fewer headwinds from global trade are needed for growth to accelerate.

The minutes from the July meeting of the Bank of England (BoE) monetary committee show that uncertainty over the eurozone led to a unanimous vote for keeping UK monetary policy unchanged. However, this masks an underlying change in the mood of BoE, due to strong fundamentals, confirmed by a reacceleration of GDP growth to 0.7% QoQ in Q2.

The BoE has started to prepare markets for a first rate hike, which we expect in Q1 2016. The timing will be more and more data dependent as stronger growth and rising wages could increase the pressure on the BoE despite the absence of inflation (0.0% YoY in June).

In any case we would expect only a gradual pace of tightening and no action before the Fed starts hiking.

(Source: BNP Paribas Investment Partners)

August 5-11, 2015

10 | GREECE | financialmirror.com

Reinventing Mr Tsipras

By Costis Stambolis The events of the last six weeks in Greece will probably leave a lasting impression on a great many people about a country’s near-death experience. As a colleague recently observed “for all of us who lived and worked in the country during this tumultuous period it felt like we were aboard a gigantic airliner whose pilot was purposely steering it to crash to the ground and we were unable to get off or do anything else to save ourselves”.

With the crash literally averted on the eleventh hour, Prime Minister Alexis Tsipras met his destiny in Brussels where he made a huge U-turn on his die-hard communist principles and agreed to a massive EUR 86 bln bailout deal – the third in a row since 2010. With the far left Syriza government unable to convince foreign investors and big industrial and commercial groups that business could soon return to normal, the country has since faltered with the economy set on a recessionary path estimated to contract by 2.5% to 3.0% by the end of the year, as most economists predict.

With capital controls still in place, and likely to remain for a considerable time, and the Athens Exchange, which opened again on Monday after a five week closure, plunging to record lows of -16.0%, the signs for an economic and business rebound look slim. The latest Consumer Confidence Indicator, calculated by the Foundation of Economics and Industry Research (IOBE), shows managers and consumers confidence and expectations have hit new lows as uncertainty looms high on the business horizon.

The main driver of uncertainty appears to be the government’s apparent inability and unwillingness to implement the set of measures agreed with the country’s creditors on July 13 and hence to be elaborated and included in a detailed staff level agreement, currently being worked out in Athens by the visiting representative of the four institutions - ESM, ECB, IMF and EC - now known as the “quartet”. The government now has just a few days left until August 12 to reach an agreement with the “quartet” on a number of highly contentious issues, with bank recapitalisation topping the list.

Greek banks are estimated to need between EUR 10 bln to 25 bln of fresh capital since the latest bailout in 2012 and following a flight of EUR 50 bln deposits and a surge in non performing loans over the last eight months.

The other pending issues include pension system reform

focusing at eliminating early retirement, a wide ranging privatisation programme to counter the failure of the one agreed in 2010 where only EUR 3.0 bln of proceeds were achieved, and the roll back of measures introduced by the Syriza-led government which clearly violated undertakings by the previous government and included in the last bailout agreement.

However, the voting through parliament on July 16 and July 23 of two packages of reforms regarding VAT increases, the broadening of the tax base, pension system reform, banking operation and civil justice, all connected to the bailout agreement has left the governing Syriza party and Mr. Tsipras with deep scars. During the most recent vote a total 36 of Syriza’s MPs, belonging to the hard core communist left platform, defied Tsipras refusing to support him in a vote on banking sector and penal code reform. The country’s creditors have insisted that parliamentary approval is necessary prior to the commencement of talks on the EUR 86 bln bailout agreement.

To enable him to secure a majority vote in the 300-seat legislature, Tsipras was forced on both occasions to accept support from the three pro-European opposition parties.

Now, he is left to govern with his 123 loyal deputies and opposition comfort votes, which in Greek politics appears as a rather unsustainable option. Given the exceedingly strong Syriza anti-bailout stream, Tsipras is now facing a survival problem as he will be trying to implement an austerity-type agreement and creditor dictated structural reforms, against a background of deepening public unrest and with his authority being questioned by party members.

At the same time, the PM will have to contend with the huge damage caused to his party’s, and his own, reputation by the reckless behaviour of his highly controversial and now discredited former economy minister, Yanis Varoufakis. As has emerged through a series of recorded conversations, recently revealed by the daily Kathimerini, Varoufakis was secretly planning to force the government to abandon the euro and adopt a parallel virtual currency he would have created, backed by a close-knit team he had put together, by hacking his own Ministry’s confidential tax payers’ data base.

As a highly placed EC official, who had participated in the latest round of Brussels talks with the Greek government recently told us on condition of anonymity, “it looks rather absurd (for the EU) to demand now of young Mr. Tsipras, a radical left populist politician, to introduce and implement a wide ranging package of market reform that his conservative predecessor was clearly unable to deliver”. Herein lies the rub and the real challenges now facing Tsipras and his incoherent party.

With the prime minister having precluded for the time

being the formation of a national unity government, where all three pro European opposition parties would have participated, the only realistic option left for him in order to remain in power, note political analysts, is a snap election sometime over the next two months.

Meanwhile, time is once again running out for Tsipras and his fragile government and elections or no elections next autumn, he will have to strive to reinvent himself as a responsible socialist leader, decrying his communist past in an effort to transform his far left radical party into a left leaning pro-European one, with a much broader electorate base and capable of introducing reform and jump starting Greece’s moribund economy.

Costis Stambolis is a Financial Mirror correspondent, based in Athens. cstambolis@iene.gr

The coming Greek debt restructuring;

By Fergus McCormick In the event of a Greek departure from the Eurozone, a default on both official sector debt and debt held by the private sector would very likely occur. For the foreseeable future, a more likely outcome is that Greece remains in the Eurozone. The recent tentative agreement between Greece and its international creditors to negotiate a third financial support programme, makes it more likely that in the near term Greece will avert the adoption of a new currency to replace the Euro. However, for the programme to work, some debt restructuring appears necessary.

The aim of the programme is to restore fiscal sustainability, financial stability and long-term growth, and bolster market confidence, so that Greece can return to the private capital markets to meet its funding needs.

Importantly, a recovery is needed to restore macroeconomic stability. If the economy does not recover, the debt burden will inevitably continue to increase. The Greek Parliament has already approved two rounds of fiscal, legislative and structural measures required by the creditors. In return, recent interim financial support from the European Stability Mechanism (ESM) and European Financial Stabilisation Mechanism (EFSM) has allowed Greek banks to reopen, some capital controls to be relaxed, Greece to repay the ECB and to clear its arrears to the IMF.

As the terms of the three-year EUR 82-86 bln ESM loan facility are being debated, some form of debt restructuring is also being considered. If a restructuring occurs, it would likely only involve official sector loans. This contrasts with the 2012 restructuring, which included both haircuts on private bonds and the extension of maturities and deferral of interest on official sector debt. So far, the design of a second restructuring has yet to be determined. Nevertheless, there are three reasons to expect a restructuring to be forthcoming.

1. The debt burden is unsustainable DBRS shares the widely held view that Greece’s debt burden is unsustainable. This is as much a function of low growth prospects as it is of debt service payments: without a return to sustainable growth Greece’s debt burden will only increase. The damage to the economy after six months of negotiations, two missed payments to the IMF, three weeks of capital controls, a popular referendum, and an abrupt acceptance by Greek negotiators of deep adjustment measures has been significant.

GDP is expected to decline this year between -1.0% and 4.0%. The extent of the deterioration will likely depend on the effect of capital controls on consumption and investment, and the impact of the expenditure cuts and tax increases that Greece must implement as part of the coming programme.

The IMF estimates that even with full implementation of structural reforms, as outlined in the July 12 ‘prior actions’,

Greece’s real long-term growth rate will be only 1.5%. Over the medium term, GDP is expected at 2% to 3% as the output gap closes and confidence is restored. Regarding debt service, even if the programme is fully implemented, the IMF expects financing needs through the end of 2018 to be EUR 85 bln, well above the 15% of GDP threshold deemed safe. Under this framework, even if growth resumes, public debt is expected to peak at close to 200% of GDP in mid2017, up from an already high 168.8% of GDP in the first quarter of 2015.

2. IMF participation is conditional on debt restructuring On July 30, IMF staff informed the IMF board that Greece is disqualified from a third IMF programme. The disqualification was because in their view the debt is unsustainable, and because Greece has a poor record of reform implementation. The IMF staff doubts that the existing loan facility for Greece, of which there remains EUR 16.5 bln to disburse, will achieve its original targets, or allow Greece to return to the private capital markets by March 2016, when the programme expires. Therefore, the IMF will not extend any new loans under a new programme unless it deems Greece’s debt burden to be sustainable “with a high probability.” This decision is important because both the EU and ECB have expressed a lack of willingness to extend a new support programme to Greece unless the IMF is involved.

In its most recent debt sustainability analysis, the IMF

August 5-11, 2015

financialmirror.com | GREECE | 11

In defense of Varoufakis

By Mohamed A. El-Erian Author of When Markets Collide From blaming him for the renewed collapse of the Greek economy, to accusing him of illegally plotting Greece’s exit from the eurozone, it has become fashionable to disparage Yanis Varoufakis, the country’s former finance minister.

While I have never met or spoken to him, I believe that he is getting a bad rap (and increasingly so). In the process, attention is being diverted away from the issues that are central to Greece’s ability to recover and prosper – whether it stays in the eurozone or decides to leave.

That is why it is important to take note of the ideas that Varoufakis continues to espouse. Greeks and others may fault him for pursuing his agenda with too little politesse while in office. But the essence of that agenda was – and remains – largely correct.

Following an impressive election victory by his Syriza party in January, Greece’s prime minister, Alexis Tsipras, appointed Varoufakis to lead the delicate negotiations with the country’s creditors. His mandate was to recast the relationship in two important ways: render its terms more amenable to economic growth and job creation; and restore balance and dignity to the treatment of Greece by its European partners and the International Monetary Fund.

These objectives reflected Greece’s frustrating and disappointing experience under two previous bailout packages administered by “the institutions” (the European Commission, the European Central Bank, and the IMF). In pursuing them, Varoufakis felt empowered by the scale of Syriza’s electoral win and compelled by economic logic to press three issues that many economists believe must be addressed if sustained growth is to be restored: less and more intelligent austerity; structural reforms that better meet social objectives; and debt reduction.

These issues remain as relevant today, with Varoufakis out of government, as they were when he was tirelessly advocating for them during visits to European capitals and in tense late-night negotiations in Brussels. Indeed, many observers view the agreement on a third bailout programme that Greece reached with its creditors – barely a week after Varoufakis resigned – as simply more of the same. At best, the deal will bring a respite – one that is likely to prove both short and shallow.

In part, the criticism of Varoufakis reflects less the substance of his proposals than the manner in which he

approached his interlocutors. Eschewing the traditional duality of frank private discussions and restrained public commentary, he aggressively advocated his case openly and bluntly, and did so in an increasingly personal manner.

Whether deemed naive or belligerent, this approach undeniably upset and angered European politicians. Rather than modifying a policy framework that had failed for five years to deliver on its stated objectives, they dug in their heels, eventually resorting to the economic equivalent of gunboat diplomacy. And they evidently also made it clear to Varoufakis’s boss, Tsipras, that the future of negotiations depended on him casting aside his unconventional minister – which he did, first by assigning someone else to lead the negotiations and then by appointing a new finance minister altogether.

Now that he is out of office, Varoufakis is being blamed for much more than failing to adapt his approach to political reality. Some hold him responsible for the renewed collapse of the Greek economy, the unprecedented shuttering of the banking system, and the imposition of stifling capital controls. Others are calling for criminal investigations, characterising the work he led on a Plan B (whereby Greece would introduce a new payments system either in parallel or instead of the euro), as tantamount to treason.

But, love him or hate him (and, it seems, very few people who have encountered him feel indifferent), Varoufakis was never the arbiter of Greece’s fate. Yes, he should have adopted a more conciliatory style and shown greater

appreciation for the norms of European negotiations; and, yes, he overestimated Greece’s bargaining power, wrongly assuming that pressing the threat of a Grexit would compel his European partners to reconsider their long-entrenched positions. But, relative to the macro situation, these are minor issues.

Varoufakis had no control over the economic mess that Syriza inherited when it came to power, including an unemployment rate hovering around 25% and youth joblessness that had been running at more than 50% for a considerable period. He could not influence in any meaningful manner the national narratives that had sunk deep roots in other European countries and thus undermined those countries’ ability to adapt.

He could not counter the view among some of the region’s politicians that success for Syriza would embolden and strengthen other nontraditional parties around Europe.

It also would have been irresponsible for Varoufakis not to work behind closed doors on a Plan B. After all, Greece’s eurozone destiny largely was – and remains – in the hands of others (particularly Germany, the ECB, and the IMF). And it is yet to be established whether Varoufakis broke any laws in the way he and his colleagues worked on their contingency plan.

When push came to shove, Varoufakis faced the difficult choice of going along with more of the same, despite knowing that it would fail, or trying to pivot to a new approach. He bravely opted for the latter. While his brash style undermined outcomes, it would be a real tragedy to lose sight of his arguments (which have been made by many others as well).

If Greece is to have any realistic chance of long-term economic recovery and meeting its citizens’ legitimate aspirations, policymakers must recast the country’s austerity programme, couple pro-growth reforms with greater social justice, and secure additional debt relief. And if Greece is to remain in the eurozone (still a big if, even after the latest agreement), it must not only earn its peers’ respect; it must be treated with greater respect by them as well.

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

debt burden is ‘unsustainable’ stated that debt relief is necessary in Greece, either through “deep upfront haircuts” of official sector debt, “explicit annual transfers to the Greek budget”, or “a very dramatic extension” of grace and repayment periods of official debt, including new assistance. However, several creditor countries believe that official debt forgiveness is incompatible with Eurozone membership. This difference in views is one of the main reasons for the delay in a debt restructuring.

3. In the absence of debt restructuring, the success of a third support programme is doubtful If the forthcoming support programme is to be based on the ‘prior actions’, it is doubtful that the economy will recover sufficiently to prevent the debt-to-GDP ratio from increasing. The ‘prior actions’ call for a new fiscal path to be centred on a primary surplus target of 1%, 2%, 3%, and 3.5% of GDP for 2015, 2016, 2017, and 2018. Attaining such surpluses will be extremely difficult should the economy in fact decline by -1.0% and -4.0% this year, as expected. The package also calls for value-added tax reforms, among other tax measures, pension reforms, public administration reforms, reforms addressing shortfalls in tax collection enforcement, and other parametric measures. The Parliament has already approved some of these measures, but they have yet to be implemented.

Although DBRS acknowledges that these measures would help long-term growth, in the near term, growth prospects will be subject to even more downside risk.

DBRS shares the IMF’s doubts over whether such a demanding fiscal path can be achieved. In the IMF’s words, “few countries have managed to” [maintain primary surpluses for the next several decades of 3.5% of GDP]. It is likely that once the primary balance is in surplus, the political pressures to ease the target will increase significantly, as has occurred in Greece under the previous two programmes.

Although not a direct catalyst for either a return to

growth of 2-3%, or the generation of a high primary surplus, a debt restructuring would help in two ways.

First, further lowering the interest rate on official loans and extending maturities would improve Greece’s capacity to pay and help attract private sector financing. The 2012 restructuring did extend the weighted average maturities on Greece’s loans to a very long 15.7 years, and lowered the implicit interest rate to 2.4%, below the Eurozone average of 2.7%. However, Greece remains shut out of private capital markets and is wholly dependent on official sector financing.

Second, Greece is severely limited in its ability to administer further austerity measures. The political opposition to austerity among the ruling Syriza party and some of its allies, was made all the more evident with the decision on July 30 by the Syriza party to hold an emergency congress in September to vote on whether to approve the support programme. Without the full commitment of the Greek government, the programme would almost inevitably fail and an exit from the Eurozone would likely follow.

Fergus McCormick Senior Vice President, Head of Sovereign Ratings Group at DBRS fmccormick@dbrs.com

August 5-11, 2015

12 | PROPERTY | financialmirror.com

UK tax relief restrictions will temper house price growth The restriction of mortgage interest relief for UK buy-to-let (BTL) landlords will, in the short term, curb lending in the sector, which currently makes up 15%-16% of mortgage lending, Moody’s Investors Service said in a special report. At the same time, 2015 is on track to become the best year for BTL mortgage deal issuance since the credit crunch.

“The government’s decision to restrict BTL mortgage interest relief reflects a willingness to put investors and owneroccupied borrowers on a more level playing field, given that the latter cannot claim tax relief on their mortgages,” observed Emily Rombeau, a Moody’s analyst.

“First-time buyers’ affordability has declined, as they struggle to get on to the property ladder. Affordability constraints and demographic changes have increased the share of privately rented housing - this sector’s evolution has strongly contributed

But 2015 could be the best year yet for buy-to-let deal issuance, says Moody’s to the rapid growth of the BTL sector in recent years,” she said.

“Repeat issuers and new players will support a robust pipeline of BTL RMBS deals this year. Issuance for this segment has accounted for 25.6% of total UK RMBS issuance so far this year, up from 10.2% in 2014,” she noted. Over the coming months, Moody’s forecasts that reduced demand for BTL properties will soften UK house price growth. Moody’s forecasts that UK house prices will nonetheless rise by up to 5% in 2015, albeit at a slower pace than in 2014.

“Notwithstanding the softening in house price growth, the risk of an immediate house

price decrease is limited given the housing shortage and the economic recovery,” said Rombeau.

According to the Moody’s report, the BTL market has grown at a steady pace since early 2010, accounting for 16.8% of total gross mortgage lending and 25.3% of total house purchases as of Q1 2015. BTL gross lending volumes have substantially increased, rising to GBP 7.6 bln in Q1 2015 from GBP 2.0 bln in Q1 2010.

Paragon, the UK’s largest buy-to-let specialist, has accounted for around 40% of BTL issuance since the financial crisis, with a total of nine transactions collectively worth

GBP 3.2 bln. A number of building societies have also tapped the securitisation market: Coventry Building Society and Co-operative Bank PLC in 2012, with Mercia No.1 PLC7 and Cambric Finance Number One PLC; Leeds Building Society in early 2015, with Guildford No. 1 PLC. Precise Mortgages also entered the BTL securitisation sphere this year; the recently established specialist lender has already completed two BTL transactions for a total amount of GBP 426 mln since January 2015.

Moody’s research says that, while UK house prices increased by 3.5% in the first half of 2015 (according to Nationwide), most regions, except for Northern Ireland and Yorkshire & Humberside, experienced a further slow-down in annual price growth in Q2 2015. The monthly year-on-year growth in UK house prices gradually declined to 3.3% from 11.8% in the 12 months to June 2015.

Russians are Berlin’s top luxury condominium buyers, Chinese catching up Foreign buyers, including large numbers from China and Russia, are targeting Berlin, according to a Die Welt report.

“Many high net worth individuals from China are looking for apartments in Berlin,” the newspaper quoted Thomas Zabel from the Zabel Property Group, specialists for luxury property in central Berlin. About 8% of Zabel’s clients are Chinese nationals, spending on average EUR 500,000 on a condominium in the city. Entire Chinese families are pooling their resources to buy German property as individual Chinese citizens are only allowed to transfer $50,000 per year outside their home country.

“Chinese investors are very keen on property. At home, in major cities such as Beijing or Shanghai, Chinese people are not able to own more than one condominium. So it’s no real surprise that wealthy Chinese investors are on the market for properties beyond China’s borders,” is Zabel’s take on their growing interest.

Zabel’s largest single group of buyers comes from Russia and the former Soviet states. In order to serve these clients, Zabel has recruited agents from Moscow and St. Petersburg.

“It’s not the oligarchs, it’s the educated upper-classes, and entrepreneurs with mid-sized companies, who are making Berlin their second, third, or even fourth home,” observed Zabel. His Russian clients spend an average of EUR 1 mln on a condo in Berlin. The most expensive property changed hands for EUR 5.5 mln. Buyers from Saudi Arabia, Kuwait and Israel have also been active. Only 30% of those interested in Berlin’s high-end properties were actually German. Zabel has not noticed any marked increase in Swiss buyers’ interest following the unpegging of the franc from the euro.

Zabel’s company brokered condominiums worth a total of EUR 100 mln last year, with this year’s figure expected to reach 140 mln. Zabel is currently acting for 360 clients who have set their sights on a condominium worth EUR 3 mln or more in Berlin.

According to Zabel, demand is running at a much higher level than supply. Most new build projects are fully sold before ground is even broken. This is the case for the latest Zabel project, Guardian, and its 134 condominiums.

The apartments range from 40 to 180sq.m., with prices from EUR 160,000 to more than 1 mln.

Half of Zabel’s foreign buyers intend to use the condos themselves, the other half view their new property as an investment asset.

(Source: German Real Estate News - info@zitelmann.com)

RICS: Property prices down in 2Q, mainly Nicosia-Larnaca Property prices were down 0.4% for apartments and 0.3% for homes in the second quarter, according to the latest index produced by RICS Cyprus. The areas that saw the biggest quarterly drops were Nicosia and Larnaca.

The 23rd edition of the RICS Cyprus quarterly Property Price Index said that the biggest drop was in Larnaca (-1.2% for flats and -3% for houses). An increase of 0.6% for house prices was recorded in Nicosia, while the values of retail properties fell by an average 0.1%, offices by 1.4%, and warehouses by 2.4%, the survey said.

Despite the Cyprus economy showing some signs of stability, compared to 2Q 2014 prices dropped by 2.6% for apartments, 2.3% for houses, 5.5% for retail, 1.4% for office, and 2.4% for warehouses.

Across Cyprus, quarterly rental values decreased by 0.3% for apartments, 2% for houses, 1.1% for offices, 2.1% for retail units and 1.4% for warehouses. Year-on-year, rents dropped by 3.0% for flats, 2.9% for houses, 6% for retail, 2.8% for warehouses, and 3.6% for offices.

The majority of asset classes and geographies continue to be affected, with areas that had dropped the most early on in the property cycle now nearing or at the bottom, with Paphos and Famagusta showing some signs of price stability, the RICS report said.

At the end of the second quarter, average gross yields stood at 3.8% for apartments, 1.9% for houses, 5.2% for retail, 4.3% for warehouses, and 4.4% for offices. The parallel reduction in capital values and rents is keeping investment yields relatively stable and at low levels (compared to yields overseas). This suggests that there is still room for some repricing, with the economy performing better than expected and tourism mildly outperforming forecasts.

Unemployment remained at a historical high level, stabilised at 16%, and discussions were ongoing regarding privatisations of state-owned enterprises, foreclosures and the turbulence in banking system.

There were few transactions during the quarter although volume was higher on a year-on-year basis. Local buyers in particular were the most discerning as the increase in unemployment and the prospects of the local economy maintained the lack of interest. Furthermore, those interested are still having trouble to access bank-finance.

The Property Price Index has recorded falls in most towns and asset classes, with significant falls recorded in Nicosia and Larnaca. Nicosia is clearly feeling the impact on the government and banking sector (the two sectors that dominate the local employment market), whilst Paphos and Famagusta are progressively bottoming out.

August 5-11, 2015

financialmirror.com | PROPERTY | 13

Holiday homes and income tax µy Antonis Loizou Antonis Loizou F.R.I.C.S. is the Director of Antonis Loizou & Associates Ltd., Real Estate & Projects Development Managers

It is estimated that from the 60,000 holiday and second homes sold to foreigners, a large percentage of about 20% or 12,000 of them, are rented out to their fellow countrymen and other holidaymakers. These so-called “holiday villas” are advertised both locally and on the Internet, and there are specialised agencies that handle such rentals.

If we conservatively estimate that 12,000 units are rented at 100 euros a day for 90 days a year, then the total income is around EUR 108 mln. This equals an evaded income tax, including the defense levy, of around EUR 22 mln a year. Of course, the actual amounts of rents charged is much higher, often reaching EUR 1,500-2,000 a week, thus almost 2-3 times higher, with a proportional increase in tax evasion.

Apart from tax evasion, there is also the issue of unfair competition to hoteliers, who face all sorts of restrictions compared to the free-to-rent holiday villas that are not subject to any restriction. Even though we cannot expect that all the holidaymakers staying at the 12,000 units will visit the hotels, even if only 6,000 of them do so, the hotels would have increased revenues and capacities.

The most frustrating is that these rentals are prohibited by law, which the CTO says applies for all rentals of less than 30 days. In Greece, where there is a similar provision, the penalty is a hefty 30 day jail sentence for the owner.

Of course, the taxation of these foreign investors could have an adverse impact on attracting them to buy properties with the aim to rent them to others (Buy-to-Let). But this would only affect the British home owners, because the other nationalities are not interested in renting them out; but surely this does not justify illegal rentals, plus there does not seem to be much demand for this from potential buyers. A 3bedroom villa with pool in Paphos would earn an annual rent (summer period) of around EUR 20,000, in the Famagusta area

about 25,000 a year, while beach-front villas are rented for around EUR 30,000-35,000 a year. Is it, therefore, reasonable or fair that apart from the illegality that prevails with the blessing of the State, that the owner does not pay a penny in dues?

But the decision for taxation and the collection are two different issues. I believe that foreign owners do not wish to have any problems with the local authorities and would probably comply to any measures, while the cooperation of local authorities is also necessary. In the current recessionary period, all countries want to improve their taxation capabilities. The government in Britain, for example, is at present conducting wide scale research to see what homes and investments its citizens have abroad and income is earned from them.

So, in an effort to improve collection and help raise funds that will be re-invested in local infrastructure projects, I suggest the following:

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

Plot Area: 556 sq.m.

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

• On the date that the sales agreement is deposited at the local Land Registry, a foreign buyer must sign a declaration that if he intends to rent out the property in future, that this will be declared to the local or tax authorities.

• When transferring property to a new buyer, a declaration must be signed that the unit has never before been rented, or if it has, to provide the necessary details (false declaration to the authorities is major legal offence).

• To submit an annual declaration to the Local Authority if the property has been rented during the year, and for how much, so that the Authority should be able to collect the local tax for renting, after which the Authority will inform the Inland Revenue, accordingly.

• Developers, real estate agents and other professionals involved in the rent business, including rent management and administration, must declare those units

rented under their own responsibility, with yearly reports.

• In relation to the above and to encourage owners to declare the rent, there should be a provision that when proof of payment of rent is submitted, 5% be refunded from the income tax of the total rent, provided that the tax has already been paid by the landlord.

Even if the last provision is adopted and the state loses, say, about EUR 2 mln a year (compared to the EUR 22 mln it should be collecting), the general tax increase will have a positive effect because it will help increase demand for hotel holidays, increase the income of local authorities from rental fees, limit to some extent the rampant rent, reduce tax evasion and will certainly increase the sense of fairness and stability among all other normal tax-paying citizens and home owners. www.aloizou.com.cy ala-HQ@aloizou.com.cy

August 5-11, 2015

14 | MARKETS | financialmirror.com

The times they are a-changin’ in China

By Oren Laurent President, Banc De Binary

Back in June, I wrote about the risks of the Chinese stock market falling. The Shanghai Composite, China’s leading index, had been climbing for 12 months, reaching a rate of over 4600. It was clear that the market was the highest it had been since July 2007, only months before the great crash which occurred soon after. Just like in 2007, the Chinese stock market has crashed again, leaving old Chinese men heartbroken, watching their retirement funds dwindling.

If there is one rule in the stock market, it’s that whatever comes up, must eventually come down. Just like Newton’s law of gravity, the stock market is susceptible to natural forces. It was greed which caused investors to over-value Chinese stocks to begin with, and it is fear which is currently gripping the trading community, causing everyone from individuals to large financial firms to sell-off their shares.

So, will the Chinese market ever rise again? What are the crucial factors investors should be watching out for, and what effect will this have on global markets? The good news, if there is any, is that a change is going to come. As Bob Dylan sang: “the times they are a-changing.”

At this particular moment in time, China is a command economy. Unlike Europe and the United States, the Chinese government doesn’t trust the free market system. In communist countries, including North Korea, Cuba, and the

former Soviet Union, the quantity of any goods produced and the price of those goods, are determined by the government.

The command economy system has worked for China up until now, but it is clear that a change is necessary for China to continue progressing into the future. China is interested in having its currency, the Renminbi, included in the IMF’s basket of reserve currencies, and this dream could bring about major reforms in China’s economy.

The second major change occurring in China currently is a crackdown on China’s shadow banking system. Unlike most developed nations, where lending is done by the big banks, in China there is a wide network of non-regulated lenders. Shadow banking has allowed riskier borrowers to receive credit by paying higher interest rates, and many analysts are now asking whether China’s over-valued stock market was caused by the inability to tame these risky lenders.

Michael Taylor, chief credit officer for Asia-Pacific at Moody’s, said in early 2015: “Although shadow banking has continued to grow, it has done so more slowly in recent quarters as regulatory measures to rein in the sector’s growth

appear to be having an effect.”

Should the Chinese market continue to fall, investors must be on the lookout for the effect it could have on Europe. Europe is China’s largest trading partner, amounting to EUR 1 bln per day. European companies like Phillips, and BMW, have already expressed their anxieties that a weaker China could hurt their businesses. On that note, hopefully Chinese stocks will correct themselves soon. The Chinese economy isn’t the only thing at stake here.

Please note that this column does not constitute financial advice.

Asset allocation: overweight global equities Markets Report ByColin Graham BNP Paribas Investment Partners

After the euro summit about Greece on 12 July, things moved more quickly towards clarification. Declining uncertainty was seen as positive for risky assets. After having taken profits on our long duration position in core eurozone government bonds some time ago, we felt it time for an overall re-risking.

Supporting this rationale was our expectation of better economic growth in the industrialised world and, even with a Fed rate hike likely later this year, a still accommodative monetary environment. We have thus gone overweight in global equities.

The additional efforts by the Chinese authorities to stabilise China’s equity markets contributed to a much more positive market risk sentiment, which has been underlined by the subsequent sharp plunge in volatility.

This also supports the expressed earlier in our commentary on Chinese equities and our avoiding an underweight in emerging equities, because it is one of the few broad asset classes that, in our opinion, is still attractively valued. The outlook for growth is cloudy not just in China, but in numerous other countries. So we think it is too early to consider an overweight in emerging market

equities on valuation grounds.

We prefer to be exposed to the attractive valuations of emerging equities via emerging Asia, which we believe offers good value and quality. Underlying earnings in Asia are on a par with developed companies’ earnings; monetary and fiscal policies are more supportive and we believe in the region’s reform progress. We are overweight Asian emerging equities versus broad emerging equities. Since we invest in MSCI indices, our exposure to Chinese domestic shares, which have made much larger moves than Chinese shares traded in Hong Kong, is limited. So we did not benefit on the upside, but we also did not suffer from the correction.

We expressed our concerns about China by going underweight in emerging market debt denominated in US dollars. This asset class has benefited from the search for yield among investors and has seen stronger inflows than emerging market equities. In an environment of fading liquidity, a lower appetite for this asset class leads us to conclude that emerging market debt is at risk of being the target of ‘hot money’ flows. This could be even more the case for corporate debt, which makes up about 20% of our investment universe.

As said, valuation-wise, emerging equities (particularly Asian) offer value in an otherwise expensive range of asset classes, while emerging market hard currency debt is

neutral. It offers no yield pickup over US credit with comparable ratings and there is a risk that yields will rise in the US once the Fed starts tightening. Local currency debt has been bolstered by recent currency depreciations as the foreign exchange element has added to its appeal. Finally, local currency debt has lagged emerging equities by more than hard currency debt, while historically, the two asset classes have been closely linked.

Within Europe, we kept an overweight in high-yield corporate bonds for fundamental and carry reasons. We are overweight small caps versus large caps in Europe, which is related to our positive view on where Europe is in the economic cycle relative to emerging economies. Thus, we are exposed to European assets, but the exposure is somewhat hedged by our short euro position versus the US dollar.

In commodities, we don’t yet foresee a turning point in prices, and prices have fallen to very low levels. This level of valuations limits the further downside potential for commodities so we have closed the underweight in commodities.

Flexible multi-asset positions In our flexible multi-asset positions, we implemented a convergence trade by going long US Dollar high yield debt versus credit default swaps, because the spread differential

and spread ratio are attractive.

We have a long position in the Japanese yen versus the euro and the South Korean won to hedge China-related risk. The yen is traditionally a safe haven currency in periods of trouble. We don’t see any signs that the Bank of Japan will try to weaken the yen further through an increase in its quantitative easing. Given high exposure to China and domestic weakness, the Bank of Korea may cut even rates further at some point.

We are overweight the US consumer discretionary and information technology sectors, which should benefit from rising consumer spending.

We are positive on the outlook for Japanese credit and long 5-year forward US inflation swaps.

We are long the cheap Mexican peso versus the strong British pound and long the US dollar versus the overvalued Swiss franc.

We are long the yen versus a 50/50 split of the US dollar and the New Zealand dollar.

Our valuation models indicate that the yen is cheap versus both currencies and, faced with weak economic data, the Reserve Bank of New Zealand recently had to abort its hiking cycle and started to cut rates in July. As in Australia, the central bank would like to see a weaker currency.

Just as in our core allocation, we are short the euro versus the US dollar. colin.graham@bnpparibas.com

August 5-11, 2015

financialmirror.com | MARKETS | 15

Stop worrying and learn to love cheap oil Marcuard’s Market update

by GaveKal Dragonomics In almost every financial cycle there comes a point when the publicly expressed views of analysts and investors diverge completely from market behaviour. Occasionally, this can be what George Soros has called a moment of truth, when investors suddenly realise that a financial boom has wildly overshot economic fundamentals and is about to turn to bust. But often it turns out that the markets have grasped a message that has not yet been consciously understood by investors — and it is analyst expectations that ultimately have to adjust.

Monday may have a marked such a moment in the oil and commodity cycles and their interaction with the world economy. Although the collapse of oil prices began more than a year ago, in July 2014, most energy experts, ranging from investment analysts and investors to OPEC ministers and “big oil” executives, have been in denial about the

fundamental political, economic and geological forces driving this market rout.

Even the prospect of Iran’s re-emergence as the world’s third biggest oil exporter, which was almost guaranteed to cause the next downward lurch in prices was initially dismissed by many analysts as a minor factor that would take until 2016 or even 2017 to affect global supply and demand.

But Monday may have been a moment of truth when investor expectations began to catch up with realities that many energy analysts have found it difficult (or unbearably expensive) to accept. A shift in psychology was suggested by the way that equity prices steadied and then rallied in New York, even as oil prices closed on their lows. This market behaviour, if it continues in the days ahead (a big “if”, of course), may imply that investors are no longer treating the collapse in oil prices as a leading indicator of global economic weakness and instead may soon start to recognise cheap oil for what it has always been and still is today: a very powerful

www.marcuardheritage.com

stimulant for global growth.

One reason investors have been slow to recognise the macroeconomic benefits of low oil prices is the state of denial among energy experts about the oil market itself. This phase of denial may also now be ending, as energy investors recognise the economic and political fundamentals that are likely to keep oil prices low for years ahead, even if the world economy accelerates strongly, as it did after the oil price crash of 1986: 1) Global oil supplies clearly exceed the probable growth in long-term demand. This is a consequence of potentially unlimited supplies of shale oil, not only in North America but also in Argentina, Russia and China. Meanwhile, on the demand side, steady reductions in the oil intensity of economic growth are inevitable because of environmental regulations and technological advances that are rapidly improving the economics of solar, wind and battery power.

2) The combination of technology, pricing and regulation above means that much of the oil that has already been discovered will never be produced and instead will become a “stranded asset” similar to most of the world’s known coal reserves. This means that searching for new oil reserves in high cost locations such as the Arctic and deep oceans is a monumental waste of money and a misallocation of capital that makes subprime property look like a prudent investment worthy of Warren Buffett. Yet drilling for oil in challenging locations is what many oil company executives still regard as their core competence.

3) Now that Saudi Arabia has realised that its oil reserves will become a stranded asset if it allows other producers to squeeze its market share, the oil trade has been transformed from a monopoly or oligopoly into a more or less normal competitive commodity market. Saudi Arabia or OPEC can no longer set a price and then defend it as that would mean cutting back Saudi production continuously to accommodate the increasing amounts of new oil that can be produced, even at high prices, in North America in addition to that which will again soon be available from Iran and Iraq, and eventually also Russia, Libya and Nigeria.

4) Geopolitical and security conditions are already so bad in many oil producing regions that military and political changes in the years ahead are likely to be conducive to more oil production, not less. And since prices are made at the margin, geopolitical surprises should now be viewed mainly as a major downside risk to oil prices.

5) As a result of the points above, oil prices are now determined by supply conditions much more than by demand. This is an important point about commodity pricing generally that Andrew Batson has discussed in his work on China and iron ore. It means that rising and falling prices should no longer be considered a leading indicator of global or Chinese GDP, but instead mainly as a function of supply conditions and production costs. Fluctuations in

global economic activity or Chinese growth will have only a minor effect on oil prices in future, compared to the large swings in supply dictated by geopolitical events such as the Iran settlement or an end to Russian sanctions and the changing economics of shale.

6) Since oil is now priced in a more or less competitive market and US shale drillers have become the swing producers, the marginal costs of US shale production should be seen as a ceiling, not a floor, for the long-term price of oil.

With fracking technology advancing and intense competition now forcing production costs and wages downwards, that marginal cost ceiling is turning out to be much lower than the $70 or so that many analysts predicted—and it is more likely to fall than to rise in the years ahead.

WORLD CURRENCIES PER US DOLLAR CURRENCY

CODE

RATE

EUROPEAN

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

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

15420 1.5595 1.7816 24.649 6.7981 14.255 1.0975 2.27 281.01 0.6403 3.1458 0.3911 18.78 8.2202 3.785 4.0121 62.7097 8.6229 0.9684 21.3

AUD CAD HKD INR JPY KRW NZD SGD

0.7394 1.3142 7.7538 63.7775 123.93 1165.09 1.5132 1.3758

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

0.3770 7.8086 29566.00 3.7823 0.7083 0.3029 1505.00 0.3850 3.6410 3.7498 12.6561 3.6729

AZN KZT TRY

1.048 187.65 2.7716

AMERICAS & PACIFIC

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

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

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

Investments in foreign currencies are subject to exchange rate fluctuations.

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

ASIA

Azerbaijanian Manat Kazakhstan Tenge Turkish Lira Note:

The Financial Markets

* 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 -0.09 0.06 -0.79

0.25 0.54 -0.05 0.08 -0.76

0.30 0.58 -0.02 0.10 -0.74

0.49 0.75 0.05 0.13 -0.69

0.81 1.07 0.17 0.25 -0.59

CCY/Period USD GBP EUR JPY CHF

2yr

3yr

4yr

5yr

7yr

10yr

0.90 1.11 0.09 0.13 -0.68

1.21 1.34 0.16 0.14 -0.62

1.46 1.52 0.27 0.18 -0.46

1.67 1.65 0.39 0.22 -0.33

1.97 1.84 0.65 0.36 -0.04

2.25 2.00 0.99 0.56 0.24

Exchange Rates Major Cross Rates

CCY1\CCY2 USD EUR GBP CHF JPY

Opening Rates

1 USD 1 EUR 1 GBP 1 CHF 1.0972 0.9114

100 JPY

1.5593

1.0322

0.8068

1.4212

0.9408

0.7353

0.6620

0.5174

0.6413

0.7036

0.9688

1.0630

1.5106

123.95

136.00

193.28

0.7816 127.94

Weekly movement of USD

CCY

Today

134.85

GBP EUR JPY

1.0546

CHF

1.5593 1.0972 123.95 0.9688

CCY\Date

07.07

14.07

21.07

28.07

04.08

USD GBP JPY CHF

1.0978

1.0948

1.0766

1.1022

1.0886

0.7041

0.7070

0.6916

0.7078

0.6980

134.51

135.08

133.78

136.04

1.0350

1.0395

1.0371

1.0589

Last Week %Change 1.5572 1.1022 123.43 0.9607

-0.13 +0.45 +0.42 +0.84

August 5-11, 2015

16 | WORLD | financialmirror.com

Can the Euro be repaired?

By Jean Pisani-Ferry When Wolfgang Schäuble, Germany’s finance minister, recently tabled the option of a Greek exit from the euro, he wanted to signal that no member could abstain from the monetary union’s strict disciplines. In fact, his initiative triggered a much broader discussion of the principles underpinning the euro, its governance, and the very rationale for its existence.

Only a fortnight before Schäuble’s proposal, Europe’s leaders had barely paid attention to a report on the euro’s future prepared by European Commission President Jean-Claude Juncker and his colleagues from the other European Union institutions. But the new dispute over Greece has convinced many policymakers of the necessity to return to the drawing board.

Meanwhile, citizens wonder why they share this currency, whether it makes sense, and if agreement can be reached on its future.

For currencies, as for countries, founding myths matter. The conventional wisdom is that the euro was the political price Germany paid for French acquiescence to its reunification. In fact, German reunification only provided the final impetus for a project conceived in the 1980s to resolve a longstanding dilemma.

European governments were both strongly averse to floating exchange rates, which they assumed would be incompatible with a single market, and unwilling to perpetuate a Bundesbankdominated monetary regime. A truly European currency built on German principles appeared to be the best way forward.

In retrospect, German reunification was more a curse than a blessing. When exchange rates were locked in 1999,

Germany’s was overvalued, and its economy was struggling; France’s was undervalued, and its economy was booming. During the ensuing decade, imbalances slowly grew between a resurgent Germany and countries where low interest rates had triggered credit booms. And when the global financial crisis erupted in 2008, conditions were ripe for a perfect storm.

No one can say how Europe would have evolved without the euro. Would the fixedexchange-rate system have endured or collapsed? Would the Deutschemark have been overvalued? Would states have reintroduced trade barriers, ending the single market? Would a real-estate bubble have developed in Spain? Would governments have reformed more or less?

Establishing a counterfactual baseline against which the euro’s impact could be assessed is impossible. But that is no excuse for complacency. Over the last 15 years, the eurozone’s economic performance has been disappointing, and its policy system must answer for this.

What really matters is whether a common European currency still makes sense for the future. This question is often evaded, because the cost of exiting is deemed too high to consider it (and could be higher still if the break-up takes place in a crisis and sharpens reciprocal acrimony among participating countries). Moreover, pulling the plug on the euro could unleash the dark forces of nationalism and protectionism.

But, as Oxford’s Kevin O’Rourke recently argued, this is hardly a sufficient argument.

It is the logical equivalent of advising a couple to remain married because divorce is too expensive.

So does the euro still make sense? It was expected to deliver three economic benefits.

Monetary union, it was assumed, would foster economic integration, bolstering Europe’s long-term growth. Instead, intraeurozone trade and investment have increased only modestly, and growth potential has actually weakened. This is

partly because national governments, rather than building on currency unification to turn the eurozone into an economic powerhouse, tried to hang onto their remaining power. This was perhaps logical politically, but it made no economic sense: Europe’s huge domestic market is one of its main assets, and opportunities to strengthen it should not be squandered.

Second, it was hoped that the euro would become a major international currency (particularly given how few countries are equipped with the necessary legal, market, and policy institutions). And, according to recent ECB statistics, this hope has been largely fulfilled. With international use of the euro behind only the US dollar, this achievement can help Europe to continue shaping the global economic order, rather than sliding into irrelevance.

Third, it was (somewhat naively) believed that the institutions underpinning the euro would improve the overall quality of economic policy, as though Europe-wide policies would automatically be better than national ones. The acid test came in the aftermath of the 2008 global financial crisis: because it overestimated the fiscal dimension of the crisis and underestimated its financial dimension, the eurozone

performed worse than the United States and the United Kingdom.

If the euro is to create prosperity, further reforms of the policy system are therefore needed. But an agenda can be designed and implemented only if there is a broad consensus on the nature of the problem.

And, as the ongoing dispute over Greece illustrates, agreement remains elusive: Participating countries have developed contradictory analyses of the causes of the debt crisis, from which they derive contradictory prescriptions.

Richard Cooper of Harvard University once observed that in the early days of international public health cooperation, the fight against global diseases was hampered by countries’ adherence to different models of contagion. They all favored joint action, but they could not agree on a plan, because they disagreed on how epidemics crossed borders.

That is the problem the eurozone faces today. Fortunately, it is not unsolvable, as significant reforms like the creation of the European Stability Mechanism and the launch of banking union show.

Disagreements also did not prevent the ECB from acting boldly, which illustrates that the governance of institutions does matter. But the fact that reforms and actions were undertaken only lately, and under the pressure of acute crisis, is a sobering reminder of the difficulty of reaching consensus.

Europe cannot afford to procrastinate and pretend. Either the eurozone’s members find agreement on an agenda of governance and political reforms that will turn the currency union into an engine of prosperity, or they will stumble repeatedly from dispute to crisis, until citizens lose patience or markets lose trust.

Clarity is a prerequisite of serious discussion and ambitious reform. Each of the major participants now has an obligation to define what it regards as indispensable, what it considers unacceptable, and what it is ready to give in exchange for what it wants.

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

August 5-11, 2015

financialmirror.com | WORLD | 17

The profit-sharing economy

By Laura D. Tyson Over the last 35 years, real wages in the United States failed to keep pace with productivity gains; for the typical non-farm worker, the latter grew twice as fast as the former. Instead, an increasing share of the gains went to a tiny fraction of workers at the very top – typically high-level managers and CEOs – and to shareholders and other capital owners. In fact, while real wages fell by about 6% for the bottom 10% of the income distribution and grew by a paltry 5-6% for the median worker, they soared by more than 150% for the top 1%. How can this troubling trend be ameliorated?

One potential solution is broad-based profit-sharing programmes. Together with job training and opportunities for workers to participate in problem-solving and decisionmaking, such programms have been shown to foster employee engagement and loyalty, reduce turnover, and boost productivity and profitability.

sharing schemes must be structured to prevent this outcome, and strong collective bargaining rights can help provide the necessary safeguards.

Third, if inclusive profit-sharing programmes are to have the desired effect on productivity, they should be combined with other initiatives to empower workers. One

Profit sharing also benefits workers.

Indeed, workers in companies with inclusive profit-sharing and employee-ownership programs typically receive significantly higher wages than workers in comparable companies without such arrangements.

About half of Fortune’s list of the 100 best companies to work for have some kind of profit-sharing or stock-ownership programme that extends beyond executives to include regular workers.

Despite the demonstrated benefits of broad-based profit-sharing programmes, only about one-third of US private-sector workers participate in them, and about 20% own stock in their companies. If these programs work so well, why are they not more widespread?

First, executives for whom shared profits already account for a significant portion of income may resist programmes that distribute profits to more workers, fearing that their own income would decline. Even when such programs increase overall profitability, they could reduce the profits going to top management and shareholders.

Second, workers are concerned that profit-sharing may come at the expense of wages, with the substitution of uncertain profits for certain wages resulting in lower overall compensation. Effective profit-

way to achieve this is by establishing “works councils,” elected groups of employees with rights to information and consultation, including on working conditions.

Works councils and strong collective bargaining rights, both features of highproductivity workplaces, are common in developed economies. But they are lacking in the US, where federal law makes it difficult for companies to establish works councils and prohibits negotiations between employers and employees over working conditions outside of collective bargaining, even though most workers lack collective bargaining rights.

Promisingly, the United Automobile Workers union recently announced that, as it continues to push for collective bargaining rights, it is also cooperating with management to form a works council in the Germanowned Volkswagen plant in Tennessee.

The fourth impediment to the establishment of profit-

sharing programmes is that they require a fundamental shift in corporate culture.

Though most companies emphasise the importance of their human capital, top executives and shareholders still tend to view labor primarily as a cost driver, rather than a revenue driver – a view embedded in traditional and costly-to-change humanresources practices.

Unlike the financial benefits of reducing labour costs, the financial benefits of profit sharing, realised gradually through greater employee engagement and reduced turnover, are difficult to measure, uncertain, and unlikely to have an immediate effect on earnings per share, a major determinant of executive compensation.

It is unsurprising, therefore, that the advantages of profitsharing are undervalued by many companies, especially those that focus on shortterm success metrics.

Moreover, even when they do recognise the advantages of profit sharing, companies may lack the technical knowledge needed to design a program that suits their needs.

Some states have established technicalassistance offices primarily to help small and medium-size companies overcome this gap.

The federal government should create its own technical-assistance programme to build on states’ efforts and reach a larger number of companies.

From a policy perspective, much more can be done to encourage firms to create broad-based profit-sharing arrangements.

Current US law allows businesses to deduct from their taxable income the wages of all employees, except the top five executives, for whom deductions are limited to $1 mln of annual pay, unless the excess compensation is “performance-related.” Spurred partly by this tax incentive, corporations have shifted top executives’ compensation toward shares, options, and other forms of profit sharing and stock ownership, largely leaving out regular workers.

Some have proposed limiting the tax deduction for performance-based pay to firms with broad-based profit-sharing programmes. But, although this approach might encourage profit sharing with more workers, it would continue to provide companies with significant tax breaks for huge compensation packages for top executives.

US presidential candidate Hillary Clinton has a more targeted proposal: a 15% tax credit for profits that companies distribute to workers over two years. By providing temporary tax relief, the scheme would help companies offset the administrative costs of establishing a profit-sharing program. In order to limit costs and prevent abuse, profits totaling more than 10% on top of an employee’s wage would be excluded; the overall amount offered to individual firms would be capped; and safeguards against the substitution of profit sharing for wages, raises, and other benefits would be established. The tax credit could also foster changes in corporate culture, by spurring board-level discussions not only of the benefits of profit sharing, but also of sharing information and decision-making authority with employees.

The stagnant incomes of the majority of US workers are undermining economic growth on the demand side (by discouraging household consumption) and on the supply side (through adverse effects on educational opportunity, human-capital development, and innovation). It is time to take action to promote stronger and more equitable growth. Clinton’s profit-sharing proposal is a promising step in the right direction.

Laura Tyson, a former chair of the US President’s Council of Economic Advisers, is a professor at the Haas School of Business at the University of California, Berkeley, and a senior adviser at the Rock Creek Group. © Project Syndicate, 2015. www.project-syndicate.org

August 5-11, 2015

18 | WORLD | financialmirror.com

Containment begins at home

By Nina L. Khrushcheva Earlier last month, Muhammad Youssef Abdulazeez, a 24-year-old US citizen of Middle Eastern descent, opened fire at two military sites in Chattanooga, Tennessee, killing five. This act of local horror was also one of national significance, for it vindicated the late US diplomat and strategist George F. Kennan’s warning that American foreign policymakers should hold in check their urge to act, especially militarily. One can never know when the blowback will come, Kennan warned, but it will.

Indeed, unforeseeable consequences were precisely what concerned Kennan when the United States charged into Afghanistan in 2001 and Iraq two years later. After all, it was no coincidence that many of those the US was fighting in Afghanistan, including Osama bin Laden himself, had been associated with the Mujahedeen, the guerillastyle units of Muslim warriors whom US forces trained as insurgents during the 19791989 Soviet occupation. Likewise, the US had armed Saddam Hussein’s Iraq to go to war with Iran in the 1980s.

Following the terrorist attacks of September 11, 2001, Americans asked, “Why do they hate us?” Yet, though the US has experienced no attack on its soil since then, US President George W. Bush’s administration pursued, virtually unchecked, the destruction of two Muslim countries – and the devastation has continued beyond Bush’s tenure with an ever-intensifying campaign of drone strikes.

These policies have helped push Afghanistan to the precipice of state failure, while opening the way for the Islamic State to take over more than one-third of Iraq’s

The countries with the biggest nuclear arsenals According to ican, nine countries across the world possess over 15,000 nuclear weapons with both the US and Russia maintaining an estimated 1,800 of them on high-alert status.

With 7,500 warheads, Russia has the biggest nuclear arsenal worldwide, followed closely by the US with 7,200.

France rounds off the top three with 300 warheads. According to ican, Israel is ambiguous about its nuclear capabilities, neither confirming nor denying it possesses such weapons.

However, estimates suggest it has approximately 80 warheads. North Korea is believed to have fewer than ten nuclear weapons, though it is not clear if it has developed the capability to deliver them. (Source: Statista.com)

territory. The resulting discontent in those countries and across the Muslim world has increasingly been felt in Europe – and now is emerging in the US, too.

To be sure, US criminal investigators have not officially identified the motives of the Kuwaiti-born Abdulazeez, who does not seem to have belonged to a terror network.

But there is plenty of precedent for an alienated and disenchanted young man, brought up in the West (Abdulazeez attended high school and college in Chattanooga), to seek a cause worth fighting for – and to find it in the perceived humiliation of Islam

by America and the West.

Of course, as soon as the word “Islam” appears, Western media start painting such “lone wolves” as agents of some vast Islamic conspiracy, rather than deeply wounded and desperate individuals.

Such an interpretation makes the act easier to understand: a cog in a terrorist network would be compelled, even brainwashed, to mount such an attack. But when the attacker is a solitary individual – an American citizen, no less – it raises serious questions about the system from which he or she (though almost always a he in these cases) emerged.

According to some press accounts, Abdulazeez felt a sense of failure at his inability to meet America’s standard of success, of which money is the primary measure. Though he did not appear deeply religious, he allegedly praised the late Anwar al-Awlaki, a US-born al-Qaeda cleric and an advocate of attacks on “hypocritical”

America, as a model of triumph over failure.

Another question about the US system stems from the refusal of Abdulazeez’s health insurer to approve his participation in an inpatient drug and alcohol programme. This is far from the first time the US has experienced a mass murder by someone whose mentalhealth issues, including addiction, had been overlooked. Does this reflect a systemic failure? More fundamentally, does it controvert America’s principles?

Rather than considering such questions, the US remains focused on the external scourge of Islamic terrorism.

Kennan recognised this tendency decades ago, when he warned that shortsighted policies at home and abroad had already put America in a vulnerable position.

Instead of basking in its own superiority, he advised, the US should learn from the mistakes of its enemies, including Russia.

In the 2000s, Kennan compared the Bush administration’s “global war on terror” to Russia’s wars against Chechen separatists in the North Caucasus. When the Soviet Union dissolved in 1991, Boris Yeltsin, Russia’s first president, promised its subjects “as much sovereignty as they can swallow.”

The Chechens, who had sought independence from Russia for centuries, took this promise as an opportunity for selfdetermination. But Yeltsin, unwilling to lose any more territories after the Soviet Union’s initial breakup, reneged on his pledge.

In 1993, the first Chechen war erupted.

Russia managed to defeat the separatists and

“Instead of basking in its own superiority, the US should learn from the mistakes of its enemies, including Russia”

maintain control over Chechnya. But it was a Pyrrhic victory, given that it drove many disillusioned and angry Chechens toward religious fundamentalism.

As a result, when the second Chechen war began in 1999, the fight was no longer just about Chechen independence from Russia; it was a fight for Islam, waged against Christians everywhere. Russia, under Yeltsin’s successor, Vladimir Putin, defeated the separatists again, restoring federal control over the territory. Fifteen years later, Chechen extremists are fighting alongside the Islamic State.

One might object to comparing America’s desire to export democracy at the barrel of a gun to Russia’s imperial death spasms under Yeltsin and Putin. But, whether we like it or not, there is a strong parallel between them: both countries are perceived to be dictating to Muslims.

And, in fact, it was Kennan who first drew my attention to this similarity, when in a private conversation about 9/11, he noted that, for many Muslims, Russia and the West were becoming indistinguishable. Both were viewed as secular states antagonistic to Islam.

Kennan warned that, just as the first Chechen war bred national and individual resentment, America’s wars in Afghanistan and Iraq would only fuel more hatred and frustration – which would eventually blow back onto the US. “The failure to fit the system makes people attack that system,” he said, “so it is never wise to bomb nations to freedom.”

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

August 5-11, 2015

financialmirror.com | WORLD | 19

No agnostics in the climate foxhole

By John Hewson On a recent 14.5-hour flight from Los Angeles to Sydney, I had time to read the columnist Charles Krauthammer’s collection of essays, Things that Matter. It made for a disturbing flight.

I have enjoyed Krauthammer’s writing over the years, but there was something in his book that I found deeply troubling: his description of himself as an “agnostic” on climate change. He “believes instinctively that it can’t be very good to pump lots of carbon dioxide into the atmosphere,” and yet he “is equally convinced that those who presume to know exactly where that leads are talking through their hats.”

The word that I found most galling was “agnostic” – not only because Krauthammer is a trained scientist, but also because the word was used repeatedly by former Australian Prime Minister John Howard when he addressed a group of climatechange deniers in London in late 2103. “Part of the problem with this debate,” Howard told the assembled skeptics, “is that to some of the zealots involved their cause has

become a substitute religion.”

As Howard and Krauthammer should know, the subject of climate change is not a matter of religion, but of science. According to a 2013 survey of peer-reviewed publications on the subject, some 97% of scientists endorse the position that humans are causing global warming. Anyone familiar with the scientific process is aware that researchers are trained to disagree, to contest one another’s hypotheses and conclusions. A consensus of such magnitude is as close as we ever get to a recognised scientific fact.

Given that even Krauthammer concedes that pumping the atmosphere full of carbon dioxide “can’t be very good,” the next logical step in the debate is to determine the best way to address the problem. As an economist, I favor an auction-based cap-andtrade system to put a price on carbon. But I also understand the potential usefulness of regulatory measures like targets for renewable energy, bans on incandescent light bulbs, and mandates for the use of biofuels. What I cannot accept is for somebody who offers no solutions to claim that those of us who do are “talking through our hats.”

Fortunately, voices like Krauthammer’s are becoming increasingly rare. To be sure, there are still holdouts, like Australian Prime Minister Tony Abbott, who replaced a carbon

tax with a plan to tax the country’s citizens in order to pay polluters to cut emissions. As a policy, this is inequitable, inefficient, and unlikely to lower emissions at a pace that is sufficient to meet the conditions of the global climate-change agreement expected to be reached in Paris in December.

A sure sign of a shift in mentality is the growing recognition by financial institutions that loans and investments may be overexposed to the risks of climate change.

These risks include natural disasters, more extreme weather, efforts by governments to reduce greenhouse-gas emissions, and the knock-on effect of a technological revolution in renewables, energy efficiency, and alternative technologies.

According to the Asset Owners Disclosure Project, which I chair, the top 500 global asset owners are alarmingly exposed to the dangers of climate change. More than half of their investments are in industries exposed to the dangers of climate change; less than 2% are in low-carbon intensive industries. As a result, there is a risk that their investments and holdings will become “stranded,” as changes in policy or market conditions cut the value of infrastructure, other property, and fossil-fuel reserves. As Hank Paulson, Secretary of the US Treasury when the global financial crisis erupted in 2008, once warned, the risks of a climate-induced

financial crisis would dwarf those of the subprime crisis.

The price of coal, for example, has plunged to around half of its peak level, with plenty of room remaining on the downside.

Consequently, shares in coal companies have fallen by as much as 90%, leaving asset owners scrambling to divest. By contrast, investing in a company like Tesla Motors – which has now developed a rechargeable battery for home use, which could lead to a sharp increase in the number of households switching to solar power – looks far more attractive.

As this realisation percolates through the market, asset owners are hedging their bets by increasing their investments in lowcarbon industries and companies like Tesla.

Over time, this will have a significant effect on the allocation of global investment funds.

Krauthammer may think that I am talking through my hat, but I am confident that soon enough he – and those who listen to him – will be eating theirs.

John Hewson, a former leader of Australia’s Liberal Party, is Chair of the Asset Owners Disclosure Project. © Project Syndicate, 2015 - www.projectsyndicate.org

Obama unveils sweeping cuts to power plant emissions Six years after first promising to “roll back the spectre of a warming planet”, Barack Obama finally committed the US to unprecedented action against climate change on Monday, with sweeping new curbs on carbon emissions from power plants that are equivalent to taking 70% of American cars off the road, according to reports by EurActiv and The Guardian.

The culmination of his long-fought battle against coal industry lobbyists and climate change sceptics in Congress was greeted with jubilation by many environmentalists who described the tougher-than-expected regulations as a “game-changer”.

Describing it as “the single most important step America has ever taken in the fight against climate change”, Obama warned it was almost too late: pointing out that 14 of the 15 warmest years on record have already fallen in the first 15 years of this century.

“Climate change is no longer about protecting the world for our children and grandchildren, it is about the reality that we are living with right now,” Obama said in a speech announcing the plan. “We are the first generation to feel the impact of climate change and the last generation that can do something about it.”

But, recalling his own experience amid the smog of 1970s Los Angeles, Obama also insisted that tackling climate change was an achievable goal – comparing it to past environmental achievements in improving air quality, and measures to tackle acid rain and polluted rivers.

“I don’t want my grandkids not to be able to swim in Hawaii or climb a mountain and see a glacier because we didn’t do something about it,” he added in an unusually personal speech on a subject that has previously proven toxic for his political strategists.

White House officials hope the timing of their binding pollution regulations – the first ever US limit on carbon pollution from power plants – will help persuade other big carbon-emitting countries to sign up to international targets at a major climate change conference in Paris this December.

“I don’t want to fool you, this is going to be hard. No single action, no single country will change the warming of the planet,” added Obama. “But today, with America leading the way, countries representing 70% of carbon emissions have announced plans to tackle emissions … We can solve this thing, but we have to get going.”

Under the Clean Power Plan, published in its final form by the US Environmental Protection Agency (EPA) on

Monday, states will now be required to work with electricity producers to reduce overall carbon emissions by 32% below 2005 levels by 2030.

The target is slightly higher than the 30% cut envisaged under draft proposals last year, but states have been given an extra two years before implementation becomes mandatory and are left to decide what mix of renewable energy, gas generation or efficiency savings is the best way to achieve the target.

The 1,000 fossil fuel-fired power plants in US are by far the largest source of CO2 emissions in the country, making up 32% of total greenhouse gas emissions. Experts predict the EPA standards will force US coal production back to levels last seen in the 1970s.

Investment in renewable alternatives, such as wind, hydro and solar power, together with mandatory new carbon-capture equipment are expected to cost the electricity industry $8.4 bln, although the EPA claims this will be dwarfed by $34-$54 bln in wider environmental benefits.

Some campaigners stressed the carbon reduction targets, which are already partially achieved by many states, are only a start toward what is necessary to curb climate change.

“While historic, when measured against increasingly dire scientific warnings it is clear the rule is not enough to address our climate crisis,” said the Friends of the Earth president, Erich Pica. “This rule is merely a down payment on the US’s historic climate responsibility.”

Others heralded the rule as a turning point. “It’s a simple idea that will change the world: cut carbon pollution today so our kids won’t inherit climate chaos tomorrow,” said the Natural Resources Defense Council president, Rhea Suh. Many international companies have also supported the plan. EBay, Nestlé and General Mills were among 365 businesses to sign a letter in support of the proposals and encouraging states not to delay implementation.

Nonetheless, the plan is expected to run into a wall of opposition from Republican-controlled states, many of whom fear it will decimate jobs in the coal industry and drive up electricity prices for consumers.

The depth of feeling among many on the right is particularly visible in the party’s presidential primary, where few major candidates acknowledge the need for emissions controls to tackle climate change.

Jeb Bush, seen as the leading establishment contender for the Republican nomination, slammed the rule as “irresponsible and overreaching” in a statement.

“The rule runs over state governments, will throw countless people out of work, and increases everyone’s energy prices,” he said.

“Climate change will not be solved by grabbing power from states or slowly hollowing out our economy. The real challenge is how do we grow and prosper in order to foster more game-changing innovations and give us the resources we need to solve problems like this one.”

Texas senator Ted Cruz added: “The president’s lawless and radical attempt to destabilise the nation’s energy system is flatly unconstitutional and – unless it is invalidated by Congress, struck down by the courts, or rescinded by the next administration – will cause Americans’ electricity costs to skyrocket at a time when we can least afford it.”

The president first pledged to tackle climate change in his 2009 inauguration address, a commitment he reiterated four years later, but despite more modest achievements on fuel efficiency standards and renewable energy investment, a comprehensive legislation was blocked in the Senate.

Instead, his administration has sought to use pollution control legislation to circumvent political opposition with executive actions that are underpinned by supportive supreme court rulings.

On Monday, Obama said it was not a moment too soon.

“This is one of those rare issues, because of its magnitude and scope, that if we don’t get it right, we may not be able to reverse. There is such a thing as being too late when it comes to climate change,” said the president.

August 5-11, 2015

20 | BACK PAGE | financialmirror.com

Polio’s last stand

By Seth Berkley and Muhammad Pate It has been a tough year for Nigeria. In the last 12 months, the country has suffered attacks by child suicide bombers and brutal massacres by Boko Haram. The vast majority of the 276 schoolgirls abducted in Chibok last year are still missing.

And yet, during this time, despite such horrors, Nigeria has quietly managed to achieve something truly remarkable: an entire year without a single new case of wild polio.

This is a great achievement for Nigeria and all of its partners in the effort to eradicate the disease. Less than 30 years ago, polio plagued 125 countries, paralysing 1,000 children a day. Until now, there were only three countries where the virus was still considered endemic: Afghanistan, Pakistan, and Nigeria. Health officials wait three years before declaring a country polio-free, but the one-year milestone in Nigeria raises hopes that we may have already seen the last case of wild polio in the country – and the whole of Africa.

In addition to the logistical challenge of reaching every child in Africa’s most populated country, the Nigerian polioeradication campaign has had to overcome security issues, opposition by religious fundamentalists, and rampant corruption. The fact that a country as troubled as Nigeria could pull off such an important feat is cause for celebration and provides grounds for optimism, not only in the fight against polio, but for global health efforts in general. Nigeria’s success shows that it is possible to bring the miracles of modern medicine to the world’s most marginalised and hardto-reach children.

This has huge implications for the reduction of childhood mortality. The children that had previously not been reached with polio vaccines live in communities with little or no access to routine immunisation, maternal healthcare, nutritional supplements, deworming, or malaria prevention.

They are the children who are most at risk of dying before they reach their fifth birthday.

Nigeria’s success in reaching these children is the result of

the efforts of thousands of dedicated local volunteers, some of whom lost their lives in the process. Since 2012, there has been nearly a fivefold increase in the number of volunteers involved in mobilizing communities during immunisation campaigns.

Meanwhile, government, global health organisations like the World Health Organisation and UNICEF, civil-society organisations, and community leaders, all working together, managed to identify and bridge the gaps that have historically impaired access to polio vaccines. In early 2012, for example, Nigeria’s government established dedicated emergency operations centres to coordinate data flow, facilitate decisionmaking, and improve accountability within the programme. With support from Gavi, the Vaccine Nigeria is on the last lap towards polio eradication with tremendous Alliance, Nigeria also installed more than 1,600 progress over the past two years but the battle is not yet over solar-powered refrigerators, which are critical to there is now being used to increase coverage of routine ensuring that vaccines remain safe and effective during their immunisation, like the 5-in-1 pentavalent vaccine. India can long journey through the distribution chain. now wind down its polio-eradication campaigns, but still These investments in physical and social infrastructure maintain its polio-free status. provide a means of protecting children from a range of So far, in 2015, only 34 cases of polio have been diseases. Already, polio workers in Nigeria are spending more documented worldwide – the majority of them in Pakistan. than half their time providing unrelated but vital health There is now a very real prospect that we could see the last services. The infrastructure has helped introduce new ever case of wild polio – a disease that once threatened vaccines – such as pneumococcal conjugate vaccines, which millions of people – before the end of 2016. To eradicate the protect against pneumonia, the biggest killer of children disease, however, we will have to build on successes like under the age of five – and increased coverage of routine Nigeria’s and strengthen routine immunisation efforts. The immunisation against measles and rubella. Thanks to the end of polio should mark not just the defeat of a terrible emergency operations centers, this infrastructure even disease, but also the beginning of a new phase in the effort to helped to stop the Ebola outbreak in Nigeria in 2014, by reduce childhood suffering and death, the benefits of which enabling contact tracing and surveillance. will be felt for generations to come.

These efforts have the additional benefit of ensuring that Nigeria cements its polio-free status. The health Seth Berkley is CEO of Gavi, the Vaccine Alliance. infrastructure put in place during the eradication campaign has enabled the deployment of injectable polio vaccines, Muhammad Pate, a former Nigerian health minister and which will complement the oral vaccines in ensuring that the former Chairman of the Presidential Task Force on Polio Eradication in Nigeria, is a professor at Duke University’s virus does not return.

This was also the pattern in India, the most recent country Global Health Institute. to be declared officially free of polio, with no cases since 2010. The infrastructure put in place to deliver polio vaccines © Project Syndicate, 2015 - www.project-syndicate.org

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