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Summer 2013

How Luxembourg became Europe’s private banking powerhouse The Top 10 Stock Exchanges in the World


Business

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Summer 2013

How Luxembourg became Europe’s private banking powerhouse The Top 10 Stock Exchanges in the World

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Editorial

Welcome from the editor

We’re dedicated to curating only the most pertinent information, and showing you the primary stakeholders in key markets

businessworldwide SUMMER 2013

Here at Business Worldwide, our mission if simple: to deliver quality content, forwardthinking and credible journalism alongside informed comments and analysis. The world of media is constantly evolving but we believe that it is now more important than ever that knowledgeable readers have access to knowledgeable, credible and high quality writing. An effective digital and mobile presence is crucial as consumers soak up information wherever they go. But we still believe passionately in the value of traditional magazines too, the convenience, readability and authority that they represent. That is why we have chosen to launch a brand new quarterly publication, as we know that its quality will speak for itself, presenting a valuable product ready to establish itself as a vital, and enjoyable, resource for those who want opinions they can value, news they can trust and comments, interviews and features that can provide genuine insights into the issues affecting global businesses. Make no mistake, the internet is an unparalleled resource, giving us all the opportunity to delve into a vast and seemingly unending library of information, up-to-the-minute news, advice and insights. For those with an unquenchable thirst for the latest developments in the world of business, from advice on start-ups to profiles of high-flying CEOs, the latest stock and trading tips to the redistribution of the globe’s oil wealth, there is plenty of material out there for you. But the internet is also a double-edged sword. With such a constant flow of data, information, articles and opinions, how do we know who to trust? Can we believe everything we read? Who is accountable for the information we glean from the world wide web? Despite the ongoing efforts of Google to deliver some semblance of quality control to the tangled web that is the internet, there is a dangerously plentiful supply of unreliable, outdated and misleading misinformation that also floods our screens. We know Business Worldwide will become a resource you can trust. Running alongside our quarterly magazine, our website will offer an up-to-the-minute hub of information, breaking news and exclusive features, giving you your daily fix of engaging business content, making Business Worldwide a valuable addition to the world of business media, both online and in print. Our team of expert economists, business journalists and respected academic contributors will deliver informed articles covering the key developments and trends in the globe’s most important financial markets and business capitals. The volatile world of international finance is ever-changing, but one thing you can rely on is that Business Worldwide will be there to deliver the consistently high quality news, opinions, features and analysis that you need to stay up to speed with modern business. We have an exciting journey ahead, and we’d love you to join us. Stay tuned for more information on our first issue, or sign up to our mailing list to be among the first in the know.

Gerald Redstone Editor

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News

MPs: ‘Name and shame corporate tax dodgers’ The treasury should “name and shame” companies engaging in big money tax avoidance activities, it has been claimed. The warning comes after revelations that global giants such as Starbucks, Amazon and Apple have been saving billions of pounds by using loopholes to avoid paying higher tax rates in the UK. Spending watchdog committee chairman Margaret Hodge MP said the treasury lost at least £5 billion every year through tax avoidance schemes, with those promoting them “running rings around HMRC.” She said greater transparency in naming those who take part in such schemes would lead to a change in behaviour. “We have seen how public anger and consumer pressure can influence large companies, such as Starbucks, to behave more responsibly,” she said. “HMRC should publicly name and shame those who sell or use tax avoidance schemes in order to discourage such activity.”

Election stalemate threatens further eurozone crisis as Italy credit rating downgraded could be slower and less able to respond to domestic or external economic shocks.” The agency has furthermore predicted an economic drop of 1.8 per cent for Italy, which has the second largest debt within the eurozone, behind Greece. Finance Minister Vittorio Grilli said the Fitch downgrade was “not surprising.”

Election deadlock last month left Italy with a hung parliament, with no party able to form a majority. The results have threatened to plunge the eurozone into further crisis, with the uncertainty having an instant impact on the financial state of the country and the wider economic region. A statement from Fitch said: “A weak government

Political uncertainty has led to Italy’s credit rating being downgraded, as the recession-hit country’s economic problems continue to mount. Credit rating agency Fitch lowered Italy’s sovereign rating by one to BBB+, claiming the inconclusive election results have caused “further adverse shock to the real economy amidst the deep recession.”

Latvia ploughs on with plan to join the euro, despite opposition Latvia has pushed ahead with plans to join the euro, despite polls suggesting nearly two thirds of its residents are against the move. The country has now made formal its expected application to join the pan-European single currency in 2014 after meeting the required financial criteria. The Baltic country, which joined the European Union in 2004, received an international bailout in 2009 after suffering a deep recession, but a stringent regime of public spending cuts imposed by prime minister Valdis

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Dombrovskis has since put its economy on the road to recovery. Opinion polls have suggested the majority of Latvians are opposed to the bid to join the euro, but finance minister Andris Vilks insisted the application day would “enter Latvia’s history.” “A new, fiscally prudent country with huge experience in the previous crisis, which has learned a lot of lessons could be a very strong valueadded for the eurozone,” he said. A decision from Brussels on the application is expected

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News

US jobs boost for investment markets Optimism in the US jobs market has helped push world equities to their highest level in nearly five years. The MSCI World Index, which tracks 9,000 stocks across 45 countries, reached 360.00 points in March, a climb of 0.3 per cent and its strongest position since June 2008. It is one of the firmest signs yet that the investment markets are beginning to recover since being hit by the global financial crisis. More than half of the stocks tracked are US based, and improvements in US jobs data and record highs for the Dow Jones are seen as major factors in the World Index rise.

The growth of China’s export market has also been credited with encouraging investors to demonstrate greater confidence in shares. Figures released in February showed China’s exports have climbed by 21.8 per cent, double the predicted rate of growth. Ut aut omnihil igendel estiuntur? Tur, te volo magnit, commolu ptatate volectionem solum que siti delitaernam qui cuptas ne dem fugiatias ressundant harcide rsperfere, quo ipisitas sum sequae pra verum ad que sequam quas sit accae reritatibus. Nequiducia que illorep repeligent, acest, sinimpo riassita ius a id qui acepell ignihil

Google share price leaves Apple trailing Google has returned to the top of the tree as the world’s leading technology company, as rival Apple’s share price continues to slump. Google stocks have risen by 17 per cent this year alone and reached record highs earlier in March, trading at 25 times profit and representing a near tenfold increase since 2004. Increasing confidence in the internet giant has coincided with a continuing fall in

the performance of its tech rival Apple Inc. Shares in the iPad manufacturer dropped to

$431.67 at the start of the month, a drop of 35 per cent compared to last year. Some analysts are predicting Google shares, on the other hand, could be the first to hit the $1,000 mark. Improvements in Google’s Android mobile operating system have seen it present a serious threat to Apple’s market share, while investors have been buoyed by Google’s dominance of the online advertising channel,

News in brief Calls for European fund calculator law

An online investment calculator showing the ‘true’ cost of a fund could become a legal requirement in Europe. Lib Dem MEP Sharon Bowles, chairman of the European Parliament’s committee on economic and monetary affairs, has proposed three amendments to new retail investment legislation currently being debated, which would make it a requirement for ESMA to introduce a fund calculator similar to that made available by the financial industry regulator in the US.

UK banking reforms ‘not enough More stringent reforms are needed in the UK banking sector, according to the commission set up in the wake of Libor scandal. The Parliamentary Commission on Banking Standards wants regulators to have the power to force banks to split their retail and investment banking operations. The panel,

Sarkozy primed for private equity career

Nicolas Sarkozy could be headhunted to lead lucrative private equity funds if he decides on a life away from politics, it has emerged. The former French prime minister is reportedly being courted by sovereign wealth funds, including Qatar’s, with offers to run funds worth up to €500m. It follows his defeat in the French presidential elections last May, but any desire he may harbour to return to political life could scupper hopes of recruiting him into the private equity arena. The drop in popularity of his successor François Hollande is said to have turned Sarkozy’s attention back towards a potential return to the campaign trail. But the bias against private finance shown by the majority of the French public would damage his political ambitions if he were to take up a private equity role, according to advisors. Should he resist a return to politics, however, he could be offered a non-executive role to lead a fund from Paris, using his international businessworldwide SUMMER 2013

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OPINION:

GLOBAL ECONOMY

The Global Economy on the Fly ISTANBUL – In the last four weeks, I have traveled to Sofia, Kuala Lumpur, Dubai, London, Milan, Frankfurt, Berlin, Paris, Beijing, Tokyo, Istanbul, and throughout the United States. As a result, the myriad challenges facing the global economy were never far away. n Europe, the tail risk of a eurozone break-up and a loss of market access by Spain and Italy were reduced by last summer’s decision by the European Central Bank to backstop sovereign debt. But the monetary union’s fundamental problems – low potential growth, ongoing recession, loss of competitiveness, and large stocks of private and public debt – have not been resolved. Moreover, the grand bargain between the eurozone core, the ECB, and the periphery – painful

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austerity and reforms in exchange for large-scale financial support – is now breaking down, as austerity fatigue in the eurozone periphery runs up against bailout fatigue in core countries like Germany and the Netherlands. Austerity fatigue in the periphery is clearly evident from the success of anti-establishment forces in Italy’s recent election; large street demonstrations in Spain, Portugal, and elsewhere; and now the botched bailout of Cypriot banks, which has fueled massive public anger. Throughout the periphery, populist parties of the left and right are gaining ground. Meanwhile, Germany’s insistence on imposing losses on bank creditors in Cyprus is the latest symptom of bailout fatigue in the core. Other core eurozone members, eager to limit the risks to their taxpayers, have similarly signaled that creditor “bail-ins” are the way of the future.

Outside the eurozone, even the United Kingdom is struggling to restore growth, owing to the damage caused by front-loaded fiscal-consolidation efforts, while anti-austerity sentiment is also mounting in Bulgaria, Romania, and Hungary. In China, the leadership transition has occurred smoothly. But the country’s economic model remains, as former Premier Wen Jiabao famously put it, “unstable, unbalanced, uncoordinated, and unsustainable. China’s problems are many: regional imbalances between its coastal regions and the interior, and between urban and rural areas; too much savings and fixed investment, and too little private consumption; growing income and wealth inequality; and massive environmental degradation, with air, water, and soil pollution jeopardizing public health and food safety.

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OPINION:

The country’s new leaders speak earnestly of deepening reforms and rebalancing the economy, but they remain cautious, gradualist, and conservative by inclination. Moreover, the power of vested interests that oppose reform – state-owned enterprises, provincial governments, and the military, for example – has yet to be broken. As a result, the reforms needed to rebalance the economy may not occur fast enough to prevent a hard landing when, by next year, an investment bust materializes. In China – and in Russia (and partly in Brazil and India) – state capitalism has become more entrenched, which does not bode well for growth. Overall, these four countries (the BRICs) have been over-hyped, and other emerging economies may do better in the next decade: Malaysia, the Philippines, and Indonesia in Asia; Chile, Colombia, and Peru in Latin America; and

Kazakhstan, Azerbaijan, and Poland in Eastern Europe and Central Asia. Farther East, Japan is trying a new economic experiment to stop deflation, boost economic growth, and restore business and consumer confidence. “Abenomics” has several components: aggressive monetary stimulus by the Bank of Japan; a fiscal stimulus this year to jump start demand, followed by fiscal austerity in 2014 to rein in deficits and debt; a push to increase nominal wages to boost domestic demand; structural reforms to deregulate the economy; and new free-trade agreements – starting with the TransPacific Partnership – to boost trade and productivity. But the challenges are daunting. It is not clear if deflation can be beaten with monetary policy; excessive fiscal stimulus and deferred austerity may make the debt unsustainable; and the structural-reform components of Abenomics are vague. Moreover, tensions with China over territorial claims in the East China Sea may adversely affect trade and foreign direct investment. Then there is the Middle East, which remains an arc of instability from the Maghreb to Pakistan. Turkey – with a young population, high potential growth, and a dynamic private sector – seeks to become a major regional power. But Turkey faces many challenges of its own. Its bid to join the European Union is currently stalled, while the eurozone recession dampens its growth. Its current-account deficit remains large, and monetary policy has been confusing, as the objective of boosting competitiveness and growth clashes with the need to control inflation and avoid excessive credit expansion. Moreover, while rapprochement with Israel has become more likely, Turkey faces severe tensions with Syria and Iran, and its Islamist ruling party must still prove that it can coexist with the country’s secular political tradition. In this fragile global environment, has America become a beacon of

businessworldwide SUMMER 2013

Farther East, Japan is trying a new economic experiment to stop deflation, boost economic growth, and restore business and consumer confidence.

GLOBAL ECONOMY

hope? The US is experiencing several positive economic trends: housing is recovering; shale gas and oil will reduce energy costs and boost competitiveness; job creation is improving; rising labor costs in Asia and the advent of robotics and automation are underpinning a manufacturing resurgence; and aggressive quantitative easing is helping both the real economy and financial markets. But risks remain. Unemployment and household debt remain stubbornly high. The fiscal drag from rising taxes and spending cuts will hit growth, and the political system is dysfunctional, with partisan polarization impeding compromise on the fiscal deficit, immigration, energy policy, and other key issues that influence potential growth. In sum, among advanced economies, the US is in the best relative shape, followed by Japan, where Abenomics is boosting confidence. The eurozone and the UK remain mired in recessions made worse by tight monetary and fiscal policies. Among emerging economies, China could face a hard landing by late 2014 if critical structural reforms are postponed, and the other BRICs need to turn away from state capitalism. While other emerging markets in Asia and Latin America are showing more dynamism than the BRICs, their strength will not be enough to turn the global tide. About the Author Nouriel Roubini, a professor at NYU’s Stern School of Business and Chairman of Roubini Global Economics, was Senior Economist for International Affairs in the White House’s Council of Economic Advisers during the Clinton Administration. He has worked for the International Monetary Fund, the US Federal Reserve, and the World Bank.

Article source: Project Syndicate 7


FEATURE

The Top 10 Stock Exchanges in the World

Stock exchanges make the financial world go round. Situated in financial hubs across the world, the exchanges are hives of activity, where billions of dollars worth of stocks and shares are traded every day. 8

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FEATURE espite financial powerhouses the world over being gripped by recessions in recent years, the exchanges themselves have remained as active as ever, although latest figures show that 2012 proved a testing year. Market capitalisation actually gave cause for positivity and was the only indicator showing growth, with a 15 per cent growth rate compared to 2011. But volumes of all products traded showed significant dips, including a 22.5 per cent drop in equity transactions, with derivatives down by 20 per cent. The performances of 58 regulated exchanges around the world are monitored and reported by the World Federation of Exchanges, with monthly statistics. Here is a guide to the top 10 performing stock exchanges in the world, according to the latest market capitalisation figures (in USD) for 2012:

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NYSE Euronext (USA) $14,086bn

Often seen as the icon of the modern financial world, the New York Stock Exchange (NYSE) is the largest and oldest stock exchange on the planet and has been trading since 1792. Some of the biggest global brands and companies including the Bank of America and Walmart are traded here, along with more than a third of the all of the world’s equities. It has enjoyed an eventful few years too having become a publicly traded firm in 2006 after merging with the Archipelago exchange, and then a year later with Euronext when it acquired its current moniker NYSE Euronext. In December 2012 it was announced that NYSE Euronext was being acquired by IntercontinentalExchange in a deal worth a staggering $8.2 billion.

2NASDAQ OMX (US) $4,582bn

The rise of the National Association of Securities Dealers Automated Quotations – or more simply NASDAQ – has been somewhat quicker, starting life as an over-the-counter securities trader in 1971 before rising to become the world’s second largest stock exchange. A merger with the Scandinavian financial

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services company OMX saw it renamed NASDAQ OMX in 2007. NASDAQ was the world’s first electronic stock market and these days is where many of the world’s biggest technology companies are traded, including tech giants Microsoft and Apple.

Tokyo Stock Exchange Group 3 (now Japan Exchange Group) $3,479bn Japan’s largest stock exchange was established in 1949, although Tokyo has hosted stock exchanges since the late 19th century. At the start of 2013 the Tokyo Stock Exchange Group merged with Osaka Securities Exchange Co to become Japan Exchange Group, forming a national bourse trading stocks, commodities and other securities. Bosses have already announced their intentions to seek overseas investment in order to fuel further growth.

Stock Exchange 4London Group $3,397bn

Founded at the turn of the century in 1801 and with roots back to the trading going on at coffee houses in the 17th century, the historic London Stock Exchange is now the beating heart of the City of London and the biggest stock exchange in Europe. In recent years it has been subject to failed takeover bids from NASDAQ and an expected merger with Canada’s TMX Group was shelved in 2011. More than two-thirds of the 2,700 companies traded on the London Stock Exchange are UK-based and include fuel giant BP, banking firm Barclays and pharmaceutical company GlaxoSmithKline.

Euronext (Europe) 5NYSE $2,832bn

The European operation of the NYSE Euronext Group, which also runs the New York Stock Exchange, is based in Amsterdam in the Netherlands and is the fifth largest stock exchange in the world, operating equities and derivatives markets. Euronext was born from the merger of three European markets in September 2000, the Paris Bourse, Brussels Stock Exchange and the Amsterdam Stock Exchange, and two years later also merged

with the Portuguese-based Bolsa de Valores de Lisboa e Porto. It became part of the NYSE Euronext Group in 2007.

Kong Exchanges 6Hong $2,832bn

This securities and derivatives market in Hong Kong is where shares companies such as the Industrial and Commercial Bank of China, PetroChina and HSBC Holdings are traded. Its current holding company was formed in 2000 but the exchange dates back to 1891, since which time it has undergone various mergers and acquisitions.

7Shanghai SE $2,547bn

The Shanghai Stock Exchange is one of two independent stock exchanges in China, alongside the Shenzhen Stock Exchange, and its listings have a market value of more than twice that of the rival exchange. Trading takes place in two currencies due to the limitations on overseas trading, with A Shares traded in the Chinese currency of renminbi, and B Shares traded in US dollars.

Group 8TMX $2,059bn

TMX Group owns the Toronto Stock Exchange based in Canada’s largest city. Its present incarnation was formed in 2007 following a merger with the Montreal Exchange. Its original formation dates back to an association of brokers in Toronto in 1861 and by 2012 nearly 4,000 companies were listed on the exchange, making it the most active stock market in the Americas by number of companies listed.

Börse 9Deutsche $1,486bn

The origins of the Frankfurt-based stock exchange can be traced back as far as 1585 when a group of businessmen attempted to standardise the exchange rates of different currencies being used by Germany’s then-disparate regions. The modern form of this joint stock company was formed in 1993 and is where trading in companies including BMW and Lufthansa takes place. An attempted merger with NYSE Euronext

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FEATURE:

LUXEMBOURG

Luxembourg’s private banking sector has long since played an important role in wealth management and financial markets in Europe and across the world. It provides an attractive destination to those working in finance sectors, with more than 67 per cent of the country’s working population being made up of overseas workers, the majority of whom have relocated from other financial centres. Banking in the country enjoys a strong international reputation, built up over many years, with high levels of expertise behind banking institutions in the country. HISTORY AND MAKEUP The Grand Duchy of Luxembourg has specialised in financial products since the 1960s when authorities made the proactive decision to diversify from the dominant steel industry and create an environment conductive to high tech development and the banking industry. It has continued to innovate and create a stable platform for foreign financial investment and is now the premier private banking destination in Europe, having grown significantly since the 1980s when it propelled itself to the forefront of Europe’s asset management industry. Its success was kickstarted when the Grand Duchy became the first European state to implement the 1985 Directive on Undertaking for Collective Investment in Transferable Securities (UCITS) into law, pioneering the concept of fund passports in the process and facilitating cross-border fund transfers. It is now the second largest fund centre in the world, behind only the USA, and has seen its private

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How Luxembourg became europe’s private banking powerhouse banking sector grow at a similarly impressive rate. Remarkably for a country with a population of just over 500,000, Luxembourg is the third largest Private Banking centre in the world and the top ranked within the Eurozone in terms of assets under man-

agement (AUM). Private Banking is also a key aspect of Luxembourg’s finance sector bringing in more than €3.4 billion in revenues. Luxembourg is not just a destination for European banks either, with a fifth of its banks coming from non-EU countries. Unsurprisingly, businessworldwide SUMMER 2013


FEATURE:

Commission de Surveillance du Secteur Financier (CSSF), which took over the responsibilities of the Institut Monétaire Luxembourgeois(IML) when it became the became the Banque centrale du Luxembourg (BcL). ADVANTAGES: Geography One of Luxembourg’s main advantages for investors has been its strategic position at the heart of Europe and its ease of access from the power bases of the European Union, making it an attractive place for those hoping to access European markets. It is estimated that around 70 per cent of EU wealth is within a 700km radius of Luxembourg. Strong transport links make it easily accessible while a reliable IT network has made digital transactions and communications efficient and effective.

the economic powerhouse of Germany has the most banks based in Luxembourg with 42 – nearly a third of all credit institutions in the Duchy – being German-owned, compared to eight from the UK and six from the USA. Since 1998, regulation of the financial industry in Luxembourg has been undertaken by the

TAX ADVANTAGES

Workforce Luxembourg has managed to attract the world’s elite to work in its financial sector meaning private banking customers in the country now have access to a highly skilled workforce. The high levels of foreign workers also mean it is a multilingual finance centre, well placed for dealing across geographical borders. Private banking clients in Luexmbourg can be confident in gaining access to experts in cross-border wealth management, tax optimisation and asset management.

It is, of course, the relatively low taxes which are one of the most appealing features about private banking in Luxembourg, with the authorities establishing an environment which is attractive to those looking for an efficient private banking and wealth management. Some of the low cost benefits include an absence of wealth tax, dividends are subject to a 15 per cent withholding tax, 20 per cent lower than in Switzerland, non-residents are not required to pay inheritance tax nor tax on capital gains. Luxembourg also has double tax treaties in place with 64 major counties around the world and ongoing negotiations to add significantly to this list. The tax system are also appealing to businesses looking to relocate or invest in Luxembourg, with VAT the lowest in the EU at a standard rate of 15 per cent, while corporate taxes are designed to encourage investment and do not go above 28 per cent, while they can effectively be less than 10 per cent for some investors. businessworldwide SUMMER 2013

LUXEMBOURG

Political and economic stability Luxembourg enjoys an almost uniquely stable political environment compared to much of Europe, having been governed by a coalition of two political parties since the end of the Second World War. The authorities have long recognised the advantages of making Luxembourg a welcoming environment for foreign wealth and since actively seeking to diversify the trade opportunities for the country in the 1960s have worked closely with relocating businesses to assist in their set up and ongoing development. Fiscal stability is another key feature, with public debt standing at less than 17 per cent. RECENT DEVELOPMENTS It is Luxembourg’s flexibility that appeals to many financial institutions and its ability to react to the changing economic climate, including responding positively to changes to EU legislation. Authorities are proactive in introduce new legal frameworks for financial products, as demonstrated by becoming the first EU state to implement the first UCITS Directive in the 1980s, a trend followed up in 2010 by becoming the first member state to transpose UCITS IV into law. This proactive approach is set to reap more benefits for the state and cement its place as Europe’s market leader in fund management. The EU’s Alternative Investment Fund Managers Directive which comes into force in July is expected to drive more foreign fund managers to relocate to domiciles such as Luxembourg and the Grand Duchy has already prepared a draft bill for its parliament on the AIFMD to help the state capitalise on these changes. This approach has led Marc Saluzzi, chairman of the Association of the Luxembourg Fund Industry, to confidently predict that Luxembourg could see its funds double to around €500 billion as a result. Impressive figures for country of such relatively small size.

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