Financial Mirror 2015 08 12

FinancialMirror JOSEPH STIGLITZ

JEFFREY FRANKEL

Issue No. 1146 €1.00 August 12 - 25, 2015

America in the way of global growth PAGE 19

The right time to reform fuel pricing PAGE 17

Is IronFX iron-clad?

FOREX GIANT SAYS IT IS VICTIM OF ‘ABUSIVE TRADING’ - PAGE 4

Google throws massive curveball in new structure with Alphabet SEE PAGE 18 WE’RE TAKING A BREAK - OUR NEXT ISSUE WILL BE ON AUGUST 26

August 12 - 25, 2015

2 | OPINION | financialmirror.com

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

Holiday homes pose high risk and loss of revenue for the state

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There is a grey market for holiday homes where the nearly 60,000 owned by nonresidents or the secondary homes (investments) owned by locals are illegally rented out to unknowing vacationers, with no guarantees and a high risk of safety involved.

Several years ago, travel professionals or managers of properties used to be harassed by the likes of the “tourism authority” unless they were licensed by the CTO, while municipalities and local councils used to chase them for taxes, water bills and ‘volunteers’ to pay for new pavements and street lighting. This killed off the ‘villa holidays’ that continues to boom in the Greek islands and along the coasts of Spain, France, Italy and Croatia.

No one regulates holiday homes nowadays, as a result of which the state is losing about 22 mln euros, conservatively speaking, according to property experts.

Many of these self-promoted holiday providers are competing unfairly with licensed and regulated hotels and apartment owners who also have to pay for insurance and high labour and maintenance costs. Pirate villa

owners don’t. All they have to do is create a website, add a booking and payment system and possibly even throw in a battered up Toyota RAV or 4WD Suzuki as a ‘bonus’.

“And if anyone asks you, just play dumb, say it belongs to a relative” is the advice offered.

But all this goes ugly when a disaster happens, such as a child wonders off and falls into a pool, or an appliance blows up in the face of the tenant, for which insurance cover is nonexistent.

Cyprus does not need to wait for such disasters to happen if the state, or the CTO, live up to their regulator role and start licensing all holiday homes, imposing strict ‘health and safety’ inspections, on-site checks and mandatory insurance cover.

Simply allowing this pirate industry to flourish by sweeping it under the carpet is unacceptable. Neither is the excuse that these incomes are declared at the local tax office, which they are not. How many tenants are aware that not paying VAT in Cyprus is a legal offence?

An amnesty may be allowed but strict enforcement must be implemented from next March, prior to the 2016 holiday season.

Otherwise, they should not be allowed to rent their villas or apartments.

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 12 - 25, 2015

financialmirror.com | CYPRUS | 3

Retail bonds oversubscribed, again P D M O s e l l s €3 3 0 m l n i n A u g u s t s e r i e s , €2 212 mln raised so far

The Ministry of Finance said that the eighth series of its retail bonds were three times oversubscribed, with the August series raising EUR 30 mln.

However, interest may be subdued for the upcoming issues as a lower interest rate kicks in.

Last month, the Public Debt Management Office Ministry of Finance sold 6-year government bonds worth EUR 31 mln in its monthly offer, the second highest in the programme that started last year, suggesting that investors continued to have an appetite for this investment, unaffected by the government’s move to lower interest rates on the retail bonds for individual investors from the next issue.

The PDMO said that the August series raised EUR 30,055,900 from 187 applicants, of whom just four were foreigners who pumped in half the amount, entitling them to apply for permanent residency or even investor-based citizenship. The size of bids ranged from EUR 3,000 to 5 mln.

The retail bond offer, that is restricted to individuals and supposed to have a monthly cap of EUR 10 mln, with the aim of raising EUR 100-120 mln a year, seems to be this administration’s hen that lays the golden egg, with upcoming offers also expected to be picked up.

Non-EU applicants must invest about EUR 3 mln in bonds or long-term deposits, or other tangible assets such as property or equity in a company, and hold on to the investment for several years in order to be eligible for citizenship.

The PDMO had said that for the July bonds, the seventh series this year, it received 123 offers for the total of EUR

31,103,800, of which 22.5 mln were from just eight foreign investors. The size of bids ranged from EUR 1,000 to 5 mln.

The retail bonds were conceived as an alternative source of mid-term funds having been shut out of markets since 2011 when the island’s banks invested in toxic Greek government bonds that led to their downfall and a EUR 10 bln bailout programme from the Troika of international investors.

The PDMO has said that it is not limited to receiving bids for only EUR 10 mln a month and that it can accept to sell all the retail bonds, if it so wishes.

The biggest amount of retail bonds sold was in December

2014 when it sold EUR 37 mln, up from EUR 27 mln in November, with most of the interest continuing to come from foreign investors.

The ninth series for September will accept bids for EUR 10 mln from August 3 to 20.

In its first quarter 2015 report, the PDMO had said that the issues of 6-year bonds continued unhindered and raised EUR 57 mln in the first three issues of the year.

The interest rate for the 2015 series has been adjusted downwards by 0.25 percentage points and ranges from 2.50% for the first year to 5.50% in the final year. These are subject to 3% tax on interest.

In May, the PDMO said it was lowering the interest rate on future bonds starting from the September series, offered this month. Thus, the rate will be lowered to 2.5% for the first 24 months, 2.75% for 24-48 months, 3.00% for 48-60 months and 3.25% for 60-70 months.

This will generate an average 6-year yield of 2.79%, down from the 4% average at the launch of the programme. As a consolation prize, the PDMO said that the previous rates would be maintained on the bonds already issued, until they expire.

At the beginning of the year, the PDMO lowered rates by 0.5% starting from an initial 2.5% for up to 24 months and gradually increasing to 5.5% for a 60-72 months holding, for an average annual yield of 3.875%.

The annual coupon rate when the series was first launched in May 2014 started from 2.75% and averaged at an attractive 4% over a six-year period, with a minimal 3% income tax on the interest, far better than the 30% imposed on all interest-yielding products.

August 12 - 25, 2015

4 | CYPRUS | financialmirror.com

Is IronFx iron-clad?

Forex giant says it is the victim of ‘abusive trading’, it is cooperating with CySEC

IronFX, billing itself as the “award-winning global leader in online trading”, seems to have fallen victim of its own grandeur with the Cyprus regulator saying the firm is under investigation following a number of complaints.

The announcement follows growing rumours of wrongdoing and default, some stretching as far as to suggest that the firm had been duped by agents in China who robbed the company causing serious liquidity problems, while the inability to pay traders who wanted to cash-in on their accounts launched several facebook pages, twitter conversations and a public petition to have its license suspended.

The Limassol-based company responded by saying it was the victim of “abusive trading” and that it, too, was investigating a number of clients who had “breached the terms and conditions of their trading agreement.”

It did not elaborate on the alleged breach, but experts suggest it may have to do with the stricter back-door security system introduced to repel abusive traders, as a result of which other trading accounts may also have been affected.

The “abusive trades” refer to clients wanting to withdraw their initial bonus and transferring that amount to a fresh trading account to create a larger margin for trading.

A senior official said that the forex firm had recruited “overseas experts” to help investigate these abuses and was seeking legal advice on how best to proceed.

“There has been no wrongdoing on our side,” said Yan Mai, Chief Marketing Officer at IronFX Global Ltd. The complaints, 68 of which have been received by the Financial Mirror in the past week alone, follow claims of nonpayment of their earnings, bonus or both, with most of them dating back to February this year.

The Cyprus securities watchdog issued an announcement saying there is an “ongoing investigation” into the matter.

However, the Financial Mirror has learned that the investigation too dates back to February, while the probe is expected to be concluded in about three months.

The announcement said that “as a consequence of media reports and the increasing number of complaints submitted by investors against the Cyprus Investment Firm IronFX Global Ltd., the Cyprus Securities and Exchange Commission wishes to clarify that there is an ongoing investigation against the CIF with respect to possible infringements of the Legislation. Upon completion of the investigation, the CySEC will publish its findings and/or will proceed with further announcements in the meantime, if deemed necessary.”

It added that “CySEC examines the complaints submitted to it by investors, against any supervised entity, in the context of its statutory mandate. For complaints against CIFs that relate to possible compensation claims, the investors are encouraged to contact the Financial Ombudsman, which is the competent body to examine compensation claims via an extrajudicial procedure, at complaints@financialombudsman.gov.cy.”

In March, President Nicos Anastasiades visited the IronFX premises and inaugurated a public park sponsored by the company and located adjacent to the headquarters in Limassol. The government has been supportive of the 100-or-so CIFs and forex companies based in Cyprus as it strives to become a financial services centre.

CySEC officials say this is not the only investigation underway, as other are also pending while fines have already been imposed on trading companies that do not conform with the licensing rules.

The Financial Mirror has seen copies of contracts whereby traders had agreed to the terms and conditions which include not receiving their sign-in bonus. The payment in some cases has even been zero.

The claims by clients demanding payment range from EUR 2,000 to 26,000, up to USD 39,000 and GBP 9,000, with many coincidentally from Poland.

The non-payment of bonuses has also sparked angry comments on the Internet and social media, some raising serious concerns about liquidity issues, while others ask why the company has not yet posted its 2Q results for 2015, whereas its peers already have.

The petition, posted on http://www.devisen-traden.de has been created “to help a large amount of #IronFx clients whose withdrawal requests have been pending since months.”

The organisers say that the petition to suspend the CIF license of IronFx “is being automatically sent via email to the CySEC, to major regulators (FCA, BaFin, ASIC, Hungary, Malaysia, Dubai) and to the ESMA. The suspension of the license does not mean the withdrawal of the license. The company has usually 15 days to comply with the provisions, which imply the return of clients’ funds if the client so wishes.”

In a statement, Yan Mai said that “the company has identified a group of abusive traders that followed an abusive trading strategy to manipulate our promotions.

This group has been placed under investigation for breach of our trading terms and pending this investigation we have put a limitation on all promotions-related withdrawals from this abusive trading strategy as we are President Nicos Anastasiades with IronFX Chairman and CEO Markos Kashouris entitled to do.

This

investigation is ongoing and upon completing, the findings will be announced to the relevant persons. Please note that we undertake a formal internal process to identify the level of abuse, if any, and the amount that is eligible for withdrawal.

The first set of investigations related to formal complaints has resulted that only 6% of the accounts have an available balance to withdraw. The rest of the accounts have no available balance as a result of the abuse.”

The latter zero-balance is the payment that clients are claiming.

The IronFX statement added that “there are particular claims that have no merit and are simply defamatory. Instead of providing facts and following the prescribed route to lodge a complaint via the regulator, they have instead chosen to follow a strategy of defamation via social media or public websites in order to force the company to give money to clients who have no merit in their claim given that they have clearly violated the terms and conditions of our product offerings.”

It added that “the company is undertaking the process as prescribed above once it receives formal complaints and presents its findings to the client together with the relevant regulator. Once this is done, it is considered as final settlement and the remaining pending withdrawal for the client is cleared.”

IronFX said that it is regulated by six regulatory authorities globally (FCA in the UK, ASIC in Australia, DFSA in Dubai, FSB in South Africa, UCRFIN in Ukraine and CySEC in Cyprus) and that “to-date no warnings or fines have been received.”

“The CySEC announcement is a standard announcement relating to our internal investigation of the abusive trading by clients in breach of our terms and conditions. We welcome the investigation that will prove there is no wrongdoing on behalf of the company and will put an end to the defamatory claims being made against the company. We have been working closely with CySEC to assist them and to date we have received no indications of wrongdoing. We have obtained several legal and expert opinions supporting our actions to date.”

There is also a “closed group” of IronFX “clients” on facebook, numbering just over 500, which is described as “No-profit platform of damaged IronFx clients with pending withdrawal requests. We are no IronFx representatives.”

August 12 - 25, 2015

financialmirror.com | CYPRUS | 5

BOCY sells 65% stake in Aphrodite Hills to US investors Bank of Cyprus has been greenlighted by the Commission for the Protection of Competition (CPC) to sell a 65% controlling stake in the holding company of the Thomson Sensatori Aphrodite Hills Resort near Paphos, to a group of US-based investors, with an estimated benefit of EUR 58.5 mln.

Though transaction details were not revealed, the sale is part of the bank’s strategy to dispose of non-core or non-performing assets, thus reducing its risk in the hotel and real estate sector, with an estimated portfolio of EUR 3.5 bln.

The bank said that the deal values the parent company, Aphrodite Holdings Ltd, at more than EUR 90 mln and that it sold most of the 75% stake it acquired last October, to hedge fund York Capital Management and its property associates Invel Real Estate Management Ltd. Bank of Cyprus said it will retain a 10% stake in the holding company which is involved in the development and sale of residential property and the ownership and administration of a championship 18-hole golf resort and a 290 room hotel.

Formerly part of the InterContinental chain, Aphrodite Hills closed for a major refurbishment last December and reopened in May this year, one of three luxury resorts operated by Thomson Sensatori and sold exclusively by TUI operators in the UK. However, the deal does not include the Aphrodite Hills residences and villas.

Thomson’s other two luxury properties opening this year were the Sensatori Resorts Ibiza and Fethiye in Turkey. The collection of luxury resorts, exclusive to Thomson, is now made up of nine properties including Jamaica, Mexico, Side (Turkey), Crete, Sharm El Sheikh and Tenerife.

Thomson offers seven-night holidays staying at the Sensatori Resort Aphrodite Hills on an all-inclusive basis from £843 per person.

Industrial production down in May Industrial production was down in May, on an annual basis, but increased in the first five months of the year, figures released by the Statistical Service showed.

The Index of Industrial Production for May reached 76.7 units (base 2010=100), a decrease of 0.6% compared to the same month last year. This is the highest level the Index has reached since September 2014 when it stood at 78.6 units. For January-May, the Index increased 1.6% compared to the same period last year.

For Manufacturing, the index reached 78.7 units in May, up 0.9% compared to May 2014.

Industrial output index drops 3.9%

In its first quarter report for 2015, Bank of Cyprus listed the 75% stake in the property which was “acquired as part of the Aphrodite group, which owns and manages a tourist resort and owns, develops and manages real estate properties in Cyprus.”

The group includes Malta-registered Aphrodite Holdings Ltd and Thalassa Holdings Ltd., and in Cyprus, Aphrodite Hills (Lakkos tou Frangou) Ltd, Aphrodite Hills Resort Ltd, Aphrodite Hotels Ltd, Aphrodite Hills Property Management Ltd, The Aphrodite Tennis And Spa Ltd and Aphrodite Hills Services Ltd.

The Industrial Output Prices Index has dropped by 3.9% in the first half of 2015 according to data released by the Statistical Service. The Index for June reached 101.1 units (base 2010=100), a drop of 0.2% compared to May. For the period January-June, the index fell by 3.9% compared to the corresponding period of the previous year.

In Manufacturing, the index for June reached 103.0 units, a drop of 0.2% compared to May.

August 12 - 25, 2015

6 | CYPRUS | financialmirror.com

EoI for Ayia Napa marina to close on August 31 Applications for expression of interest (EoI) for the 600berth Ayia Napa marina project closes on August 31.

With potential investors already lined up, the project is regarded as one of the most mature ventures in recent years, allowing the design and construction to begin very soon.

The developer of the project, M.M. Makronisos Marina Ltd., has signed a concession agreement with the Ministry of Energy, Commerce, Industry and Tourism (MECIT) for the design, build, finance, operate and transfer (D.B.F.O.T.), for

Trade deficit narrows Cyprus’ trade deficit was EUR 1,175.9 mln in the first five months of the year compared to EUR 1,336.6 mln in the same period lat year, according to the May report of the Statistical Service.

Total imports in January-May amounted to EUR 2,027 mln as compared to EUR 1,971.4 mln in January-May 2014. Total exports in the first five months of the current year rose to EUR 851.1 mln compared to EUR 634.8 mln in the same period of 2014.

In May total imports were valued at EUR 432.5 mln.

Total exports including stores and provisions in May amounted to EUR 181.4 mln. Exports of domestically produced goods, including stores and provisions, reached EUR 118.5 mln whilst exports of foreign goods, including stores and provisions, were EUR 62.9 mln.

The Statistical Service also announced that on the basis of preliminary estimates for June, total imports were EUR 444.3 mln, of which EUR 323.5 mln were arrivals from other EU member states and EUR 120.8 mln imports from third countries.

Total exports reached EUR 125.7 mln of which EUR 62.4 mln were dispatches to other EU member states and EUR 63.3 mln exports to third countries.

Inflation drops Inflation dropped by 2.4% in July, compared to a drop of 2.1% the previous month, the Statistical Service said.

In July 2014, inflation had increased at a rate of 0.9%.

Based on the Harmonised Index of Consumer Prices, the drop in July for housing, water, electricity and gas was -9.2%, compared to the same month last year, while inflation on food and non-alcoholic beverages also declined by -5.1%. Alcoholic beverages and tobacco, however, saw a rise of 1.9%.

Inflation in clothing and footwear decreased by -2.4%, in transport by -2.2% and in recreation and culture by -1.8%.

the development of a 600 berth marina at Makronisos.

The Marina will be developed on the western edge of Ayia Napa, on a thin coastal strip between the Ayia Thekla chapel and the Makronisos peninsula. It envisages a world-class waterfront development with a variety of commercial, residential and governmental uses centered around a new modern marina.

Makronisos Marina is seeking to appoint contractors for the construction of marine works, infrastructure, essential

buildings, dry stack and port facilities and invites companies or consortia interested to provide their services in relation to the construction of the marine works, infrastructure, essential buildings, dry stack and port facilities, to express their interest by August 31.

Relevant documents are available from info@alaplanning.com.cy or from the project manager A.L.A. Planning Partnership Consultancy L.L.C., Tel. 357 22518556, info@alaplanning.com

EU allocates €74.9 mln to Cyprus for migration The European Commission has approved EUR 74.9 mln to Cyprus out of a total of EUR 2.4 bln distributed in 23 multi-annual national programmes for the 2014 – 2020 period under the Asylum, Migration and Integration Fund (AMIF) and the Internal Security Fund (ISF).

The Cyprus national programme for the AMIF is EUR 32.3 mln, while for the ISF is EUR 42.6 ml, the Commission announced on Monday.

In the area of asylum, the European Commission said that, “Cyprus focuses strongly on improving the quality and speed of asylum procedures, increasing and improving the quality of the reception and accommodation capacities and providing assistance to applicants for international protection”.

As regards legal migration and integration, the funding “will mainly support pre-departure measures as well as preparatory actions facilitating access of third-country nationals to the labour market”.

In addition, Cyprus will focus “on strengthening the administrative capacity and awareness rising of the receiving society”.

Cyprus will continue the recently established voluntary return programme and will also support forced return.

As regards the common visa policy, Cyprus will focus “on supporting the visa sections for short-stay, the national visa system, and training on issues related to the Visa Information System.”

In relation to border management, Cyprus continues the

development of EUROSUR and plans to introduce Automated Border Control gates.

It will also support the Schengen Information System II/SIRENE, increase the capacity for border surveillance and implement the Smart Borders package. The EC said Cyprus will furthermore expand training for border guards on issues related to external border management.

Under ISF Police, Cyprus focuses “on improving the capacity for financial investigations and fighting against cyber crime, drug trafficking and corruption through purchasing specialised equipment, enhanced exchange of information and training.”

It will also invest in enhancing its operational capacity for fighting against terrorism and effectively managing security related risks and crises (including CBRN), the Commission said.

“Member states nowadays face unprecedented challenges in the fields of migration and security and the Commission is taking action in a spirit of solidarity”, Migration, Home Affairs and Citizenship Commissioner Dimitris Avramopoulos said.

Through the European Agendas on Migration and Security, he added, “the Commission is taking bold steps to improve migration management, foster cooperation and make Europe safer from organised crime and terrorism for our citizens.”

Avramopoulos also expressed the Commission’s determination “to continue to put solidarity into practice.”

Cyta unions to respond to privatisations plan this week Trade unions at state-owned telecoms provider Cyta met on Tuesday to review the government’s proposal over the status and the rights of the employees after the privatisation of the semi-government organisation. The unions said that they would respond to the Finance Minister by the end of the week. They also said that they want the proposal to be submitted to Parliament in the form of a bill. The government’s proposal has been prepared after consultation and exchange of views at

the joint consultative committee for Cyta.

Government sources were quoted by the Cyprus News Agency as saying that the proposal would make sense only after the government finds a suitable investor, adding that even after the bill on the establishment of the new private company passes through Parliament, the employees will still belong to the public company.

During the transitional period the workers will have four options. The first is to work with the new private company on the basis of

a private sector contract. A package of free shares will be offered to the workers as an incentive. The second is to work with the new company under a contract but maintain their position at the public company without payment for as long as they or the investor wish. The third option would be voluntary retirement and the fourth would be a transfer to another public department.

The bill on the establishment of the new private Cyta is expected to be tabled to the Cabinet on August 19 and then to the

Parliament. The government will then begin looking for a strategic investor, a procedure that is expected to last no nine months.

Meanwhile, the federation of independent unions POAS, said that Undersecretary to the President Constantinos Petrides has undermined their organisation, especially now that privatisations are being discussed.

POAS said that it represents some 20% of all workers in public organisations, including EAC, the Ports Authority, water boards and Cyta through PASE-ATHK.

August 12 - 25, 2015

financialmirror.com | COMMENT | 7

African migrants threaten EU social infrastructure, says UK’s Hammond A surge in migrants from Africa threatens the European Union’s living standards and social infrastructure, Britain’s Foreign Secretary Philip Hammond said on Sunday, adding that the bloc was unable to take in millions of people seeking a new life, according to a report on EurActiv.com.

Hammond’s comments, some of his most outspoken on the subject yet, underscore how the British government is ramping up its anti-immigration rhetoric in response to a spike in migrant attempts to reach Britain via the Channel Tunnel from France.

They are also part of a wider EU trend which has seen Alexis Tsipras say Greece cannot cope with the number of migrants fleeing instability in the Middle East and Africa and German calls for tighter immigration curbs.

“We have got to be able to resolve this problem ultimately by being able to return those who are not entitled to claim asylum back to their countries of origin,” Hammond, speaking while visiting Singapore, told BBC TV. Hammond said there would always be millions of Africans with “the economic motivation” to want to get to Europe and that EU laws meant migrants were “pretty confident” they could stay. “That is not a sustainable situation because Europe can’t protect itself and preserve its standard of living and social infrastructure, if it has to absorb millions of migrants from Africa,” he said.

The Conservative government is under pressure to show

Italy to receive most EU funding for migrant crisis The European Commission has approved EUR 2.4 bln of aid over six years for countries including Greece and Italy that have struggled to cope with a surge in numbers of immigrants.

Italy is to receive the most aid - nearly EUR 560 mln, while Greece will receive 473 mln, according to EurActiv.com “Member States nowadays face unprecedented challenges in the fields of migration and security and the Commission is taking action in a spirit of solidarity,” Migration, Home Affairs and Citizenship Commissioner Dimitris Avramopoulos said, adding that bold steps must be taken to improve migration management, foster cooperation and make Europe safer from organised crime and terrorism for our citizens.

“The national programmes approved by the Commission provide significant financial assistance to the Member States to address these challenges. We are determined to continue to put solidarity into practice,” he insisted.

The Commission has worked intensively with member states to ensure that EU funds are released urgently. Some 22 national programmes were already approved in March, and an additional 13 programmes will be approved later this year. Tensions have escalated this year as thousands of migrants from the Middle East and Africa try to gain asylum in the European Union.

On Sunday, UK British Foreign Secretary Philip Hammond said the bloc was unable to take in millions of people seeking a new life.

Hammond’s comments, some of his most outspoken on the subject yet, underscore how the British government is ramping up its anti-immigration rhetoric in response to a spike in migrant attempts to reach Britain via the Channel Tunnel from France.

Around 188,000 migrants have made the crossing from North Africa to Europe so far this year, according to the International Organisation for Migration (IOM), which puts the death toll in the Mediterranean at over 2,000 since January 2015.

Faced with the scale of the crisis, nationalist parties across Europe have become increasingly vocal in their opposition to policies of resettlement and solidarity.

Immigration has overtaken unemployment and the financial crisis as the number one concern for EU citizens in recent months, according to a study by Eurostat. Many European governments have taken strong anti-immigration measures in order to mollify their increasingly worried voters.

it is acting to solve what the press has dubbed “the Calais crisis” with hundreds of migrants trying nightly to scale fences around the entrance to the Channel Tunnel in France.

That has disrupted passenger and freight traffic and dominated the summer’s headlines. The British government has announced that immigration officers and French police are to work side by side at Eurotunnel’s control room at Coquelles, making it easier to respond quickly to attempts by migrants to break into the tunnel.

But the government’s increasingly shrill tone on the issue - Cameron was criticised for referring to migrants as “a swarm” - has upset charities, churchmen and left-wing politicians.

Earlier this month, Church of England Bishop Trevor Willmott told the government not to forget its humanity.

“When we become harsh with each other and forget our humanity then we end up in these stand-off positions,” he told the Observer.

The number of migrants trying to reach the European Union has increased sharply over the past two years. 90,000 migrants have arrived in Italy alone since January this year.

Last Wednesday, the Italian coastguard plucked a further 400 refugees from the Mediterranean, after their overcrowded boat sank off the coast of Libya. According to some accounts, 200 people had already drowned before help arrived.

Around 188,000 migrants have made the crossing from

North Africa to Europe so far this year, according to the International Organisation for Migration (IOM), which puts the death toll in the Mediterranean at over 2,000 since January 2015.

In April, after an even worse disaster estimated to have cost 800 migrant lives, the 28 European Union leaders agreed to take urgent action — to step up rescue efforts at sea and to try and halt the problem at source, including the use of limited military action against people traffickers in Libya.

The bloc failed however to agree last month on how to distribute 40,000 mostly Syrian and Eritrean migrants from overstretched Italy and Greece.

Member states offered to take in take some 32,000 plus another 22,500 Syrian asylum seekers currently in camps outside the EU. Given the numbers involved and the scale of upheaval across North Africa and the Middle East, many believe the problem dwarfs such measures.

Faced with the scale of the crisis, nationalist parties across Europe have become increasingly vocal in their opposition to policies of resettlement and solidarity.

Immigration has overtaken unemployment and the financial crisis as the number one concern for EU citizens in recent months, according to a study by Eurostat. Many European governments have taken strong anti-immigration measures in order to mollify their increasingly worried voters.

August 12 - 25, 2015

8 | COMMENT | financialmirror.com

Thoughts for summer wine and food...

My first encounter with Cypriot food was at the old Ledra Palace Hotel, Nicosia, in 1965. Several years after that, I moved my offices in London W1 to a building just off Great Portland Street, where just around the corner, was a Cypriot restaurant. At her little 20-seater place on a corner, Eleni Ttokou did much of the cooking for many years (until she trained a man from Bangladesh to replicate, exactly, all her dishes), whilst her husband, Gabriel, chatted with his cronies and looked after his accounts, at least one of which was with the local bookmaker. The food was superb – the finest Cyprus grub I have ever had. The reason was that Eleni always used the very best and most tender English or New Zealand lamb for her kebabs, her “Kofta”, keftedes and sheftalia.

I courted my dear wife at Ttokos and today our minds boggle at the meals we used to get down us. We started with a generous glass of KEO Fino sherry, followed it with a bottle of either Afames, red, or Arsinoe white, concluding, with a handsome slug of VSOP Anglias brandy. The food kicked off with dishes of olives and pickles, the best taramasalata we ever had, homous and cucumber-with-yogurt, or Avgolemono soup (chicken with egg and lemon sauce). The house special was Eleni’s “Mixture” – a plate of two sticks of lamb kebabs, a couple of keftedes and a substantial example of sheftalia, accompanied by a chopped salad and roast potatoes to die for.

Over the course of numerous summer lunches, we formed a great liking for the white Arsinoe. And so it was, prompted by the Cyprus food at Ttokos, that we began to holiday on this pleasant island, where we continued the custom. Perhaps, sadly, we never, ever, got a “Mixture” as good as Eleni’s. One day we stumbled upon a bottle of Ayios Andronicos, Chrysorioyiatissa Monastery white, which we learned was made from the indigenous white grape of Cyprus. We thought then, and still do, that in a good year, a good bottle of this is the best white in Cyprus. It has had problems of consistency, though. Nevertheless, among my handful of good Cyprus Xynisteris, I number it along with Vasilikon, Kyperounda and Constantinou. Once upon a time, I took a couple of bottles back to the UK and one night one of them went with us to a Cypriot restaurant in south-east London which had no drinks licence. The proprietor, upon tasting it, refused to believe it was Cyprus wine. This was no doubt due to the fact that when it went modern, the people at Monte Roya acquired winemaking equipment and advice from Germany.

And to think it isn’t so long since a lot of us tut-tutted and said “They’ll never make a good wine from Xynisteri”. I won’t shame by naming them!

Instead, I shall raise my glass to those intrepid chaps, many I am proud to call my friends, who have succeeded with this local grape. As I do I offer a recipe or Without blemish! Fine examples of their kind; ripe Xynisteri two for some summer salads with a difference… grapes being loaded into the crusher at Fikardos Winery

FOOD, DRINK and OTHER MATTERS with Patrick Skinner 1 small green or red pepper 2 Cyprus cucumbers, peeled.

1 tbsp mint, 1 tbsp parsley, finely chopped 4 tbsp salad oil Juice of 1 large lemon 1 crushed garlic clove Salt and pepper 1 slice of griddled Halloumi per person (optional)

Method 1. Toast, oven-bake or fry the bread until it is quite crisp. Cut or break into small pieces or strips.

2. Shred the lettuce into very fine strips.

3. De-seed and slice pepper very, very thinly.

4. Trim and finely slice spring onions.

6. Remove skins and chop tomatoes and cucumbers.

7. Put all ingredients except the bread into a salad bowl, mix and season with salt and pepper to taste.

8. Just before serving, add the bread.

Warm Pasta Salad It is said that this is popular with the smarter citizens of Rome for lunch on hot summer days. It adapts ideally to Cypriot ingredients and is simple and inexpensive to make.

Ingredients (serves 4) 450 g peeled, de-seeded and chopped tomatoes 125 g halloumi, chopped into small cubes 4-6 anchovy fillets, chopped 1 des-sp capers (briefly washed) Finely chopped or crushed garlic to taste 2 tbsp olive oil A good handful of plump pitted black olives Fresh basil leaves, hand-broken Salt and pepper 350 g spaghetti or linguini

Method 1. Put all the ingredients, except the spaghetti, into a large bowl and mix together well.

2. In a large saucepan, cook the spaghetti in plenty of salted boiling water, according to instructions on the packet.

3. When ready, drain and mix into the salad mixture and serve at once.

Accompaniments If the day is hot, I would serve this dish with sliced cucumbers tossed in oil, lemon and finely chopped mint and a chopped green salad of lettuce, lachana, green pepper and some parsley. Then merely add some crusty fresh bread and a cool glass of your chosen white wine.

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

Fattoush This lifts an “ordinary” chopped salad to considerable heights. It is a nice light dish on its own, or accompanying cold meats, ham, salami or grilled fish.

Ingredients (for 4-6 servings) 1 piece of Arab or Pitta bread The inside leaves of a lettuce 4-5 medium-sized tomatoes, skinned 1 bunch of salad onions

Thank you Petros Mavros (of Lengo taverna in Paphos) for sending in a photo of your own selection of some lovely Cyprus wines for summer

August 12 - 25, 2015

financialmirror.com | COMMENT | 9

Louis opens first “To Elliniko” Greek-style ouzeri at Hilton Park Louis Group has opened “To Elliniko”, a Greek restaurant-taverna at the Hilton Park hotel in Nicosia, next door to the popular Akakiko.

The new restaurant was established in Thessaloniki in 2011 and is gradually spreading its wings, thanks to the 90-dish meze menu. As with other franchises operated by the Group, “To Elliniko” may also make its appearance at the Royal Apollonia in Limassol or any other Louisoperated hotel on the island.

As Greek restaurants have become the latest trend in Cyprus, so should their pricing, with the “Elliniko” menu seeming affordable and with a wide range of Greek wines, ouzo and tsipoura.

Anastasia to represent Cyprus at the Costa Coffee Barista of the Year competition Anastasia Paloyiannidi was the winner of the local Barista of the Year competition hosted by Costa Coffee and will represent Cyprus at the European finals to be held in Barcelona in October.

She was one of nine finalists in the local competition where baristas had to create their own speciality drink using the Costa mocha blend and also took part in a speed contest to make a many espressos as possible within two minutes.

By adding passion and high standards of professionality, Anastasia excelled among the local baristas and convinced the jury.

Costa Coffee, the UK-based coffee house with an Italian touch, launched the Barista of the Year competition in 2006 and since then many of the winners’ creations have made it to the main menu of the international chain.

Costa Coffee marked its tenth anniversary on the island where it enjoys a franchise network of 18 outlets.

The countries that eat the most meat Which countries have the biggest appetite for meat worldwide? Across all of the OECD countries at least, Australia comes first. Every year, the average Australian will eat 93 kg of beef and veal, poultry, pork and sheep meat. The United States is in second position with 91.1 kg despite a very low value for sheep, followed by Israel with 86 kg.

Argentina, Uruguay and Brazil, renowned for their steak, come next on the list with around 85, 83 and 78 kg, respectively. According to the OECD, increasing meat consumption worldwide is proving detrimental to our health and the environment, despite the fact that it generates substantial revenue and employment. (Source: Statista)

August 12 - 25, 2015

10 | GREECE | financialmirror.com

Deal reached with lenders on primary budget targets for 2015-2018 The Greek government agreed with its creditors on the primary budget targets for 2015-2018, according to government sources cited by the Athens News Agency on Tuesday.

An agreement should keep the country in the eurozone and avert bankruptcy with an August 20 default looming.

The two sides agreed on the following targets for the primary budget: - in 2015, a primary deficit of -0.25% of GDP; - in 2016, a primary surplus of +0.5%; - a primary surplus of +1.75% in 2017; and, - a primary surplus of +3.5% in 2018.

The sources underlined that there would be no new measures introduced in relation to fiscal targets for the years 2015 to 2016.

The meeting has now completed a long stretch of 17 hours since it began on Monday, with a brief break the same day to update the cabinet at a meeting chaired by Prime Minister Alexis Tsipras at the government’s Maximos Palace.

According to sources, the two sides have agreed on the majority of issues. The pending issues currently being discussed include 90 bln euros of non-performing “red” loans (which will be resolved after the banks’ stress tests in late August and their recapitalisation by end of the year), a privatisation fund (which will oversee 50 bln euros of assets and will be based in Athens), and the deregulation of the energy market.

Greece needs to reach an agreement on its third bailout by August 20, when it must repay EUR 3.4 bln to the European Central Bank.

“There are issues (the creditors) want to discuss again and again, but I think there should be optimism that there will be a deal soon... I don’t know if it will be tomorrow morning, but soon, it will be soon,” Finance Minster Euclid Tsakalotos said.

The talks between Tsakalotos, Economy Minister Giorgos Stathakis, and the ECB, the International Monetary Fund and the European Stability Mechanism aim to finalise the list of new reforms to be required of the Greek government in exchange for a lifeline of up to EUR 86 bln.

But Germany may stand in the way of a full disbursement of the third bailout, which comes on top of two earlier rescue packages totalling EUR 240 bln.

Appearing to throw cold water on the positive comments from both sides, German government spokesman Steffen

Seibert told reporters: “The principle ‘thoroughness over speed’ applies here in particular.”

Berlin favours a stopgap solution such as the short-term EU bridging loan of EUR 7 bln that enabled Greece to meet debt payments to the IMF and ECB in June and July.

German MP Ralph Brinkhaus, a top official of Chancellor Angela Merkel’s CDU party, said earlier on Monday that such a solution would be “better than a bad agreement”.

On the back of expectations of an imminent agreement, the Athens stock exchange on Monday jumped 2.06%, its third day of gains after losing nearly two thirds it value when it reopened last week.

Greece and its creditors are yet to announce a consensus on other issues, including raising a solidarity tax on large incomes and VAT taxes on private studies, petrol for farmers and beef.

Any decision affecting farmers carries political risk and Tsipras last week promised to extract as many concessions as possible from the creditors.

On Monday, the prime minister pledged to cut lawmakers’ tax breaks and ministers’ salaries in a “symbolic” move to appease Greek society.

“When the issue of scrapping tax breaks for farmers falls on the negotiating table, we cannot pretend not to care about our own tax breaks,” Tsipras said.

The Greek parliament may vote on the accord on Thursday, after which eurozone finance ministers could be asked to approve it on Friday.

Tsipras, meanwhile, is under pressure from many in his radical left Syriza party who say the new accord will pile further austerity on a weakened economy and goes against the party’s campaign pledges.

But with his popularity among Greeks still high, Tsipras has warned the dissidents of early elections in the autumn if they continue to resist the measures.

Former energy minister Panagiotis Lafazanis, who is opposed to the new bailout agreement, has dismissed it as “a negotiating fiasco” and said Tsipras could not “avoid the outcry by resorting guiltily and hurriedly to

elections”.

Iskra, a website of the Lafazanis-led Left Platform, the anti-euro group inside Syriza, on Saturday raised the prospect of snap elections as soon as the first half of September.

Quoting anonymous government sources, the website said the plan was to rush the bailout accord through parliament and then immediately call for snap elections in order to “purge” MPs who oppose the new deal.

When creditors agreed in July to negotiate a deal aimed at keeping it afloat and in the euro zone, Greece committed to implementing major reforms, such as scrapping early retirement, by the end of October. Lenders want, for example, an increase in the retirement age to 67 from the nominal 62 that falls significantly depending on the number of years worked and family status.

Technical teams also discussed tax, justice and corruption issues and about setting up a new Greek privatisation fund and about bad loans.

The draft of the new MoU The Greek government and institutions have reached an agreement on the prior-actions and the draft of the new MoU, after a marathon midnight negotiations, writes Michalis Tezaris of Intelligent News.

The government will submit the agreement to Parliament likely on Wednesday for a vote on Thursday, opening the door for the disbursement of the first tranche of some EUR 25 bln by August 20. In the meantime, a Eurogroup on Friday will approve the agreement and give the green light to the Euro area parliaments to vote for the third bailout programme to Greece by August 18.

Kathimerini newspaper published the draft of the new MoU. According to the report, the following list presents in short the major prior-actions that should be voted for in August. It is noted that the new 27-pages MoU includes a huge number of prior-actions and additional measures for October and onwards. This may explain the fact that the Greek Premier wants elections in September, the daily reported.

Next package of measures Hard measures like the increase of the taxation of the farmers and the new law for the labour market (new Labour Code) including collective dismissals in private sectors, etc. should be ready by the end of the year with effect from January 1, 2016.

Also, from January 1, a new wage grid in the public sector

should be implemented.

Earlier, in Q3 this year all pension funds should be absorbed by one entity.

The new super-privatisation fund will be launched by March 2016 but in the meantime all the privatisation programme will be fully implemented by the incumbent body TAIPED. There is no protection from foreclosures but a new permeant social safety net is introduced to protect and support vulnerable people.

In the medium term, the education system in all stages should be linked with the research and development.

Greece will implement all the reforms recommended by OECD (toolkit 1 and 2).

Pension system and social security organisations should save 0.5% of GDP per year.

The wage cost and the employed force in public sector should decline and be in line with the GDP. A new mobility scheme in the public sector should be introduced.

August Prior Actions As regards the main list with the immediate prioractions, it is as follows:

Fiscal policy 1. Sustainable primary surpluses over the medium-term

that will reduce the debt to output ratio steadily. 2018 and beyond: 3.5% of GDP. 2. Tighten the definition of farmers.

3. Increase the tonnage tax on shipping.

4. Actions to launch the 2015 ENFIA property tax in order to issue the bills in early September.

5. Correct issues with the revenues measures recently implanted.

6. Re-establish full INN prescription.

7. Reduce the price of all off-patent drugs.

8. Abolish subsidies for excise on diesel oil for farmers.

9. Halve heating oil subsidies expenditure in the 2016 budget.

10. Launch the comprehensive social welfare review.

11. Additional measures of 0.5 to 1.5% of GDP.

Taxation 1. Eliminate the cross-border withholding tax introduced in 2015.

2. Clarify that the VAT discounts for islands will be fully eliminated by end 2016.

3. Legislation on garnishments: eliminate the 25% ceiling on wages and pensions and lower all thresholds of 1,500 euros, while ensuring in all cases reasonable living conditions.

4. Amend the 2014-2015 tax and outstanding debt instalment schemes; market based interest rates; enforcement action regarding debtors who fail to pay their instalment or current obligations on time.

August 12 - 25, 2015

financialmirror.com | GREECE | 11

‘Stress tests’ for banks by end-August, fresh capital by year-end Greece’s battered banks will undergo accelerated tests by the end of this month to uncover their capital shortfalls as authorities race to recapitalise the lenders by the end of the year and avoid penalising large depositors, according to reports by EurActiv and Reuters.

This scrutiny by European and Greek regulators will be completed after the summer with the aim of plugging the capital holes before legislation comes into force in January that can require bigger depositors to contribute to the cost of rescuing a failing bank.

Greek banks already underwent stress tests and asset quality reviews (AQRs) last year as part of a continent-wide exercise that took nine months.

But since then the state of the four main lenders National Bank, Piraeus, Eurobank and Alpha - has worsened dramatically along with the national economy, meaning they need their third recapitalisation since Greece plunged into crisis in 2010.

European Union authorities must find out how much worse things have got before working out the size of the required recapitalisation, to be made by either the European or Greek bailout funds.

This means the stress tests, which simulate how a bank can cope with a crisis, and the AQRs, which assess the value of its assets, have to be re-run.

“The comprehensive assessment will be completed after the summer,” a banking source. “It will be a faster process compared to last year’s health checks.”

Preparations are under way at the European Central Bank on the review and the assumptions that will be used. The yardsticks on how much capital the banks should hold under normal and crisis conditions may not be changed from last year’s exercise.

“A standard process will be followed, assessing the capital gap for each bank. The minimum core equity capital ratio that will be required may be 8% under a baseline scenario and 5.5% under an adverse scenario, as in last year’s stress test.

But this has not been finalised yet,” the source said.

Greece imposed capital controls in June to slow massive withdrawals from the banks, but these have accelerated the recession that the economy has sunk back into. This in turn has sent the rates of “impaired” loans at the banks soaring.

“The million dollar question is what the check up will show, how big the capital shortfall is,” another source told Reuters.

According to figures from Greece’s international creditors, the four banks could need EUR 10 bln to 25 bln to restore

their capital base.

Worries that such a massive boost will severely dilute the stakes of existing shareholders pummelled the banks’ stock prices when the Athens market reopened on Monday after a five week closure.

Over three days, they lost 63% of their market value before a rebound began.

Judged by European Banking Authority standards, banks’ “non-performing exposures” - which include loans in arrears for more than 90 days and restructured credit unlikely to be repaid - hit 40% of their portfolios last year.

Greece’s bank rescue fund injected EUR 25 bln into the four in 2013 in exchange for shares, and last year they raised a further 8 bln from international investors.

The Hellenic Financial Stability Fund (HFSF) now has majority stakes in all the banks except Eurobank. It and private shareholders such as U.S. billionaire investor Wilbur Ross, who bought a stake in Eurobank, are nursing huge losses.

Since January, when the leftist-led government came to power promising to roll back austerity policies, the banks have lost 75% or EUR 14.5 bln of their market value.

Ross, who invests in distressed assets, said earlier this week he has not lost heart. “Our immediate concern is whether the AQR and the stress test are sensible and do not

go overboard with negativity because of the recent tumult,” he told CNN, adding he might be interested in joining a capital-raising rights issue for existing shareholders.

“As long as the treatment of the institutions is fair and not based on wild assumptions, then in principle many of us would be prepared to participate in a rights offering.”

Last month, the Greek parliament adopted the EU’s Bank Recovery and Resolution Directive (BRRD) which spells how authorities can deal with failing banks. This includes “bail-ins” under which depositors can be forced to contribute to a rescue so the burden does not fall on taxpayers, as was the case in the bailouts of the 2008-2009 crisis.

“There will have to be a race against time to wrap up the recapitalisation by the end of this year. If it is done in 2016, when the BRRD directive goes into full effect, there could be a risk for large depositors,” the banking source said. “Completing it this year effectively avoids a bail-in of depositors.”

Unsecured depositors with more than EUR 100,000 in their accounts will be spared if the recapitalisation goes through this year. However, shareholders will be hit along with other investors holding junior debt before either the European Stability Mechanism or the HFSF injects the new money.

Finance Minister Euclid Tsakalotos said this week the international lenders also wanted to complete the recapitalisation by the end of the year.

ECB Governing Council member Christian Noyer has said he opposes asking major depositors to contribute to the recapitalisation - as was the case with the bail-in of banks in Cyprus in 2013 - since most of them in Greece are small and medium-sized enterprises.

Bankers say depositors in Greece most fear Cypriot-style “haircuts”, along with a return to the drachma national currency. But once the recapitalisation is complete and the euro zone had agreed a new bailout for the Greek government, depositors will be reassured and capital controls can be lifted.

“For as long as banks remain undercapitalised, capital controls cannot be lifted and this is a main issue for depositors,” the banking source said. “The sooner this ends, the better.”

agreed with the “institutions” 5. No new instalment or other amnesty or settlement schemes nor amend existing schemes such as by extending deadlines.

4. Guaranteed Minimum Income (GMI) cheme from January 1, 2017.

Financial Stability Pensions 1. Savings of around 0.25% of GDP in 2015, and 1% by 2016.

2. The increase health contributions of pensioners to 6% will be integrated to ETEA by September 1, 2015.

3. Clarify the rules for eligibility for the minimum guaranteed pensions after 67 years.

4. Correct the 2015 law and apply the freeze on monthly guaranteed benefits and extend to the public sector.

5. Repeal the amendment to the pension system introduced in 2015.

6. Limit of statutory retirement age of 67 years at the latest by 2022 or immediately to the age of 62 and 40 years of contributions.

Social safety nets 1. Immediate support to the most vulnerable with measures on food, housing, access to health care, return to work, guaranteed employment support schemes, protection from foreclosures, etc.

First priority is the employment of 50,000 long term unemployed.

2. Launch a comprehensive social Welfare Review including both cash and in-kind benefits (October 2015).

Target to generate savings of 0.5% of GDP.

1. Normalise liquidity and recapitalisation of banks.

2. Enhance governance.

3. Address NPLs. 4. Gradual easing of capital controls.

4. Eliminate non reciprocal nuisance charges (third party taxes) and align them to the service provided.

5. Reduce red tape in the financial services sector, including on horizontal licensing requirements of investments and on low-risk activities.

Energy 1. Reform the gas market towards to a full liberalisation (switch suppliers for all customers) by 2018

Non-performing loans (NPLs) 1. Non-bank entities to provide services on preventing NPLs. 2. Amend the out of court arbitration and settlement.

3. Permanent social safety net for vulnerable borrowers.

4. Acceleration of NLP resolution for “strategic defaulters” and non-viable cases.

Labour market 1. Reverse the legislation of the after-effect of agreements legislated in 2015.

Product markets - Business environment 1. OECD competition toolkit I, exclude OTC (over-thecounter) pharmaceutical products.

2. OECD competition toolkit II on beverages and petroleum.

3. Open restricted professions of engineers, notaries, actuaries, and bailiffs and liberalise the market for tourist rentals.

Privatisation 1. Timeframe and annual targets on the privatisation programme and revenues.

2. Tenders for OLP, OLTH by end of October.

3. No material changes in the terms tenders for trains operator TRAINOSE ROSCO. 4. Irreversible steps for the sale of the regional airports at the current terms with the winning bidder that has already ben selected.

5. List with the pending privatisations.

6. Appoint independent task force to accelerate privatisation (the new fully independent super-fund will be launched in March 2016; and must be fully functional by June 2016).

Public administration 1. Align non-wage benefits with best practices in EU, effective January 1, 2016.

2. Legislation the restructuring for OASA.

August 12 - 25, 2015

12 | PROPERTY | financialmirror.com

City buildings are an ugly sight to be avoided NON-PAYERS

By George Mouskides

City buildings in Cyprus are in such a bad state that one is better off not looking at them.

Many buildings have never been maintained, resulting in an unacceptable state of affairs both in the sector of security as well as aesthetics, in almost all town areas.

The result is that both people living in these buildings as well as neighbours have to put up with this chaos.

VALUE What must be taken into account is that the value of these buildings as well as newer ones in the vicinity diminishes to an alarming level. Consequently, when properties go on the market they never secure a good selling price.

A ray of hope emerged following cases of collapsing old balconies, but soon after that it was all forgotten. One of the stumbling blocks in restoring these buildings remains the fact that based on current legislation too many agencies are involved, the Lands & Surveys Dept., municipalities, etc.

German social housing sector to seek more access to capital markets More German municipal housing companies are likely to seek capital market access as changing social housing policy increases their funding needs, Moody’s Public Sector Europe (Moody’s) said in a report.

“We expect housing companies to increasingly tap capital markets over the next few years, owing to growing housing demand in Germany’s larger cities and because of the German government’s renewed commitment to invest in social housing,” said Harald Sperlein, a senior analyst and a co-author of the report.

The growth of some German cities has led the public sector owners of social housing companies to draw up ambitious growth and investment programmes. However, given constraints on local government budgets, some of these investments are debt-financed at the company level, leading to these increased funding requirements.

“Traditionally, Germany’s municipal housing investments have been principally funded by bank loans, but capital market instruments are becoming increasingly attractive for public entities who need long-term funding to match their assets,” Sperlein added.

This is because the recent tightening of banks’ capital requirements has made long-term lending at competitive rates less attractive for financial institutions. Therefore, Moody’s expects more social housing entities to tap the capital markets directly by issuing bonds and other financial instruments instead of raising bank finance, potentially matching the growth trajectory the rating agency has seen in the English housing association sector.

Moody’s notes that the German social housing sector’s role in delivering public policy implies strong government support and supervision, a credit positive. The German government’s recently announced commitment to strengthening investment in housing and reviving social housing development would strengthen these credit positive ties.

The sector also benefits from a strong institutional framework, including public ownership which entails financial, operational, and regulatory links with the public sector, a credit positive in Moody’s view.

Experience also tells us that a lot of owners are not willing to pay for these repairs.

Property owners know all too well that a minor maintenance is required every three or so years, only to be followed by a major one every decade. Major repairs might account for about 10% or more of the cost of the house.

Many apartment owners fail to understand that buildings need maintenance and no-one will pay for them.

The Cyprus Association of Property Owners has set the maintenance of these buildings as a priority.

INSPECTION It might be a good idea to set up a system along the lines of the motor vehicle MOT inspections, whereby every three years a building’s Main Administrative Committee employs a licensed engineer to inspect and report problems, based on set guidelines.

If the inspector’s repair list is not followed and repairs are not carried out within six months then the new agency to be set up would have the right to step in, make the repairs and charge the owners.

Completion of necessary repairs would be followed by a relevant certificate and be posted on the building’s notice board. This would be required to be presented during the sale

or rent of any flat.

The relevant law (on commonly held buildings), requires several changes to become efficient, including: All owners must automatically be members of the Administrative Committee, by law, regardless of whether they attend the meetings or not, so that they bear the responsibilities of all decisions; The Administrative Committee’s ability to collect common expenses must be strengthened by law, i.e. legal proceedings must be expedited for small claims; Any illegal activities by owners/tenants regarding common areas, (staircases, roof, parking place), must be regarded as a criminal offence and police must be empowered to intervene; The amount of common expenses to be paid by each flat must be clear enough and not be left to the discretion of each Administrative Committee; The law must explicitly provide for the creation of a bailout fund to aid future repairs and maintenance.

It is high time that state and municipal officials take measures that will paint a better and safer picture of our towns and their buildings.

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

London still resilient and prospers Optimism and confidence return to prime central market

By Lefteris Eleftheriou Many things are changing in the property market in London at the moment and the market for new build property is growing rapidly. Pastor Real Estate has conducted a research report that offers an in-depth analysis of the prime central London residential property market.

These insights reveal the development of the prime central London market.

Since 2009, housing stock across prime central London has risen by 8.6%, which equates to 5,200 new residential addresses. This is compared to only 4% across Inner London as a whole. There are a total of 7,000 new homes in the pipeline and total housing stock has increased by 8.6%. These days, the modern developers in London are involved in shifting from small singleoccupancy units to familysized homes.

Also, there is at least one three-bedroom flat within 71% of the developments currently in the pipeline in London. There has been a shift in the development pipeline to larger units across the neighbourhoods of Marylebone, Belgravia, Knightsbridge and Mayfair. In addition, there has also been an increase in the average size of apartments. The average size of studio apartments is 763 square feet, compared to 543 sq.ft. for those that are under construction.

Optimism and confidence have been returning to the prime central London property market after a long period characterised by a sense of hesitancy. Viewings, offers and sales have increased since May across all sectors of the market, and there have been a lot of enquiries from international and domestic purchasers – especially from the Middle East.

In 2015, there are 13 schemes that are due to be completed, bringing 213 units to the market. The majority of these units are within two main London schemes, the Chilterns (Marylebone)

and Phase 1 of the Chelsea Barracks (Belgravia).

There were fears of a housing bubble in London at the beginning of 2014, which were then dissipated by the introduction of the Mortgage Market Review and the fear of a potential rise in interest rates.

Through it all, prime central London’s residential market has remained resilient and has continued to prosper. Luxurious developments have been in very high demand for both domestic and international buyers. The important factors cited in prime central London purchases have been high-specification, quality and location, and sellers are marketing the “lifestyle” of the area.

Developers are working to create urban retreats within London, in the style of ultra-prime and super-prime.

London is very attractive as a safe haven and it has been a desirable investment in the recent years following the credit crunch. The growth in property values clearly demonstrates the attraction of London residential property. The majority of the properties that are in the development pipeline are new, as opposed to old buildings that have been refurbished or new buildings with the old façade retained. Of course, this statistic is skewed by the large new build schemes that include Clarges Mayfair.

Lefteris Eleftheriou is former real estate agent who is currently consulting other real estate agents on the property market of prime central London. lefteris.eleftheriou@90digital.com Twitter: @ElefLefteris

August 12 - 25, 2015

financialmirror.com | PROPERTY | 13

Sale and rental of government offices an option to consider µy Antonis Loizou Antonis Loizou F.R.I.C.S. is the Director of Antonis Loizou & Associates Ltd., Real Estate & Projects Development Managers

Perhaps it is time we all reconsider bad policies o fthe pat and come up with new ones in order to provide an alternative method of collection that will also benefit government coffers. The previous administration’s philosophy was to build brand new government offices rather than rent, otherwise, they believed, the taxpayer’s money would be wasted.

This was a completely uneconomic method, that was not in the interest of the state and I have already written extensively on the matter, citing numbers etc. that show the construction of government offices was not in the interest of the state. There is a perception that the construction of offices on public land “halitika” (hence without the added cost of buying the land) and then the labyrinthine procedures in build-operatetransfer projects (with endless objections, appeals, arduous architectural competitions, etc.) was the best solution. This approach did not take into account the value of land, the non-payment by the owner (state) of income tax and various property taxes, which is why this method wrongly seemed that it was advantageous to the state. The reason is quite simple: buildings and the construction technology develop rapidly and in the end

Would the government be better off renting instead of building its own offices? the state will be left with an out-dated building that will be demolished after 25-35 years, as opposed to renting and the state services moving to new premises at the end of its lease and according to its needs.

If the state borrows with one interest rate, even at 3-4%, it makes sense to offload some government owned offices at whatever amount, which will yield the buyer or investor with a gross return of 4-5%. These buildings can be sold with the government remaining as a tenant (sale & lease back) for a period of, say, ten years with a right to renew for another two terms of 5 years + 5 years.

Assuming that the investor will receive 4.5% in rent, but exempt from income tax and property tax, the cost for the state will be below 3%, which is the cost of borrowing

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even under present high conditions. It is not unreasonable to assume that some government-owned offices could be sold to raise an amount of around EUR 500 mln, thus partly meeting the demands of the international lenders for privatisation or sale of non-core assets. These sales may even include the offices of some semigovernmental organisations with the same reasoning, ie. to increase the total income perhaps closer to EUR 1 bln.

It is also safe to assume that there is a somewhat but growing interest for such investments mainly by foreigners, either towards acquiring Cyprus citizenship and passports or as a purely investment deal due to the low deposit rates and the liquidity levels being in the range of EUR 10-50 mln.

We have already seen such examples in the

hotels sector, as well as some office complexes (at least four sold in Nicosia and three in Limassol). This should not come as a surprise since this approach is already applied in another format for BOT projects whereby the investor holds the property for 20-100 years (as in the case of the marinas) and then plans to return the entire property and project to the state.

So, the central offices for the Land Surveys Dept., new office blocks for the electricity utility EAC, the district court houses in Larnaca and Paphos (which have already started to show their age in terms of deterioration and unsatisfactory size) is a thought that should be considered. Perhaps it is only in our mind when such ideas are rejected on the outset, but a list of assets has already been submitted to the Troika to show as collateral for state loans. Hence, we have already entered the process of offering suitable properties.

Having in mind that there is no longer any interest in the notorious “prime fillets” of state properties, at the very end we might be forced to sell these assets at lower prices.

There are, however, several parallel issues that need to be clarified first, if, for example, the plot had been bought through expropriation, in which case there could be an obstacle in the sale, while alternatively the sale could be turned into a lease at an annual 1 euro a year, also on long-term basis of, say, 100 years.

It will be very difficult for some to “digest” this approach and not ignore the political reactions, especially of the leftist parties. But on the other hand, what choices do we have?

Now that deposit rates internationally are around 1%, a yield of 4-5% with the State as a tenant (regardless if it is struggling at present to survive economically) is an opportunity for several foreign investment funds that may not be available in future. www.aloizou.com.cy ala-HQ@aloizou.com.cy

August 12 - 25, 2015

14 | MARKETS | financialmirror.com

Samsung struggles as competition mounts in China

By Oren Laurent President, Banc De Binary

The markets might be troubled by the massive nosedive Apple Inc. stock has taken in the past 6 months – a 10% plunge, to be exact – but as the saying goes, it could always be worse. And for Samsung Electronics Co., it most definitely is. In the cutthroat smartphone arena, the company’s Galaxy product has not been delivering, to say the least, and waning demand has led to a 16% fall in the share since 2015 commenced. The company’s stock lost $60 bln since this year’s peak and continues to drop with each passing week.

The less-than-stellar performance of the Galaxy S6 has led to a recent price cut, which is rather unusual considering it launched only four months ago. In the UK, the S6 now sells for GBP 499 with the hopes of overcoming disappointing, and quite unexpected results. Debuting to rave reviews, the S6 had a restricted supply, which, in turn, led to unsatisfactory sales.

So, who is chipping away at Samsung’s earnings? It started with Xiaomi and Huawei, who have since taken up a much larger slice of the smartphone market and occupy the top two positions in China’s mobile market for Q2 (with Apple’s iPhone in third place and Samsung lagging fifth).With the recent announcement that Xiaomi is planning to build its own processors as early as next year, the Korean giant will most likely continue to lose momentum.

However, as of late, new, even smaller and more obscure players have entered the ring, simultaneously damaging Samsung’s already subpar performance, and rewriting the

rules of the industry. One such smartphone brand is Vivo. If you were to ask about it outside of China, you will most likely be met with a resounding silence, but this little engine that could is making a name for itself on its home turf. According to Canalys research, Vivo’s market share took a giant leap from 4% a year ago to 8% by the end of June 2015. Vivo took fourth place in the top five ranking mentioned before, and its incredible growth graph is something to behold.

Vivo’s model can also be seen with Oppo, another Chinese smartphone maker that is staying close to its roots and finding domestic success. What is the secret formula for these companies’ growth and how have they been able to push Samsung so brutally out of the limelight? Their sales have focused exclusively on smaller cities in China, and have been completely retail oriented, forgoing the ubiquitous ecommerce.

Nicole Peng, research director at Canalys, explained the relatively simple, yet quite ingenious method in a recent interview. “Oppo and Vivo have a [smaller] number of

distributors, but these distributors are exclusive to them.” In a world dominated by e-commerce giants like China’s very own Alibaba, it seems almost archaic to rely on distributors, but these up-andcoming brands are proof that good relationships (and a promise of margin level) goes a long way.

Distributors have an incentive to boost sales and offer better inperson service, elements that are crucial for the establishment of a solid reputation as a quality brand.

With Vivo and Oppo winning by a landslide in third-tier and fourthtier cities, how imminent is their arrival at the real power centres of China? With Samsung expected to debut it phablet-sized Note 5 this month, the question remains: will the electronic giant be able to climb back or will it succumb to its younger competitors? Whatever the answer, it will surely have a lasting impact on the mobile and electronic industry in China.

Please note that this column does not constitute financial advice.

Bankrolling the Eurozone recovery Marcuard’s Market update

by GaveKal Dragonomics Europe’s banking sector has been catching the eye with 18 out of the 31 banks in the STOXX Europe 600 reporting positive earnings surprises and almost all beating sales targets. It may be too early to declare Europe’s banking sector as being off to the races after a seven year nightmare that started in August 2007, but we see three big trends in the results.

In Spain and Ireland, cheaper funding has driven interest income growth—this stems from more friendly wholesale markets and the European Central Bank’s TLTRO program which lets banks borrow at just 0.05% until 2018. Spain’s second biggest bank BBVA tapped the ECB for EUR 4 bln in 2Q15 while Barcelona-based Caixabank has, since last September, snaffled EUR 16 bln and Italy’s Unicredit, EUR 18 bln. In total, the TLTRO has provided EUR 384 bln of funding, mostly to peripheral banks.

The periphery looks to be in a virtuous circle with recoveries in Spain and Ireland especially strong (growth was 3.1% and 6.5% respectively in the last year). This is reinforcing the improvement in financial conditions and reducing the incentive for depositors to squirrel funds in time deposits. As the recovery raises transactional demand for cash, the effect can be seen in monetary aggregates with M1—overnight deposits and currency—rising relative to the broader M2 measure. On the demand-side, loan volumes are improving due to better business sentiment as renewed profit growth spurs investment; job growth has boosted disposable household income, causing more interest in the mortgage market.

The picture is different for banks in core economies such as France and Germany which face an interest income squeeze due to low rates. Societe Generale saw its net interest income fall 8.6% to EUR 4.54 bln in 1H15. Higher fees have partly offset this squeeze, but the big boost for Europe’s bulge bracket has come from strong investment banking, advisory and trading activities. Looking forward, as Europe’s recovery deepens higher loan volumes should support net interest income despite tight margins.

Lastly, the impact of tough restructuring is flowing through to the bottom line via lower loan-loss provisioning.

The latest results show banks making inroads with Caixabank

and Bankia in Spain cutting their non-performing loan ratio to 9% and 12.2% respectively in 2Q15 compared to 9.7% and 12.9% in 3Q14. Bankia was formed in 2010 as a product of seven troubled regional banks and hence has an especially high share of NPLs. Elsewhere, the Bank of Ireland (a commercial bank) reduced the volume of defaulted loans by EUR 1 bln from 2Q14.

Looking forward, profitability should improve further.

Banks will continue to cut costs and use capital more efficiently, partly due to tighter regulatory requirements and low rates—it is encouraging that the net-income-to-riskweighted-asset ratio has improved. As such, the story is of general pick-up, reflecting the steady European economic recovery. To be sure, banks are not out of the woods, especially in Italy where the NPL ratio remains at about 18% and the government is only now getting serious about reforming the sector. But in February a bill was passed to

overhaul governance at the ten largest cooperative banks and resolution of the NPL problem should be aided by a planned overhaul of Italy’s inefficient bankruptcy process.

To put it in perspective eurozone banks can be seen as being at a similar stage to Japanese banks in 2002-03. After trying every other alternative, Japan learnt that the only way to fix a broken banking system is to reduce NPLs, recapitalise banks and help the private sector deleverage. All these things are now occurring in Europe and are supported by structural reforms to boost growth prospects especially in peripheral countries. When Japan finally got serious about fixing its banks it led to a period of outperformance versus the TOPIX. We believe Europe’s banks, which are up 3% versus their benchmark since the start of March, are starting to do the same thing. www.marcuardheritage.com

Twitter’s stock price crashes Twitter’s stock hit an alltime low earlier this week after shares slumped 5.6% to $29.27. That pushed Twitter’s market value below $20 bln, making it a potential acquisition target for companies like Google and Facebook. However, analysts believe it will have to fall a further $10 bln for those tech giants to seriously consider any kind of approach. Twitter hit an all time high of over $70 in December 2013, two months after it went public. (Source: Statista)

August 12 - 25, 2015

financialmirror.com | MARKETS | 15

Strong US data confirm underweight Marcuard’s Market update

by GaveKal Dragonomics Data released on Friday reaffirmed the robust health of the US domestic sector. Paradoxically, this only strengthened our conviction that investors should underweight US equities in favour of other markets.

The July payroll report did not spring any surprises, but it did confirm the status quo—that the US labour market, while still growing, is looking increasingly tight. July payroll growth was stable at just over 200,000; unemployment was steady at just 5.3%; hours ticked up by a hair, and private hourly earnings growth inched up from 2.0% to 2.1% yearon-year. Following recent conflicting signals on wage growth, Friday’s data fit in with our expectations that tighter supplies of labor will lead to a rising trend in wage growth.

limited. If we were to see a US recession in the making, we would not want to be overweight non-US equities, but instead overweight US long bonds. However, this is not (yet) the core scenario for some of our colleagues, such as Tan Kai Xian.

2. A stronger US consumer increases the odds of interest rate “lift-off” this year. The lack of any major deterioration in July’s labour data keeps the door open for the Federal Reserve to do as it wishes. And it wishes to start hiking rates—however timidly—before the end of 2015, and perhaps as soon as the September 17 meeting. Historically, rate hikes have weighed on equity multiples. And while it is possible that earnings growth could more than compensate for the multiple contraction, this could be difficult given our next factor...

3. Strong domestic data supports the US dollar at lofty levels. Considering that the US dollar is now clearly overvalued against almost every currency out there, except

US current account deficit, more US dollars will flow abroad—which usually leads to the outperformance of non-US markets.

This is not to say that the probability of a US and global recession in the next 12-18 months is zero. As Charles Gave has highlighted recently, there are some worrying signs that need to be assessed alongside all the positives (manufacturing is weak, profit growth is weak, and while corporate interest rates are still low, they have ticked up some recently). Appropriate portfolio protections should be in place. Charles says he is getting very close to calling for recession—and that he will do so if his indicators deteriorate any more. However, we do not yet see a recession in the making. As a result, we continue to expect superior returns from non-US markets, such as Japan and Europe.

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

Almost two years ago, we claimed that US households had largely repaired their balance sheets and that they were likely to start adding debt again, further encouraged by low interest rates. This renewed appetite is now showing up in credit card and auto loans. So far, household mortgage debt has only stabilised, but we expect growth there soon as well.

Eventually, debt increases will lead to trouble, but for now they boost consumers’ power, which has also been juiced up by the fall in energy prices.

So, why does all this apparently positive news lead us to reiterate our underweight view on US equities relative to other equity markets? A few reasons: 1. So long as the largest consuming block in the world is showing strength, the chances of a global recession are

www.marcuardheritage.com

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

15750 1.5587 1.7736 24.507 6.7676 14.1895 1.1025 2.284 282.94 0.63735 3.1314 0.3893 18.8 8.2042 3.8105 4.0025 63.328 8.6928 0.9838 21.375

AUD CAD HKD INR JPY KRW NZD SGD

0.733 1.3046 7.7558 64.195 124.78 1178.7 1.5262 1.3988

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

0.3771 7.8076 29566.00 3.8118 0.7080 0.3028 1508.00 0.3848 3.6414 3.7501 12.7263 3.6729

Azerbaijanian Manat AZN Kazakhstan Tenge KZT Turkish Lira TRY Note: * USD per National Currency

1.0441 187.85 2.7711

AMERICAS & PACIFIC

for the Chinese renminbi, we are negative on the US dollar over the long-term. However, it could be some time before the US dollar corrects. So long as domestic data is supportive of Fed rate hikes, while most other countries remain miles away from even thinking about raising rates, the US dollar is likely to remain strong. The US dollar’s rise has already hurt the profit numbers of multinationals, because of the translation effect. If the currency now stalls at these uncompetitive levels, future profit pains will be felt most keenly by US exporters, and by domestic producers who compete with foreign makers of tradable goods. So, while bad news for US producers, a strong US consumer and a strong US dollar are great news for foreign producers. Moreover, with the strong US dollar encouraging a widening of the

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

The Financial Markets 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 -0.10 0.05 -0.78

0.26 0.54 -0.05 0.08 -0.76

0.31 0.59 -0.02 0.09 -0.73

0.52 0.75 0.05 0.13 -0.68

0.85 1.07 0.16 0.24 -0.57

CCY/Period USD GBP EUR JPY CHF

2yr

3yr

4yr

5yr

7yr

10yr

0.95 1.12 0.09 0.14 -0.68

1.26 1.37 0.16 0.14 -0.59

1.50 1.56 0.27 0.19 -0.45

1.69 1.69 0.39 0.24 -0.34

1.99 1.88 0.66 0.36 -0.05

2.26 2.03 1.01 0.55 0.23

Exchange Rates Major Cross Rates

CCY1\CCY2 USD EUR GBP CHF JPY

Opening Rates

1 USD 1 EUR 1 GBP 1 CHF 1.1025 0.9070

100 JPY

1.5587

1.0165

0.8014

1.4138

0.9220

0.7269

0.6521

0.5142

0.6416

0.7073

0.9838

1.0846

1.5334

124.78

137.57

194.49

0.7884 126.83

Weekly movement of USD

CCY

Today

136.02

GBP EUR JPY

1.0739

CHF

1.5587 1.1025 124.78 0.9838

CCY\Date

14.07

21.07

28.07

04.08

11.08

USD GBP JPY CHF

1.0948

1.0766

1.1022

1.0886

1.0915

0.7070

0.6916

0.7078

0.6980

0.7011

135.08

133.78

136.04

134.85

1.0395

1.0371

1.0589

1.0546

Last Week %Change 1.5593 1.0972 123.95 0.9688

+0.04 -0.48 +0.67 +1.55

August 12 - 25, 2015

16 | WORLD | financialmirror.com

What is the PBOC really up to?

Marcuard’s Market update

by GaveKal Dragonomics The People’s Bank of China sprang a surprise on Tuesday morning, lifting the daily fixing rate for the US$-CNY exchange rate by 1.9% and triggering an effective 1.8% devaluation of the renminbi—the currency’s biggest one day move since July 2005 when Beijing started its exchange rate reforms.

At first glance, the move looks like a response to months of dismal trade data. In our view, this exchange rate move is a lot more than a panic reaction to deteriorating exports. It is part of a longer term reform process aimed at partially liberalising China’s exchange rate policy ahead of the expected inclusion of the renminbi in the International Monetary Fund’s Special Drawing Rights basket. Successfully implementing this policy over the coming days and months, however, will confront the PBOC with some tricky challenges.

The central bank explained its move by saying it was aimed at “improving the quoting mechanism of the US$CNY fixing price”. In recent months the PBOC has kept its daily fixing rate steady, effectively pegging the renminbi to the US dollar. Meanwhile, the spot exchange rate has remained glued to the weak side of the renminbi’s permitted trading band (the fixing rate plus or minus 2%), reflecting market beliefs that by linking the renminbi to the strong US dollar, Beijing was allowing the Chinese currency to become increasingly over-valued.

But while maintaining exchange rate stability against the US dollar served Beijing’s short term ends—notably by helping Chinese companies which have accumulated sizable US dollar liabilities—it conflicted with the central bank’s longer term objectives. That is partly because the PBOC wants to reduce its daily involvement in the market, but also because SDR inclusion will necessarily require greater renminbi exchange rate volatility.

This last point may sound counter-intuitive, but actually makes good sense. Beijing believes SDR inclusion to be central to promoting the renminbi as a successful international reserve currency. However, if the PBOC were to continue to keep the renminbi stable against the US dollar, the effect of including it in the SDR would simply be to increase the weighting of the US dollar in the basket—the opposite of what the IMF wants to achieve. As a result, to justify its inclusion in the SDR, the renminbi must show greater volatility against the US dollar.

The PBOC appeared to take an important step in this direction, when it announced that it would reform the daily

fixing mechanism to let the market play a more important role in determining the price. Under the new mechanism, the PBOC will ask marketmakers—mostly Chinese banks—to submit rates for the daily fixing with reference to the previous day’s closing spot rate. In theory, this would indeed allow a greater role for the market in determining the renminbi’s exchange rate and for greater volatility. In practice, implementation will present some challenges.

1. If the PBOC were really to let the market set the fixing rate, tomorrow’s fix would move into line with today’s spot rate, which would mean another 1.5%-2% devaluation.

Similar moves would follow on subsequent days as the market tested the central bank’s will, with the renminbi’s exchange rate very likely overshooting to the downside in what would amount to a significant devaluation.

2. If the PBOC itself determines the fixing rate tomorrow (and on subsequent days) in order to calm the market, the fixing mechanism will have not changed, and the central bank will have achieved nothing by Tuesday’s move.

In reality, the PBOC is likely to attempt to steer a middle course, dictating the fixing rate tomorrow and on subsequent days to calm market jitters, but gradually allowing the market to play a greater role in determining the daily fix, in order to allow greater day-to-day volatility in line with its longer term aims.

Getting things right—stepping back from the market while continuing to direct the long term trajectory of the renminbi’s exchange rate—will be tricky, and the PBOC’s

degree of success will only become apparent over the next month or two. But by moving now to introduce more exchange rate volatility—months before either we or the market expected—the PBOC has shown a deft sense of timing and an improved understanding of market psychology.

In the longer run, we expect Tuesday’s move to herald not only greater day-to-day volatility, but a greater tolerance of renminbi weakness against the US dollar in a strong US dollar environment. While this move was not aimed directly at enhancing China’s export competitiveness, the PBOC does have domestic as well as international goals in setting the exchange rate.

With it now widely acknowledged after a decade of substantial appreciation that the renminbi is no longer undervalued—and with SDR inclusion probable next year, making the promotion of renminbi internationalisation less urgent—the international goals are fading in importance.

Meanwhile, weaker domestic demand and poor export growth give the PBOC more reason to focus on its domestic goals. That does not mean China will indulge in competitive devaluation. But it does mean that in a strong US dollar environment the authorities will be more inclined to tolerate a degree of renminbi weakness against the US dollar in order to maintain exchange rate stability against a basket of currencies. www.marcuardheritage.com

PBoC strikes again by devaluing Yuan, UK data ahead Markets Report b

By Jameel Ahmad, Chief Market Analyst at FXTM

The second trading day of the week commenced with an unexpected surprise after the People’s Bank of China (PBoC) shocked the markets overnight by devaluing the Yuan in a move that has blasted the USDCNY from 6.21 to 6.37 in just a few hours. China has acted swiftly to devalue the currency in another attempt to reinvigorate its declining economic momentum, which is highlighted by continually weaker economic data being announced on a frequent basis. The export figures out of China over the weekend were even worse than expected, and it is quite clear that this move has been made to inspire stronger export competiveness.

It was already well-known that the economy was suffering from declining inflation and reduced domestic momentum, but the export numbers highlighted that there is slowing demand for Chinese goods and that the economy is also exposed to weakness outside of mainland China. This would have alarmed both the PBoC and Beijing government because GDP was already appearing vulnerable to falling below the 7% government target before the end of the year, with declining exports showing that the downside pressures on the economy are intensifying. Make no mistake, this 7%

GDP target is absolutely critical, and both the PBoC and the Beijing government will do whatever it takes to defend this benchmark target.

For those wondering if this move is going to be successful when it comes to reinvigorating the economy, it is far too early to tell but the move to devalue the Yuan shows that China will adapt innovative measures to reinvigorate its economy. Due to economic weakness elsewhere being a contributor behind the weaker export numbers, and the correlation being strong that these economies have also seen their currency weaken, China might need to devalue its currency even further if this move does not improve economic data. Either way, with stagnant inflation and economic data consistently suggesting that the China economy is entering a deeper downturn than what was previously expected, we need to prepare ourselves to wake up to more similar headlines regarding China throughout the second half of this year.

Elsewhere, the GBPUSD has bounced sharply away from its monthly low at 1.5424 and rebounded towards 1.5605.

The GBPUSD bulls are attempting to recover momentum and regain control of the pair after it encountered heavy selling pressures late last week. Although investor sentiment towards the Pound took quite the hit after the Bank of England (BoE) outlined returning concerns over currency appreciation and inflation risks following the resumed selling in commodities, there is still some potential for the GBPUSD to continue advancing. Investors

will be looking ahead to Wednesday’s UK jobless claims data and optimistically hoping that the consistently strong UK economic outlook raises sentiment towards the Pound once again, but it will require an impressive piece of data to send the pair any higher than 1.56.

What would really encourage the GBPUSD bulls to charge forward is if the jobs report shows further improvement in wage growth because this would enhance expectations that the extra disposable income can be filtered through the UK economy and improve inflation expectations. Ultimately, it is the alarmingly weak inflation readings that are continuing to haunt investor attraction towards the Pound because if inflation readings didn’t take such a nosedive following the dramatic tumble in commodity prices, the BoE would have most likely began raising UK interest rates by now. From an economic standpoint and moving away from inflation readings, the UK economy is ready for the BoE to begin raising interest rates.

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

August 12 - 25, 2015

financialmirror.com | WORLD | 17

The right time to reform fuel pricing

By Jeffrey Frankel Professor of Capital Formation and Growth at Harvard University World oil prices, which have been highly volatile during the last decade, have fallen more than 50% over the past year.

The economic effects have been negative overall for oilexporting countries, and positive for oil-importing countries.

But what about effects that are not directly economic? If we care about environmental and other externalities, should we want oil prices to go up, because that will discourage oil consumption, or down because that will discourage oil production?

The answer is that countries should seek to do both: Lower the price paid to oil producers and raise the price paid by oil consumers, by cutting subsidies for oil and refined products or raising taxes on them. Many emerging-market countries have taken advantage of falling oil prices to implement such reforms. The United States, which is now surprisingly close to energy self-sufficiency, so that the macroeconomic effects roughly balance, should follow suit.

Consider this: America’s roads and bridges are crumbling, and the national transportation infrastructure requires investment and maintenance. And yet the US Congress shamefully continues to evade its responsibility to fund the Federal Highway Trust Fund and put it on a sound long-term basis, owing to disagreement over how to pay for it. The obvious solution, which economists have long advocated, is an increase in America’s gasoline taxes. The federal gas tax has been stuck at 18.4 cents a gallon since 1993, the lowest among advanced countries. And yet, on July 30, Congress adopted only a three-month stopgap measure, kicking the gas can down the road for the 35th time since 2009.

Fossil-fuel pricing is a striking exception to the general rule that if the government has only one policy instrument, it can achieve only one policy objective.

For starters, the money saved from a reduction in subsidies or an increase in taxes in the oil sector could be used either to reduce budget deficits or to fund desirable spending (such as US highway construction and maintenance). At the same time, lower oil consumption would reduce traffic congestion and accidents, limit local air pollution and its adverse health effects, and lower greenhouse-gas emissions, which lead to global climate change. Fuel taxes are a more efficient way to achieve these environmental goals than most of the alternatives.

There is also a national-security rationale. If the retail price of fuel is low, domestic consumption will be high. High oil consumption leaves a country vulnerable to oil-market

Putin is held in low regard around the world Even though Vladimir Putin’s approval rating is at record levels at home, reaching an alltime high of 89% in June, the Russian president is held in low regard overseas. A survey by Pew Research has found that when it comes to confidence about Vladimir Putin doing the right thing regarding world affairs, 75% of Americans have no faith in his abilities.

In other countries, that number is even higher, reaching 92% in Spain, 87% in Poland and 76% in Germany. The Russian leader does have some support, however, primarily in Asia. In China, 54% of respondents are confident about Putin making the right moves on the world stage. Confidence is highest in Vietnam where 70% of people hold him in high regard. (Source: Statista)

disruptions arising, for example, from instability in the Middle East. If gas taxes are high and consumption is low, as in Europe, fluctuations in the world price of oil have a smaller effect domestically. Subsidies to US oil producers have often been sold on national-security grounds; in fact, a policy to “drain America first” reduces self-sufficiency in the longer run.

Finally, although fuel subsidies are often misleadingly sold as a way to improve income distribution, the reality is more nearly the opposite. Worldwide, fossil-fuel subsidies are regressive: far less than 20% of the payments benefit the poorest 20% of the population. Poor people are not the ones who do most of the driving; rather, they tend to use public transportation (or walk).

The conventional wisdom is that it is politically impossible in the US to increase the gas tax. But other countries have political constraints, too. Indeed, some developing-country governments have faced civil unrest, even coups, over fuel taxes or subsidies. Yet Egypt, Ghana, India, Indonesia, Malaysia, Mexico, Morocco, and the United Arab Emirates have all reduced or abolished various fuel subsidies in the last year.

Besides raising taxes on fuel consumption, the US should also stop some of its subsidies for oil production. Oil companies can immediately deduct a high percentage of their drilling costs from their tax liability, which other industries cannot do with their investments. Likewise, the oil industry has often been able to drill on federal land and offshore without paying the full market rate for the leases.

Most politicians know that sound economics would call for

these benefits to be eliminated; but those who complain the loudest that the government must not pick corporate winners and losers seem to be the least able to summon the political will to act.

A recent study by the International Monetary Fund estimated that global energy subsidies are running at more than $5 trln per year, while fossil-fuel subsidies in the US have been conservatively valued at $37 bln per year (not including the cost of environmental externalities). As leaders in emerging-market countries have recognised, falling oil prices represent the best opportunity to implement reform.

Governments that act now can reduce energy subsidies or increase taxes while sparing consumers an increase in the retail price from one year to the next.

For the US and other advanced countries, it is also a good time for reform from a macroeconomic standpoint. In the past, countries had to worry that a rising fuel tax could become built into uncomfortably high inflation rates.

Currently, however, central bankers are not worried about inflation, except in the sense that they want it to be a little higher.

The US Congress will have to come back to highway funding in September. If other countries have found that what was politically impossible has suddenly turned out to be possible, why not the US? Jeffrey Frankel is Professor of Capital Formation and Growth at Harvard University. © Project Syndicate, 2015 - www.project-syndicate.org

August 12 - 25, 2015

18 | WORLD | financialmirror.com

Google throws massive curveball in new structure – Alphabet vs. Google

By Jon C. Ogg Google Inc. (NASDAQ: GOOGL) is creating a new public holding company called Alphabet Inc. This represents what may be a paradigm shift in the reporting structure, as well as who is running the day to day operations at Google. It is also going to leave many shareholders scratching their heads.

Google is going to be asking shareholders to trust management here, albeit new management. Without much surprise, Google shares rose 5% or so in the afterhours session on this news. The belief here is that this streamlines the business structure.

Still, we have to see what this really means for the Google structure and holders before making a final judgment — and a lot of the issues here will not be known for quite some time.

The new operating structure is said to increase management scale and focus on its consolidated businesses. The main Google business will include search, ads, maps, apps, YouTube and Android and the related technical infrastructure.

Businesses such as Calico, Nest, and Fiber, as well as its investing arms, such as Google Ventures and Google Capital, and its incubator projects, such as Google X, will be managed separately from the Google business.

Under the new operating structure, Larry Page will become the Chief Executive Officer of Alphabet and Sergey Brin will become the President of Alphabet. Dr. Eric Schmidt will become the Executive Chairman of Alphabet, with Ruth Porat being the Senior Vice President and Chief Financial Officer of Alphabet.

David C. Drummond will become the Senior Vice President, Corporate

The world’s most valuable startups Uber, the five-year old startup running a popular app matching drivers with consumers, is once again the world’s most valuable startup. After the last round of funding, the company is now worth $50 bln. Uber is followed by Chinese smartphone vendor Xiaomi ($46 bln) and Airbnb ($25.5 bln). The Wall Street Journal currently lists 108 so called “Unicorns”, companies valued at $1 bln or more by venture-capital firms.

Most of them are U.S. (72) or Asia based. Only nine of them are European.

(Source: Statista)

Development, Chief Legal Officer and Secretary of Alphabet.

Larry, Sergey, Eric and David will transition to these roles from their respective roles at Google, whereas Ruth will also retain her role as the CFO of Google.

After the completion of the Alphabet merger, Sundar Pichai will become the new CEO of Google Inc. — he is currently the Senior Vice President of Products at Google, and he oversees product management, engineering, and research efforts for Google’s products and platforms. Prior to his current role, he served as Google’s SVP of Android, Chrome and Apps.

Google calls this a “Holding Company Reorganisation” and it will result in Alphabet owning all of the capital stock of Google. The company said that “upon consummation of the Alphabet Merger, Google’s current stockholders will become stockholders of Alphabet. The stockholders of Google will not recogniSe gain or loss for U.S. federal income tax purposes upon the conversion of their shares in the Alphabet Merger.”

Following the consummation of the Alphabet Merger, shares of Class C capital stock and Class A common stock will continue to trade on the NASDAQ Global Select Market under the symbol “GOOG” and “GOOGL”, respectively.

Upon consummation of the Alphabet Merger, the directors of Alphabet will be the same individuals who are the directors of Google immediately prior to the Alphabet

Merger.

Here is where this gets to another “trust me” area for shareholders. The financial reporting’s new legal and operating structure will be introduced in phases over the coming months and when finalised, Google anticipates that it will result in two reportable segments for financial reporting purposes, with the Google business presented separately from other Alphabet businesses taken as a whole. Accordingly, Alphabet will report its results under this new structure commencing with its Q4 earnings release and its Annual Report on Form 10-K for the period ending December 31, 2015.

Google also noted even more changes here. Concurrently upon completion of the Alphabet merger, Omid Kordestani will transition from his role as Google’s Chief Business Officer to become an Advisor to Alphabet and Google.

Google’s official blog post said: “What is Alphabet? Alphabet is mostly a collection of companies. The largest of which, of course, is Google. This newer Google is a bit slimmed down, with the companies that are pretty far afield of our main internet products contained in Alphabet instead.

What do we mean by far afield? Good examples are our health efforts: Life Sciences (that works on the glucose sensing contact lens), and Calico (focused on longevity).

Fundamentally, we believe this allows us more management scale, as we can run things independently that aren’t very related.

Alphabet is about businesses prospering through strong leaders and independence. In general, our model is to have a strong CEO who runs each business, with Sergey and me in service to them as needed. We will rigorously handle capital allocation and work to make sure each business is executing well.

We’ll also make sure we have a great CEO for each business, and we’ll determine their compensation.”

The long and short of the matter here is that investors are going to have to play a game of wait and see before they really understand how this works out. When Google conducted its stock split that it was really an issue of taking more control by creating the two public classes of shares.

Google’s shareholders already had to accept that they had no real vote that matters in how the company is run. Now they get that plus being confused over what the real structure will be ahead.

August 12 - 25, 2015

financialmirror.com | WORLD | 19

America in the way of global growth

By Joseph E. Stiglitz The Third International Conference on Financing for Development recently convened in Ethiopia’s capital, Addis Ababa.

The conference came at a time when developing countries and emerging markets have demonstrated their ability to absorb huge amounts of money productively.

Indeed, the tasks that these countries are undertaking – investing in infrastructure (roads, electricity, ports, and much else), building cities that will one day be home to billions, and moving toward a green economy – are truly enormous.

At the same time, there is no shortage of money waiting to be put to productive use.

Just a few years ago, Ben Bernanke, then the chairman of the US Federal Reserve Board, talked about a global savings glut. And yet investment projects with high social returns were being starved of funds. That remains true today.

The problem, then as now, is that the world’s financial markets, meant to intermediate efficiently between savings and investment opportunities, instead misallocate capital and create risk.

There is another irony. Most of the investment projects that the emerging world needs are long term, as are much of the available savings – the trillions in retirement accounts, pension funds, and sovereign wealth funds. But our increasingly shortsighted financial markets stand between the two.

Much has changed in the 13 years since the first International Conference on Financing for Development was held in Monterrey, Mexico, in 2002. Back then, the

G-7 dominated global economic policymaking; today, China is the world’s largest economy (in purchasing-powerparity terms), with savings some 50% larger than that of the US. In 2002, Western financial institutions were thought to be wizards at managing risk and allocating capital; today, we see that they are wizards at market manipulation and other deceptive practices.

Gone are the calls for the developed countries to live up to their commitment to give at least 0.7% of their GNI in development aid. A few northern European countries – Denmark, Luxembourg, Norway, Sweden and, most surprisingly, the United Kingdom – in the midst of its self-inflicted austerity – fulfilled their pledges in 2014. But the United States (which gave 0.19% of GNI in 2014) lags far, far behind.

Today, developing countries and emerging markets say to the US and others: If you will not live up to your promises, at least get out of the way and let us create an international architecture for a global economy that works for the poor, too. Not surprisingly, the existing hegemons, led by the US, are doing whatever they can to thwart such efforts. When China proposed the Asian Infrastructure Investment Bank to help recycle some of the surfeit of global savings to where financing is badly needed, the US sought to torpedo the effort.

President Barack Obama’s administration suffered a stinging (and highly embarrassing) defeat.

The US is also blocking the world’s path toward an international rule of law for debt and finance. If bond markets, for example, are to work well, an orderly way of resolving cases of sovereign insolvency must be found.

But today, there is no such way. Ukraine, Greece, and Argentina are all examples of the failure of existing international arrangements. The vast majority of countries have called for the creation of a framework

for sovereign-debt restructuring. The US remains the major obstacle.

Private investment is important, too. But the new investment provisions embedded in the trade agreements that the Obama administration is negotiating across both oceans imply that accompanying any such foreign direct investment comes a marked reduction in governments’ abilities to regulate the environment, health, working conditions, and even the economy.

The US stance concerning the most disputed part of the Addis Ababa conference was particularly disappointing. As developing countries and emerging markets open themselves to multinationals, it becomes increasingly important that they can tax these behemoths on the profits generated by the business that occurs within their borders. Apple, Google, and General Electric have demonstrated a genius for avoiding taxes that exceeds what they employed in creating innovative products.

All countries – both developed and developing – have been losing billions of dollars in tax revenues.

Last year, the International Consortium of Investigative Journalists released information about Luxembourg’s tax rulings that exposed the scale of tax avoidance and evasion. While a rich country like the US arguably can afford the behavior described in the so-called Luxembourg Leaks, the poor cannot.

I was a member of an international commission, the Independent Commission for the Reform of International Corporate Taxation, examining ways to reform the current tax system. In a report presented to the International Conference on Financing for Development, we unanimously agreed that the current system is broken, and that minor tweaks will not fix it. We proposed an alternative – similar to the way corporations are taxed within the US, with profits allocated to each state on the basis of the

economic activity occurring within state borders.

The US and other advanced countries have been pushing for much smaller changes, to be recommended by the OECD, the advanced countries’ club. In other words, the countries from which the politically powerful tax evaders and avoiders come are supposed to design a system to reduce tax evasion. Our Commission explains why the OECD reforms were at best tweaks in a fundamentally flawed system and were simply inadequate.

Developing countries and emerging markets, led by India, argued that the proper forum for discussing such global issues was an already established group within the United Nations, the Committee of Experts on International Cooperation in Tax Matters, whose status and funding needed to be elevated. The US strongly opposed: it wanted to keep things the same as in the past, with global governance by and for the advanced countries.

New geopolitical realities demand new forms of global governance, with a greater voice for developing and emerging countries.

The US prevailed in Addis, but it also showed itself to be on the wrong side of history.

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

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

A defeat for international tax cooperation Most of the world’s governments – eager to mobilise more tax revenues to finance development and curb pervasive taxavoidance schemes, such as those revealed in the so-called Luxembourg Leaks scandal last year – have an interest in collaborating on taxation matters. Yet at the Third International Conference on Financing for Development, held in Addis Ababa last month, the momentum toward strengthening international tax cooperation came to an abrupt halt.

Developed countries blocked a proposal at the conference to establish an intergovernmental tax body within the United Nations to replace the current UN Committee of Experts.

These countries insist that tax cooperation should take place exclusively under the leadership of the OECD, a body that they control.

The rest of the world should hope this will prove to be a pause rather than an end to progress on international tax cooperation, which began 13 years ago, at the first International Conference on Financing for Development in Monterrey, Mexico. Two years later, in 2004, the United Nations Economic and Social Council (ECOSOC) upgraded its “ad hoc group” of tax experts to a regular committee. This meant that the experts would meet regularly and have an expanded mandate that went beyond merely updating a model double-taxation treaty.

Four years later, at the Second Conference on Financing for Development, in Doha, Qatar, policymakers acknowledged that more needed to be done in tax matters, and asked ECOSOC to consider strengthening institutional arrangements. And then, in the year leading up to the Addis Ababa conference, the UN Secretary-General endorsed the need for “an intergovernmental committee on tax

By Jose Antonio Ocampo cooperation, under the auspices of the United Nations.”

His endorsement, along with strong support from nongovernmental organisations and the Independent Commission for the Reform of International Corporate Taxation, gave greater force to the demand by developing countries, organised around the Group of 77 and China, for an equal voice in setting global tax norms. Up until the 11th hour of negotiations in Addis Ababa, they stood firm in calling for an intergovernmental body with the mandate and resources to create a coherent global framework for international tax cooperation.

But to no avail: Developed countries, led by the United States and the United Kingdom –home to many of the multinational corporations implicated in the “Lux Leaks” – succeeded in blocking this much-needed advance in global governance. In the end, the Addis Ababa Action Agenda provides that the current Committee of Experts will continue to function according to its 2004 mandate, with three additional meeting days per year, all funded through voluntary contributions. That is a profoundly disappointing outcome.

The developed countries have an argument – but not a convincing one. The OECD, whose members are essentially the world’s 34 richest countries, certainly has the capacity to

set international standards on taxation. Yet the domination of a select group of countries over tax norms has meant that, in reality, the global governance architecture for taxation has not kept pace with globalisation.

The Monterrey Consensus reached in 2002 included a call to enhance “the voice and participation of developing countries in international economic decision-making and norms-setting.” But although the OECD invites some developing countries to participate in its discussions to establish norms, it offers them no decision-making power.

The OECD is thus a weak surrogate for a globally representative intergovernmental forum.

Such a body must operate under the auspices of the United Nations, which bears the institutional legitimacy necessary to respond effectively to the challenges of globalisation with coherent global standards to combat abusive tax practices and ensure fair taxation of corporate profits worldwide.

Despite the disappointment in Addis Ababa, the call for reform of the international tax system is not likely to be silenced. Instead, it will grow louder on all sides, as the developed countries’ counter-productive resistance to any give and take on international cooperation results in a tsunami of unilateral tax measures beyond OECD control.

José Antonio Ocampo, a professor at Columbia University and Chair of the Independent Commission for the Reform of International Corporate Taxation, was Minister of Finance of Colombia and United Nations Under-Secretary-General for Economic and Social Affairs. © Project Syndicate, 2015 www.project-syndicate.org

August 12 - 25, 2015

20 | BACK PAGE | financialmirror.com

Francis of the Forest

By Bruce Babbitt When Pope Francis visited Latin America in July, he made an impassioned plea for the protection of the Amazon rainforest and the people who live there. “Our common home is being pillaged, laid waste and harmed with impunity,” he told activists gathered in Bolivia for the World Meeting of Popular Movements. “Cowardice in defending it is a grave sin.”

Heeding Francis’s call for action is not only a moral issue; it is a practical one. When world leaders meet at the United Nations Climate Change Conference in Paris later this year to craft a response to the challenges of global warming, they should put in place policies to protect tropical forests and the people who make them their home.

Francis is hardly the first missionary to have visited the Amazon. Franciscan, Jesuit and Dominican priests have been spreading the gospel in the region for centuries. What makes Francis’s appeal different is that his words were directed not so much at the local population, but at the residents of North America and Europe, where demand for timber, biofuels, and agricultural products drives the destruction of the rainforests and imperils the lives of indigenous populations.

Communities in the Amazon have suffered grievously from the economic incentives to cut down the rainforests.

Around the world, indigenous people are being threatened, murdered, and driven from their homelands. Of the 116 environmental activists killed in 2014, 40% were indigenous leaders. In September 2014, for example, Edwin Chota and three other leaders of the Asháninka communities in Peru, were brutally murdered, most likely by illegal loggers. Two months later, José Isidro Tendetza Antún, a leader of the Shuar people in Ecuador, was tortured and killed while headed to a protest against a mining project that threatened his people’s homeland.

In addition to being an affront to human rights, deforestation and the accompanying assault on indigenous

cultures is a serious threat to the fight against climate change. The links between the loss of forest cover and global warming has been well documented. Carbon-dioxide emissions from forest clearing and burning account for nearly 10% of global emissions.

Meanwhile, forest people have demonstrated that they are often the best guardians of the trees on which their livelihoods depend. The forests where indigenous people live often hold more carbon than those managed by any other owners, public or private.

Indeed, indigenous reserves in the Brazilian Amazon have played a critical role in lowering deforestation rates – at a considerable cost. In the past 12 years, more activists and indigenous leaders have been killed in Brazil than in any other country.

During the proceedings in Paris later this year, countries will be expected to present national plans – known as Intended Nationally Determined Contributions (INDCs) – outlining the specific steps they will take to reduce CO2 emissions. If Francis’s appeal is to be respected, these steps must include commitments to help indigenous people secure the right to their land and empower them to protect their forests against destruction.

So far, only a little more than one-quarter of the world’s countries have submitted preliminary INDCs for review.

Unfortunately, few countries with tropical forests have submitted their plans, and not one of the Amazon countries has done so.

Mexico, by contrast, is setting a good example. The government has used its INDC to set several ambitious goals, including commitments to zero deforestation by the year 2030 and to restoring forest ecosystems in the country’s watersheds. And yet, while Mexico has relatively strong formal land and property rights for indigenous peoples and local communities, those rights have yet to be integrated with other regulations – hindering any kind of economic

development.

Industrialized countries, such as the United States and the members of the European Union, bear a special responsibility for providing solutions to the problem of deforestation.

Forest communities must be provided with assistance in managing their resources and maintaining their livelihoods.

The Green Climate Fund, established by the United Nations to help developing countries mitigate CO2 emissions and adapt to climate change, should include provisions specifically for indigenous people, along the lines of the Climate Investment Fund’s Dedicated Grant Mechanism.

Francis’s upcoming trips will include visits to Washington, DC and Paris, where he is expected to continue his advocacy on behalf of the environment. It is up to our leaders to answer his call and turn prayers into policy.

Bruce Babbitt, former US Secretary of the Interior and former Governor of Arizona, is a board member of the Amazon Conservation Association. © Project Syndicate, 2015 - www.project-syndicate.org

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