Financial Mirror 2015 12 09

FinancialMirror OREN LAURENT

MOHAMED EL-ERIAN

NFP: Should we be happy with the numbers? PAGE 14

The great policy divergence

Issue No. 1163 â‚Ź1.00 December 9 - 15, 2015

PAGE 17

Eurozone: what lies ahead RECOVERY HAS ARRIVED, GROWTH BELOW PRE-CRISIS - SEE PAGES 10-11

The Akamas plan: 25 years on...

By Antonis Loizou - SEE PAGE 13

December 9 - 15, 2015

2 | OPINION | financialmirror.com

FinancialMirror State doctors should retire at 68 Published every Wednesday by Financial Mirror Ltd.

EDITORIAL

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At a time when efforts are still underway to contain the drop in GDP, keep output levels healthy and maintain employment wherever possible, the civil servants’ union PASYDY has once again showed how irrelevant it is to the reality when it threatens to strike against any measures to raise the retirement age for government doctors to 68.

The excuse given by the union, whose doctor members will receive their 13th salary within the first quarter of the new year – while others in the private sector have not seen such a bonus for at least 3-4 years – is that raising the retirement age will further hamper “the already acute problem of youth unemployment”. Another pathetic justification for potential strike action at the hospitals once again, is the status of contract workers which may be lifted if the autonomy of hospitals goes ahead after all.

This is obviously a scaremongering tactic deployed by the union because it does not say how many young doctors remain unemployed (a highly unlikely scenario in the Cypriot market), nor what the rate of growth will be in the demand for new/young doctors with the reform of the public health sector.

The union also fears that this will cause a chain effect in all public sectors and if one sector is imposed the change, then others will follow, meaning an end to “early” retirements at 65, which is nowadays considered not too far off the performance peak of normal workers.

On the other hand, no one talks of the fact that doctors in the private sector continue to practise well beyond their 70th year, with only delicate matters such as surgeries and interventions reduced due to the insurance risk being higher.

Also, what government doctors fear most is that if they retire at 68 they will not have enough years to practice in the private sector, as many do today.

The solution is very simple. With the autonomy of the hospitals, the employment criteria should also be raised whereby hiring in the public health sector should become competitive once again.

Also, what the unions do not realise is that they are now forcing the hand of the Minister of Health to (hopefully) introduce the National Health Scheme as soon as possible, without being influenced by the vote-dependant MPs who cower at any threat from barking unions.

Cyprus needs a good and efficient public health sector where all will benefit, and not just those of the privileged class of civil servants and trade unions.

THE FINANCIAL MIRROR THIS WEEK 10 YEARS AGO

UK shock for developers, IBUs rush to buy CYP The UK Budget announced by Gordon Brown dealt a nasty blow to Cypriot developers when he closed the tax loophole for property investments, while IBUs were rushing to buy Cyprus pounds ahead of a directive for reserves, according to the Financial Mirror issue 648, on December 7, 2005.

SIPPS shock: The Chancellor of the Exchequer announced in the new budget for 2006 that he was closing the tax loophole that would have given significant tax relief to Britons who buy property at home or abroad to include in the trust-based features

20 YEARS AGO

Cheese imports frozen, summer booking down The implementation of the new GATT trade rules and increased EU quotas has forced the government to freeze all new cheese import licenses, while tourism prospects also seem gloomy with summer 1996 bookings down 20%, according to the Cyprus Financial Mirror issue 139, on December 6, 1995.

Cheese imports: The Ministry of Commerce has frozen all cheese import licenses until new measures are passed through parliament adhering to the General Agreement on Tariffs and Trade (GATT), as

of their self-invested personal pensions, with a serious impact to buyers on the island, as Cyprus was one of the few countries that recognises trusts, unlike holiday home destinations France and Spain.

IBUs buy CYP: International banking units (formerly “offshore” banks) are rushing to buy Cyprus pounds in order to comply with a Central Bank directive ordering them to hold 2% of their deposits as Minimum Reserve with the central bank as from January 1, 2006. The demand for CYP 42-45 mln during December will put upward pressure on the already strong Cyprus pound.

CSE profit stalls: The profit performance of the 21 public companies reporting their nine month results showed a mediocre performance with total profits actually declining, if the spectacular results of Bank of Cyprus and Laiki are excluded. The 21 reported a total of CYP 109.8 mln in profits, up 34% from CYP 82 mln a year ago, but this includes CYP 50.5 mln from BOCY and 30.4 mln from CPB. Bond yield: A massive over-subscription in the 10year and 52-week T-bill auction caused a plunge in bond yields, with the first dropping from 4.22% at the September auction to 4.08%, while the 52-week paper was down from 3.51% in September to 3.12%.

Fiscal deficit down: Finance Minister Michalis Sarris said that prospects for the economy seem “encouraging” with income of CYP 2.3 bln (EUR 4 bln) and expenses CYP 3.3 bln (EUR 5.7 bln) in the 2006 Budget, with the fiscal deficit dropping to 3.7% of GDP.

and higher quotas for imports from the EU, after Austria and Finland joined the Union, adding 1,200 tonnes to the current quota for a total of 2,440. The EU wants a free levy on cheese imports while Cyprus wants to impose a tax of 8% and 12% from non-EU markets.

Andreas Papachristodoulou of Bellapais Suppliers said there were “ample stocks” of cheese to last until the end of January.

Tourism down: Turkey is fast gaining ground in the British market as the ideal destination for bargainhunting holiday makers with summer 1996 bookings down 20%, despite government assurances of the opposite. First Choice, Airtours and Thomson were

raising prices by 8-12% to cover for falling margins and reduced capacity, while Cyprus-specialist Noel Josephides of Sunvil said “large operators taught the public to book the last minute and wait for discounts.

But cutting capacity isn’t as easy,” he warned.

Trade deficit: The trade deficit in the first nine months of the year increased 14.3% to CYP 607.6 mln, as imports outpaced exports.

PCP Global fund: The global fund Private Client Portfolio (PCP) has been launched with its management based in Cyprus, according to Caymanbased Ken Paul, who has joined forces with Kevin Mudd of OFS Asset Management, a company that manages in excess of USD 50 mln. The PCP is a dollar-based fund and minimum subscription is USD 5,000 with an initial fee of 6%.

And Bank of Cyprus said it was opening its first unmanned branch in the heart of Nicosia.

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December 9 - 15, 2015

financialmirror.com | CYPRUS | 3

Natgas prospects ‘promising’, say energy experts The demand and the supply of natural gas in Egypt will continue to increase and the north African country continues to be very interested in Cypriot natural gas, Dimitris Fessas, Manager at Cyprus Hydrocarbons Company, told a discussion of experts at the 4th Energy Symposium in Nicosia.

Fessas added that a few weeks after the discovery of the Zohr gasfield within Egyptian waters, there was a reassessment of the new situation, but that Cyprus’ strategy still remains on the table.

He added that Egypt’s plan at Zohr is to satisfy the needs of the domestic market, noting that the liquefaction terminals of BG and those at the city of Damietta are potential buyers of Cypriot gas.

Greece is willing to act as a transit country for Cypriot and Israeli natural gas, on its way to Europe, Greek Environment and Energy Minister Panos Skourletis told the conference. In his address, Skourletis said that this can be achieved either

through tankers, or directly through the EastMed pipeline, yet to be constructed.

Athens seeks to play a central role in the region, due to a combination of gas pipelines running through the country, the Greek Minister said, referring to the IGB connecting Bulgaria with Greece, the natural gas hub in northern Greece and the designs for a new Russian gas pipeline, expected to extend to Greece and Italy.

Petroleum geologist Constantinos Nicolaou appeared optimistic that Cyprus has similar geological structures such as those discovered in Zohr. He explained that the giant discovery in Egypt’s offshore zone was made possible when ENI changed its geological model and searched reefs instead of drilling in sandy areas with rocks.

CEO at Cyprus Natural Hydrocarbons Company Ltd, Charles Ellinas said that Cyprus should keep all options open in relation to the development of its natural gas and should develop a plan B and C, because of the increasingly reduced

price of natural gas.

Ellinas also said that Cyprus must reconsider the option of compressed gas in order to achieve more competitive prices.

According to Ellinas, “we have put all our eggs in one basket” and he appeared concerned over the fact that Egypt has large gas reserves which will be developed over the next few years.

Former Director of the Energy Department at the Energy Ministry, Solon Kasinis said that the proximity of Zohr deposit to Cyprus’ exclusive economic zone (EEZ) is very promising, adding that it seems that “we will be key players in the region.”

He expressed hope that drilling in Block 11 by French company Total in 2016 will yield significant results.

In a similar tone, President Nicos Anastasiades said in his opening address at the conference that 2016 will be a decision-making year as regards the exploitation of Cyprus’ natural resources.

December 9 - 15, 2015

4 | CYPRUS | financialmirror.com

Inflation down 1.5% in November Deflationary pressures were partially contained in November, compared to the past seven months with the Harmonized Index of Consumer Prices declining for the 12th consecutive month.

The inflation rate for November decreased at a rate of -1.5% compared to -1.8% in October, according to the Statistical Service.

The corresponding rate for November 2014 was 0%.

The fluctuation of the deflation over the past seven months was between 1.7% and 2.4%. After July 2015, when the HICP dropped 2.4%, a de-escalation of deflationary pressures is being observed.

In January-November, inflation stood at -1.6%, compared with the corresponding period last year.

30-day T-bills oversubscribed The Public Debt Management Office of the Ministry of Finance said that Tuesday’s auction of 30day Treasury Bills received tenders of EUR 283.9 mln for the EUR 50 mln issue, with a weighted average yield of 0.25%. The accepted yields ranged between 0.11-0.42%.

Banks to offer 10-40% discount on CHF loans Three banks have agreed on voluntary schemes with the Central Bank of Cyprus, to address the problem faced by consumers who borrowed in Swiss francs.

The scheme provides for writing off loans ranging from 10% to 40% to be converted into euros or sterling or loan repayment.

Speaking before the House Finance Committee, the Deputy Senior Director of the Central Bank’s Banking Supervision said that 60% of borrowers who have taken out loans in Swiss francs receive their income in sterling, so they did not suffer any substantial exchange loss.

ECB bond-buying reaches €285 mln The European Central Bank has bought Cypriot public sector securities amounting to EUR 285 mln until November 30, under its public sector purchase programme (PSPP) which came into force as of March 2015.

According to the ECB, in November the Eurosystem purchased Cypriot public sector Securities amounting to EUR 97 mln.

Moody’s raises banking system outlook to ‘stable’ from ‘negative’ Moody’s Investors Service has changed its outlook for the Cypriot banking system to stable from negative, reflecting the modest economic recovery, which will bring an end to five years of acute asset quality deterioration.

“Although Cypriot banks’ massive stocks of problem loans will remain high and provision buffers low, we expect these stocks to begin to ease towards the end of 2016,” said Melina Skouridou, an analyst at Moody’s.

The stabilisation of asset quality metrics will be underpinned by a declining rate of new borrower defaults as household income and business cash flows rise in line with growing economic activity.

The rating agency anticipates 1.2% real GDP growth in 2015 and 1.4% in 2016, improving restructuring conditions for banks in Cyprus.

At between 50%-54% for the core domestic

banks, banks’ problem loan ratios will remain amongst the highest of any banking system Moody’s rates globally, while banks’ provisioning buffers will remain low.

“Cleaning up the balance sheet will take time, given the large volumes of problem loans the banks have to deal with and the fragile realestate market that will not support a high volume of foreclosed asset sales,” explained Skouridou.

As for the banks’ capital, Moody’s expects the rated banks’ capital cushions to decline under its baseline scenario, though they will remain above the regulatory minimum. The rating agency expects the ratio of tangible common equity to risk weighted asset declining by 140 basis points to 11.5% over the outlook horizon, as banks increase their provisions against non-performing loans.

Funding conditions for Cypriot banks will gradually improve, with depositor confidence — albeit still fragile — increasing in recent quarters. In addition, banks in Cyprus will finally return to profit in 2016, following five years of losses. For 2015, Moody’s expects a negative return on assets of around 2%, despite being marginally profitable in the first nine months of the year, as banks enhance their provision reserves.

Finally, while Moody’s rated Cypriot banks are identified by the authorities as domestically systemically important institutions, the rating agency’s deposit ratings continue to not incorporate any government support uplift due to, among other factors, the historic absence of support in Cyprus where senior bank creditors, including depositors, were bailed-in during the country’s financial crisis in 2013.

DBRS upgrades rating to B, ‘stable’ trend, warns that challenges remain DBRS Inc., the fourth-largest credit rating agency in the world, has upgraded the longterm foreign and local currency issuer ratings for the Republic of Cyprus from B (low) it issued in December 2014 to B as “strong fiscal performance and signs of economic stabilisation have helped to ease near-term concerns regarding the fallout from the financial crisis”.

The Canadian rating agency, one of only four to receive “external credit assessment institution” from the European Central Bank has also upgraded the short-term foreign and local currency issuer ratings from R-5 to R-4, thus rising from “highly speculative credit quality” to “speculative credit quality” on commercial paper and short term debt.

DBRS said that the trend on all ratings is ‘stable’ as “Cypriot authorities have demonstrated a strong commitment to the troika-supported adjustment programme, and available official financing exceeds Cyprus’ needs. Nonetheless, Cyprus’ B ratings underscore the depth of challenges and continued need for external support. Cyprus remains vulnerable due to high levels of debt, relatively high real interest rates and reliance on external demand to fuel growth.”

Cyprus’ small and relatively undiversified economy will remain heavily dependent on external demand for the foreseeable future.

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

Improvements in fiscal management and in debt and liquidity are the main factors driving the upgrade, the rating agency said, adding that sustained economic and fiscal outperformance could lead to further upward pressure on the ratings.

“Accelerating progress on the resolution of non-performing loans, on privatisation and on steps to encourage foreign investment could enhance growth prospects and also provide

support to the ratings. On the other hand, a prolonged period of weak growth, particularly if combined with fiscal policy slippages and higher financing needs, could result in downward pressure on the ratings. External factors, including political developments between Cyprus and Turkey and between the EU and Russia, could also have an impact on prospects for growth and investment in tourism, financial services and the energy sector.”

DBRS said that the EUR 10 bln programme agreed with the European Commission, European Central Bank and International Monetary Fund in 2013 has cushioned the impact of the financial crisis and recession and given Cypriot authorities space to tackle fiscal challenges. Given the Republic’s strong performance under the Eurogroup and IMF programme thus far, Cyprus is expected to forgo a portion of the support available under its existing programme.

The low tax environment remains attractive to foreign corporations. Business owners from Russia and other eastern European countries continue to incorporate in Cyprus for tax and other reasons in spite of the losses imposed on foreign bank depositors in 2013. Although Cyprus’ advantages are not unique and could be eroded by external competitors or by regulatory changes in creditor countries, DBRS expects the business services sector to remain an important source of employment and income.

On tourism, the rating agency said that rising household incomes in Eastern Europe should continue to provide a stable source of growth in tourist arrivals. The declining rouble and Russian recession have had a significant

impact on overall receipts, but this has largely been offset by increased tourism from the UK and other countries. Tourism will remain highly seasonal and vulnerable to economic downturns, but focused and pragmatic public and private sector efforts to expand the island’s appeal could generate long-term benefits.

Over the next few decades, exploitation of offshore natural gas deposits could provide a major new source of income for the economy.

Although exploration efforts have slowed due to global market conditions, proven gas reserves should still bring in a considerable amount of new revenue for the government. If managed prudently, the associated financial inflows could help to significantly reduce Cyprus’ exposure to shocks. In addition, related investment and lower domestic energy costs could have ancillary benefits for the economy.

The pace of development of the gas sector could nonetheless be affected by relations with Turkey.

In spite of these strengths, Cyprus faces several near-term challenges. General government debt appears to have peaked at 108.2% in 2014. Although the fiscal adjustment appears largely complete at this stage, continued fiscal discipline and stronger economic growth will be essential to bring debt down to more manageable levels over time.

Gross financing requirements through mid2016 can be comfortably met through official financing, and the government has taken advantage of lower market interest rates to extend debt maturities and minimise financing needs in the post-program period (2016-18). A prolonged deterioration in market conditions could nonetheless present significant challenges given Cyprus’ heavy reliance on external funding.

Private sector debt ratios are also at historically high levels and suggest that growth will be constrained by further deleveraging.

Household and corporate balance sheets have been damaged in the crisis, including through the bail-in of uninsured depositors.

Real estate prices are still declining, albeit at a more moderate pace, and the ultimate impact of the decline on household wealth, domestic savings, and bank solvency is not yet clear.

Financial institutions will need to significantly reduce outstanding domestic credit or identify significant new sources of funding.

December 9 - 15, 2015

financialmirror.com | NEWS | 5

EU-10 agree on partial FTT, EPP wants global deal Ten euro zone countries agreed on Tuesday on some aspects of a harmonised tax on financial transactions - and gave themselves until the middle of next year to reach agreement on remaining issues, including tax rates, the group said in a statement.

A financial-transaction tax (FTT) is intended to recover some of the public money used to support banks, to curb speculative trading and to unify the various levies already charged in several EU countries.

The EPP Group’s negotiator on the European FTT, Othmar Karas, welcomed the agreement. “This is reasonable and an overdue political signal. Unfortunately this is just the fourth best option: this is just the lowest common denominator, further steps must follow,” the Austrian MEP said after the agreement.

Talks on imposing one have been dragging on since 2011. In September of this year, ministers from Germany, France, Italy, Austria, Belgium, Estonia, Greece, Portugal, Slovakia, Slovenia and Spain said they had made progress and they expected a political agreement in December.

Estonia, which did not sign the agreement, had been worried that because most of the shares traded by its financial institutions are issued outside the participating group, it would hardly get any revenue. At the same time, its traders would have an incentive to move their business elsewhere.

The joint statement by the ten said all share transactions, including intraday trading, would be taxed.

The tax would be paid by traders in one of the countries participating in the scheme on shares issued in those countries.

“In order to sustain liquidity in illiquid market configurations, a narrow market-making exemption might be required,” said the statement. France had insisted on such an exemption.

The ministers said they would analyse whether it would be better to tax all shares, regardless of where they were issued.

The ministers also agreed that derivatives transactions should be taxed “on the principle of the widest possible base and low rates and it should not impact the cost of sovereign borrowing.”

They said option-type derivatives should be taxed on the

option premium. For other types of derivatives, the taxable base could be a termadjusted or non-term-adjusted notional amount, depending on whether the instrument has a maturity date.

They also agreed to further analyse the impact of the tax on the real economy and pension schemes as well as the financial viability of the tax for each country.

“On the basis of these features, in order to prepare the next step, experts in close cooperation with the Commission should elaborate adequate tax rates for the different variants,” the statement said.

The proposal of the European Commission from 2013 envisaged a tax rate of 0.1% on share and bond trades and 0.01% on derivatives trades. The FTT would have to be paid if at least one of the parties is based in the EU. The longterm goal - according to MEP Karas - must be to get a global financial transactions tax.

“The best would have been to include all global financial centres. The second option was an EU-wide FTT, the third option was joint action of the Eurozone. I remain optimistic,” Karas stressed.

“The purpose of the FTT is not to be another cash cow, but to have a regulatory effect. Risky and untransparent business practices should be taxed more,” he said.

In 2012 and 2013 the European Parliament voted by an overwhelming majority in favour of the swift introduction of an EU-wide FTT. In December 2013 Parliament gave its consent to only 11 member states going ahead with the tax (533 votes in favour, 91 against and 32 abstentions).

December 9 - 15, 2015

6 | COMMENT | financialmirror.com

Diplomacy vs foreign policy THE FUNCTIONS OF A DIPLOMAT AND THEIR PROTOCOL DIMENSIONS

By Dr Andrestinos Papadopoulos Ambassador a.h.

I would like, at the outset, to make a distinction between diplomacy and foreign policy, as many people are confusing these two notions.

Foreign policy charts the course to be followed by the state in accordance with its goals. These goals are defined by permanent data, like geography, history, civilisation, national characteristics, etc, and changing factors of an internal or external nature.

Diplomacy implements the foreign policy charted by the state. The function, therefore, of a diplomat is a very serious affair, since it is through diplomacy that the relations between states are governed. The general public believes that diplomats are well-dressed people who enjoy themselves participating in receptions, dinners, social functions, etc. The truth, however, lies in the fact that the diplomats work hard to protect the independence of their country through friendships and alliances, promote its various interests, settle peacefully international disputes, and patiently develop international relations. The art and the technique deployed to that effect, though, have to respect rules and time-honoured practices.

The diplomatic profession is very old. Ancient documents contain treaties of peace and alliance, and we know that in ancient Greece the amphictyons, deputies from Greek states, were forming a council to solve disputes. To the amphictyonies, the ancient Greek cities were sending their old people, who were wise and experienced. In fact, the Greek word for Ambassador is presvis, meaning old man. In the fifteenth century relations between states were served through the establishment of permanent missions in foreign capitals. This practice was generalised in the seventeenth century, and in particular after the Treaty of Westfalen. The term diplomat appeared at the end of the eighteenth century, and derives from the Greek word diploma, “folded paper”, i.e. official letters of credence delivered by the Ambassador.

This for background. The functions of the diplomat cover grosso modo four areas: representation, protection, information and negotiation.

The Ambassador represents the government of his country, and speaks in its name. Hence the reference in its title “extraordinary and plenipotentiary”. In the past, the Ambassador was considered as representing the person of the

sovereign, which explains the exceptional immunities enjoyed by the chief of mission, and his staff. Since the diplomats reflect the image of their country, their public and private behaviour should be irreproachable. In order to promote good relations between the two countries, the Ambassador should establish good personal relations through contacts with the central authorities of the receiving country, as well as the local authorities. Also important is the duty to entertain well. In this respect, mention should be made of the advice Napoleon was giving to his ambassadors before leaving for their country of accreditation. “Tenez bonnes tables” (entertain well). We observe that he took well the advice given to him by his close personal aide, soldier and diplomat, the Marquis de Caulaincourt, that “c’est principalement par la table que l’on gouverne” (it is principally through the table that we govern).

Within the general framework of protection, the Ambassador should protect and ameliorate the status of the citizens of his country, enhance the commercial trade, and strengthen intellectual and cultural relations, essential elements for the development of good relations between the two countries.

Another important field of activities is information. There are many ways to get it: reading the press, discussions with Ministry of Foreign Affairs officials, colleagues from other embassies, and personalities of different background, to mention some.

Any action aiming at getting secret information through devious means gives the right to the government of the country of residence to expel the diplomat engaged in such activities, as persona non grata.

On many occasions the Ambassador has to find a solution

to problems arising from the need to adjust the views of the receiving country to those of his government. He is, therefore, obliged to negotiate. Given the fact that the negotiation is “the art of the possible”, the Ambassador has to know the maximum objective he is pursuing, the minimum result he can live with, and the maximum concessions he can make. The success of his endeavours depends on his personal temperament, the respect and confidence he can command, his connections, his discretion and modesty.

On the other hand, what would be of help to the successful conclusion of the negotiation are, inter alia, the following: In-depth knowledge of the policy of his country, and that of the host country, general knowledge to guide his reactions, vigilant and objective spirit, prudent and reserved character, healthy judgement, immense patience, knowledge of foreign languages, and most important, tact. To be efficient in the exercise of these four functions, the diplomat should have the qualities just described.

With the expansion of international organisations the functions of the diplomatic agents took a multilateral character. In contrast to bilateral diplomacy, multilateral diplomacy offers advantages to small states, as they can benefit from the conflict of interests of the great powers and can count on the one country – one vote system. Mere reference to multilateral diplomacy immediately introduces the complex system of international relations and the constant element of change, which gives a new dimension to the functions of the modern diplomat. He has to cultivate contracts and establish relations with a host of diplomatic agents from different countries for the promotion of his country’s interests. This is exactly the case of Cyprus, whose diplomats for the last fifty years have been trying to find a solution to the Cyprus problem within the framework of international organisations, using existing mechanisms.

Concluding, we observe that the functions of the diplomat have undergone big changes. In the past, the Ambassador was handling exclusively the affairs of his Government.

Today, the Head of State or his Foreign Minister communicate directly with their counterparts, through telephone, e-mails or otherwise. The Ambassador is informed about the event and the content of their understanding post factum. Newly independent countries of the sixties, mainly from Africa, brought considerable changes to some aspects of the diplomatic protocol, the tenets of which he has to obey in his everyday activity, and this is what is expected of him.

Excerpts from a lecture delivered at the event organised by the Diplomatic Academy of the University of Nicosia on November 23

Yogi Berra: “When you come to a fork in the road - take it!”

By Olga Kandinskaia If you are not familiar with the legendary quotes of Yogi Berra, you must be seriously wondering what this headline means. A uniquely successful baseball catcher with the New York Yankees for almost two decades, elected to the Baseball Hall of Fame in 1972, Yogi Berra also became known as the most quoted sports figure in history. Why? Was he a great speaker? No. In fact, he was just the opposite: he produced short illogical phrases of a self-contradictory nature. They would normally leave listeners shaking their heads in bewilderment, yet somehow get the point across. One of his classical quotes is: “You’ve got to be very careful if you don’t know where you are going, because you might not get there.”

As for the “fork in the road” quote, it evolved into an inspirational statement, and has been used by many speakers as a commencement address to university graduates. Yogi Berra gave his own explanation, in 2007, when he spoke at the graduation ceremony of Saint Louis University in the US: “Dear graduates, when you come to a

fork in the road, take it, In life, the only poor decisions are the ones you don’t follow through on. When you leave here today you will have more choices than you ever thought possible.”

In the pre-crisis optimism of 2007 it sounded encouraging. Today unfortunately we live in a totally different economic environment. Recent university graduates are looking around with considerable pessimism.

They are entering a depressed and at the same time highly competitive job market. For many professions, in both public and private sector, the market is already saturated.

Many of those choices and opportunities which existed in the pre-crisis economy for young university graduates are not available any more. The situation with youth unemployment in Europe is really dramatic. Employers these days want people with work experience and, conveniently for them, the supply of such candidates in the job market has been growing. Meanwhile, recent university graduates stand little chance. What can one do these days to get a proper career start?

One possible solution is to seek an internship. The idea of a three to six months unpaid work, provided that the company-host involves the student in an important and meaningful project, is nothing unusual in the US and Germany, but here in Cyprus it is a rather rare phenomenon. People think: why should I work for free?

Think about it the other way. You get a chance to acquire

valuable experience which will put you ahead of other job candidates. You may want to consider enrolling in a postgraduate management programme, such as Master of Science in Management at CIIM. The Programme will offer you several feasible advantages that will place you on a steady career path. Firstly, the MSc Management offers an optional internship – so that you could acquire valuable work experience to improve your skills and enrich your CV. Secondly, the MSc Management programme at CIIM will equip you with business knowledge that is highly practical and relevant to the current environment. Practical aspect is essential because as Yogi Berra said, “In theory there is no difference between theory and practice. In practice there is.”

Finally, your CIIM experience will enable you to discover many new opportunities for your future career and meet people in the business community.

Dr Olga Kandinskaia is Assistant Professor of Finance and Director of MSc Management at the Cyprus International Institute of Management (CIIM) CIIM is currently offering one full scholarship for the MSc Management Programme in collaboration with the Phileleftheros and the Cyprus Weekly. The deadline for applications is January 15, 2016. For more information: www.ciim.ac.cy

December 9 - 15, 2015

COMMENT | 7

Probable possibilities for 2016 Now that 2015 is rapidly fading in the rear view mirror, it is time to consider what we may expect in the probable future. The following are some probable possibilities: Greece: PM Alexis Tsipras loses his

current governing majority as more members of his coalition mutiny and balk at enforcing the Eurogroup’s latest austerity programme. New tax measures fail to bring in the expected revenues. A new election is programmed. Political and economic uncertainty prevails. Grexit is once again in the headlines.

global economic stagnation receives increasing attention. Harvard’s Larry Summers, the most forceful exponent of this view, suggests that the notion that the current slow growth of world economies is “only a temporary consequence of the 2008 financial crisis” is absurd. He states that the world has now entered a new macro economic epoch whose main feature is a glut of saving and deficiency of demand.

European Politics: Parties of the extreme left and right continue to gain ground in European politics.

UK Politics: Jeremy Corbyn, leader of Britain’s Labour Party, is replaced after a long acrimonious internal struggle which comes close to splitting the party.

USA Election: Hilary Clinton wins the Democratic nomination and goes on to win the Presidency.

Refugee crisis. The refugee crisis continues. Europe’s efforts to outsource the migration problem to Turkey fail.

Arrangements with Turkey to contain the refugees from flooding into Greece and Italy are unsuccessful.

Many thousands of refugees continue to press at Europe’s borders. Poland and Hungary along with other East European countries challenge the official EU position on migration. The EU’s Schengen “free borders” agreements collapse.

China: China’s economy continues to stumble even while growing at a rapid (but reduced) rate. Investment is particularly hard hit. The governing authorities intensify efforts to stimulate local consumer demand.

Both exports and imports decline. Stock market volatility increases.

Cyprus Tourism: Cyprus tourism hits a new record, giving the entire economy a welcome boost. Aided by arrivals that have been diverted by terrorism related events from both Turkey and Egypt, the 2001 level of 2,700,000 incoming tourists is surpassed for the first time. The Cyprus Tourist Organisation claims credit for the achievement.

Cyprus Economy: The Cyprus economy continues its slow growth attended by high unemployment. Non-performing loans, higher even than those of Greece, continue to be a major problem, contributing to a shortage of credit and hampering efforts to stimulate the economy. Prodded by the Troika of international lenders, the Cyprus Parliament has to address the issue yet again, focusing particularly on strategic defaulters.

A turtle-fast judicial process contributes to the difficulties.

Labour Disputes: Labour strife increases in Cyprus as the government tackles the privatisation of CYTA and EAC. Political opposition parties intensify their efforts to forward various alternatives in an effort to save these important sources of rusfeti.

By Dr. Jim Leontiades Cyprus International Institute of Management The ECB: Senior Draghi will keep the printing presses of the European Central Bank rolling, printing money in an effort to stimulate a sluggish Eurozone growth and inflation through his Quantitative Easing (bond buying) programme. But despite his resolve to “do what it takes”, Eurozone inflation will remain weak and below the ECB’s target of 2%. Germany continues to oppose the demand creating actions required to bring the Eurozone economy out of its high unemployment, slow growth pattern.

The Euro: The euro hits parity with the dollar. Most of the decline of the Eurozone currency has happened but there is still more to come. It is no coincidence that there was marginal improvement in the Eurozone economy about the time Mario Draghi initiated his QE programme. A substantial contribution to this improvement was made by the associated drop in the Euro, aiding European exports.

EU Stability and Growth Pact: France and Italy become increasingly at odds with EU budget rules, challenging Germany’s economic leadership. For 2016, neither country will agree to meet the 3% government deficit target of the EU’s stability and growth pact. The French finance minister hints that the country’s deficit may increase even more following the Paris terrorist attacks. Dissatisfaction with German economic austerity prescriptions increases within the Eurozone.

Global Stagnation: The possibility that the world has entered a period of long term

December 9 - 15, 2015

8 | COMMENT | financialmirror.com

Roll up! Roll up! for a slice of RETRO

FOOD, DRINK and OTHER MATTERS with Patrick Skinner

A WEEK’S WORLD WAR II FOOD RATIONS FOR ONE

Ably assisted by my daughter Susanna, who is a wiz with Internet publishing and my son Robert who is highly expert with websites, I have launched my first non-food book, a bit of autobiography in fact. It takes the reader back quite a few years – more than 75 - and tells what it was like to be a kid in Britain growing up during World War II. Anyone interested can find it on Amazon, a Kindle book, priced at St£4.99. I will respond to any and all feedback!

The cover is pictured left – that’s me in the school cap, aged ten. There is, of course, a food element in my narrative and a short extract follows. It demonstrates what food we were legally allowed to buy to keep body and soul together.

If you were to spread out on a table the official allowance of food for one week, you would imagine seriously undernourished people. This was not the case. People weren’t obese, but they were fit. This is our weekly allowance: 1s. 2d. - one shilling and twopence (St£0.05) worth of meat. This was about half a kilo of stewing beef or two or three lamb chops.

4 oz (113 g) bacon or ham.

2 oz (57 g) butter, 4 oz (114 g) margarine. 4 oz (57 g) fat or lard.

2 oz (57 g) of tea (loose).

1 egg, 2 oz (57 g) jam, 4 oz (114 g) sugar, 1 oz (28 g) cheese.

3 oz (85 g) sweets.

16 “Points” per month for canned and dried food.

Many products in grocers’ stores – canned food such as soups, baked beans, spaghetti etc, jams and preserves, cornflakes and other cereals – were rationed under a system called “Points”. In each person’s Ration Book there were coupons for the basics such as meat, fats, eggs, bacon etc, which had to be cut out by the butcher or grocer with whom you were “registered”. You could not take your Ration Book to any store. The Points pages were quite different. You could go to any grocer and buy your baked beans, salad cream or whatever and he would cut out the appropriate number of points from your book.

Although not rationed, milk, bread, fruit vegetables and potatoes were often in short supply and imported things like oranges and lemons were very scarce. Bananas were held to be of low nutritious value, so for over five years were didn’t see any. Bread was not rationed, but you had to be at the baker’s shop early!

Somehow, the dairies made a daily delivery of milk, in pint (51 cl) or half-pint bottles. The milk-float was pulled by one horse whose droppings were greatly prized by gardeners as fertiliser. It was an unwritten law that you could only scoop up the horse-dung outside your own house and on your side of the road. My father always did this and I followed his example.

There were no supermarkets in those days and very often the butcher’s assistant, the grocery delivery boy and the younger baker had all been called up, so you had to walk or cycle to the shops. There you formed a queue and many an hour did I stand in line outside the butcher or the grocer or the baker to buy some of our foodstuffs. In the butcher everybody eyed everybody else in case a favourite customer got an extra half ounce of stewing steak or, more likely, something that was not on the ration, such as offal (liver, kidneys, hearts and very occasionally sweetbreads) and sausages. These latter seemed to be made of sawdust, with mostly bread and very little meat, and they burst open when grilled or fried. My mother used to cajole a couple of lamb’s hearts out of the butcher every so often, which she would stuff with sage and onion stuffing and bake. I liked them a lot and could never understand why, after the war, they never featured in our diet again.

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

Department of Further Amplification I am asked by an eagle-eyed reader the significance of this picture at the head of my article last week about Mediterranean cuisine. One answer, of course, is that it is a device of our editor to elicit reader response, i.e. enquiries as to why the bus photo was inserted on the page at all. I would like be able to tell you that at just after mid-day, this bus crossing the Nubian desert from Wadi Halfa to Khartoum, a distance of 1046 kms (641 miles) mostly across sandy, stony desert and hills, had stopped for lunch. And that the driver opened up the motor so the passengers could cook their burgers on its hot top.

Actually, it had broken down. I know, because I took the picture. Not being of a mechanical nature I could not assist in the resuscitation of the bus. It was an incredible, notable for truly memorable meals, many of which consisted of stale, dry, full-of-grit, flat bread, very dry goat’s cheese and huge almost tasteless tomatoes.

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Airbus wide-body orders overtake Boeing

By Paul Ausick Aircraft maker Airbus Group announced that it has taken net new orders for 1,007 passenger airplanes to the end of November.

That total is well above the 568 net new orders written by Boeing Co. up to December 2. The really unhappy news for Boeing is that new orders for the Airbus A330, A350 and A380 have pushed the European maker’s total for net new wide-body orders to 127, compared with 113 net new wide-body orders for Boeing’s 747, 777 and 787.

Airbus also holds a wide lead in the market for narrow-body planes. The A320 family of single-aisle passenger planes has received net new orders for 876 planes in the first 11 months of the year, compared with a net total of 389 new orders for Boeing’s 737 family. For the year, Airbus’s share of the narrow-body market is nearly 70%.

While this comparison favours Airbus, Boeing is the easy winner when it comes to deliveries. The company has delivered 705 new commercial aircraft so far in 2015 and should easily deliver more than its stated yearly target of around 755 planes. Airbus has struggled with deliveries in 2015 and has

shipped out just 556 new planes. In order to meet its target of 630 deliveries, Airbus needs to roll out 74 new planes in December. That’s possible, but it won’t be easy. Airbus had shipped just ten of the 15 A350s it had targeted for deliveries this year by the end of November. It still expects to meet its target, having delivered one new A350 last week, with the other four on schedule for delivery by the end of this month. The Christmas holidays, however, could slow production.

Airbus did deliver four new A350s in October, so there is precedent.

Another issue for Boeing is slow sales of its current 777 wide-body, for which the company has taken orders for just 38 so far in 2015. Boeing’s target for the year was 40 to 60 new orders for the plane, and it still hopes to sign a deal with United Airlines for ten of the 777-300ERs by the end of December, according to a report from Leeham News. The new 777X has logged 20 net new orders so far this year.

On Monday, Boeing Capital Corp. (BCC) released its market outlook for aircraft finance in 2016. The recent reauthorisation of the U.S. Export-Import Bank has lifted the outlook to its best level since 2009. Boeing estimates that the total global market for new aircraft will reach $127 bln in 2016, up from

$122 bln this year, and that 36% of the funding for those planes will come from the capital markets. By 2020, BCC projects total new deliveries will reach $172 bln.

Leasing companies are expected to take

about half the capital market’s funding in 2016 and the Ex-Im Bank’s funding support “is projected to be limited in scale.” The ExIm Bank’s total financing assistance to Boeing in 2016 is forecast at 9%.

Large private banks in Russia take market share amid recession Amid Russia’s recession, the country’s largest private banks are consolidating their market share — a credit positive trend likely to continue in 2016, Moody’s Investors Service said.

“The share of assets at the top five privately owned banks increased to 12.5% in mid-2015, from 10.8% at the end of 2014 and 8.4% at the end of 2013,” said Elena Redko, an Assistant Vice President at Moody’s. “The share of smaller private banks, on the other hand, fell to 18.9% from 23.4% at end2013.”

“We view the consolidation of Russian private banks as credit positive because stronger private banks will enhance overall competitive dynamics in the banking system,” said Redko. “In addition, integration risks for most of the transactions seem manageable and unlikely to erode credit fundamentals of the leading banks.”

A number of trends are driving consolidation at the top of the privatesector Russian banking market. The Russian regulator, for example, is encouraging “rehab” takeovers of small weak banks by financially stronger institutions.

“Many privately owned banks have weak capital buffers which are eroding further in the current environment,” explained Redko. “If current shareholders are unable to provide additional capital, in many cases the Central Bank of Russia has been providing regulatory and liquidity support to encourage poorly capitalised banks to integrate into larger institutions.”

In addition, the CBR is also pushing problematic banks out of the market entirely by revoking banking licenses for reasons including dubious transactions, misrepresentation of financial statements, and excessive credit risk — more than 100, mostly small, institutions have had their banking licenses revoked by the CBR in 2014 and 2015.

Moody’s expects the regulator to encourage further shrinking of the number of banks as it encourages consolidation into strongly capitalised, well-run institutions.

Furthermore, many Russian subsidiaries of foreign banks are

downsising - they simply do not have the appetite to take increased credit risk in the current environment, according to the rating agency - and are likely to further deleverage their Russian operations in 2016 in Moody’s view. Market share has already dropped to 8.2% of assets as at July 1, 2015 from 9% as at year-end 2013.

Finally, international sanctions against major state-owned

banks are creating opportunities for large private banks to take business.

As these sanctions (in some cases) prevent the state banks from providing Russia’s largest companies with needed foreign-currency credit, private banks have been able to compete for high-quality borrowers when such borrowers refinance maturing international debt.

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What to expect in 2016: Political will to preserve Eurozone remains strong Recovery has arrived, but growth is well below pre-crisis trend The external risks are significant, too

By Fergus McCormick, DBRS In anticipating macroeconomic conditions for the Eurozone in 2016, three themes are relevant. The first is that the political will to preserve the Eurozone, and to deepen European economic integration, appears to be as strong as ever. Since the start of the Eurozone debt crisis in 2008, this political will has been underestimated. This also largely explains why during the crisis DBRS maintained its sovereign ratings on Italy, Spain, Ireland and Portugal higher those of other credit rating agencies.

During the crisis DBRS downgraded these ratings, but no lower than ‘Single A (low)’ in the cases of Italy, Spain and Ireland, and no lower than ‘BBB (low)’ in the case of Portugal.

There is some evidence to support the theory that the more Europe is tested, the greater the impetus to deepen integration. Integration is in fact proceeding in both fiscal policy and financial policy. The European Commission has a mandate to impose sanctions on countries that do not adhere to the Stability and Growth Pact. However, the treatment of member states’ budgets is complex and allows for significant exceptions to the rules. For example, the Commission’s November 2015 assessment of the member states’ 2016 draft budgetary plans permits higher incremental spending linked to unusual events outside the control of the government, such as the exceptional inflow of refugees. However, only some member states have included the net extra costs of the refugee crisis in their draft budgetary plans. While greater fiscal flexibility may be appropriate to accommodate cyclical downturns or unexpected shocks such as the influx of refugees, the application of the rules is unclear.

To enforce oversight, the forthcoming European Fiscal Board will coordinate the monitoring of national budgets with national fiscal councils. Presumably, this should improve the monitoring of member states’ budgets, and could result in greater consistency of the application of the fiscal rules across member states.

Greater integration is also occurring with the banking union. The supervisory pillar is in place and the resolution mechanism is being implemented. As of January 1, 2016, all member states will apply a single rulebook for the resolution of banks and large investment firms as part of the Bank Recovery and Resolution Directive. The BRRD requires shareholders and creditors of banks to contribute to the costs

of a failing institution through a bail-in mechanism.

Although this could dissuade investors from purchasing shares or bonds, these rules are nevertheless likely to make the winding down of a bankrupt financial institution more predictable.

The Eurozone’s evolving financial backstop, in the form of ECB monetary accommodation and the support facilities, is further evidence of willingness to preserve the Eurozone. The ECB’s extraordinary monetary accommodation has been the single most important factor in stabilizing the region, from the Securities Markets Program to the promise of Outright Monetary Transactions – Governor Mario Draghi’s July 2012 statement that the ECB would do “whatever it takes to preserve the Euro” – to Quantitative Easing (QE). The EFSF and ESM financial backstops rolled out since the first support programme for Greece also demonstrated this willingness.

These programmes may not have necessarily restored debt sustainability in all cases, but they did stem the panic and prevent contagion to other countries. The preservation of Greece and Cyprus as member states in the Eurozone further demonstrated this willingness.

Recovery has arrived, but growth is below pre-crisis trend The second theme is that the recovery has arrived, but GDP growth is well below the pre-crisis trend. The IMF’s October World Economic Outlook GDP growth projections appear to be reasonable: the IMF expects the world economy to grow by 3.1% this year and 3.6% next year, while in the Eurozone growth is expected at 1.5% this year and 1.6% next year. In the third quarter, the Eurozone grew 0.3% quarteron-quarter, slowing from 0.4% in the second quarter. Yearon-year, the Eurozone grew 1.6%, slightly higher than 1.5% in the second quarter. As Exhibit 1 shows, the United States and United Kingdom are growing well above their pre-crisis peak; the EU has just surpassed it; the Eurozone and Japan not quite. This is an uneven picture, and the uncertainties facing the Eurozone present downside risks to growth.

Indeed, it is doubtful that the Eurozone has emerged stronger after the crisis. When the output gap closes, it is likely to do so at a lower level of output. As Exhibit 2 shows, the dotted black line represents the slope of potential GDP as it would have been had the crisis not occurred; the yellow line is the new projected rate of growth of the economy; the blue line below is the actual rate of growth. The output gap – the gap between the blue line and the yellow line – is

expected to close at a lower level of output than it would have given the original projected potential GDP. By one measure, the loss to potential GDP for a selection of 22 advanced economies is 8.4% below the pre-crisis path would have predicted.

The question is, why has trend growth declined? One would expect a rebound in exports given the weaker exchange rate, higher consumption and investment from lower world oil and commodity prices, and greater consumption and lending from low interest rates because of bond purchases by the ECB. However, domestic demand has yet to rebound in a more robust manner. The most convincing argument for why growth in the Eurozone is so far below potential is the “savings glut” argument – “secular stagnation” – or the tendency for demand to be weak relative to potential supply.

Weak domestic demand, supply side constraints, and political fragmentation may all be contributing to this phenomenon. Despite some signs of a pickup in consumption, both consumption and investment remain lacklustre. This deficient domestic demand is at least partly the result of deleveraging governments, households, nonfinancial corporations and banks. In such an environment, it is no surprise that spending is lower. Second, with low investment, especially public investment, labour productivity has declined. Exhibit 3 shows that the labor productivity growth that is attributable to investment has declined sharply in the G7 countries – not only in the US, the UK and Japan, but also in Germany, France, Italy and Spain. Therefore, this is a worldwide phenomenon. With lower productivity comes lower growth.

Second, there are significant supply side constraints. One sign of this is in persistent unemployment, which is affecting human capital. For long-term unemployed, inactive or discouraged workers, their adverse experience may negatively affect their attitude toward work, as well as their aptitude for work. The risk is that in the event of persistent low growth, or worse, a severe downturn, the bad cycle might permanently damage the trend. An equally important supply side constraint is sluggish credit growth. In spite of QE, which has kept bond yields low and expanded the ECB’s balance sheet, credit growth to households and non-financial corporations has been limited.

A third possible reason for low growth is political fragmentation. There have been several layers of fragmentation. Austerity fatigue and other factors are resulting in the splintering of traditional centrist political parties, and this is drawing mainstream politicians to the

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Eurozone outlook right or to the left. Secessionist factions in Scotland and Catalonia have called into question the integrity of the nation state. Meanwhile, calls have increased for referendums on whether to continue EU membership, as in Britain and Finland. This has added significant uncertainty to the outlook. If the Eurozone continues to grow in line with expectations of 1.5% this year and 1.6% next year, then in most member states a stabilisation and eventual decline in government debt to GDP ratios is likely.

However, the main risk to the Eurozone is a growth shock resulting in even lower growth. As Exhibit 6 shows, applying a two times standard deviation growth shock to Spain results in an increase in its public debt to GDP of 9.9%. In the case of Italy, given its higher debt stock, a similar shock results in an increase in debt to GDP of 23.4%. Although these are only simulations, they show the danger that the more highly indebted countries face in the event of a sharp economic downturn.

External risks are significant The third theme is that the external risks are significant.

One potential source of lower growth is the global economy.

Turning first to the U.S. Federal Reserve, Fed funds futures prices point to 74% of investors believing that the Fed will hike interest rates on December 16. How the Fed responds to the improving labour market and real economy is important in several respects. Once the Fed starts its tightening cycle, this will demonstrate its confidence in the strength and resilience of the U.S. economy, in spite of low inflation. The effect of monetary policy normalization on the dollar will also be important for the U.S. recovery, as well as for global asset prices. Indeed, Fed policy is likely to drive the dollar, which since the 2013 taper tantrum has been appreciating on the back of cyclical inflows related to U.S. monetary policy.

The signal the Fed sends on the pace of monetary tightening, and the forward guidance on the reasons for the tightening, will be important for emerging market currencies as well as the Euro, which has depreciated by 12% in the year.

It will also be important for the pace of growth of both developed and emerging markets. The Euro could depreciate further if there is greater divergence between the monetary cycles of the Fed and the ECB. This could be the result of a more aggressive Fed tightening, an increase in ECB QE to perhaps as high as EUR 80 billion from 60 billion currently,

or an adverse outcome to either the December Spanish elections or a vote on Brexit in 2016.

A second external risk is a sharper emerging markets slowdown amid rising corporate defaults. With the exception of Central Europe, the IMF projects GDP growth in the emerging markets to slow this year to 3.9%, before picking up to 4.5% next year. However, emerging markets suffer from excessive private sector leverage, high rates of credit growth, and declining corporate profit margins. China continues to rebalance from public investment-led growth to consumption-led growth, while Brazil is in the deepest recession since the 1930s. High debt and low growth leave many emerging markets exposed to a tightening of U.S. monetary policy. Furthermore, the third quarter saw a slowdown in Eurozone goods and services exports to the rest of the world. Given the exposure of the Eurozone to emerging markets, this could be a further source of weakness.

A third risk to Eurozone growth is geopolitics, particularly

migration. Migration is concerning on two fronts. First, there is no common Eurozone or EU policy toward migration. This has created uncertainty and has begun to interrupt supply chains, which could further slow output. Second, the erection of barriers to migrants could prove to be permanent. Interrupting the free movement of labour – the dissolution of the Schengen Area, the 26 European countries that have abolished passport and other border controls at their common borders – goes against one of the principles of European integration.

The political will to preserve the Eurozone does appear to be as strong as ever. However, this will continue to be tested. The divergence of sovereign bond yields reflects the persistence of different perceptions of country risk.

From the launch of the Euro in 1999 until the Lehman collapse, yields traded at the same level of risk. Currently, yields are trading lower than before the Lehman collapse and are closer together than during the Euro crisis. However, this convergence can be largely attributed to ECB bond purchases. Once QE begins to be withdrawn – not expected until the fourth quarter of 2016, more likely in 2017 or 2018 – a faster pace of growth and higher inflation are likely to be needed to avoid an even greater divergence in bond yields.

This will not be favourable for growth prospects.

The Lehman collapse served as a wake-up call for the need for better bank supervision. It also brought into stark relief the main policy mismatch of the Eurozone: In the absence of a central fiscal authority and common treasury, monetary union under a fixed exchange rate system may be insufficient to achieve what the founders of European integration set out to do: promote growth and increase political unity across the entire Eurozone. In the absence of greater political unity, the onus will be on growth to offset the many uncertainties the region is facing.

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

Brexit is ‘negative’ for UK Moody’s says it may cut outlook on Aa1 If the UK were to leave the EU, the credit impact for the sovereign and the implications for its rating would depend primarily on what new trade arrangements the UK government could achieve, as well as its other economic policy choices, according to Moody’s Investors Service.

The rating agency added it might assign a negative outlook to the Aa1 in the event of a vote to withdraw from the EU, to reflect its view that exit would have negative consequences for the UK economy and hence potentially for the UK’s credit strength.

“Exit would be negative for trade and investment in the UK, given the close links with the EU as the UK’s single most important trading partner and largest source of foreign-direct investment,” said Kathrin Muehlbronner, a Senior Vice President at Moody’s. “These outweigh the benefits from exit such as cost savings for government and a reduced regulatory burden for businesses in our view,” she added.

However, rather than the short-term impact on growth, Moody’s would focus on the medium term economic and political impact of an exit. In the rating agency’s view, exit from the EU would not provide

immediate clarification on the UK’s future trade and economic prospects. Instead, it would likely be the beginning of potentially multiple, lengthy and complex negotiations on a new trade agreement with the EU that conserves at least part of the benefits that EU membership affords.

“The UK could face a potentially prolonged period of uncertainty, which in itself would be damaging to confidence and investment. A Swiss-style series of bilateral agreements or a comprehensive free trade agreement would invariably take time to negotiate and this process wouldn’t be easy,” said Muehlbronner. According to EU legislation, effective withdrawal from the EU could take up to two years, during which the outline of an alternative arrangement would likely emerge. In addition to negotiating with the EU on a new trade deal, the UK authorities would probably have to renegotiate other bilateral and multilateral free trade agreements that the UK currently benefits from as an EU member state.

The UK might also reconsider other domestic policies, such as banking regulation, in order to limit the impact on the financial services sector. While Moody’s considers the UK’s institutional strength to

be very high, exit and the associated challenges would place a significant burden on policy-makers and the agency would monitor the implications for the effectiveness of policymaking very closely.

These challenges would likely outweigh the economic benefits of exit, according to Moody’s. The cost savings on the government’s contributions to the EU budget are modest at around 0.6% of GDP per annum and in the rating agency’s view UK-based businesses would continue to have to comply with EU regulation even after exit, if they wanted to sell into the Single Market.

Moody’s also noted that EU regulation has not impeded the UK’s flexible labour and product markets, nor does the EU seem to be a key constraining factor for extra-EU trade, as Germany’ strong trade links with China and other emerging markets show.

The EU accounts for around 50% of UK goods exports and 37% of services exports (2014 data). Last year, the UK received net foreign-direct investment (FDI) of GBP 44 bln, which equates to around a third of all EU investment inflows, with many investments from outside of the EU attracted to the UK as an entry point to the larger EU market.

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U.S. foreclosures highest in NYC, Chicago, Washington DC ByPaul Ausick - 24/7 Wall St.com In the month of October, some 37,000 U.S. home foreclosures were completed, down 12.3% month over month and down 27.1% from a total of 51,000 in October 2014, according to CoreLogic. The research firm notes that the current foreclosure inventory totals 1.2% of all homes with a mortgage in the United States, down from 1.6% in August of 2014.

The number of U.S. homes currently in some stage of foreclosure totals 463,000, compared with 589,000 in October 2014. That represents a decline in the national foreclosure inventory of 21.5% compared with October a year ago.

The four states and the District of Columbia with the largest foreclosed inventory as a percentage of mortgaged properties are New Jersey (4.5%), New York (3.6%), Hawaii (2.5%), Florida (2.5%) and D.C. (2.3%). The five states with

the lowest inventories of foreclosed properties are Alaska (0.4%), Arizona (0.4%), Minnesota (0.4%), Nebraska (0.4%) and Colorado (0.4%).

The five states with the highest number of completed foreclosures in the past 12 months were Florida (86,000), Michigan (59,000), Texas (30,000), Georgia (25,000) and California (24,000).

The five states with the fewest foreclosures in the prior 12 months through October were District of Columbia (76), North Dakota (239), Wyoming (515), West Virginia (544) and Hawaii (700).

CoreLogic’s chief economist said that “improved economic conditions and more foreclosure completions have pushed the foreclosure rate lower. The national unemployment rate declined to 5.0% in October, the lowest since December 2007, and the CoreLogic national Home Price Index has risen 37% from its trough.”

The company’s CEO added, “we are heading into 2016 with the lowest foreclosure inventory in eight years thanks to excalating [sic] home values and progressive improvement in

the U.S. economy. A large proportion of the remaining foreclosure inventory is clustered in New York, New Jersey, and Florida. Equally encouraging is the drop in mortgage delinquency rates reflecting the stronger labour market and tighter underwriting since 2009.”

Of the ten largest U.S. metro areas, the foreclosure inventory was highest in the New York area, at 3.6%.

Chicago’s foreclosure inventory totalled 1.7%, and Washington, D.C., posted a total of 1.1%.

The New York metropolitan area, including White Plains and Jersey City, also posted the highest serious delinquency rate of 6.3%, followed by the Chicago metro area’s serious delinquency rate of 4.6% and a rate of 3.3% in the Atlanta metro area.

According to CoreLogic, the current foreclosure rate of 1.2% is the same as the November 2007 rate, and the foreclosure inventory has declined every month for the past 48 months. Before the collapse in the housing market in 2007, the average number of foreclosures completed in a month was 21,000.

Green shoots in Italy’s housing market indicate a very gradual recovery

Property Gallery supports charity concert in aid of cancer children Property Gallery Developers & Constructors is supporting the charity concert ‘Christmas in Vienna’ as a premium sponsor, organised by The Cyprus Association ‘One Dream One Wish’ in cooperation with the Austrian Embassy in aid of children suffering with cancer and other related diseases.

The charity concert will take place with the renowned soprano Chryso Makariou and Aliki Chrysochou along with the Austrian baritone Thomas Weinhappel under the patronage of First Lady Andri Anastasiadis on Saturday, December 19, at Strovolos Municipal Theatre.

Santa visits Leptos Kamares in Paphos The annual Kamares Christmas Fair took place at the Leptos Kamares Club, near Tala, Paphos. There were 50 stall holders displaying their home made and imported goods including candles, books, jewellery, cakes, sweets, ceramics, art works and toys.

The organisers “In Any Event” and “Leptos Kamares Club” arranged a surprise visit from Santa Claus for the children of Paphos donating gifts for those who met him.

Entertainment was provided by the “Les Holmes”, “Platinum Gym Thompson School of Dance” and “SM & KC Entertainment”. As with all their events a charity raffle took place and raised 1,000 euros for local charities including the “Cancer Patients Support Group” and the “Royal British Legion”.

Italy’s housing market is in the nascent stages of a recovery, Moody’s Investors Service said in a special report.

Mildly positive macro conditions, low interest rates and low household debt leverage will help stabilise credit trends for securities backed by residential mortgages into 2016.

“Some signs of recovery are emerging, but its pace will be muted: New mortgage applications soared by 42.5% year-on-year. House prices have fallen by 19% since their peak in 2008, but trends suggest that they are slowly stabilising,” said Carole Bernard, a senior analyst at Moody’s.

“In the longer term, a slower population increase, muted economic growth and high unemployment will weigh on housing demand. This points to house prices staying relatively stable in 2016, which holds back a more pronounced recovery for the market,” she added.

Moody’s said that during the debt build-up in the boom years, the Italian housing market was more restrained than Spain and Ireland. Private house sales were up 6.2% year-on-year in Q2 2015. Lending is also on the rise, and underwriting standards have remained strong, with loan-to-value ratios for new mortgage loans in 2014 averaging

67%. Household debt amounted to 62.6% as of Q4 2014.

The rating agency’s research shows improved mortgage affordability is driving signs of recovery. Falling house prices post-crisis and low interest rates have translated into improved debt affordability for new buyers. In turn, mortgage applications have risen and the trend in total gross mortgage lending for the sector has improved.

Moody’s anticipates a moderate improvement in arrears in 2016. Over

the past 12 months, data indicate that Italian residential mortgage-backed securities (RMBS) lagged behind other European countries. Overall, Italian RMBS have exhibited stable to mildly deteriorating performance on average, with a few outliers still showing increasing delinquencies and defaults.

In contrast, RMBS countries in other peripheral markets like Spain and Ireland, which deteriorated most in the crisis, showed strong improvement over the same period.

U.S. housing market expansion expected to continue in 2016 Housing prices in the U.S. have risen by around 6% over the past 12 months and, barring any major economic downturn, demand for housing should support additional growth in home prices next year. Researchers at CoreLogic have noted five factors that will affect the housing market in 2016, based on assumed overall economic growth of 2% to 3% in the United States.

First is an expected increase in the Federal Reserve’s policy rate of around 1% between now and the end of 2016.

That will affect adjustable-rate mortgage holders and cost new fixed-rate mortgage borrowers an additional half a percentage point, pushing mortgage interest rates to around 4.5% by the end of 2016.

Second, more than 1.25 mln new households are projected to be formed in 2016, most of which will be seeking

rental homes.

Third is continued strong demand for rental housing.

CoreLogic expects rental vacancy rates to remain low and rent payments to rise faster than inflation.

Fourth, the owner-occupied housing market should see a rise in both sales and prices. Purchase demand may lead to the best sales year since 2007, and home prices could appreciate in a range of 4% to 5% during the year.

Fifth, mortgage originations for single-family homes are likely to decline by 10% in 2016, while new loans for multifamily properties are likely to rise. Overall, CoreLogic projects that total loan originations will rise by 10% to 12% and that home equity lending will also increase.

Refinancings, however, could drop by a third. (Source: 24/7 Wall St.com)

December 9 - 15, 2015

financialmirror.com | PROPERTY | 13

The Akamas plan - 25 years on… µy Antonis Loizou Antonis Loizou F.R.I.C.S. is the Director of Antonis Loizou & Associates Ltd., Real Estate & Projects Development Managers

The study for Akamas started 25 years ago and to date has seen no progress. For all that, the mistake was that the original plan proposed that the whole area of forest and governmental/non-governmental be incorporated as a conservation area in a total 140 square kilometres, with private land comprising 50% of that area. At the time, I had suggested that the study was incorrect, out of scale for the size of Cyprus and was not viable. The surveyors at the time criticised me and reported by to the technical chamber ETEK to seek an apology because of my “extreme views.” Who, today, will apologise for this major failure? Even the municipal councillor of the Greens had joined the attack with a written protest against me, to which I suggested that she and our office staff chain ourselves to the entrance of the Interior Ministry to condemn the state’s inaction. Clearly, as doing so would make us criminals in the eyes of the law, jeopardising any future public office or directorship in public companies, we got no answer to the challenge.

Time has passed and the present method for major projects under the current situation of the economy is the build-operate-transfer (BOT) by private investors. The proposals put forward by the previous government for the exchange of land (who in his right mind from Drousia would accept land in, say, Kornos) or compensation in the form of a 20% building coefficient, access to public road and water was catastrophic, to say the least. This compensation would have cost many millions, even up to 1 bln euros. There was also a proposal to transfer the 20% coefficient to other areas worth more than 1 mln sq. meters. This would have violated local planning permits in areas where the coefficient was only 10-15%, in addition to the damage to listed buildings from the inability of the owners to sell the excess building coefficient.

Within all this madness and considering the fact that the cash-strapped state has no money to pay the unemployed and pensioners, I would repeat the proposal submitted 15 years ago as the only feasible plan, under the circumstances.

of building road access and other services.

- the proposed tourism development projects (not housing development) are completed within a period of three years. The large properties belong mainly to the Archbishopric and the Photiadis Group and both have the vision and the funds to go ahead with the projects. Imagine how this could help reduce local and attract investors to the area in general.

Other Developments These could include small marinas and fishing shelters for local tourism (such as that of Latchi where Russian sailors frequent), scuba and diving schools, etc. These spaces can be rented on a long-term lease with the execution of the projects undertaken by the investors.

Development + Natura

The boundaries of Akamas

There is a misconception that areas designated as such can not be developed. This is wrong – this can be achieved in the case of some development, with respect to the environment and there is a relevant opinion from the European Commission on this. Additionally, did the Anassa hotel spoil or benefit the environment, considering its direct contribution to local tourism, employment, etc.

Furthermore, two years ago the U.K. Environment Minister proposed that areas of natural beauty, such as the Natura, could see some development provided that either the environment of the area is upgraded or the developer be offered to subsidise the environmental upgrade in other areas, through tree planting and other actions in disadvantaged areas.

The boundaries as has been currently defined is objectionable. Limiting the forest designation could allow some properties which will create a financially sustainable park.

Small Properties To cluster areas with common water supply, roads access, etc. and exchange them with properties of equal value.

Considering the current values ??as agricultural and landlocked mini-plots with no access, it is understood that the exchange will be 1/10 of the area of ??private plots, but this would be some form of reforestation. On the one hand micro-property owners would be relieved from their current impasse, while cost on the State will be less for infrastructure, probably around EUR 5 mln, and maybe with EU grants, while these properties would be encouraged to develop tourism projects, museums, art schools, and even agrotourism units.

Large Properties For large properties, I resubmit our older proposal.

Whether at their present location or somewhere similar and in equal size within the Akamas, to allow development so long as: - they pay an amount at least EUR 5 mln to cover the cost

Who will undertake the task?

To current mess of the Akamas project is still in place with highly-paid civil servants doing nothing. Therefore, this calls for a joint venture between the State and individual investors for a BOT-type development. This consortium (certainly not a semi-government body just to place people with party favours) would consist mainly of private investors who will be responsible for the administration.

The priorities of the project consortium will be: - To secure resources either from foreign investors or by issuing shares or even from the receipts of the leases and with EU aid.

- The project execution be based on an economic viability

study with all the details submitted in advance.

- The consortium will have costs and revenues. The expenses of the various property exchanges will have to burden the state so that it delivers to the consortium and integrated property.

- Assuming that the plan needs infrastructure projects of EUR 50 mln, plus another 10 mln for the operation of the park: (i) the consortium should undertake all infrastructure projects; (ii) it be allowed to develop other areas within Akamas park to be able to market them for development or golf courses in order to raise the EUR 50 mln needed; (iii) The consortium should enrich the environment with intensive tree planting and the prohibition of grazing and hunting in the area, but allowing small farms to enrich the animal wildlife in the areas, such as donkey shelters, breeding farms, etc. that would also attract tourists for hiking. (iv) as regards the administration, we are all fed up of the use of the same public officials who are recycled based on party favours, and introduce foreign experts on the matter, such as those employed at the Crooker Park in South Africa which is a huge income for the state rich both from tourists and wildlife conservation which can become a model park.

This consortium would have some hope of success, as long as the state has a minority interest.

I am sure that some will still raise their usual objections, but they must also have suggestions of their own of how to introduce an environmental plan of their liking with proper funding and considering all the pros and cons for the area and its inhabitants I believe that with the current “mess” of 50,000 unemployed, the only good thing going for this place is tourism while so much time and effort is wasted endlessly debating solutions that area unrealistic and not financially viable, whereas the Environment Commissioner seems to be unaffected by all these and lives in a world of her own. www.aloizou.com.cy - ala-HQ@aloizou.com.cy

December 9 - 15, 2015

14 | MARKETS | financialmirror.com

NFP: Should we be happy with the numbers?

By Oren Laurent President, Banc De Binary

On Friday, December 4, US non-farm payroll data was released – the last time this will happen in 2015. The consensus estimate figure for November was 200,000 new jobs; however the actual figure came in over 5% above expectations at 211,000 new jobs created. This follows an exceptional month of non-farm payroll data in October 2015 where 271,000 new jobs were reported after consensus estimates placed the figure at 180,000. However such was the strength of the US economy in October that the actual jobs figure was revised upwards to 298,000 new jobs created. The data is typically released on the first Friday of the month, and it is one of the most highly anticipated economic metrics.

Better Than Expected But Not Enough To Pop The Bubbly Just Yet The figure itself can be interpreted in several ways: positive and negative. Viewed from a positive perspective, the NFP figure came in 11,000 jobs over expectations and sentiment is therefore bullish. However, it is substantially lower than the NFP data for October which was revised upwards to 298,000 new jobs for the month. The biggest drivers of job growth were healthcare, construction, professional and technical-related services. As expected, information and mining employment suffered in November.

The US non-farm payrolls chart has endured more successive monthly declines (month on month) than increases. Between May and September, each successive month offered up a smaller increase in employment over the previous month, although there have been no negative growth rates in the US all year long.

before.

However, the figure is still sufficiently strong to warrant a short-term interest-rate hike in December. This would be the first time in almost nine years that the Fed has initiated an interest-rate hike.

In other positive news, the unemployment rate is holding firm at the October level of 5%. This certainly bodes well for the upcoming Fed decision next week. That the unemployment rate is at a 7.5 year low is laudable. The Fed has been targeting an unemployment rate of 4.9%, and that figure is considered the full employment level. The NFP data is the clearest possible indicator that the most important components of the US economy are functioning as they should. All of this points to an inescapable reality: a December rate hike is more likely than ever.

What Do All These Numbers Mean And How Will They Affect The Fed? If we break down the numbers, we can see that healthcare increased by 24,000 jobs in November, employment in drinking places and food services increased by 32,000 in the month, construction increased by 46,000, and retail trade increased by 31,000. There were, however, two negative growth rates in information which shed 12,000 jobs and mining which gave up 11,000 jobs. The employment report is especially important at this critical juncture. The Federal Reserve is meeting on December 15/16 for the last non-farm payrolls jobs report of the year. The December report will be discussed on the first Friday of January 2016. The next significant announcement will be US retail sales month on month for November on December 11, just four days before the decision about the interest rates. The Fed continues to target strong domestic growth data in the form of retail sales, non-farm payrolls, healthy unemployment rates, rising purchases and rising wages. The US employment report immediately cast a shadow on the size and scope of the US recovery, with the Fed decision slightly less likely than

The Fed And The ECB: Polar Opposites In Monetary Policy On Wednesday, December 2, Janet Yellen addressed legislators and she made it clear that the US economy was on track to achieving its overall objectives. As a result, the path has been cleared for a December liftoff. According to Yellen, the US economy will need to create a little less than 100,000 jobs every month to maintain pace with the growth in the population. Therefore, the November figure of 211,000 new jobs more than satisfied expectations.

The vast majority of primary dealer banks dealing with the Federal Reserve Bank are expecting a rate hike next week.

The consensus among central bankers is clear: a slow and steady rate hike is preferred to a sharp and sudden uptick in the interest-rate. This is likely to continue throughout 2016, but the Fed will be careful not to increase interest rates too much because the biggest debtor – the US government – would not be able to repay excessive interest on almost $20 trln of national debt.

Europe Gets A Boost From Lukewarm ECB, Dollar Wins Out Across the Atlantic, the European Central Bank moved in the opposite direction. Mario Draghi of the ECB decided to make good on his promises to prop up the Euro and stimulate the Eurozone by reducing the deposit rate by 10 basis points to -0.3% and by a continuance of the asset repurchases programme for an additional six months to March 2017 at a rate of EUR 60 bln per month. Strangely, the actions taken by the ECB strengthened the Euro. The European currency hit a 1-month high against the greenback after the announcements were made. Currency traders, market participants and speculators were expecting an increase in the asset repurchases programme in the region of EUR 75 bln per month. The fact that less was done to stimulate the Euro helped to strengthen it in the currency markets. However stocks turned south since the prospect of a strong euro is a negative harbinger for export-driven growth. By the end of the trading week on Friday, December 4, the USD strengthened against the euro after it was reported that OPEC could not come to consensus regarding a production ceiling on oil output. In other words, OPEC will continue to pursue market share above price considerations.

Please note that this column does not constitute financial advice.

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

0.29 0.50 -0.18 0.05 -0.84

0.38 0.54 -0.14 0.07 -0.84

0.48 0.58 -0.11 0.08 -0.82

0.71 0.74 -0.03 0.12 -0.77

1.04 1.05 0.07 0.22 -0.68

CCY/Period USD GBP EUR JPY CHF

2yr

3yr

4yr

5yr

7yr

10yr

1.06 0.99 -0.05 0.10 -0.83

1.30 1.16 0.02 0.10 -0.78

1.48 1.31 0.13 0.12 -0.67

1.63 1.44 0.26 0.16 -0.55

1.87 1.66 0.54 0.26 -0.25

2.12 1.88 0.92 0.44 0.07

Exchange Rates Major Cross Rates

CCY1\CCY2 USD EUR GBP CHF JPY

Opening Rates

1 USD 1 EUR 1 GBP 1 CHF 1.0858 0.9210

100 JPY

1.4997

1.0028

0.8123

1.3812

0.9236

0.7482

0.6687

0.5417

0.6668

0.7240

0.9972

1.0828

1.4955

123.10

133.66

184.61

0.8101 123.45

Weekly movement of USD

CCY\Date

10.11

17.11

24.11

01.12

08.12

CCY

Today

USD GBP JPY CHF

1.0690

1.0604

1.0572

1.0532

1.0801

0.7075

0.6990

0.6986

0.6976

0.7179

131.59

130.74

129.63

129.30

132.85

GBP EUR JPY

1.0724

1.0712

1.0757

1.0795

1.0786

CHF

1.4997 1.0858 123.10 0.9972

Last Week %Change 1.5097 1.0532 122.77 1.0250

+0.67 -3.10 +0.27 -2.71

December 9 - 15, 2015

financialmirror.com | MARKETS | 15

A year-defining week Marcuard’s Market update

by GaveKal Dragonomics

Four hugely important events occurred last week which between them have largely determined the course of the world economy in the year ahead: the strong US payrolls, the Organisation of the Petroleum Exporting Countries’ decision not to reduce production, the European Central Bank’s escalation of monetary stimulus and the inclusion of the renmimbi in the International Monetary Fund’s Special Drawing Rights basket. While all these events were predictable, it was hard to gauge the extent to which they were discounted in market prices. Now we know.

The strong US economy and the Federal Reserve’s signalled rate hike on December 16 — which is now all but certain — was already “in the price”, as was the onetime contrarian view that China’s currency “shock” in August was a welcome liberalising reform, rather than a dangerous competitive devaluation. On the other hand, last Thursday’s ECB announcement triggered some of the biggest currency and bond moves since the 2009 crisis, and the consequences of Friday’s OPEC meeting were still playing out over the weekend as oil prices threatened to plunge through their August lows. Why did Europe and OPEC create great volatility last week, while events in the US and China hardly provoked a shrug?

Conventional wisdom says that investors were fully prepared for the US and Chinese news, whereas ECB President Mario Draghi deeply disappointed market expectations and even the OPEC meeting was surrounded by political uncertainty. This explanation is unconvincing.

OPEC’s inaction on oil production was at least as predictable as the IMF’s action on the renminbi. By contrast, there was genuine uncertainty about Friday’s US payrolls, which could easily have been as low as 100,000 purely as a result of statistical noise.

Most strikingly, the “disappointing” ECB announcement

was really nothing of the kind. Once Draghi made clear that the ECB intended to intensify its QE programme, the most logical way to do this was always to extend the period of bond buying beyond September 2016 and to cut the ECB’s deposit rate. The idea of increasing monthly purchases never made any sense, since the ECB was already creating astonishing levels of excess reserves and the credit crunch in the periphery was already over, with credit growing at a very decent pace in Italy, Spain and France.

Draghi may have made a minor tactical error by allowing some analysts to predict even more dramatic actions, but by any objective standards, what the ECB announced last Thursday was one of the biggest stimulus moves in the annals of central banking. Putting all these four events together, the vastly differing scale of market reactions cannot be explained by surprises contained in the news.

A better explanation lies in the market’s own positioning.

Bulls and bears in the US bond and equity markets are reasonably balanced, which is why small changes in expectations about US interest rates are unlikely to have much market impact. Similarly, the bets against China are no longer near the summer’s extremes. But positioning in the currency and oil markets is a very different matter.

Thursday saw the biggest move in EUR-USD since 2009 not because the ECB’s announcement was a bigger shock than anything that happened during the euro crisis, but simply because US dollar bulls and euro bears were more overextended than at any time in living memory. This kind of positioning suggests a turning point in the US dollar bull market, which has been running for more than seven years.

In the oil market, positioning was also one-sided, though less extreme. While speculative long positions (476,000 contracts on NYMEX) were somewhat lower last week than their highs in May (531,000) or October (494,000), they still exceeded speculative short positions (267,000) by almost two to one.

That sort of positioning does not suggest a turning point in the bear market in oil which has lasted only 15 months (so far).

All of which points to some conclusions about market prospects for the year ahead. In currency markets the effects of monetary divergence are now fully discounted, as we have argued in the past two months. If you accept our view — and the evidence of history — that diverging interest rates are not the only determinant of currency moves (nor even the most important one), then it now pays to become a

contrarian and bet on a stable to somewhat weaker US dollar versus a stronger euro and yen.

Moreover, if the US dollar starts to weaken after the Fed rate hike, as we expect, then contrarian bullish bets should also start to work in emerging markets. But contrarian trading only works at market turning points. Being a contrarian makes no sense in the middle of a powerful trend.

That still seems to be the situation in oil, where OPEC’s monopoly pricing regime is disintegrating, for reasons that we have discussed over the last year. Yet paradoxically it is in the energy markets that investors seem most determined to catch the proverbial falling knives.

As long as the unbalanced market positioning in energy and currencies continues, oil prices and the dollar will probably keep falling—and other assets will keep going up.

WORLD CURRENCIES PER US DOLLAR CURRENCY

CODE

RATE

EUROPEAN

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

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

18087 1.4999 1.8004 24.872 6.8689 14.4054 1.0861 2.377 288.36 0.64705 3.1789 0.3954 19.94 8.7073 3.9845 4.1248 69.1961 8.5086 0.997 22.6249

AUD CAD HKD INR JPY KRW NZD SGD

0.7218 1.354 7.7504 66.8325 123.08 1178.35 1.5097 1.4105

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

0.3772 7.8082 29980.00 3.8758 0.7080 0.3036 1469.70 0.3850 3.6413 3.7517 14.6080 3.6728

AZN KZT TRY

1.048 308 2.9107

AMERICAS & PACIFIC

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

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

www.marcuardheritage.com

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.

Azerbaijanian Manat Kazakhstan Tenge Turkish Lira

Note:

* USD per National Currency

December 9 - 15, 2015

16 | WORLD | financialmirror.com

The apex of market stupidity

By Charles Gave In some 40 years of watching financial markets, my dominant emotion has been a mixture of curiosity, amusement and despair. It seems the stock market must have been invented to make the maximum number of people miserable for the greatest possible amount of time. The bond market, meanwhile, has just one goal in life: to make economists’ forecasts for interest rates look even sillier than their other predictions.

Over the years, I have often observed how most market participants are able to concentrate on only one set of information at a time. For example, in the 1970s, the only data release that mattered was the consumer price index. In the days leading up to the CPI’s publication, everybody dropped all other considerations to speculate feverishly about what the number might be. And then following the release, they would spend the next week or two commenting sagely on what the number actually had been. Eventually, Milton Friedman convinced the Federal Reserve (and from there the markets) that there was some kind of relationship between the money supply and the CPI. So, everyone stopped looking at the CPI, and instead started to focus on the publication every Thursday evening of M1 (or was it M2?). Inevitably, each week would see an immediate rash of commentary on these arcane matters from the leading specialists at the time, Dr. Doom and Dr. Gloom.

This gave way to a period in which the US dollar went through the roof on the covering of short positions established during the era of the minister of silly walks in the 1970s. For a few years, the only thing that mattered was the spread between the three-month T-bill yield and the threemonth rate on dollar deposits in London (an indication of the shortage of dollars outside the US). The beauty of this one was that the scribblers on Wall Street could comment on it twice a day or more, which of course had no discernible impact on reality, except for the destruction of the forests needed to print so much waffle.

That era came to an end in 1985 with the Plaza Accord. At

that point the Fed, under the wise guidance of Paul Volcker — my favourite central banker of all time, probably because he was the only one without a PhD in economics, which may well explain his success — decided it was going to follow a type of Wicksellian rule-based policy under which short rates were kept closely in line with the rate of GDP growth. Of course, this meant the Fed paid little attention to the vagaries of the financial markets, so there was very little to comment on. The result of policymakers’ lack of interest in financial markets was that from 1985 to 2000 the US enjoyed a long period of rising economic growth, low inflation, low unemployment and high productivity; a period dubbed “the great moderation”. The trouble was that no one was able to make any money trading on inside information provided by the politicians and central bankers. As an advertisement for Smith Barney put it at the time: “We are making money the old way. We earn it.”

Naturally, that wouldn’t do at all. After nearly 20 years of economic success, the US budget was in surplus, the pension funds were over-funded, and the “consultants” in Washington were on the verge of bankruptcy, having nothing to say. Clearly something had to be done, and it was: policy shifted to accommodate Wall Street, with forward guidance, negative real rates, the privatization of money, and a lack of regulation. This allowed Wall Street to make money, but it created nightmares elsewhere through the eversuccessful euthanasia of the dreadful rentier.

Still, the shift to an economy driven by the decisions of central bankers meant the market commentators were back in business in a big way. For the last 12 years, the only thing that has mattered has been to know whether or not the chairman of the Federal Reserve has had a good night’s sleep.

Similarly in Europe, the dysfunctional euro, created by a bunch of incompetent politicians and Eurocrats, bred drama after drama. Since nobody wanted to admit it was a failure, the most important man in Europe became the president of the European Central Bank.

In the last week, we have reached what is surely the apex of this stupidity. A bunch of algo traders programmed their computers expecting “Derivative Draghi” to be extremely dovish, as any proper Italian central banker should be. I am not sure I understand why, but some traders obviously decided that he had not been dovish enough. European stock markets plunged by -4%, while the euro went up by roughly the same amount in the space of a few minutes. What that

means is simple: value in the financial markets is no longer a function of the discounted cash flow of future income, but instead is determined by the amount of money the central bank is printing, and especially by how much it intends to print in the coming months. So we are in a world where I can postulate the following economic and financial law: variations in the value of assets are a function of the expected changes in the quantity of money printed by the central bank. To put it in a format that today’s economists understand:

¢ (VA) = x * ¢ (M), where VA is the value of assets and M is the monetary increase.

What we are seeing is in fact in one of the stupidest possible applications of the Cantillon effect, whereby those who are closest to the money-printing, i.e. the financial markets, are the biggest beneficiaries of that printing. This is exactly what happened in 1720 in France during the Mississippi Bubble inflated by John Law. The end results were not pretty.

What I find most hilarious is that some serious commentators have been pontificating at considerable length about what the market’s participants think. These days, some 70% of market orders are generated by computers, and many of the rest by indexers. And computers do not think. They simply calculate at light speed, which allows them to react to short term movements in market prices as they were programmed to do. And since they are all programmed the same way, the result is some big short term market moves.

In essence, these computers act as machines that allow market participants to stop thinking. As a result, I cannot remember a time when less thinking has ever been done in the financial markets, which is why I find today’s financial markets infinitely boring.

We are swimming in an ocean of ignorance, just like France in 1720. It seems all the painful economics lessons learned over the last 300 years have been forgotten. I suppose that means we will just have to wait for another Adam Smith to appear. La vie est un eternel recommencement...

Charles Gave is Founding Partner and Chairman, is one of the world’s leading independent providers of global investment research www.marcuardheritage.com

As oil falls to $40, US pump prices drop toward $1

By Douglas McIntyre 24/7 WallSt.com Retail pump prices are driven by four factors: oil prices, proximity to refineries, refinery capacity and state taxes and levies.

Oil prices have dropped below $40, recently hitting $39.60 a barrel. The recent decision

by Saudi Arabia to continue to keep its oil exports high has almost dissolved the OPEC cartel. This guarantees oversupply of crude.

Slowing national economies in the largest countries, which include China, will lower demand. The cost of producing oil from shale deposits is greater in some cases than what it can be sold for; nonetheless, parts of this industry continue pumping, increasing supply.

In some gas stations around the U.S., the price of a gallon of regular has dropped below $1.50. AAA and GasBuddy, two organisations that follow pump prices, say that less than $2 per gallon ($0.53/litre) will be routine around the United States.

Already, more than a third of states have prices below $2. As oil prices fall, and refinery capacity stays strong, the price of gas could reach $1, particularly in some stations in low-price states, such as Ohio, Missouri, Texas and South Carolina.

Several states house large refineries or are

close to those that do. This is particularly the case near the Gulf of Mexico, and the massive refinery operations south of Houston. Some owned by Exxon Mobil Corp. pump several hundreds of thousands of barrels per day.

Gas prices in several states are low in

large part because of the level of state and federal taxes and levies. The American Petroleum Institute’s October state fuel tax report put the national average at $0.4869 per gallon. However, in South Carolina, a state with extremely low gas prices, that figure is $0.3515. In the Gulf Coast states,

the tax level is $0.3719 in Mississippi, $0.3840 in Texas and $0.3841 in Louisiana.

The odds grow each day that gas prices will be $1 a gallon in some areas in the United States, and they may go below that level across much larger regions. (Source: 24/7 Wall St.com)

December 9 - 15, 2015

financialmirror.com | WORLD | 17

The great policy divergence

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

Over the next few weeks, the US Federal Reserve and the European Central Bank are likely to put in place notably different policies. The Fed is set to raise interest rates for the first time in almost ten years. Meanwhile, the ECB is introducing additional unconventional measures to drive rates in the opposite direction, even if that means putting further downward pressure on some government bonds that are already trading at negative nominal yields.

In implementing these policies, both central banks are pursuing domestic objectives mandated by their governing legislation. The problem is that there may be few, if any, orderly mechanisms to manage the international repercussions of this growing divergence.

The Fed is responding to continued indications of robust job creation in the United States and other signs that the country’s economy is recovering, albeit moderately so. Also conscious of the risk to financial stability if interest rates remain at artificially low levels, the Fed is expected to increase them when its policy-setting Federal Open Market Committee meets on December 15-16. The move marks a turning point in the Fed’s approach to the economy. In deciding to raise interest rates, it will be doing more than simply lifting its foot from the financial-stimulus accelerator; it will also be taking a notable step toward the multiyear normalisation of its overall policy stance.

In the meantime, the ECB is facing a very different set of economic conditions, including generally sluggish growth, the risk of deflation, and worries about the impact of the terrorist attacks in Paris on business and consumer confidence. As a result, the bank’s decision-makers are giving serious consideration to pushing the discount rate further into negative territory and extending its large-scale assetpurchase programme (otherwise known as quantitative easing). In other words, the ECB is likely to expand and

extend experimental measures that will press even harder on the financial-stimulus accelerator.

In a perfect world, policymakers would have assessed the potential for international spillovers from these divergent policies (including possible spillbacks on both sides of the Atlantic) and put in place a range of instruments to ensure a better alignment of domestic and global objectives.

Unfortunately, political polarisation and general policy dysfunction in both the US and the European Union continue to inhibit such an effort. As a result, lacking a more comprehensive policy response, the harmonization of their central banks’ divergent policies will be left to the markets – in particular, those for fixed-income assets and currencies.

Already, the interest-rate differential between “risk-free” bonds on both sides of the Atlantic – say, US Treasuries and German Bunds – has widened notably. And, at the same time, the dollar has strengthened not only against the euro, but also against most other currencies. Left unchecked, these trends are likely to persist.

If history is any guide, there are three major issues that warrant careful monitoring in the coming months. First, the US is unlikely to stand by for long if its currency appreciates significantly and its international competitiveness deteriorates substantially. Companies are already reporting earning pressures due to the rising dollar, and some are even asking their governments to play a more forceful role in countering a stealth “currency war.”

Second, because the dollar is used as a reserve currency, a rapid rise in its value could put pressure on those who have used it imprudently. At particular risk are emerging-country companies that, having borrowed overwhelmingly in dollars but generating only limited dollar earnings, might have large currency mismatches in their assets and liabilities or their incomes and expenditures.

And, finally, sharp movements in interest rates and exchange rates can cause volatility in other markets, most notably for equities. Because regulatory controls and market constraints have made brokers less able to play a countercyclical role by accumulating inventory on their balance sheets, the resulting price instability is likely to be large. There is a risk that some portfolios will be forced into disordered unwinding. Furthermore, the central banks’ policy of curtailing so-called “volatile volatility” is likely to be challenged.

Of course, none of these outcomes is preordained.

Politicians on both sides of the Atlantic have the ability to lower the risk of instability by implementing structural reforms, ensuring more balanced aggregate demand, removing pockets of excessive indebtedness, and smoothing out the mechanisms of multilateral and regional governance.

The three possible outcomes of all this include a relatively stable multi-speed world, notable disruptions that undermine the US’s economic recovery, and a European revival that benefits from US growth. The good news is that the impact of the divergence will depend on how policymakers manage its pressures. The bad news is that they have yet to find the political will to act decisively to minimise the risks.

As the Fed normalises its monetary policy and the ECB doubles down on extraordinary measures, we certainly should hope for the best. But we should also be planning for a substantial rise in financial and economic uncertainty.

Mohamed A. El-Erian is Chief Economic Adviser at Allianz, the corporate parent of PIMCO, where he served as CEO and co-CIO (2007-1014). He is also Chairman of US President Barack Obama’s Global Development Council. © Project Syndicate, 2015 - www.project-syndicate.org

When inequality kills

By Joseph E. Stiglitz This week, Angus Deaton will receive the Nobel Memorial Prize in Economics “for his analysis of consumption, poverty, and welfare.” Deservedly so. Indeed, soon after the award was announced in October, Deaton published some startling work with Ann Case in the Proceedings of the National Academy of Sciences – research that is at least as newsworthy as the Nobel ceremony.

Analysing a vast amount of data about health and deaths among Americans, Case and Deaton showed declining life expectancy and health for middle-aged white Americans, especially those with a high school education or less. Among the causes were suicide, drugs, and alcoholism.

America prides itself on being one of the world’s most prosperous countries, and can boast that in every recent year except one (2009) per capita GDP has increased. And a sign of prosperity is supposed to be good health and longevity. But, while the US spends more money per capita on medical care than almost any other country (and more as a percentage of GDP), it is far from topping the world in life expectancy. France, for example, spends less than 12% of its GDP on medical care, compared to 17% in the US. Yet Americans can expect to live three full

years less than the French.

For years, many Americans explained away this gap. The US is a more heterogeneous society, they argued, and the gap supposedly reflected the huge difference in average life expectancy between African Americans and white Americans.

The racial gap in health is, of course, all too real. According to a study published in 2014, life expectancy for African Americans is some four years lower for women and more than five years lower for men, relative to whites. This disparity, however, is hardly just an innocuous result of a more heterogeneous society. It is a symptom of America’s disgrace: pervasive discrimination against African Americans, reflected in median household income that is less than 60% that of white households. The effects of lower income are exacerbated by the fact that the US is the only advanced country not to recognise access to health care as a basic right. Some white Americans, however, have attempted to shift the blame for dying younger to African Americans themselves, citing their “lifestyles.” It is perhaps true that unhealthy habits are more concentrated among poor Americans, a disproportionate number of whom are black. But these habits are a consequence of economic conditions, not to mention the stresses of racism.

The Case-Deaton results show that such theories will no longer do. America is becoming a more divided society – divided not only between whites and African Americans, but also between the 1% and the rest, and between the highly educated and

the less educated, regardless of race. And the gap can now be measured not just in wages, but also in early deaths. White Americans, too, are dying earlier as their incomes decline. This evidence is hardly a shock to those of us studying inequality in America.

The median income of a full-time male employee is lower than it was 40 years ago.

Wages of male high school graduates have plummeted by some 19% in the period studied by Case and Deaton.

To stay above water, many Americans borrowed from banks at usurious interest rates. In 2005, President George W. Bush’s administration made it far more difficult for households to declare bankruptcy and write off debt. Then came the financial crisis, which cost millions of Americans their jobs and homes. When unemployment insurance, designed for short-term bouts of joblessness in a full-employment world, ran out, they were left to fend for themselves, with no safety net (beyond food stamps), while the government bailed out the banks that had caused the crisis.

The basic perquisites of a middle-class life were increasingly beyond the reach of a growing share of Americans. The Great Recession had shown their vulnerability.

Those who had invested in the stock market saw much of their wealth wiped out; those who had put their money in safe government bonds saw retirement income diminish to near zero, as the Fed relentlessly drove down both short- and long-term interest rates. With college tuition soaring, the only way their children could get the

education that would provide a modicum of hope was to borrow; but, with education loans virtually never dischargeable, student debt seemed even worse than other forms of debt. There was no way that this mounting financial pressure could not have placed middle-class Americans and their families under greater stress. And it is not surprising that this has been reflected in higher rates of drug abuse, alcoholism, and suicide.

I was chief economist of the World Bank in the late 1990s, when we began to receive similarly depressing news from Russia. Our data showed that GDP had fallen some 30% since the collapse of the Soviet Union. But we weren’t confident in our measurements.

Data showing that male life expectancy was declining, even as it was increasing in the rest of the world, confirmed the impression that things were not going very well in Russia, especially outside of the major cities.

The international Commission on the Measurement of Economic Performance and Social Progress, which I co-chaired and on which Deaton served, had earlier emphasised that GDP often is not a good measure of a society’s wellbeing. These new data on white Americans’ declining health status confirms this conclusion. The world’s quintessential middle-class society is on the way to becoming its first former middleclass society.

Joseph E. Stiglitz, a Nobel laureate in economics, is University Professor at Columbia University and Chief Economist at the Roosevelt Institute.

December 9 - 15, 2015

18 | WORLD | financialmirror.com

The Copenhagen-Paris express

By Lars Christian Lilleholt

In 2009, when Copenhagen hosted the United Nations Climate Change Conference, I was there as a member of parliament, and I had the feeling that I was witnessing a world-changing event. For years, negotiators had been working toward an ambitious, binding agreement to limit greenhouse-gas emissions, and the world’s attention was directed toward Denmark. Unfortunately, the global financial crisis and national special interests colluded to derail a comprehensive deal.

Now, climate negotiators are gathering once again – this time in Paris, where expectations for an agreement are equally high. This time, however, chances are good that a robust deal will be struck. I will be in attendance, as the Danish minister responsible for climate issues, and I believe that this year’s conference will mark the moment when the world got serious about bringing global warming under control.

The political environment is very different from that of six years ago. When the conference in Copenhagen took place, the world was still reeling from the near-collapse of global finance, prominent politicians were questioning whether human activity was responsible for climate change, and industry groups were campaigning against binding emission

cuts.

Today, the global economy is recovering, climate scientists have dismissed the last doubts about the causes of climate change, and the business community has entered the fight on the side of the environment. In 2009, green business leaders could be counted on the fingers of one hand. Today, their ranks have grown into an army. In November, for example, Goldman Sachs announced that it would invest $150 bln in green energy by 2025.

The dynamics of the negotiations themselves have changed fundamentally. The goal is no longer to forge an agreement dictating the emission cuts that countries must make; instead, we are developing a framework for reducing emissions that allows governments to decide what their countries can put on the table. As a result, individual countries are driving the deal forward. They have realised that the consequences of doing nothing will be dire, and that cutting emissions will pay off over the long run.

Signs of progress are everywhere. Last year, for example, the United States and China entered into a bilateral agreement to fight climate change. The US agreed to reduce its CO2 emissions by 26-28% by 2025, and China committed to reaching peak emissions around 2030 and bringing emissions down thereafter.

This new approach has broadly expanded the scope of the climate negotiations. The agreement in Paris is set to include more than 180 countries, and cover at least 90% of global CO2 emissions. By comparison, the 1997 Kyoto Protocol covered less than 15% of global emissions.

To be sure, much more can and needs to be done.

Denmark will continue the fight against climate change.

Over the next 25 years, global demand for energy will increase by almost a third, primarily in non-OECD countries like China and India, and we must ensure that this demand is met in as sustainable a manner as possible. Organisations such as the International Energy Agency could play an even larger role in helping to drive the clean-energy transition.

The international community seems on track to reach the goal agreed to in Copenhagen of mobilizing $100 bln a year in climate financing for developing countries by 2020. To accomplish this, we will need to harness the power of the marketplace, leveraging public funds to attract private investment. In this, the Danish Climate Investment Fund, through which the government invests, together with large Danish pension funds, in climate projects for the benefit of Danish companies, could serve as an example for others.

The effort will also involve phasing out fossil-fuel subsidies, as well as developing new financial tools to motivate investors to help solve problems on their own, without relying on public funds.

An agreement in Paris would put in place the muchneeded global framework the world needs to reduce total greenhouse-gas emissions. And while it would by no means mark the successful conclusion of the fight against climate change, it would provide a strong foundation for the global transition to a green economy.

Lars Christian Lilleholt is Denmark’s minister for energy, utilities, and climate. © Project Syndicate, 2015 - www.project-syndicate.org

The renewable energy revolution

By John A. Mathews

In the United States and Europe, the benefits of renewable energy are predominantly seen as environmental.

Energy from the wind and sun can offset the need to burn fossil fuels, helping to mitigate climate change. In China and India, however, renewable energy is viewed in a remarkably different fashion. The relatively rapid transition away from fossil fuels in both countries is driven not so much by concerns about climate change as by the economic benefits renewable energy sources are perceived as conveying.

Indeed, while the economic benefits of renewables can be attractive to advanced economies such as Germany or Japan (both of which are rapidly moving away from fossil fuels), the advantages for emerging industrial giants are overwhelming. For India and China, an economic trajectory based on fossil fuels could spell catastrophe, as efforts to secure enough for their immense populations ratchet up geopolitical tensions.

Aside from increased energy security, a lowcarbon economy would promote domestic manufacturing and improve local environmental quality by, for example, reducing urban smog. To be sure, fossil fuels conferred enormous benefits on the Western world as it industrialised over the past 200 years. The transition to a carbon-based economy liberated economies from age-old Malthusian constraints. For a group of select countries representing a small slice of the global population, burning fossil fuels enabled an era of explosive growth, ushering in dramatic improvements in productivity, income, wealth, and standards of living.

For much of the past 20 years, China and India led the charge in claiming the benefits

of fossil fuels for the rest of the world.

Recently, however, they have begun to moderate their approach. As their use of fossil fuels brushes up against geopolitical and environmental limits, they have been forced to invest seriously in alternatives – most notably, renewables. In doing so, they have put themselves in the vanguard of a planetary transition that in a few short decades could eliminate the use of fossil fuels altogether. The economic arguments advanced against renewable sources of energy – that they can be expensive, intermittent, or not sufficiently concentrated – are easily rebutted. And while renewables’ opponents are legion, they are motivated more by interest in preserving the status quo of fossil fuels and nuclear energy than by worries that wind turbines or solar farms will blot the landscape.

In any case, those wishing to halt the expansion of renewables are unlikely to triumph over simple economics. The renewable energy revolution is not being driven by a tax on carbon emissions or

subsidies for clean energy; it is the result of reductions in the cost of manufacturing that will soon make it more cost-effective to generate power from water, wind, and the sun than from burning coal. Countries can build their way to energy security by investing in the industrial capacity needed to produce wind turbines, solar cells, and other sources of renewable energy at scale. As China and India throw their economic weight into the renewables revolution, they are triggering a global chain reaction known as “circular and cumulative causation.”

Unlike, mining, drilling, or extraction, manufacturers benefit from learning curves that make production increasingly efficient – and cheaper. Investments in renewable energy drive down the cost of their production, expanding the market for their adoption and making further investment more attractive. From 2009 to 2014, these mechanisms drove down the cost of solar photovoltaic energy by 80% and reduced the cost of land-based wind power by 60%, according to Lazard’s Power, Energy &

Infrastructure Group.

The impact of the rapid uptake in renewable energy could have consequences as profound as those unleashed by the Industrial Revolution. In the eighteenth century, the economies of Europe and the United States initiated the transition to an energy system based on fossil fuels without fully understanding what was happening.

This time, we can see the way things are changing and prepare for the implications.

For the moment, the outlook appears promising. Efforts to reduce carbon dioxide emissions may not be the prime driver of the renewable energy revolution; but it is very possible that without the revolution, efforts to minimise the impact of climate change would never succeed. If we are able to avoid the worst dangers of a warming planet, we may have India and China to thank for it.

John A. Mathews is Professor of Strategy at Macquarie Graduate School of Management in Sydney and the author of Greening of Capitalism.

December 9 - 15, 2015

financialmirror.com | WORLD | 19

Caught REDD+ handed in Paris

By Jutta Kill It’s been 30 years since the UN’s Food and Agriculture Organisation launched the Tropical Forestry Action Plan, the first global intergovernmental initiative to halt forest loss.

Since then, deforestation has continued unabated, and the latest international effort to stop it – an initiative known as Reducing Emissions from Deforestation and Forest Degradation (REDD+) – looks no more likely to be effective.

Far from protecting the world’s forests, the most notable outcome of these two agreements has been, ironically, the production of reams of expensive consultancy reports.

REDD+ was created as part of the UN Framework Convention on Climate Change, and the agreement governing its implementation is expected to be finalised during the UN Conference on Climate Change in Paris. But if world leaders are serious about halting forest loss, they should instead abandon REDD+ and replace it with a mechanism that addresses the underlying drivers of largescale deforestation. The flaws in REDD+ are evident in how it approaches the problem it is meant to solve. The majority of its projects treat forest peoples and peasant farmers as the main agents of deforestation. REDD project developers seem to be especially fond of projects that focus on restricting traditional farming, even as they shy away from efforts to tackle the true causes of deforestation: the expansion of industrial agriculture, massive infrastructure projects, largescale logging, and out-of-control consumption.

These shortcomings are exemplified in the Socio Bosque Programme, a REDD+ initiative in Ecuador, in which efforts to control forest communities and peasant farming overlook the far larger potential damage caused by industrial activity.

Under the programme, forest-dependent communities sign five-year agreements with the Ministry of Environment, agreeing to restrict forest use in return for small cash payments. At the same time, the programme’s documentation explicitly nullifies the agreement if the area under its jurisdiction becomes slated for oil exploitation or

mining. Today, peasant farmers are being barred from forests as part of the fight against climate change; tomorrow, the same forests could be uprooted in order to allow companies to extract the fossil fuels that are the underlying cause of the problem. There is a disturbing rationale for this myopic focus on peasants and forest people and for the prominence of this approach on the agendas of international agencies and climate negotiators. REDD+, it turns out, has less to do with stopping forest loss than with allowing industrialised countries to continue to pollute.

The approach underlying the initiative is part of a broader effort to create a market for emission credits, which would allow polluters to continue releasing greenhouse gases if they can produce a certificate attesting that they have contributed

toward preventing a similar amount of emissions elsewhere.

The forests being protected by REDD+ are important producers of these tradable certificates to pollute, known as carbon credits. And REDD implementation through experimental projects provides advocates of this approach a solid foundation on which to advance their agenda.

For industrialised countries, carbon credits have proved to be an easy way to meet their international commitments under agreements like the Kyoto Protocol. If REDD credits are approved in Paris, countries and companies could pay peasant farmers in Ecuador or elsewhere to protect trees that programmes like REDD+ claim they otherwise would have chopped down – thereby avoiding the need to make difficult structural changes to cut emissions at home. Under the rules governing these transactions, the fact that no emissions were actually cut does not matter; what is important is that the tradable permission to pollute has been obtained.

Unfortunately, few of those meeting in Paris have incentives to question this approach. For governments, programmes like REDD+ offer an opportunity to avoid politically costly changes. And for international conservation groups like The Nature Conservancy, Conservation International, the World Wildlife Fund, and the Wildlife Conservation Society, the programme provides access to international development and philanthropic funding.

The biggest beneficiaries, of course, are the corporations whose hunger for land is driving most of the large-scale deforestation. In addition to allowing them to continue cutting down trees as long as they can produce the necessary carbon credits, REDD+ effectively shifts the blame for forest loss away from their actions and onto communities that have the greatest stake in forests’ long-term health. If the climate negotiators meeting in Paris are truly interested in halting forest loss and bringing climate change under control, they should pull the plug on REDD+ and address the underlying causes of these problems. Rather than attempting to control the lives and actions of forest peoples and peasant farmers, the effort in Paris should focus on ending large-scale deforestation and leaving fossil fuels in the ground.

Jutta Kill is a researcher and activist who has written extensively about carbon markets and voluntary certification schemes.

Stopping the child killers

By Anita Zaidi In far too many places around the world, the biggest child killers are caused by the smallest of organisms – the viruses, bacteria, and single cell parasites that cause diarrhea and pneumonia. Given the monumental advances that have been made in public health – both diseases are preventable and curable – this is inexcusable. It is imperative that all children, especially those most at risk, have access to life-saving health-care services.

According to UNICEF, pneumonia and diarrhea kill a full one-quarter of the 5.9 million children under the age of five who die each year. And a new report from the International Vaccine Access Center shows that nearly three-quarters of pneumonia and diarrhea deaths occur in just 15 countries.

In these countries and elsewhere, such deaths are most prevalent within the poorest and most marginalised communities.

While the figures do reflect progress in recent decades, the tragedy is that the improvement could have been much larger, had governments not consistently succumbed to the temptation to focus on only one or two interventions at a time. To end child deaths from these diseases once and for all, governments must commit to

scaling up simultaneously the full suite of interventions identified by the World Health Organisation and UNICEF two years ago, in their integrated Global Action Plan for Pneumonia and Diarrhea.

One critical – and extraordinarily costeffective – intervention is the promotion of exclusive breastfeeding for the first six months of life, a practice that helps supports the development of a baby’s immune system. As it stands, in 12 of the 15 countries suffering the most child deaths from pneumonia and diarrhea, exclusive breastfeeding rates fall short of the WHO’s 50% global target.

Furthermore, governments must ensure that all children have access to life-saving vaccines.

Though a vaccine for pneumococcal infection – a leading cause of pneumonia – was developed at the turn of the century, it is not included in routine immunisation programmes in five of the countries where pneumonia is most pervasive (Chad, China, India, Indonesia, and Somalia). This must change.

As for diarrhea, a comprehensive global study found that moderate to severe cases are caused primarily by rotavirus, making that virus the leading killer of infants and toddlers worldwide. But, though rotavirus vaccines have been rolled out in 79 countries – a significant accomplishment – a staggering 74% of the world’s infants remain unlikely to be inoculated this year.

The vaccine’s introduction for Indian infants next year will be a major milestone. But other Asian countries, such as Bangladesh

and Pakistan, have not yet decided whether to do the same.

When children contract diarrhea, they need access to the right treatments. Oral rehydration salts and zinc supplements not only drastically reduce mortality rates; they are also inexpensive to scale up. In treating pneumonia, access to antibiotics is essential.

The common denominator among these interventions is the need for sufficient welltrained health workers serving impoverished communities. Indeed, health workers are needed to guide mothers as they attempt to breastfeed – which is not always as easy as it sounds – and reinforce the importance of the practice. They are needed to deliver vaccines and treatments. And they are needed to dispense advice to families on how to protect their children from death by pneumonia, diarrhea, and other diseases, including through information about when to seek care if they do.

Governments have a pivotal role to play in ensuring that the poorest and most marginalised communities have access to critical health services, by providing the right training, tools, supervision, funding, and logistical support for health workers.

This – together with other critical interventions, such as the provision of clean water and effective sanitation facilities – will require a strong and sustained political commitment, one that civil society and the media, by keeping their governments accountable, can help to secure.

There are still far too many children

around the world who do not have access to the essential health services they need to survive and thrive. Accelerating the discussion of proven, low-cost methods to prevent, treat, and cure pneumonia and diarrhea is critical to give all children the chance they deserve. Where you live should not determine whether you live.

Anita Zaidi is Director of the Enteric and Diarrheal Diseases programme at the Bill & Melinda Gates Foundation. © Project Syndicate, 2015. www.project-syndicate.org

December 9 - 15, 2015

20 | BACK PAGE | financialmirror.com

China trade data dampens global sentiment Markets Report by Forextime Ltd

By Lukman Otununga, Research Analyst at FXTM

Markets are waking up to further concerns over the ongoing decline in economic momentum for the Chinese economy following another batch of weak data from China on Tuesday. China data is continuing to follow a downwards trajectory and another noticeable decline in both exports and imports has reinforced these concerns. While some could say that imports exceeded expectations at -5.6% this still illustrates that China is importing less from overseas and once again confirms to investors that it is those economies that rely on trade from China that will also suffer the fallout from a decline in China trade. With the data outlining further economic weakness, sentiment remains bearish for the Chinese economy and these concerns could elevate further ahead of the CPI report which will be released on Wednesday morning.

During Tuesday’s European trading session, the latest manufacturing production data was expected to be released from the UK and a positive number will allow some upside momentum for the GBP. Sterling is trying to recover losses at present but with that being said, sentiment remains bruised and the clear resistance and hesitance from the Bank of England (BoE) towards even mentioning raising UK interest rates will limit investor attraction. For an extended period of time, Sterling has fallen victim to the BoE’s clear resistance towards raising UK interest rates and while it is visible that stagnant inflation is mitigating any pressure on the central bank to act, this is also contributing to the factors behind the repeatedly pushed back UK interest rate expectations.

Despite the aggressive appreciation experienced in the GBPUSD late last week, the pair is still bearish. The lingering concerns over a potential slowdown in economic momentum in the UK, mixed with the BoE’s clear hesitance towards raising interest rates holds the potential to encourage sellers to attack the GBPUSD and push prices back towards 1.49.

From a technical standpoint, the GBPUSD remains bearish as last week’s rebound offered the opportunity for

sellers to push prices back lower. Prices have respected the downwards trend channel with the next relevant level based at 1.4900.

Commodity spotlight – Gold Gold experienced an aggressive appreciation on Friday despite the impressive NFP which reinforced the growing optimism around the prospects of a December US rate hike.

The instability created from the ECB’s under-delivery on Thursday which temporary weakened the USD may have been the cause behind the abrupt gains in Gold. Regardless, this precious metal remains bearish and the resumption of Dollar strength should provide the momentum for Gold bears to install another wave of selling momentum throughout

metal trading. With the Fed futures market pricing in an 80% chance of an interest rate rise this month, Gold will be left exposed and vulnerable to pressures.

From a technical standpoint prices are trading below the daily 20 SMA and the MACD has also crossed to the downside. A breakdown below 1063 may encourage sellers to send the metal towards 1046.

For information disclaimer, and risk warning note 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)

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