Page 1


issue 03 june 2011


COVER STORY Sovereign Debt and Euro Fears 24 Haircuts and Pigs 25 Why Germany Will Not Allow

a Euro Failure

26 Politics, Not Economics, Is To Blame 30 How Well Would the Cypriot Banks

Cope With a Greek Default? 32 The Prospects for Cyprus Through the Debt Crisis

+ opinion The Euro’s Political Weakness by Simon Smith 18 The Debate: “Will the price of gold continue to rise over the next decade?” by Andreas Andreou (Yes) and Marios Mavrides (No) 20 Neither A Borrower Nor A Lender Be… by Alexis Erotocritou


Survival Of The Fittest by George Th. Karaolis




Unlimited Communication: 50 Years of Cyta by Rita Hadjiloizou-Karatzia 58 And The Sea Smiled Back :) by Peter Economides


FEATURES 34 | Private Sector ADR Initiatives Secure Business Community Backing An in-depth look at how Cyprus is starting to come to terms with Arbitration

44 | One Man’s Crisis…Is Another Man’s Hedge Fund Return The Gold Guide to Hedge Fund Investing


the international investment, business & finance magazine of cyprus

50 | Hard Times in the Global Village Physics and Philosophy meets Economics in an interview with Lou Marinoff

63 | Taking Cyprus On The Road The role of the Cyprus Chamber of Commerce and its foreign trade missions in promoting Cyprus to the international business community

66 74 84 88 88

{money} {business} {economy} {tax&legal} {lifestyle}


Safe As Houses


t’s often said that if you want to get the view of the proverbial ‘main in the street’, you should ask a taxi driver for his views on issues of importance. If it’s true that taxi drivers are some kind of modern Everyman, then I can tell you that the issue of Greece’s present worries is crystal-clear in his mind. On my way back from the airport last week, I was told in no uncertain terms that Greece’s woes are all down to a conspiracy led by Germany and France, whose leaders have decided that they want to destroy the country and that if Cyprus isn’t careful, it will be next. When I asked why two leading members of the eurozone would want to take any action that would cause untold problems for their own currency, the driver’s reply was that they didn’t care. He was willing to admit that successive Greek governments are to blame ‘to a certain extent’ but he was adamant that ‘the EU and the Americans’ want to bring Greece to its knees. Later the same evening I watched a discussion on Greece’s satellite channel, during which an unemployed woman was explaining in measured, eloquent terms to Greece’s Deputy Prime Minister, Theodoros Pangalos, why she felt that it was unfair that she and hundreds of thousands of her fellow citizens should be obliged to tighten their already tight belts and make even more sacrifices in order to put right a situation for which they bore absolutely no responsibility. She had previously worked hard, paid her taxes and been a law-abiding citizen. Now she was out of work, out of money and being asked to do even more. Pangalos, to his credit, agreed that she could not be held responsible for Greece’s huge sovereign debt and acknowledged that his party and the previous ruling party were responsible for such wasteful scandals as appointing more than 100,000 people ‘who shouldn’t be there’ to the civil service. It is easy to watch the demonstrations and strikes in Greece on the TV news bulletins from the comfort of our armchairs in Cyprus and to ask ‘what good will they do?’ but it is clear that for the people who are out of work or who are seeing their salaries and benefits slashed, the sovereign debt issue is far more than a talking point for politicians and economists. They are now feeling the tangible results of their politicians’ long-term failings. It is natural for Greek Cypriots in particular to sympathise with their plight but there is also a palpable sense of worry among many people that if something so devastating could occur in Greece, it might happen here. One reason is the fact that, as well as close historical and political ties, there are strong business links between the two countries. As you will see in this month’s cover story, the island’s three main banks have lent billions of euros to Greece. Fortunately, all the indications are that they could withstand the blow of even 40% of this debt having to be written off. However, we are being reminded every day that what happens in one country cannot fail to affect another, especially within the EU and even more particularly within the eurozone. The answer to the burning question of whether Greece will default on its obligations cannot be answered with a simple ‘yes’ or ‘no’. You will read the arguments for both possibilities set out by eminent contributors to this issue of Gold. Taxi drivers are not necessarily the shrewdest of analysts when it comes to complex economic and political issues and I do not subscribe to the German-French conspiracy theory. But politicians need to be aware of the ideas and views that their constituents hold. It will be interesting to see if any attempt is made by the new House of Representatives to deal seriously with the problems facing Cyprus now that the elections and the desperate struggle for prime time TV soundbites has ended. The unseemly horse-trading that we have observed regarding the position of Speaker of the House does not bode well. Our banks may once have been considered to be safe as houses but if the global financial crisis taught us one thing, it is that houses are nowhere as safe as we have traditionally believed them to be. Our leaders, in Cyprus, Greece and throughout the EU, need to have the courage to be honest with us and take the measures they think necessary to lead us to recovery. Otherwise, you know what France and Germany have in mind for the rest of us…

Published by IMH ISSN 1986 - 3543

Managing Director:

George Michail General Manager:


Daphne Roditou Tang Media Manager: Elena Leontiou Editor-In-Chief:

John Vickers Senior Editor:

Konstantine Ioannides Contributing Editors:

Angelos Angelodimou, Antonis Antoniou, Stella Mourettou, Maria Pilidou, Erato Pishiara Contributors to this issue:

Andreas Andreou, Dinos Andreou, Antonis Antoniou, Steven Archer, Haris Christoforou, Peter Economides, Alexis Erotocritou, Isavella Frangou-Pavlou, Rita Hadjiloizou-Karatzia, George Th. Karaolis, Marios Mavrides, Dimis Michaelides, Fiona Mullen, Dr. Savvas Savouri, George Savvides, Simon Smith. Art Direction:

Andreas Koumis Photography:

Olesia Constantinou, Michael Kyprianou Marketing Executive:



Christos Kyriakides Advertising Executives:

Irene Georgiou, Christopher Constantinou Operations Manager:

Voulla Nicolaou

John Vickers, Chief Editor


Themoula Leonidou Printers:

Cassoulides Masterprinters 8

the international investment, business & finance magazine of cyprus

issue_03_editorial.indd 8


6/6/11 10:15:02 AM

{news briefing: global }

one MOTHERCARE TO CLOSE STORES Mother and baby products firm Mothercare says it will close over a quarter of its UK stores over the next two years following a 23% slump in profits and share price. CHINA POSTS TRADE SURPLUS China posts its biggest trade surplus in four months in April, as exports hit a record on stronger global demand. BURBERRY POSTS REVENUES OF £1.5bn Strong sales of leather bags and other accessories boost profits at luxury fashion brand Burberry. Profits were £296m, up 40% on a year ago, with revenues up 27% to £1.5bn. SEX WORK One in three university students in Berlin would consider sex work as a means to finance their education, a study from the Berlin Studies Centre reveals. The figure for Paris was 29.2% and for Kiev 18.5%.


r accesbrand 0% on a 1.5bn.

VOLKSWAGEN CHINA VENTURE German carmaker Volkswagen is to launch electric cars in China under the new Kaili brand together with FAW Group. Volkswagen says it expects to start production by the end of 2013.

Playboy goes digital


Moving further into the digital age, Playboy has decided to put 57 years of its iconic magazine online. The web-based subscription service, which is also optimized for the iPad, gives users the opportunity to read, search and explore every issue of Playboy magazine ever published. With more than 130,000 pages in total, the iPlayboy will house every pictorial, interview, centrefold, investigative reporting piece, story, advertisement and image that ever appeared in Playboy, ranging from the current issue all the way back to the inaugural 1953 issue. This month, the site will also feature exclusive videos and curated content recommendations from a panel of individuals in the areas of art, design, fashion, media and technology to be collectively known as the Playboy Commission. A subscription to iPlayboy costs $8 a month or $60 per year.

M & S PROFITS British retailer Marks & Spencer announces pre-tax profits of £714.3 million for the year ending April 2. Revenues rose by 4.2% to £9.3 billion and the dividend was increased 13.3% percent to 17pence per share.

TIFFANY 25% UP Net profits at Tiffany & Co rise 25% in the first quarter in a sign that the luxury sector remains strong. The jeweller announces a profit of $81.1m for the three months to April.

+ 3 10

Sony reports $3.1bn loss Last month, Japanese electronics giant Sony reported a loss of $3.1bn (£1.9bn) for the year to 31 March. The net loss was largely due to writing off $4.4bn related to a tax credit though the company noted that a stronger yen had also affected earnings during the year. Business was also affected by the earthquake in Japan in March. This is the third successive year that Sony has reported a loss. However, it is forecasting a profit of 80bn yen ($976m) for the current fiscal year.

the international investment, business & finance magazine of cyprus

Lagarde’s IMF bid support moves up a notch


Christine Lagarde looks sure to become the next Head of the International Monetary Fund (IMF), particularly after Russian President Dmitry Medvedev acknowledged after the recent G8 summit that, ‘on the whole, consensus has practically been reached on this issue’. France, Germany, the UK and Italy strongly support Lagarde, who is the French Minister of Finance, and US Secretary of State Hillary Clinton, noted last week that, ‘unofficially, we welcome women who are well qualified and experienced to head major organisations such as the IMF’. The other candidate for the position, vacated by Dominique Strauss-Kahn following the latter’s arrest for attempted rape, is Agustin Carstens, Governor of the Bank of Mexico. ‘If elected, I will give the IMF all my experience as a lawyer, a director of enterprise, a minister and a woman,’ Ms Lagarde told a news conference in Paris where she announced her candidacy for the post.



1 million ticket applications for Olympics 100m final

Over one million ticket applications have been received for the men’s 100 metres final at next year’s London Olympics. While the London Organising Committee (LOCOG) is not giving a detailed breakdown of how many applications it has received for individual sessions at the two-week Games, a spokesman confirmed that those for the 100m final had topped the million mark. However, with around 50% of seats in the 80,000-seater stadium being taken up by sponsors, VIPs and the media, most people will be disappointed. The initial application process for the 6.6 million tickets available for the Games has now closed. LOCOG said it had received 20 million applications from 1.8 million individuals, an average of 12 ticket requests per applicant. Money is already being taken from bank accounts although exactly what tickets people have secured will not be known until June 24 – a system that has attracted some criticism and was labelled ‘peculiar’ by London Mayor Boris Johnson. ‘We can’t tell people what tickets they’ve got until we’ve charged their card. We need to make sure it’s a fully paid for order before we inform people,’ head of ticketing Paul Williamson said in a statement this week. LOCOG is expected to raise a quarter of its £2 billion operating budget from ticket sales.

Germany to Phase out Nuclear Power Stations Germany’s coalition government has announced that it intends to phase out all seventeen of the country’s nuclear power plants by 2022.The decision makes Germany the biggest industrial power to give up nuclear energy. Chancellor Angela Merkel had set up a panel to review nuclear power following the crisis at Fukushima in Japan and there have been mass anti-nuclear protests across Germany in the wake of the crisis, triggered by an earthquake and tsunami.

the international investment, business & finance magazine of cyprus


{news briefing: global }


deals of the month said Mamut. ‘I believe that our investment and strategy will secure a dynamic future for the UK’s largest bookshop chain and I look forward to working with its booksellers in building on the principle of excellent bookselling, which is at the very heart of the business.’

HMV sells Waterstone’s

HMV has sold its Waterstone’s book chain to a fund controlled by Russian billionaire Alexander Mamut for £53m. Mamut, who owns the San Francisco-based social networking site LiveJournal, already holds a 6.7% stake in HMV. He has bought the business for cash through A&NN Capital Fund Management, a company controlled by a trust in which Mamut has an interest. The deal is expected to be completed by the end of June. HMV Group, which issued its third profit warning in April this year, put the 314-strong Waterstone’s chain up for sale in March. The company said on Friday that the sale represented an ‘important step towards strengthening the capital structure of the remaining HMV Group’. HMV said that it needs to reduce its borrowing requirements in the short term to ‘achieve a satisfactory refinancing’ and had concluded that the most timely and effective way to achieve this was through the disposal of Waterstone’s. The proceeds of the sale – which will see £40m paid on completion in June and £13m in October – will be largely used to reduce HMV’s borrowing requirements. ‘We are extremely pleased to have reached an agreement to acquire Waterstone’s and its great heritage,’



Fiat to take majority share in Chrysler

Fiat says it will buy the US government’s 6% stake in Chrysler, which will give the Italian carmaker a majority share in the US company. After Chrysler emerged from bankruptcy protection in 2009, Fiat agreed with the US government to share technology and management in return for a 20% stake and has quickly built that up. Buying out the government would give Fiat 52% ownership of Chrysler. In a statement issued on 27 May, Fiat notified the US Treasury that it was exercising its option to buy the government’s share. Its stake is likely to increase to 57% by the end of the year, when it is expected to have met certain government targets. On Tuesday, Chrysler said it had repaid $7.6 billion in US and Canadian government loans, six years ahead of schedule, leaving only small equity stakes as a reminder that the two countries helped Chrysler emerge from bankruptcy in June 2009 and form a new company with Fiat. Last month, it reported a profit of $116m (£69m) in the first three months of the year, its first quarterly profit since it emerged from bankruptcy protection.

Microsoft buys Skype

Skype’s owners, led by private equity firm Silver Lake , are set to earn more than three times their investment, for a total capital gain of more than $5 billion, on the sale of Skype to Microsoft Corp. The gain is particularly large considering that the investors have only owned the Internet phone service Skype for 18 months, since buying a majority stake from eBay. The $8.5 billion price Skype is commanding from Microsoft reflects the premium being put on hot social media properties and the number of potential buyers. Skype, which was considering an IPO, had already sparked interest from parties including Facebook and Google. For Microsoft, the stakes were high. The world’s largest software maker has been beset by a string of setbacks including the failed acquisition of Yahoo Inc and a halting start in the mobile phone arena now dominated by Google Inc and Apple.

EU Inflation up





States rose from 2.9% to 3.2%. One exception was Greece where it fell from 4.3% to 3.7%.






Eurostat. The inflation rate in the eurozone was 2.8%, up from 2.7% in March, while inflation across the 27 Member






Annual inflation rates recorded an increase in the EU and the Eurozone in April, according to data released by

3.9% 3.7% 3.7% 3.5% 3.5% 3.4% 3.3% 2.9% 2.7% 2.4% 2.2% 2.2% 2.0% 1.5%


the international investment, business & finance magazine of cyprus

{news briefing: local }

cy news

Britain to Review Bases

OVER 100,000 CYPRIOTS TAKE EASTER TRIP ABROAD The Statistical Service reports that 110,672 residents of Cyprus returned from a trip abroad in April. A total of 39,017 travelled to Greece and 28,866 to the UK.

Controversial Conservative Party donor and Deputy Party Chairman Lord Ashcroft is to lead a review of the UK’s military bases in Cyprus. British Defence Secretary Liam Fox confirmed in May that Lord Ashcroft would undertake the role of senior independent advisor to the review of the Cyprus bases, working alongside Conservative MP and former Army officer Patrick Mercer. The study, due to be completed by the end of 2011, is part of the UK’s strategic defence review. More than 3,000 UK personnel are currently stationed in the two Sovereign Bases at Akrotiri and Dhekelia.

INDUSTRIAL OUTPUT FALLS Industrial production falls by 5.9% in March 2011 compared with March 2010 though pharmaceutical exports rise by 9%. As a percentage of GDP, industry is down from 13% in 1995 to 8.3% in 2010.

DISY Tops Poll

FULL BROADBAND COVERAGE THIS YEAR Communications & Works Minister Erato Kozakou Marcoullis announces that broadband coverage is expected to reach 100% in Cyprus during 2011. SHIPMANAGEMENT REVENUE GROWS A Central Bank survey reveals thatshipmanagement revenues rose by 7.3% in the second half of 2010.The shipmanagement sector accounts for 4.8% of GDP.

COURT OVERTURNS FUEL PRICE FINE The Supreme Court overturns a fine on local fuel companies for uncompetitive pricing after ruling that the composition of the Competition Commission was invalid. NO IMPROVEMENT IN CAR MARKET Registrations of motor vehicles are down for the 28th consecutive month in April. They fell by 15.2% to 3,160 from 3,728 in April 2010 MARFIN ISSUES €1 BN IN BONDS Marfin Popular Bank issues €1bn in mortgage-backed covered bonds which are trading on the Irish Stock Exchange. They carry an annual interest rate of 3-month Euribor plus 2%.

The main opposition party, the right wing Democratic Rally (DISY), topped the polls in last month’s parliamentary elections with 34.27% of the vote. The ruling left wing party AKEL came second position with 32.67%. Both parties increased their share of the vote, compared with the 2006 elections. In a country where voting is compulsory, it was big news that 21.32% of registered voters abstained. Following the main two parties were the Democratic Party (DIKO) with 15.77%, the Socialist party EDEK with 8.93% the European Party (EVROKO) with 3.88% and the Green Party with 2.21% of the vote. DISY President Nicos Anastasiades

Qatar deal finalised Agreement was reached in May with Qatar over the development of a prime site opposite the Hilton Cyprus in Nicosia. It provides for the construction of a luxury hotel, apartments, shops and offices for Cypriot and foreign investors. Government Spokesman Stephanos Stephanou described the investment by Qatar, one of the biggest investors in the world, as a vote

Lower Airport Charges Welcomed 14

of confidence in the Cypriot economy, one which is expected to boost growth by creating hundreds of new jobs, upgrading and enriching Nicosia’s tourism product and opening up new prospects for other investments in Cyprus by Qatar and other countries. The Chairman of the Council overseeing the joint venture is former Minister of Finance, Christos Mavrellis.

Ryanair has welcomed last month’s announcement of lower airport charges at the island’s two international airports as a way of encouraging tourism growth and new routes. Ryanair’s Director of New Route Development, Ken O’Toole said that his company congratulated the government and Hermes Airports on their decision to focus on delivering new routes and opening up new markets. “Cyprus must break free of its dependency on high cost Tour Operators and the UK market by lowering costs to ensure it attracts many thousands of new visitors from currently un-served markets and countries,” he said.

the international investment, business & finance magazine of cyprus

commodities forex watch

COMMODITIES & INDICES ROUND-UP By Isavella Frangou-Pavlou Director- Global Marketing, KAB Strategy (Cyprus) Ltd.

Gold May was a month of consolidation for gold prices. After a remarkable climb in April, gold dipped to US$1460/oz early May on a stronger dollar but got support as the European debt crisis concerns intensified and investors returned to gold as a safe haven. Early on in the month, the US Federal Reserve kept its monetary policy unchanged but confirmed that QE2 would end late June. Meanwhile, the eurozone debt crisis intensified again as rating agencies downgraded Greece’s sovereign debt and negatively remarked on the credit outlook for Spain, Italy, and Belgium. Both QE2 exiting expectations and euro debt worries helped strengthen the dollar, the index of which rallied from 72.70 to 76.30. Demand for gold remains strong. Though reports show that George Soros abandoned his gold ETFs, the strong demand from emerging countries will support the price of gold. China, the world’s largest gold producer, also became the world’s largest gold buyer in Q1 2011. Investors should keep an eye on the US Non-Farm Payroll report due June 3, and the Fed’s new interest rate decision on June 23. Both BOE and ECB will also decide their monetary policies. ECB may keep its rates unchanged as the eurozone debt crisis is likely to deteriorate support a bullish outlook on gold price. Support is around US$1460/ in the future. BOE may hike its rates since inflation in the UK has oz and gold may resume the up spiral after consolidation. been hovering at high levels. Consumption demand, risk aversion on Source: KAB-MetaTrader eurozone debt worries, and the relative loosening of monetary policy

US Stocks It was a rollercoaster ride for the US stock market in May. On May 2, the S&P 500 index climbed to a three-year high at 1373 points, followed by the index testing 1300 for support. The current global economic situation makes further declines possible. The European debt crisis, inflation, China’s slipping economic growth, and turmoil in the Middle East are major influences. Among them, inflation is the core, caused by high commodity prices due to loose monetary policy. In June, several events need to be paid close attention to:  US Federal Reserve Meeting on June 22nd  European Central Bank meeting on June 9th  Bank of England meeting on June 9th (BOE is expected to raise its interest rate in the short term)  Greece’s progress on cutting public spending. Technically on the weekly chart, the S&P 500 index has completed 5 uptrend waves and now it is in for correction wave B. The target of 1300 for correction wave A has almost been reached. Then a rebound should kick in and the index should probably reach a range of 1335-1340 before the final fall. The final correction wave should not be lower than 1240 and 1275 before another round of climbing begins. Source: KAB-MetaTrader

oil Oil prices were significantly pressured downwards at the beginning of May, as the killing of Osama Bin Laden by the U.S. and eurozone debt worries both led to an appreciation of the dollar. Investors took profit and NYMEX oil futures fluctuated between US$95 and US105/barrel over May. Additionally, oil prices faced policy pressure in May. The IEA released a report blaming the surging oil prices for hurting global recovery and the CME hiked oil futures trading margin requirements this month to control speculation, which was blamed for causing the unacceptable high oil prices in April. Oil prices are likely to fluctuate in the coming months. On the demand side estimates for oil may be lowered, as the US economy recovery is below expectations. On the supply side, Libya’s supply may not resume in the short-term. Fundamentally, inflation risk, eurozone debt issues and world monetary policy changes will affect the direction of oil prices. Technically, oil may continue its wide range consolidation, the support is 95/93and the resistance is 105/110. In June investors should watch the U.S. Non-farm Payrolls (June 3), U.S. CPI (June15), and a series of data that will suggest the economic outlook. Source: KAB-MetaTradertor.

info: Isavella Frangou-Pavlou is Sales and Marketing Manager at KAB Strategy (Cyprus) Ltd (CySEC-License No. 058/05)


the international investment, business & finance magazine OF CYPRUS

FOREX WATCH GBPUSD May was not a very good month for Sterling. The pound fell for most of May reaching a low of 1.605 on May 24. A rebound followed on hopes that the BOE will hike its interest rate during its next meeting, reaching a peak at 1.651. On the weekly chart, the pound has been trading in the range of 1.605-1.675 for weeks. In the near-term, it is expected to trade around the resistance region of between 1.655 and 1.66, followed by a decline down to roughly 1.60 again. However, if more signs confirm that the BOE will increase rates on June 9, Sterling will break the trading range upwards. Source: KAB-MetaTrader

EURUSD The euro trended downwards in May from a high of 1.494 due to European sovereign debt worries, mainly from Greece. Neighbouring economies such as Spain, Italy, and Portugal also seem to be deteriorating. EU Finance Minister Juncker’s suggestion that Greece may not receive the next tranche of its financial assistance from the IMF next month as the group awaits 12-month refinancing guarantees topped the headlines. In the meantime, Spain is reportedly looking for a six-month extension on guarantees for 80 billion euro in bank bonds. To sum up, there is no quick and easy solution to lift the EU out of trouble in the near future, and therefore bears have support from fundamentals. The focus in June is without doubt inflation and Greece. High inflationary pressure will push the ECB to hike its rates; however, such a measure is not likely to be implemented in June. Technically, the euro is in correction wave B and we shall see the rally wave reaching the 1.431.445 region before final correction wave C. Wave C will send the euro lower than 1.40 and the depth will be determined by developments around the debt crisis. Source: KAB-MetaTrader

This research report or summary has been prepared by KAB Strategy (Cyprus) Ltd (CYSEC Licence No. 058/05) and KAB Financial Advisory Ltd from information believed to be reliable. Such information has not been independently verified and no warranty, representation or warranty, express or implied, is made as to its accuracy, completeness or correctness. Â This report is provided for information purposes only. Nothing in this report should be considered to constitute investment advice. It is not intended, and should not be considered, as an offer, invitation, solicitation or recommendation to buy or sell any of the financial instruments described herein. Leveraged products incur a high level of risk and can result in the loss of all your invested capital. KAB Strategy (Cyprus) Ltd and its affiliates accept no liability whatsoever for any direct or consequential loss arising from the use of this document or its contents. the international investment, business & finance magazine OF CYPRUS



The euro’s

By Simon Smith



seem to spend more time worrying about who, rather than what, is going to pull the eurozone out of the current crisis. Whilst the crisis has transformed over the past eighteen months or so in terms of intensity, focus and implications, the lack of leadership and strategic oversight has been a constant. Unless this changes, I struggle to see what will allow the eurozone to turn a corner and put the worst of times behind it. We knew from the outset that the eurozone would be unique; a single currency without political or fiscal union. Many said it would not work (and they may yet be proved correct) but systems were put in place to aid coordination of policies, the pinnacle of which was the stability and growth pact, designed to prevent government deficits and debt from getting out of hand. These measures proved to be weak at best, because when push came to shove, politicians put their domestic interests above that of the eurozone as a whole. Ironically, Germany and France were the main culprits in undermining the very procedures they had pushed for most, gaining exemption from fines in 2004-05 and permanently softening the rules. We’re seeing a similar pattern in the present day. There are many tough choices that have to be made so as to ensure the long-term survival of the single currency but they often come at the price of disenfranchising domestic electorates. That’s become all too apparent for Germany and Finland recently, where voters are punishing incumbent administrations for the perceived cost of bailouts. But in a bid to capture the most appealing collective option, these choices are skirted around. Absurd as it is, the notion of debt ‘re-profiling’ was floated in May, despite the fact that it is a default by any other name (as the rating agencies have confirmed). Furthermore, whilst Germany insisted on the no bail-out clause in the Maastricht Treaty that founded the euro, the initial terms and subsequent easing of lending conditions info: Simon Smith is Chief Economist at FxPro.


the international investment, business & finance magazine of cyprus


(albeit in return for concessions) to Greece is in effect a fiscal transfer. Germany has pledged to lend to Greece at rates and on terms that would be unobtainable elsewhere. It’s not quite handing money over, but isn’t that far off. If the eurozone is to wake up to the reality that a Greek default is the only way out and that fiscal transfers are inevitable, then it needs a leader who is going to push these to the top of the agenda. They’ve shown a particular lack of interest in creating one up to now. Given the choice between an EU President that would have been a leader and one whose name few can remember, they chose the latter. The IMF leader stepped up to the plate when it was needed last year but there’s a vacuum there that will take time to fill. Meanwhile, whilst the ECB was fairly vocal in its opposition to government fiscal policies and the flouting of rules during the last decade, this was from a powerless position over government policies. Now, given the size of its bond buying and lending to stressed eurozone banks, it has itself become too involved in the current crisis to be the dispassionate voice of reason that it once was.


The notion of debt ‘re-profiling’ was floated in May, despite the fact that it is a default by any other name


Such a leader is never likely to emerge, though, as domestic politicians naturally don’t want to sign away their control to someone over whom they have little control and who will no doubt undermine their chances of electoral success. This inherent shortcoming of the single currency is here to stay and may ultimately prove to be its downfall.

{the debate}

QUESTION: Will the price of gold continue

to rise over the next decade?


By Andreas Andreou In his 2005 book The Long Emergency, American author James Howard Kunstler argued that the end of the cheap oil era would also signal an end to the modern global economy’s infinite growth paradigm. The book also predicted a debt market and real estate crisis whereby, as growth rates slowed and stalled, it would become impossible for debtors to service their repayments. Kunstler’s advice for survival was twofold: Get out of debt to protect against the prospect of high interest rates, and invest only in physical gold as the only easily tradable asset holding its value. Today’s indebted governments, heavily swayed by the ever more powerful and consolidated financial sector, are trying to maintain the status quo through quantitative easing in a desperate attempt to keep their economies afloat. However, printing money has the implicit effect of devaluing that currency (and any non-index linked bonds/ stocks, etc. denominated therein) and its price relative to gold. When it comes to the price of gold, it’s important to understand that the money supply and inflation are two critical elements in its calculation but how the adjustment for inflation is made is also crucial. Using dollars as the benchmark, the peak gold spot price of $850 per ounce in the 1980s would actually be around $2,300 using the US government’s consumer price index. Moreover, if we consider expansion of the money supply as a measure of inflation, today’s gold price should actually be somewhere between $7,000 and $14,000, especially when the bank bailouts are taken into consideration. Therefore, no matter how we calculate it, the price of gold is not nearly as high as it could be given the levels of scarcity in the commodities market and uncertainty in the global financial system. In the short term, the price of gold may fluctuate wildly. However, given the relative inelasticity of the gold supply and rising energy prices, inflation (in monetary terms) can only increase. As such, the law of supply and demand dictates that the price of commodities will also continue to increase in price. With securely stored physical gold being the most universally tradable commodity in the world, it should prove to hold its real value (and therefore increase in terms of monetary value) against most, if not all the world’s declining, inflation-ridden fiat currencies.


By Marios Mavrides The beginning of the credit crisis in summer 2007 marked the beginning of an upward trend in the price of gold which is still continuing today. The price has risen from $600 per ounce right before the crisis to the historic record of $1,560 per ounce a few days ago. Can the price of gold continue to rise into the future? There is no clear answer to this – if there was, we would all be making easy and quick money. The point is that gold has traditionally been considered (until today) a safe haven for investors during periods of uncertainty and inflation. Since inflation reduces the purchasing power of money, gold is a good way to maintain this purchasing power due to the fact that its price will always rise at least by the rate of inflation. Also, uncertainty and an unstable financial environment discourage investors. Because of the high risk, investors invest less in real estate and shares and are looking instead for a safe haven until the financial climate improves. Gold has been a very good option for those investors who are not willing to take high risks. Speculation has added to all of the above to make things worse. Speculators have been buying with the expectation that prices will continue to go up and provide them with quick and easy profits. This speculative activity is responsible for the dramatic increase in the price of gold. As investors speculate, the increase demand for gold and the price also increases. The expectation of a quick and easy profit attracts more buyers, increasing demand and the price even more. Speculation in the market for gold is destabilizing and has resulted in what is called a ‘bubble’, where the price continues to increase without any substantial reason. Such phenomena are occasionally observed in organized markets such as oil, commodities and shares. The dramatic increase in the price of gold is not sustainable as destabilizing speculative activity cannot continue for ever. At some point, the market for gold will begin to collapse and its price will fall sharply. It may even go back to where it was before the crisis began. The price will begin to fall when the uncertainty and instability in financial markets begin to vanish. The price of gold will collapse. We just don’t know when. The dramatic increase in the price of gold is not sustainable as destabilizing speculative activity cannot continue for ever.

info: Andreas Andreou is an economics analyst. 20

Marios Mavrides is Chair, Department of Accounting, Finance and Economics, School of Business Administration at the European University Cyprus. the international investment, business & finance magazine OF CYPRUS

Gold Magazine, June 2011  

The International Investment, Business & Finance Magazine of Cyprus