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FinancialMirror JIM LEONTIADES Euro no place for countries with no competitiveness PAGE 7

OREN LAURENT

Issue No. 1139 €1.00 June 24 - 30 , 2015

‘China mania’ grips Shanghai equity markets PAGE 16

Bailout extension on the cards at Eurogroup MINISTERS TO DISCUSS STRETCHING PLAN TO END OF YEAR -

GEORGE SOROS: A winning strategy for Ukraine SEE PAGES 18 - 19

PAGES 10 - 11


June 24 - 30, 2015

2 | OPINION | financialmirror.com

FinancialMirror

Limassol port model is the way

Published every Wednesday by Financial Mirror Ltd.

EDITORIAL

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The release of the tender last week for the management of the three concessions at Limassol Port seems to have produced the ideal model with a perfect balance between the need for privatisation and de-nationalisation on the one hand, and on the other, satisfying union demands for the eternal continuity of “jobs for the boys” in public service – a political win-win for the incumbent administration. The fact that as many as 70 potential investors have shown interest to submit a bid for one or all three of the concessions – container terminal, passenger terminal and marine services – goes to show that the port, that handles 80% of cruise passenger traffic and 70% of all trade, has great potential, despite its rigid management and archaic work rules. What the government has achieved, with little resistance from opposition parties, is that the current owner-operator Cyprus Ports Authority will become a landlord and regulator, hence, its staff numbers will eventually decrease or, on the upside that private management boosts business, the workforce will remain in place, as their responsibilities will double, in the least. This is what should happen with the other major utilities that will be “denationalised”, for

fear of using the “privatise” term just eleven months from the next parliamentary elections, as part of the economic adjustment programme imposed by the Troika of international lenders and the 10 bln euro bailout plan. So, as suggested by (then opposition) DISY leader Averof Neophytou a decade ago, Cyta should be split into two – the state network owner and the commercial operator – similar to electricity provider EAC – the grid owner and the commercial operator. Already, in the case of the EAC, the noisy unions are preparing to trouble consumers again by planning strikes because the strategy here is to transfer all assets (the grid) to the energy regulator, which makes great sense, just as Britain did when it split BritRail by holding on to the rail lines and maintenance, while privatising all passenger services. With Finance Minister Haris Georghiades doing a superb job of bringing the economy back on track, he should now do the smart thing and reallocate the surplus from the bailout fund to invest in infrastructure to improve the electricity and telecommunications grids, making it easier to find investors for both commercial services and thus improving connectivity, lowering costs for the private sector and truly supporting innovation and competitiveness.

THE FINANCIAL MIRROR THIS WEEK 10 YEARS AGO EU solidarity? UL blocks Aspis The EU leaders summit is expected to decide on ‘solidarity’ or ‘suicide’ when deciding on the nextterm budget, with Britain rejecting compromise and Italy expected to torpedo the proposal, while in other news, Universal Life’s chief has blocked a takeover deal by Asbis, according to the Financial Mirror issue 624, on June 15, 2005. EU summit: EU leaders formally start what will be the most important European Council summit in recent years, whether it will be a ‘solidarity summit’ of

20 YEARS AGO Offshores ‘here to stay’, money launder charges A senior Central Bank official said that the offshore concept was ‘here to stay’, while the government went on the offensive to counter charges of money laundering, according to the Cyprus Financial Mirror issue 115, on June 14, 1995. Offshore concept: Senior Central Bank Manager Iakovos Pashos said that the offshore concept will remain and Cyprus is determined to defend the tax advantages offered to these companies. He said that British consultants JF Chown & Co had drafted a

the optimists or the ‘suicidal summit’ of the pessimists, depending on attitudes over the budget for 2007-13, given the crisis after the rejection of the new EU constitution by France and Luxembourg. Britain rejects: PM Tony Blair rejected as ‘unacceptable’ new proposals by the EU Luxembourg presidency to resolve a damaging budget dispute, fighting to maintain the widely detested ‘rebate’ which other EU leaders

want to freeze, with Britain losing 25-30 bln euros. UL blocks Aspis: Universal Life CEO Andreas Georghiou blocked the second largest takeover deal of the year of CYP 16.5 mln by exercising his right to first offer for the 28% stake in the insurer that Bank of Cyprus wanted to sell to Aspis Pronia. Laiki held a 35% stake. The biggest deal of the year was 100% of Chris Cash & Carry by Carrefour Marinopoulos for CYP 21.6 mln. EMED on AIM: Eastern Mediterranean Resources, the Australian-owned company prospecting for copper in Cyprus, east and central Europe and Asia, listed on the LSE AIM market raising GBP 2.25 mln from its IPO.

study to see how Cyprus could maintain these advantages, and even expand them, in the case of a possible EU accession. Money launder: Government spokesman Yiannakis Casoulides said Cyprus was about to launch a counter offensive to silence the accusers that the island was harbouring money launderers. (Ed’s Note: If only we had learned anything from those accusations…) At the same time, the government said it was ‘unacceptable’ that the US Treasury Dept. named two lawyers as facilitating

sanctions-busting concerning Serbia. The Office of Foreign Assets Control named them as Tassos Papadopoulos and Pambos Ioannides, acting on behalf of Beogradska Bank, known as the ‘piggy bank’ of Slobodan Milosevic. Ioannides said he would sue the US government and Ambassador Richard Boucher. Limassol sewerage: The Limassol sewerage system is expected to go online by the end of June initially connecting 2,000 households and hotels from the ultimate goal of 10,000. The CYP 40 mln project will be partly funded by a Ecu 5 mln loan from the EIB. 1Q recovery: The economy continued its recovery in the first quarter, boosted by tourism and construction, while retail spending and car sales showed large growth, according to the Dept. of Statistics. Tourist arrivals were up 3.2% to 321,000 year-on-year, but British arrivals fell 16% to 112,000.

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June 24 - 30, 2015

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Cooperative bank chief quits, the search is on for new CEO ‘by mid-July’ Reports of Central Bank role, board conflict over NPLs

Marios Clerides, a soft-spoken and well-respected economist, resigned as chief executive of the Cooperative Central Bank, less than half-way through his five-year contract. It has been reported that he resigned for “personal reasons”. Bank officials said that the search for his successor is already underway, with a replacement recruited probably by mid-July, just before the arrival of the next team of inspectors from the Troika of international lenders. However, Clerides’ surprise resignation caused a flurry of speculation, ranging from his appointment as the next Central Bank Governor, should incumbent Chrystalla Georghadji quit or be forced out, while other suggest that it follows the same pattern as the earlier-than-expected resignation of Bank of Cyprus CEO John Hourican, who leaves Cyprus at the end of August. Both banks are still dogged with high rates of nonperforming loans, despite the passage through parliament of the long-delayed framework for foreclosures and insolvencies. Differences with their respective boards over how best to handle the problem have also been cited as reasons for the departures of both Clerides and Hourican. Clerides, 62, who joined the Coop from Hellenic Bank in December 2013, had a contract to the end of 2018, by which time the state-rescued cooperative bank would have been on a path to recovery and growth, and possibly return to public ownership.

The bank had been bailed out by the government to the tune of 1.5 bln euros, which helped it restructure, downsize and merged all loosely-regulated Coop credit societies into one entity, subsequently offloading non-core assets and selling off unproductive divisions and properties. On Monday, the Cooperative Central Bank issued a statement confirming Clerides resignation, which has immediate effect. “We would like to thank (him) for his valuable services to the movement at a critical juncture for the Cooperative and the economy of Cyprus, contributing through the ethos that describes him the successful path of growth, recapitalisation and reorganisation of the Cooperative Credit Sector in the past year and a half,” the CCB said in a statement. It added that the supervisory committee is proceeding with all necessary steps to ensure a smooth succession to Clerides. “We continue on the path that we have charted, with the aim to realise our plans for the completion of the effort to create a modern European Cooperative that will continue, through its 18 credit societies (subsidiaries) to provide beneficial services to its members and customers.” Marios Clerides, a graduate of the London School of Economics who has also served as Chairman of the Securities and Exchange Commission (CySEC), has taught at the University of Cyprus where he served on the council for the Centre for Economic Research and was Chairman of

the Cyprus Banking Association. In April 2013, he was appointed to the National Council for the Economy, headed by economics Nobel laureate Dr Christoforos Pissarides that advises the President of Cyprus on economy issues and future policy. On Tuesday, the Cyprus News Agency quoted Yiannis Stavrinides, in charge of strategy and communication at the Cooperative Central Bank, as confirming that Marios Clerides’ replacement will be selected by the bank’s supervisory committee early next month. Stavrinides said that vital issues that regard the wider banking sector, as well as the strategic plans of the Cooperative, will be on the agenda of talks with the Troika inspectors. He added that the pre-selection process should be concluded by the end of next week, without elaborating if specific names had been mentioned, while the recruitment of a non-Cypriot CEO is also possible.


June 24 - 30, 2015

4 | CYPRUS | financialmirror.com

Foreclosures, NPLs and debt restructuring focus of next Troika mission in July Inspectors to review progress in implementation of new legislation

The next mission of the Troika inspectors, expected on the island on July 14 to begin the eight review of the economic adjustment programme, will focus on the implementation of the insolvency and foreclosure laws, restructuring of loans and how banks are dealing and dealing with the issue of non-performing loans (NPLs), estimated at 46% of all loans at the end of March. IMF Mission Chief Mark Lewis said during a conference that inspectors will also look into the growing number title deeds which have not been transferred to property owners who have paid off their mortgages, complicating the NPLs issue further. The problem arises from the inability of the property’s developer to settle loans or debts, with those properties already mortgaged. The inspectors from the IMF, the ECB and the European Commission will also review reforms of public finances, the overall fiscal policy and reforms to improve revenue collection, tax administration, public spending management and improvement in public investment. Other growth-enhancing issues, such as the privatisation of semi-government organisations, will also be on the agenda Regarding the privatisation process, Lewis said that the benefits include attracting foreign direct investment or domestic investment, technology and productivity improvement and improved delivery of public services to Cypriots. He also said that in order to achieve the primary surplus goals there was no need for further wage cuts in the public sector. Speaking on the conclusion of the fifth, sixth and seventh reviews last week, that subsequently freed outstanding traches worth 380 mln euros, Lewis said GDP turned positive for the first time in four years and praised strong improvement in the public finances well ahead of schedule. He added that reforms also need to continue in the banking sector, where financial stability has been restored despite the challenges and that the level of NPLs was quite high and a challenge for growth, increasing jobs and income increase. “To get there we need credit to start flowing again from the banking system to households and business”, he said. Meanwhile, the IMF published its official report on the completion of the three reviews of the reform programme, noting that

despite the encouraging developments, the challenge is to maintain the reform momentum in the face of a difficult political environment. “Cyprus’s Fund-supported reform programme continues to produce positive results. Economic and fiscal outcomes have been better-than-expected, with growth turning positive in the first quarter of 2015 and public finances exceeding targets. Liquidity and solvency in the banking system have improved, allowing the elimination of external payment restrictions. Going forward, it will be important to maintain the reform momentum and strong programme ownership”, said IMF First Deputy Managing Director David Lipton. At the same time the IMF notes that risks to the programme are “manageable”, but the challenge is to maintain the reform

momentum in the face of a difficult political environment. It adds that the political obstacles to adopt the new private debt restructuring legislation were overcome, although at the expense of some deviations from international norms. “Going forward, it will be crucial that vested interests and reform fatigue do not derail the reform efforts. Otherwise, this could threaten the recovery and the consolidation of financial stability, and hinder Cyprus’s efforts to raise a trajectory of slow growth”, the report said. It added that solving the NPL problem is essential to ensure financial stability and boost growth. The report also notes that further efforts to strengthen banking supervision and restructure of banks are needed and that the Central Bank should continue to strengthen

its supervisory capacity. Moreover the report suggests that the reform of the public administration should ensure “the sustainability of the wage bill after the expiration of the programme and enhance government efficiency. “The authorities should also move forcefully to address weaknesses in the business environment to support growth prospects.” Based on an assessment by the banks, the NPLs that could be eligible for the insolvency process could range between 1 and 3 bln euros (6-7% of GDP). The estimates suggest that the insolvency process could bring about a debt reduction in the private sector of about 0.5-2.1 bln euros with an impact of 0.2-1.1 bln on the banks’ capital due to additional provisioning under the different scenarios.

NPLs unchanged at 46% in March The ratio of non-performing loans (NPLs) in the Cyprus banking system remained almost unchanged in March at 46.1% of the national loanbook worth EUR 59.8 bln, representing some EUR 27.6 bln, according to the Central Bank of Cyprus. The marginal drop resulted from a decrease in NPLs extended to the general government to EUR 63.6 mln in March from EUR 110.8 mln the month before. The ratio of NPLs extended to nonfinancial corporations and households rose to 55.8% and 53.9%, in March from 55.2 and 53.6%, respectively, the previous month before. Outstanding loans extended to companies and households amounted EUR 24.8 bln and 23.6 bln, respectively, and make up 41% and 39% of the overall loan portfolio. The ratio of non-performing loans extended to small and medium size enterprises rose to 64.7% in March from 64.2% the month before for a total of EUR 13.9 bln. Meanwhile, some 22% of NPLs are loans that are or have been restructured, but have not yet completed the probation period.

Trade deficit narrows further as exports continue to rise The trade deficit widened further in the first quarter of the year, after two consecutive months of relative stability in imports and increase in exports, according to the statistical service Cystat. Total imports/arrivals in January-March amounted to EUR 1,156.4 mln as compared to EUR 1,152.8 mln in January-March 2014. Total exports/dispatches in January-March were EUR 519.2 mln compared to EUR 355.5 mln in the first quarter of 2014. As a result, the trade deficit narrowed to EUR 637.2 mln in January-March this year compared to EUR 797.3 mln in the corresponding period of 2014. Leading the list of imports was ‘mineral products’

with EUR 293.1 mln followed by ‘chemical or other industrial products’ with EUR 138.2 mln, and ‘foodstuffs, beverages, and tobacco’ with EUR 136.7 mln. The European Union continued to be the main source of supply of goods to Cyprus accounting for 73% mainly from Greece, Italy, Germany, the United Kingdom and Bulgaria. Imports from the rest of the world were dominated by Israel, China and India. The biggest category of exports was ‘vehicles, aircraft, vessels and transport equipment’, followed by mineral and chemical products, suggesting these are re-exports, as Cyprus does not have a manufacturing or chemical sector, apart from cement. The traditional categories of ‘live animals and animal

products’, ‘foodstuffs, beverages and tobacco’ and ‘vegetable products’ only accounted for 7%, 5% and 4% of exports, respectively. For the month of March alone, imports were unchanged year-on-year, at EUR 424.8 mln, while exports were up to EUR 156.0 mln in March 2015 compared with EUR 138.1 mln in March 2014. The trend follows the January-February two-month period when the trade deficit narrowed by just over a quarter from a year earlier to EUR 368.6 mln from EUR 510.6 mln, with imports marginally up, but exports leaping about 60%, probably due to the re-export of liquid fuels from the Vitol-owned VTTV storage facility in Vassiliko that started work in December 2014.


June 24 - 30, 2015

financialmirror.com | CYPRUS | 5

€380 mln in Troika funds by mid-July The main financiers of the EUR 10 bln Cyprus bailout programme have agreed to pay up the next instalments totalling some EUR 380 mln within the next three weeks, following a positive review by inspectors that had been delayed by the foreclosures and insolvencies law that were outstanding in parliament since last September. The IMF said that economic and fiscal outcomes in Cyprus have been better than expected, but that the high level of nonperforming loans remains an urgent priority and must be addressed in order to preserve financial stability and boost growth and job creation. On Friday, the IMF Executive Board in Washington completed the combined fifth, sixth and seventh reviews of the Cyprus economic adjustment programme supported by the Extended Fund Facility (EFF) enabling the disbursement of EUR 278.4 mln, with total disbursements under the programme since March 2013 reaching EUR 742.4 mln. The Executive Board also approved a revised schedule of future disbursements and reviews, with the eighth review now expected to take place in September, with two more reviews following on a quarterly basis. The three-year, EUR 1 bln arrangement was approved on May 15, 2013 in addition to EUR 9 bln in financial assistance from the European Stability Mechanism (ESM). Following Friday’s Executive Board discussion, David Lipton, IMF First Deputy Managing Director and Acting Chair, stated that “Cyprus’s Fund-supported reform programme

continues to produce positive results.” “Liquidity and solvency in the banking system have improved, allowing the elimination of external payment restrictions. Going forward, it will be important to maintain the reform momentum and strong programme ownership,” he said. “Addressing the high level of nonperforming loans remains an urgent priority to preserve financial stability and boost growth and job creation. In this respect, adoption of the new insolvency and foreclosure legislation is a key step,” Lipton added. Moreover, he said that “continued efforts are needed to strengthen banking supervision and build the capacity of the banking system to restructure loans in a sustainable manner.” Lipton warned that “high public debt together with sizeable contingent liabilities warrants continued prudence and efforts to lock in fiscal savings from better-than-expected macroeconomic developments. Thorough implementation of the new welfare system is important to protect vulnerable groups, while public investment allocations need to be executed to support economic recovery.” He concluded that “the authorities should continue to advance structural reforms to strengthen public finances and lay the ground for sustained growth. Fiscal reforms should focus on revenue administration, public financial management, and public administration. Progress in privatisation and further efforts to improve the business environment and reduce unemployment are

also needed.” Earlier on Friday, the Eurogroup of Eurozone finance ministers welcomed the conclusions presented following the sixth review mission that the Cyprus adjustment programme has been brought back on track, calling on Cypriot authorities to lend renewed momentum to the implementation of the fiscalstructural and structural reform agenda, including privatisation and public administration reform, “in order to improve economic growth prospects and strengthen public finances, while safeguarding the protection of the most vulnerable groups”. The Eurozone ministers subsequently endorsed the disbursement of the EUR 100 mln next tranche of financial assistance by ESM in mid-July. Meeting in Brussels, the Eurogroup noted that the fiscal performance continues to be solid, the debt outlook has improved, and structural reforms are progressing in several areas, although unemployment remains high. It indicated that reforms in the financial sector have progressed and that after repeated delays, the legal framework establishing a new foreclosure procedure has entered into force and that a comprehensive reform of corporate and personal insolvency laws has also been adopted, an essential step towards addressing the very high level of non-performing loans, which is a drag on restoring growth and job creation in Cyprus. One key issue was facilitating the sale of loans and ensuring that title deeds are transferred without delay to property buyers.

Arrivals up from UK, Germany, Israel Tourist arrivals from Britain, Germany and Israel were significantly up in the first five months of the year, according to the Cyprus Tourism Organisation, with the drop in arrivals from Russia, the second largest tourist market, expected to be limited to 25% for the year. Five month figures show that tourist arrivals from Russia are down by 18.4%. Arrivals from the UK in January-May were up by 39,140, or by 16.4% compared to the year-earlier period. Tourists from Germany were up by 26.5% or 7,641, while the Israeli market recorded a 58.1% increase with 9,189 more arrivals than in 2014. Tourist arrivals from France and Holland are also up by 44.7% and 40.7%, respectively. The Austrian market has also recorded an increase of 76.1%.


June 24 - 30, 2015

6 | COMMENT | financialmirror.com

EY: Renewed external funding to support Cyprus growth, but Greece is a worry A pickup to growth of about 1.8% year expected in 2017–2019

The ending of capital controls and the approval of key insolvency laws should clear the way for a resumption of funding under Cyprus’ 10 bln euro international bailout agreed in March 2013, according to the June 2015 EY Eurozone Forecast (EEF), that added that this will bolster prospects for a return to growth. Despite short-term headwinds from the recession in Russia and fresh uncertainty about a possible Greek Eurozone exit, Cyprus’ GDP grew 1.6% on the quarter and 0.2% on the year in Q1 this year. As a result, after three years of decline, GDP is now forecast to grow 0.3% in 2015, the EY report said. The EEF said that the latest policy developments, expected to trigger a resumption of IMF, ECB and European Commission funding, suspended since October 2014, may be an important milestone, as Cyprus moves toward an exit from its bailout and a return to market-based financing, underlined by its successful EUR 1 bln international bond issue at the end of April. The EY reported also noted that the government has announced some modest economic stimulus measures, including infrastructure spending, aimed at creating new jobs (unemployment remains high at 16%) and stimulating domestic demand. Together with the resumption of external funding, EY now forecasts stronger GDP growth of 1.3% in 2016, followed by a steady pickup to 2.2% in 2019. “Growth prospects for 2016 will be assisted by ongoing recovery in Europe and an expected return to growth in Russia, after the recession there slows growth of tourism and other services this year. “There are already signs of stronger tourism after a sharp setback in Q4 2014, with the number of Russian visitors (25% of total visitors) now picking up again.” Worsening deflation in recent months (with prices falling 1.7% on the year in April), due to lower oil prices and constraints on consumer spending from high unemployment, could hold back investment recovery in

2015. But a return to positive inflation, forecast to average 1% in 2016 and then climbing to about 2% a year in 2017–19,

should help by reducing real interest rates and the burden of debt, the EY report said.

Eurozone sees strongest period of growth since 2011 The Eurozone’s positive start to 2015 — with Q1 GDP growing by 0.4% on the quarter, stronger than the US or the UK — suggests that consumers are responding to lower energy prices, according to the June 2015 issue of the EY Eurozone Forecast (EEF). The forecast also predicts that the recovery will become more broad-based, with growth forecast at 1.6% in 2015 and then 1.9% for 2016. Businesses are preparing to invest, with increasingly positive business surveys and loans data in recent months. The EEF expects total investment to grow 1.1% in 2015, before accelerating to almost 3% in 2016–17 but then easing to 2.5% in 2018–19. This is well short of pre-crisis rates of investment growth, but since much of the latter was accounted for by housing, a slower pace of capital accumulation need not necessarily imply lower future output growth. Quantitative easing will help keep borrowing costs low for businesses, governments and individuals in the Eurozone this year and next. However, the possibility of a Greek exit from the euro may continue to overshadow financial markets. “Greece aside, many of the clouds that have hung over the Eurozone have dispersed over the past 6 to 12 months, and the economy has responded with faster growth and job creation,” said Tom Rogers, Senior Economic Adviser to the EEF.

Consumer spending and exports to lift growth to 1.6% this year and 1.9% in 2016 Corporate investment to accelerate to 3% in 2016-17 “Risks remain of course, but cheap finance, a weak euro, and a steadily improving sense of household confidence, are all factors that suggest business investment can start to rebound in the quarters ahead.” “Lower energy prices, higher consumer spending, a stronger labour market and a weaker euro are all contributing to a broadbased recovery,” added Mark Otty, EY’s Area Managing Partner for Europe, Middle East, India and Africa. “But despite the positive movement in consumer spending, unemployment is high in much of the currency bloc. The Eurozone business and political community have to work together to address this major challenge with the top priority of creating a better environment for young people.” In the second half of 2015, households will start to feel energy bills rising by 5% in 2016 in line with world oil prices, taking a little steam out of consumer spending. Nevertheless, with more reliable labour market prospects, EEF expects consumer spending to rise by 1.7% in 2015 and by 1.6%

in 2016, up from just 1% in 2014 and well above the average of recent years. In some countries, such as Germany, this is being driven by wage growth in tightening labour markets. In others, such as Italy, consumers are spending their energy windfall on bigticket items such as cars and white goods, encouraged by stabilizing employment markets. Depreciation has left the euro 7% weaker than at the start of 2015 and weaker still against the Sterling. This has reinforced Eurozone competitiveness in key export markets as the dollar soars. The EEF expects the euro to weaken to US$1.10 by the end of this year and about US$1.05 by the end of 2016. Exporters will also continue to benefit from the recovery in other advanced economies like the UK and the US. The EEF expects Eurozone exports to grow by 3.7% in 2015, while imports remain strong despite becoming more expensive. However with some emerging economies — in particular China — set for a managed slowdown in the

coming years, demand for European capital goods could grow modestly with export growth easing back from a peak of 4.2% in 2016 to 4.1% in 2017 and 3.6% in each of 2018 and 2019. The EEF expects a gradual pickup in the pace of investment spending through the second half of this year and in 2016. Credit conditions have continued to improve, as have measures of business confidence. However, with ongoing uncertainty over Greece’s future in the Eurozone, and the consequences of its possible exit, this is not yet materialising into higher investment spending. “The economic outlook is certainly much improved, but it is important for policymakers to sustain efforts across the board. It is particularly important for governments to push ahead with sometimes difficult economic reforms that improve competitiveness, and to use whatever fiscal space opens to prioritize spending in areas that boost future potential growth,” said Tom Rogers. Otty added: “Business leaders with interests in the Eurozone need to prepare themselves for this return to more stable growth. The fate of Greece remains a major stumbling block for the single currency. But as uncertainty over Greece’s future is addressed, we expect investment growth to become more apparent in the near future.”


June 24 - 30, 2015

financialmirror.com | COMMENT | 7

Euro no place if you lack competitiveness By Dr. Jim Leontiades Cyprus International Institute of Management The Eurozone was initially supposed to make the member countries more similar. This has not happened. Some member countries are enjoying relatively full employment and satisfactory economic development and some are experiencing far different situations. Germany enjoys relatively low unemployment (4.7%) and modest economic growth, while the “bailout countries”, Greece, Spain, Ireland, Portugal, Cyprus, still have high levels of unemployment. Unemployment in Greece and Spain is still near 25%, a level not seen since the Great Depression of the 1930s. Such economic diversity between countries using a common currency can reinforce the strengths of the economically stronger countries of the Eurozone at the expense of the weaker, less competitive, members. The features of the common currency indicated below contribute to this: Capital Movement: The Eurozone has been successful in reducing exchange rate risk and other barriers to capital movement. But the ease of capital movement can also prove harmful for countries experiencing economic difficulties. We have seen massive amounts of capital exiting countries, such as Cyprus and Greece, which desperately need capital investment to become more competitive. This fleeing capital seeks the safety of member countries doing better economically and offering superior investment

opportunities. Interest rates: Closely related to capital movement is the question of interest rates. Low interest rates encourage investment in new businesses and are crucial for countries hoping to promote new business enterprise. Capital outflows, such as discussed above reduce capital availability, raising interest rates in those countries which can least afford them. In 2015, the relatively stronger economies of the Eurozone (Finland, Holland, Belgium, Luxembourg, Germany, France) had long term interest rates of less than 1%. Those countries in recession or just emerging – Spain, Italy and Portugal – were significantly higher with Greek long term rates at 11% (current bond yields at 29%) and Cyprus rates at 6% (ECB statistics). Emigration: A country’s youth represents a major investment for the future. Billions have been spent on their education. They are a key resource for countries hoping to emerge from recession. The single currency has undoubtedly made the emigration of such persons easier. Not only are traditional border barriers reduced but university and professional qualifications are now more generally recognised, facilitating job search and application. Bloomberg recently reported that the outflow of professionally qualified persons leaving Greece is now at roughly ten times the level before the financial crisis. (20,281 professionals left Greece between 2009-2014 versus 2,552 in the comparable period prior to the crisis). Cyprus emigration increased more than 400% since the financial crisis, from 4,106 in 2007 to over 25,000 annually in 2013. Exchange rates: Countries in the Eurozone share a common exchange rate regardless of their international competitiveness. Germany has a massive trade surplus, Greece has a generally weak international trading

performance with frequent deficits. Yet they both share the same currency with the same exchange rate. This benefits the internationally stronger countries and works against the interests of those with a weaker trade performance. There is little doubt that if, for example, Greece were outside the Eurozone, its exports would be cheaper and prices to tourists lower.

SHORT AND LONG TERM SOLUTIONS The above structural features make for instability within the Eurozone. They increase the disadvantages of the less competitive member countries while reinforcing the advantages of the stronger economies. Financial aid and bail outs as offered by the Eurozone are not a long term solution. The longer term solution is to improve the competitiveness of the weaker countries. Measures such as privatisation, labour flexibility, smaller government, a more competitive domestic economic environment, better education are directed at the root of the problem. Without such measures, the bail-out, bail-in countries presently receiving financial aid are likely to be back at some future date asking for more. This is the thinking behind the Eurogroup’s emphasis on “restructuring” measures. They are needed to put the less competitive countries on a par with the rest of the Eurozone. Yet, it is simplistic to believe that such measures alone, useful as they are, will by themselves prove sufficient. They do not begin to touch on the cultural problems these countries face, such as nepotism, corruption, weak government and dysfunctional political parties. There is little the Eurogroup can do to correct such issues. This can only be done by the citizens of each country in the courts and at the ballot box.


June 24 - 30, 2015

8 | COMMENT | financialmirror.com

Food that’s Fresh, Fragrant and Frugal FOOD, DRINK and OTHER MATTERS with Patrick Skinner In difficult times, family budgets have to be cut and many luxuries deleted. This may mean lessening the amount of meat and fish we eat and using ingenuity to feed ourselves. Anyone who remembers – as I do as a small child – or has read about the 1939-1945 World War, will know that food was severely rationed. Nevertheless, what people ate was enough to keep them fit and, perhaps more important, it reduced the risk of obesity. You can eat well, healthily and cheaply. From time to time I shall propose nourishing, but inexpensive, dishes. Here are three…

Halloumi Balls These little marvels can make a tasty starter, or part of a main dish with a tomato sauce, green vegetable and roast potatoes, or a salad. Method 1. Using a coarse grater, grate a piece of Halloumi. You can use it straight from the packet (draining the liquid) or you can bake it for 8-10 minutes in a moderate oven first to make it drier. 2. Put grated cheese into a bowl. 3. Add the fresh mint and an egg yolk and mix well adding some ground black pepper. 4. Take a generous teaspoonful of the halloumi mixture and roll it into a ball. 5. Repeat until all the mixture is used. 6. Fry the halloumi balls in hot oil turning several times. This will take about three minutes. Remove from the pan and set aside.

Bread Dumplings with Bacon and Salami This is a remarkably cheap and tasty dish, made entirely from Cyprus produced ingredients. This recipe originated in Austria, where they were called “Knödel”, and crept over the border into what had become a part of Italy, the South Tyrol. Its Italian name: ‘Canéderli’. It is a delicious dish for a buffet or as a main dish with some accompaniments. It comes from Tritino in northern Italy. You will never see this in any Italian restaurant these days, so it’s truly ‘home-made’. “Canéderli” – Ingredients to make between 15 and 20 dumplings 4 good sized eggs 180ml / 6 fl oz milk 250g /9 oz dry bread (Pitta bread is ideal for this) 50g / 2 oz Pancetta or “Snack” brand streaky bacon 50g / 2 oz “Snack” brand dry salami. 1 medium onion, peeled Salt and pepper 1 sprig parsley, chopped. 3 tbsp plain flour 30g (1 oz) butter Grated Parmesan cheese

Zorpas seeks US expansion to mark 40th anniversary A. Zorpas & Sons, owners of the 54 Zorpas bakeries throughout Cyprus, plan to expand overseas, with their first outlets expected to open in New York in October to coincide with the company’s 40 th anniversary. From the humble beginnings in Athienou, when Andreas Zorpas (second left) first started baking bread and selling retail, the company has grown to become the biggest chain on its kind on the island, with three production lines in the Aradippou industrial zone and two Pralina confectioners in Nicosia. The next step, according to Andreas’ son, Costas (centre), who has taken over as executive chairman of the family-run company, is to open outlets in Canada, Australia and the United Arab Emirates. The family has also decided to divert funds to the non-profit MAZI, a charity established to raise awareness and conduct research about eating disorders, especially among young people.

Method 1. In a bowl, whisk the eggs with the milk and a pinch of salt. 2. Break the bread into small pieces and add to the milk and let it oak for 20 minutes, stirring regularly, until the bread has absorbed all the liquid. 3. Finely dice the bacon and salami, chop the onion finely, chop the parsley. 4. Heat a little olive oil in a frying pan and cook the bacon/salami mixture for a few minutes, stirring frequently, then after a minute or two add the parsley, then spoon into the bread/milk and mix. 5. Now add the flour, little by little, stirring carefully until it is well blended, adding salt and pepper to taste. 6. Spoon out the mixture and form into egg-shaped balls the size of an apricot (about 5cm / 2” in diameter) NOTE: Try forming and cooking one dumpling first – if it should break apart, add a tablespoon or two of flour to the mixture, mix well, make the dumplings and cook. 7. In a large pot of boiling salted water, or light chicken stock, gently put the dumplings in to cook, four or five at a time. Simmer for around 10 minutes. Try one to see if it is nicely cooked through. 8. In a small pan melt the butter. Drain the dumplings, put them in a serving dish and pour over the melted butter and the grated Parmesan. 9. Serve with an Italian tomato sauce, or coulis, or dolly up the cooking liquid by thickening it slightly with a little flour and adding some more flavour, like a spoon or two of white wine and a teaspoon of tomato purée.

Penne with Leeks and Mushrooms So simple! For each serving you will need a generous handful of button mushrooms of 3 cm chunks, cut off a leek and two tablespoons of frozen peas. Fry the mushrooms in butter. Cook the leeks for just a couple of minutes in boiling water or stock and throw in the peas the last minute. Drain most of the water and add to the mushrooms. Stir and then pour over the cooked penne (100 – 125 grams per person, cooked for 9 – 11 minutes). Serve with grated hard cheese.

Mediterranean Potato Salad This, too, is easy-peasy. Per person you will need: one medium-sized potato cooked through but firm, chopped into small chunks; one smallmedium salad onion, finely sliced; six pitted black olives and some salad leaves. In a bowl gently mix. Sprinkle over my drizzling dressing: In a small bowl put: 25 cl of good salad oil; 1 des-sp of white wine vinegar; 1 good tsp of Dijon mustard; salt and pepper to taste. Some people add a teaspoon or two of Cyprus honey. Drizzle over your salad and toss. Send me your news! To be published in Cyprus Gourmet, here and on-line. Email: editor@eastward-ho.com


June 24 - 30, 2015

financialmirror.com | COMMENT | 9

STEP conference focuses on challenges and tax The STEP international conference held at the Four Seasons hotel in Limassol, attended by 200 delegates from Cyprus and abroad focused on the trusts and tax industry. Other topics which were covered during the conference included strategic planning for Cyprus as a financial centre, the OECD’s BEPS project, the legitimacy of tax planning in today’s world and a jurisdictional comparative perspective of funds. Finance Minister Harris Georgiades inaugurated the conference with a speech on the current status of the economy of Cyprus and its prospects. Emily Yiolitis, the Chairwoman of STEP Cyprus stated that “whilst the economy of Cyprus is slowly improving, the road to recovery is not without challenges and targeted reforms can ensure stability and prosperity.” STEP is the leading organisation worldwide on trusts, succession and inheritance planning, dealing with cross border transactions of high net worth individuals and corporations involved in sophisticated international structures ranging from asset protection to philanthropic giving. Today STEP boasts over 20,000 members across 95 countries. They include lawyers, accountants and other trust and estate specialists.

New board for AIPFE Cyprus The Cyprus Chapter of the International Association for the Promotion of Women of Europe (AIPFE) has elected its new board for the term 2015-2018 with the following members: Anna Koukkides-Procopiou, President; Despina Papadopoulou, Vice President; Chryso Angeli, Treasurer; Marianna Charalambous, Secretary; Evanthia Koronis, Assistant Secretary; Lefki Panteli, Gender Expert; Thalia Iacovou, Communications Officer; Mahi Solomou, Press Officer; Myria Avraamidou and Georgia Neophytou, members. Antigoni Athienitis and Soula Zavou remain Honourary Presidents. Anna Koukkides-Procopiou’s message upon her re-election as President focused on the theme ‘Together, the same message’. “I have always noted that people may ignore your opinion, but they can never ignore your achievements. So, let’s go out and achieve, and empower, as many other women do the same,” she said. Koukkides-Procopiou referred to two European-funded projects which the Association is involved with, stressing the importance of women’s empowerment in AIPFE-Cyprus’ vision: “Women Fit 4 Business”, which aims to provide soft skills through training, internships and mentoring to young unemployed female university graduates, and “Gender Diversity in Decision-Making Positions”, focusing on mapping the local labour market in each partner country for training and the creation of a good practices manual.


June 24 - 30, 2015

10 | GREECE | financialmirror.com

Bailout extension on the cards Eurogroup meeting to decide on extension of bailout package to end of year

By Frederic Simon, EurActiv An extension of Greece’s current bailout package until the end of the year is at the centre of talks taking place in the Eurogroup, according to a senior EU diplomatic source who did not rule out the possibility of a third bailout plan for Athens. Greece’s current bailout plan expires at the end of June “but because there has been some delays, we haven’t had time to prepare the next steps,” said the diplomat, who was briefing French journalists on condition of anonymity on Tuesday. “The Eurogroup will probably have to discuss the extension of the existing programme,” the source indicated, saying the extension would span “several months”. “On the duration, we will see, it could be end of the year or beginning of next year.” Greece is hoping a funds-for-reforms deal will release the EUR 7.2 bln left in Greece’s bailout before the end of the month. But national parliaments may only approve the disbursement once the Greeks pass laws to enact their reform promises. This leaves Greece too little time to pass the June deadline without defaulting on its debt. Athens must repay the International Monetary Fund some EUR 1.6 bln by June 30 or be declared in default. A so-called “staff level agreement” on the review of Greece’s current bailout plan has to be concluded – possibly at the Eurogroup meeting Wednesday evening – in order to unblock the remaining funds. But even assuming the Eurogroup agrees to extend the current bailout plan, the question of a deeper restructuring of Greece’s debt will eventually return to haunt negotiators, the diplomat said, adding this would require a “political mandate”. Leftist Prime Minister Alexis Tsipras has long sought a renegotiation of Greece’s debt, which amounts to some EUR 320 bln or nearly 180% of annual economic output. Tspiras says the debt must be radically restructured if Greece is to have any chance of recovery.

A key topic in the talks currently taking place in Brussels is there “how to define this mandate”, the diplomat indicated. Asked whether additional funding for Greece or a third bailout plan was on the table, the diplomat replied: “There are financial instruments which could be unblocked – pending technical work – to cover Greece’s needs, without having to resort to new loans or aid” from EU member states. He said such instruments include, for example, a fund for the recapitalisation of Greek banks, the Hellenic Financial Stability Fund (HFSF), as well as the Securities Markets Programme (SMP) at the European Central Bank, which could both be mobilised. “So it’s possible.” The anti-austerity party Syriza won an overwhelming victory in the Greek elections on January 25, but nonetheless failed to obtain an absolute parliamentary majority. Alexis Tsipras provoked mixed reactions among his EU

counterparts, announcing that the “vicious cycle of austerity is over”. He was elected promising to end five years of austerity. Reforms offered by Athens have failed to convince the Eurogroup and the country’s creditors, and Greece now finds itself unable to pay its debts and in a more precarious situation than ever. The proposals were a bid to unlock the final EUR 7.2 bln tranche of its international bailout, which creditors have refused to release unless Greece agrees to more austerity measures. Without the bailout cash Greece will be unable to meet a EUR 1.5 bln IMF payment on June 30, and a default could send Athens crashing out of the single currency and possibly the EU. European Council President Donald Tusk called an emergency summit of Eurozone leaders on Thursday and Friday in a bid to break the deadlock.

Grexit: Hedging the unknown Marcuard’s Market update by GaveKal Dragonomics As Athens and its creditors inch painfully towards a deal that should see the release of fresh bailout funds, the probability that Greece will be unceremoniously ejected from the eurozone is diminishing. Grexit has never been Gavekal’s core scenario, however we have long held the view that while the chances of a Greek exit may have been relatively small, the damage it would have inflicted on financial markets would have been disproportionately large. The main reason for this is that Grexit would completely discredit the pledge that the euro’s adoption is irrevocable. The market would once again allot euro financial assets the infamous redenomination risk premium that the European Central Bank has worked so hard over the last few years to stamp out. This redenomination risk premium would vary across countries depending on economic and political developments, and its re-emergence would slow and probably even reverse the ongoing revival of cross-border financial flows in the euro area, with negative implications for economic growth in the region. But is the risk so clear-cut? When dealing with the unknown, what is important is not

one’s opinion about the likely consequences of an event. What really matters is what the bulk of investors and economic agents conclude. Today, there are at least two broad reasons why we might have been too pessimistic about the consequence of a Grexit. 1) Even though “Grexit” has now entered the vocabulary of official policymakers, financial markets have not panicked. It could well be that the majority of investors consider that Greece, with its Balkan-style governance and administration of Marxists and anarchists, really is an aberration that deserves a special treatment. The risk that the hard left could win an absolute majority in the upcoming general elections in either Portugal or Spain borders on zero. Even Portugal is now enjoying a substantial recovery in both economic growth and employment, and—unlike Greece—it benefits from the ECB’s massive programme of quantitative easing (QE). As a result, the gulf between Greece and the second weakest link in the eurozone is now considerable. For example, in April, the unemployment rate in Greece stood slightly more than 12 percentage points higher than in Portugal— by far the highest spread in modern history—compared with a spread of zero in May 2010. The evidence that Portugal is not Greece is now conclusive. 2) Experience shows how difficult it is to

predict the implications of a negative confidence shock. In early 2013, when the eurozone’s Germanic paymasters decided to bail-in the banks of Cyprus, hitting their depositors hard, many observers concluded that a wave of bank runs would follow. The governments of Europe’s weakest economies did not have the means to guarantee deposits with any credibility, and it would not have been surprising if households and businesses in Portugal and Spain had looked at the Cypriot bail-in and concluded that it was safer to keep their money elsewhere. But the feared exodus never materialised, and after a few weeks of uncertainty things settled down, leaving Europe’s financial system and economy completely unaffected. The Cypriot precedent demonstrates that in the absence of a direct impact, the implications of negative psychological shocks are unpredictable. Nasty domino effects may or may not result, and forecasting them is a highly speculative exercise. It is therefore conceivable that a Grexit— again not Gavekal’s core scenario—could have only modest and temporary negative implications for financial markets. Considering that all other scenarios—an 11th hour deal, or a default leading to a change of government —are all favourable for financial markets, what should investors do?

“The Cypriot precedent demonstrates that in the absence of a direct impact, the implications of negative psychological shocks are unpredictable” The recent sharp correction in bund prices offers attractive opportunities. Investors can hedge our recommended above-benchmark exposure to European equities against the possibility of Grexit by buying calls on the very liquid bund futures market. The strategy should be calibrated to ensure that each -30 to -40bp decline in bund yields offsets a -10% decline in equity prices. If the 10-year bund yield returns from 0.80% today to almost 0%, as it did in midApril, equity investors would be protected against a -20 to -25% decline in equity markets, which on the back of a -10% decline since mid-April, should be adequate. If a more positive scenario than Grexit occurs, the downside of a bund hedge should be modest as bunds, while clearly not cheap, are no longer overbought. Non-euro based investors might consider a similar hedge using US Treasuries instead of bunds.


June 24 - 30, 2015

financialmirror.com | GREECE | 11

The Greek government debt By George Theocharides Cyprus International Institute of Management

Europe and the rest of the world are watching nervously these days as the Greek drama (tragedy) is entering its last phase. There has to be some type of compromise (agreement) between the Greek government and its lenders before the end of June, or else Greece will default on its debt obligations that will likely lead to an exit from the Eurozone and return to the national currency. The Greek government is demanding that the solution needs to have a clear commitment on the part of the international lenders for a future debt relief which will make the government debt sustainable. At this point, the debt of the Greek government stands at around 177% of the country’s GDP (end of 2014). The aim of this article is to analyse what led to this explosion in debt level, and what needs to be done to keep the debt-to-GDP ratio under control.

HISTORY OF PUBLIC DEBT During the period 2008-2013 Greece experienced an accelerating debt-to-GDP ratio, growing from 103% in 2007 to 175% in 2013. Why did this happen? One reason has to do with the deep recession that hit Greece, starting in 2008 (at a negative real GDP growth rate of 0.4%) until 2013, peaking at -8.9% in 2011. Another reason are the massive fiscal imbalances throughout the period 2000-2010 that peaked at more than 15% at the end of 2009. The massive fiscal deficits and the already high pre-existing debt levels raised the yields (interest) on government debt as investors expected a higher return to compensate them for the higher risk, sending Greece into a negative “interest rate death” spiral. Isolated from the foreign capital markets, Greece was

forced to sign the first economic adjustment programme (MoU) in April 2010. In 2012, a haircut on public debt held by private creditors was imposed (around EUR 110 bln) to lower the debt level. The aim at that point was that this restructuring, coupled with lower interest payments and prolonged maturities on remaining debt, fiscal consolidation, primary surpluses and proceeds from the privatisation programme would lead to a sustainable level of 120.5% of GDP by 2020. By the end of 2014 and after some years of tough austerity measures, Greece managed to produce positive economic growth for all the first three quarters of 2014 (after years of recession), a primary surplus though fiscal consolidation, was able to fully recapitalise its banking system and pass the ECB stress tests, which created the foundations to significantly lower the debtto-GDP ratio in the coming years (by both lowering the debt burden and increasing the GDP). However, the events that materialised since last January changed the whole dynamics with the economic situation deteriorating drastically with an accelerated pace, and liquidity has completely vanished from both the government budget and the banking system. The uncertainty led to new financing gaps, and now more drastic measures will be needed to correct the situation.

EXPECTATIONS FOR THE FUTURE Greece needs to agree to a deal with its lenders even if this includes harsher measures because the alternative would be far worse. At the same time, the country needs to finally implement the structural reforms that would make the economy more competitive and productive (that includes

labour and pension reforms, as well as privatisation of stateowned enterprises). That can lead to a sustainable and healthy GDP growth which can help reduce the debt-to-GDP ratio to sustainable levels. In a non-paper provided by the Greek government during the Eurogroup meetings of last February, the Greek technocrats argued that GDP growth is as important, and even more important, than the primary surplus to reduce the debt-to-GDP ratio. They also argued that the Greek debt should be calculated in net present value (NPV) terms (as opposed to nominal terms). With an assumed discount rate of 5%, this ratio is now at 133% of GDP and can reach a sustainable level of 120% in 2020 with an annual primary surplus of 1.5% of GDP and a nominal growth at 4%. I do not disagree with the above remarks, but I would add that in order to achieve this rate of growth, structural reforms need to be implemented as soon as possible. George Theocharides is an Associate Professor of Finance at the Cyprus International Institute of Management (CIIM) and the Director of the MSc in Financial Services. www.ciim.ac.cy

Tsipras desperate to hold coalition intact ECB to raise Prime Minister Alexis Tsipras needs to ensure his coalition, ranging from Maoists to Social Democrats, will back proposals he outlined on Monday that include eliminating early retirement options, raising the sales tax, increasing taxes on middle- and highincome earners and introducing a new levy for companies with annual profit of more than 500,000 euros, according to Bloomberg. “The Greek government — somewhat surprising for a selfprofessed reform and antiausterity government — seems to have merely agreed to impose a lot more austerity through higher taxes, but offers relatively little commitment to genuine economic reform,” said Jacob Funk Kirkegaard, a senior fellow at the Peterson Institute for International Economics in Washington. Tsipras is seeking to assuage the left flank of his party — some of whom want Greece to default on its debt altogether — by focusing on tax increases for companies and high-income individuals instead of spending cuts. The Left Platform, which holds about 40 seats in parliament and is composed of former communists and others closely aligned with trade unions, could defeat the government if its members vote against the plan. European leaders said at an emergency summit in Brussels on Monday that Tsipras

is finally getting serious after being criticised for lacking good faith in earlier talks. At the meeting, they agreed to step up the pace of negotiations to secure a breakthrough that leaders can sign off at the end of the week. The possible deal got a resounding endorsement from Greece’s markets with government bonds and stocks rallying for the

second day. The yield on the 2-year bond fell 313 basis points to 21.2%. The Athens Stock Exchange main index was trading 5% higher, after surging 9% on Monday. “How the political process plays out largely depends on the number of parliament members the current government loses,” said George Saravelos, an analyst at

Deutsche Bank AG. Any substantial defections requiring the support of opposition New Democracy would open up the possibility of broader changes to the government or a referendum, said Saravelos, who calculates that between 10 and 40 Syriza lawmakers could dissent based on local media reports. Getting the support of New Democracy could be a challenge given the party’s probusiness stance and the proposed new corporate tax. Tsipras “has to explain to the people why we failed in a negotiation and arrived at this result,” deputy parliament speaker and Syriza lawmaker Alexios Mitropoulos said on Tuesday in a televised interview on Mega. “After five months of negotiations, I consider that, at the very least, the negotiation didn’t succeed.” His remarks illustrate the kind of internal opposition Tsipras will have to overcome to secure backing for an agreement that runs against his party’s pledge to end austerity. While the agreement could get parliamentary approval with the help of votes from the opposition, the government signaled on Tuesday that without enough support from its own ranks, it could lose the ability to stay in power. “If it doesn’t have the parliamentary majority with it, then it can’t remain a government,” Gabriel Sakellaridis, Tsipras’s spokesman said.

ELA cap for Greek banks The European Central Bank increased the cap on emergency liquidity for Greek lenders for the fourth time in less than a week, Bloomberg quoted a person familiar with the matter. The ECB Governing Council raised the limit on the funds in a telephone conference on Tuesday, the source said, without specifying the size of the increase. Policy makers lifted Emergency Liquidity Assistance by about EUR 1.9 bln o 87.8 bln on Monday, and are setting the aid level almost daily as Greece edges closer to a potential default. Prime Minister Alexis Tsipras is running out of time to reach a deal with his country’s creditors and end a fivemonth standoff over bailout payments that risks splitting the euro. After a day of talks on Monday, leaders from Greece’s 18 fellow eurozone countries agreed that Tsipras’s government was finally getting serious after it submitted a set of reform measures that began to converge with the terms demanded by creditors. They agreed to step up the pace of negotiations to secure a breakthrough on Wednesday that leaders can sign off at the end of the week.


June 24 - 30, 2015

12 | PROPERTY | financialmirror.com

Property deals drop 26% in May The number of property transactions fell by a quarter to 405 deals in May, compared to 511 year on year, according to data from the Lands and Surveys department. The drop, the first since November last year, occurred throughout Cyprus, the department said. However, the total number of property transactions in the first five months of the year rose 4% to 1,884 compared to 1,810 in January-May last year. In May, property transactions fell 26% in Nicosia, -17% in Limassol, -12% in Larnaca, -35% in Paphos and -55% in Famagusta. Of the 405 contracts in May, 61% were domestic buyers, while 36% were overseas buyers. During the first five months of 2015, property sales to the domestic market have risen 65, while sales to the overseas market are up just 0.2%.

Aristo Sales and Operations Manager wins FIABCI award Aristo Developers’ Sales and Operations Manager, Tasos Stavrou, was recently awarded the FIABCI Excellence Award during the 66th annual FIABCI congress held in Kuala Lumpur. The event, attended by 1,000 participants from around the world, provided the ideal platform for industry experts to showcase the world’s leading development and housing projects. The “FIABCI World Prix d’Excellence” is awarded to individuals and companies in recognition of their contribution and achievements in the property and real estate sector. “Receiving the award is a true honour for our company,” said Stavrou, who is also Vice

President of the board of FIABCI Cyprus, and President of FIABCI Young Members. “Since its inception, FIABCI has played an important role, demarcating how business is conducted, how capital is raised, ensuring a code of ethics is adhered to, and more. FIABCI is even represented in the U.N., and we work closely with this body in ensuring that real estate growth is sustainable.” Founded in 1945, FIABCI is a worldwide network federation, open to all professionals involved in the property and real estate industry, enabling its members to benefit from mutual business opportunities, develop networks and optimise business potential all over the world.

Kalopanayiotis taps into €23m funds, €174m for Nicosia President Nicos Anastasiades inaugurated a public escalator in the scenic village of Kalopanayiotis on Sunday, praising the community for effectively tapping into EU structural and rural funds. “We continue to face major hurdles and have a long way ahead of us, but we will continue on the path of reforming public spending, but also the state’s best possible participation in development projects,” he said, after riding in the EUR 1.4 mln project. The elevator project, that is 50% financed by EU structural and regional funds, was built to solve the problem of transporting tourists and locals from the upper levels of the village to the traditional centre below, without affecting or damaging the scenic and cobbled narrow historic streets. Praising community leader and creator of the Casale Panayiotis agrotourism hotel and spa, Yiannakis Papadouris, the president said that the village has utilised EUR 9 mln in funds for infrastructure projects, while a further EUR 14 mln were invested privately. “Since 2001, when Papadouris took charge as community leader, specific projects were introduced that helped prevent the downfall of the village and revived it to the stage that it won the EDEN prize as a European destination of excellence for tourism and revival of natural communities.” In 2002, the president added, an ambitious project was presented to the then Cabinet and so, upon EU accession in 2004, Kalopanayiotis rightly chased EU funds. Anastasiades added that having already announced public projects worth EUR 60 mln, last week he unveiled another programme for EUR 173.9 mln in investments in Nicosia district and the capital, that should help improve the quality of life, implement development projects that will lead to growth and boost employment. The ‘mature’ projects were announced during a meeting with the mayors of greater Nicosia municipalities, MPs, community leaders and other stakeholders. Anastasiades said the projects were selected on the basis of their maturity, that is, the fact that the projects received the necessary licenses and a tender can be launched

immediately. The projects in Nicosia include the reconstruction of the capital’s high streets, a network of cycle paths, underground parking, the restoration of the Public Modern Arts Gallery and the old Municipal Theatre, the beautification of the area of the old GSP Stadium and restoration of the old Secretariat building and the Ministry of the Interior. The project list also includes the restoration and reconstruction of the Pancyprian Gymnasium of Nicosia, a school founded in 1812, at cost of EUR 9.4 mln. Anastasiades said a architectural tender will be launched in 2016 for the new Archeological Museum to be constructed in the old Nicosia General Hospital with a total cost of EUR 50 mln. Outlying projects include the reconstruction of Tseriou Avenue and its connection with the Avenues of Strovolou and Spyrou Kyprianou, Aglantzia Avenue and parts of Larnaca and Famagusta Avenues, the home for elders in Palekhori, a new police station in Evrikhou, anti-flood works in Pera Khorio Nisou with a cost of EUR 1 mln, the Solea regional sewage system, a wastewater treatment and recycled water installation for western Nicosia amounting and the extension of the Central Prisons.


June 24 - 30, 2015

financialmirror.com | PROPERTY | 13

Paralimni marina and other projects µy Antonis Loizou Antonis Loizou F.R.I.C.S. is the Director of Antonis Loizou & Associates Ltd., Real Estate & Projects Development Managers

It was upsetting to read the announcements of Paralimni Municipality, as well as that of Ayia Napa, suggesting bureaucratic delays to take a final decision on vital projects planned or underway in these areas. It is assumed that most boat owners who would be looking to berth their yachts or other vessels in marinas on the east coast are from Nicosian, consist primarily of speedboats and a very small proportion of small sailboats, albeit small in number, due to the lack of proper shelter. In Paralimni, there is of course a fishing shelter, which is exploited by a number of local fishermen who reportedly sublet their berths to boat-owners from Nicosia. The absence of a proper marina in either resort town has led to ingenuity of some “boat keepers” who have transformed farmland to landbased parking space for boats throughout most of the season. The owner calls the boat keeper, who then lowers the boat into the water and the owner must swim to get to the boat and the same to return ashore. The cost depends on how many times this system is used and usually amounts to 1,000-1,500 euros per year, equal to the cost of rental of a berth in any marina. It is also assumed that the Famagusta area of eastern Cyprus, faces the most injustice, both because of the limited investments in infrastructure, support services and tourism, as well as because of seasonality. Many hopes were raised when there was talk of a golf course in the area, where some investors started to show interest but eventually backed out because of changing terms and conditions. I do not expect this golf course ever to become a reality, unless the government includes this project on its premium list of strategic investments, by fast-tracking all the necessary operating and building permits and allowing for a speedy attraction of foreign investors. Now we expect to see progress on the construction of the Ayia Napa marina, thanks to the Egyptian investor who has been found and is willing to pump in some 300 mln euros. If all goes well, the project is expected to be completed (albeit still pending various issues and permits) within the next two and a half years. Both the construction of this marina, and the golf-marina project in Paralimni will have a positive impact on extending the tourist season in the area, which already accounts for 30% of all foreign arrivals a year, despite the fact that the area is fully operational for only six months. Naturally, with the reserved, but positive momentum in the Cyprus talks, we must not forget that we may see the return of Famagusta, which too will give a huge boost to tourism and help extend the season, while the construction frenzy to rebuilt the abandoned city, could provide hundreds, if not thousands of new jobs, reviving the economic activity of the whole area.

Artist’s concept of the Ayia Napa marina project

However, the municipality of both Ayia Napa and Paralimni, as well as other municipalities in the area should organise themselves better in order to benefit from all these development. The most important issues are the misspellings in English of many signs and communication in Ayia Napa, the gross tolerance by Paralimni’s mayor of the ugly containers along the beach of Protaras that have been converted into holiday homes, the abandonment of the volleyball pitch and the subsequent management to other on behalf of the municipality (a complaint I raised two years ago but has only now been discovered by the Auditor General), the creation of futsal pitches between Ayia Napa and Paralimni to encourage the youth, the elimination of “poachers” who promote restaurants and souvenir shops, overcharging at clubs mainly of alcoholic drinks, the absence of proper public transportation under pressure from the gangs of taxi drivers who charge 8 euros for a 4 km trip who might even beat you up, as was the case recently with Australian tourists. Therefore, the construction of the Paralimni and Ayia Napa marinas alone will not solve the problems. We need determined people to be in charge, a culture change and a love for their area by the ‘natives’ themselves who often abuse the system as was the case lat year of some locally hired public workers skimming the revenues from the hire of sunbeds and umbrellas. No wonder the municipality has no cash. However, as we all live in small communities where one is close friends or even related to the other, we should, perhaps, speed up the study into the consolidation of the municipalities of Ayia Napa, Paralimni, Dheryneia and Sotira,

COMMERCIAL BUILDING PLOT FOR SALE IN NICOSIA Suitable for retail/office construction. Located in a very desirable location, opposite Marks & Spencer and within 50 mtrs of Acropolis Park. Plot Area: 556 sq.m. Max. Building Cover: 50% Max. Building Height: 24 meters Max. No. of Floors: 6 Road Frontage: Approx. 24 meters Price: €650,000 For more info please contact us at: 99317468

for the benefit of all. The fact that a number of town officials and elected deputies can block the state from implementing EU directives on the liberal use of water sports, as well as comments by respected MP Stella Kyriakides that operators “should have experience in the area of at least 3-5 years” is the worst that could be done. Such mentalities suggest that those few who have been exploiting watersports licenses will remain there for life, barring the arrival of any new entrants. In an effort to boost competitiveness and reduce profiteering, the greatest part of responsibility lies with the local municipalities that should create an ‘entertainment guide’ in print or on their websites with full transparency, obliging all service providers to publish their rates for all to see for restaurants, bars, watersports, rentals, etc. This could also be a platform where complaints about overcharging can be properly posted (supported with the relevant proof). This could be too innovative and perhaps unique for Cypriot standards. For example, a tavern in Protaras charged us 25 euros for a bottle of wine, while the same wine was served in a Sotira tavern for 18. Unfortunately, as things are nowadays, with the overcharging of alcoholic drinks, the per-person cost for a drink is almost the same as the cost for food. A little crazy for a country that produces its own wine, don’t you think? Such examples and suggestions ought to make us all think about year-round tourism, both for the Nicosians who need a short break every now and then, and certainly for all foreigners. But in order to succeed, we should all have an open mind and start thinking clearly for a charge. www.aloizou.com.cy - ala-HQ@aloizou.com.cy


June 24 - 30, 2015

14 | WORLD MARKETS | financialmirror.com

China mania reaches equities By Oren Laurent President, Banc De Binary

Over the past 12 months, China’s Shanghai Composite index has grown by a whopping 152%. The market capitalisation of Chinese stocks has surpassed $10 trln for the first time, and it is clear that traders are flocking to invest in Chinese assets. The only question is: where are all these investments coming from, and is the rising market price still rooted in the fundamental data? There is currently a debate raging within the analyst community regarding what’s next for Chinese stocks. Bill Gross, the former “Bond King,” announced in early June, that we are on the verge of “the short of a lifetime.” Hao Hong, chief strategist of Bank of Communications International in Hong Kong, begs to differ with Gross. “Gross is not right,” Hong said flatly. “The Chinese market has gone up substantially this year but just because it’s risen too high, too fast doesn’t mean it has to crash down.” It is crucial to understand the magnitude of China’s sudden spike in market capitalisation. China’s Shanghai Stock Exchange is now the third-largest exchange in the world. In contrast, companies with a primary listing in the US are valued at a total of $25 trln, making America’s New York Stock Exchange, and Nasdaq Exchange the world’s top two largest exchanges. With a wave of voices now zoning in to what’s happening in China, it’s important to understand what is causing this optimism, and who is buying up Chinese stocks at this insane pace. David Wertime, a Senior Editor for Foreign

Policy Magazine, believes the rally can be attributed to the Chinese media, and that the recent rush of investments into Chinese stocks is coming from investors within China itself. Wertime writes: “The latest bull market began with the cooperation of China’s massive, state-controlled media apparatus.” Wertime’s assessment is supported by the most recent data from EPFR Global, which reports that, in the second week of June, foreign funds sold off $6.8 bln of Chinese assets. It appears that a group of international traders took Bill Gross’ advice to heart, and folded their cards, fearing that the trend was over. Despite these new developments, there is still no shortage

of analysts continuing to ride out the trend. Uwe Parpart, Head of Research at Reorient Financial Markets, has said: “We went over to pay a visit to the [Shanghai] stock exchange a few days ago. If you take a look at what these companies are, a lot of them are well founded, doing a good job.” One thing that’s for sure is that China’s middle-class is growing. In the month of February, the Chinese cinema market surpassed the American movie market for the first time in history. There is adequate proof that the standard of living in China is rising, making it possible for the middle-class to enjoy leisurely activities, like trips to the theatre. In addition, because Chinese citizens are getting wealthier, that also means that they now also have the luxury of investing in the stock market. This line of thinking supports the premise that Chinese money rushing into Chinese stocks is not only about “irrational hype.” What we seem to be seeing is the gradual development of the world’s second largest economy.

Pound bulls are losing momentum, NZD continues to fall Markets Report b By Jameel Ahmad, Chief Market Analyst at FXTM

It was an impressive rally driven by continual USD weakness providing upside momentum, but it appears that the GBPUSD bulls are finally losing steam. The Pound slipped 100 pips against the Dollar on Monday and while some might be right to suggest this could be another consolidation before the next leg higher, it is more likely a signal that the GBPUSD is beginning to erase some of the unexpected 600 pip gains over the past fortnight. As mentioned before, the weak sentiment towards the USD has been providing direction for the Pound and the GBPUSD would be vulnerable to downside pressures when trader appetite towards the USD returns. While there are very few who are questioning that the UK economic outlook is not attractive, we are at least a year away from a UK interest rate rise and this will continue to limit how high the Pound can extend against the Dollar. There is also valid argument to suggest that the USD is currently oversold, especially considering that the Federal Reserve will be raising US interest rates over the next couple of months, which I expect in September, pressuring the Pound. This also means that any GBPUSD upside beyond 1.60 would be ambitious unless UK interest rate expectations are pushed forward and if it were to occur, it would more likely be motivated at this stage by widespread USD weakness. Global markets rallied on the increased prospects of a deal between Greece and its creditors. The improved market sentiment stretched globally with NASDAQ closing at a record level, and both the German DAX and FTSE 100 surged to the upside. If recent history is anything to go by, there are likely to be a few more twists and turns before a deal is concluded but this is at least a positive sign. The strong gains in global markets shows how much investors

want a deal to be reached and everyone would much prefer it to be this way, rather than for the uncertainty over a looming default. One of my greatest concerns over this ongoing situation is that markets have not priced a default in the slightest and the potential global implications of such an event remain unclear. This is a risk all investors would want to avoid. The Euro managed to rebound against the Dollar on optimism that progress on a Greek deal is finally being reached with a variety of reports emerging that Greece submitted new proposals to Eurogroup officials. This

pushed the EURUSD marginally above 1.14 but as we have repeatedly seen over the past few weeks, there are traders out there that see this as a sell-on rally opportunity and the pair wasted little time in once again pulling back quickly to 1.1320. Until the Euro managed to surpass what many see as super strong resistance against the USD at 1.1450, gains for this pair appear capped. If you are a Euro buyer, chances of gains in the short-term against the Pound are more likely than against the USD.

Despite the continual mixed sentiment towards the USD, the NZDUSD continues to fall with this stating a great deal about the weak attraction towards the NZD following the unexpected interest rate cut from the Reserve Bank of New Zealand (RBNZ) a week ago. After the initial interest rate cut, economic performances from the New Zealand economy suggest that the pressure will remain on the RBNZ to continue cutting rates. This is quite a contrast to the spectacular rally the currency encountered this time last year, but the economic sentiment has changed and investors are pricing in further declines. The NZDUSD has now sunk below the psychological 0.69 support level, which is likely going to lead to a further downside towards 0.66 at some point in the future. Although WTI crude has advanced back above $60, the lack of gains for this commodity despite the weak sentiment towards the USD demonstrates that there are limited buyers in the market for WTI. This is no major surprise considering OPEC left production levels unchanged a fortnight ago and you would expect there to be hesitation from investors to enter new positions as a result of that. While reduced trade surpluses from the U.S. are becoming a regular fixture of the weekly inventory reports, it is clear investment in oil production from OPEC members is increasing and this will offset reduced inventory from elsewhere. Concerns over there being an oversupply in the market has been a dominant theme when it comes to discussing oil for a year now and it will not be changing anytime soon, which will also continue to weigh on investor sentiment. OPEC supply is now at its highest level since August 2012 and with the total rig counts in the U.S. declining at their slowest rate since December at the end of last week, markets are receiving further confirmation that low oil prices are set to stay. FXTM is an international forex broker. ForexTime Limited is regulated by the Cyprus Securities and Exchange Commission (CySEC), and FT Global Limited is regulated by the International Financial Services Commission (IFSC).


June 24 - 30, 2015

financialmirror.com | MARKETS | 15

The Fed and dollar depreciation Marcuard’s Market update by GaveKal Dragonomics So no surprises. A slightly more dovish Federal Open Market Committee stuck to the script of future monetary policy moves being data dependent. Since the US central bank last week scaled back its 2015 GDP growth forecast to 1.8%-2%, the implication is that rate increases, even if they start in September, will be a gradual affair. Investors liked what they heard as this suggests that Goldilocks lives, and a “not-too-hot, not-too-cold” scenario remains possible for the rest of the year—the S&P 500 rose 0.2%, 10-year treasury yields fell to 2.27% and the DXY dollar index drifted lower by 0.9%. We think the market got it about right, and the dollar will continue to trend lower on a softish growth outlook. The cut in the Fed’s 2015 growth forecast from an earlier 2.3-2.7% partly reflects the soft patch in 1Q15. But Janet Yellen was also clear in stating that netexports have been a big drag. We think this is largely due to the strong US dollar, which will remain a headache for US producers. It is clear that the rise in the dollar’s real effective exchange rate since 2011 is now causing real pain for the US tradable sector, especially manufacturing. Even as the property market perks up with the onset of summer, there is little sign of any recovery for metal bashers. US industrial production for May fell by -0.2% MoM, so there is little chance of a 2014 repeat, when both manufacturing and services picked up steam in the second half after a slow start to the year. Last week, our analyst Charles argued that his key indicators were offering an almost entirely neutral reading, but he tended toward a negative view, implying US dollar strength. Together with US economist Will Denyer, we tend to have a mildly more optimistic view, which suggests the DXY is unlikely to rally substantially. History, of course, tells

www.marcuardheritage.com

us that a further dollar spike cannot be ruled out, but any gains will render the US even more uncompetitive, in turn forcing the Fed to keep policy loose. In the absence of economic overheating, the chances of the Fed being pushed into accelerated rate hikes is low. For this reason the softer growth outlook suggests that the eventual rate hike trajectory will be more gentle than might reasonably have been assumed at the start of the year. By contrast, the European economies are showing increased signs of reflation as corporate lending and crossborder credit flows continue to improve. As such, we think the pendulum in currency markets will swing back in favour of the euro. After all, the dollar rally, which started last year, was driven by a sharp divergence opening up between a

What to expect from Nike Nike Inc. (NYSE: NKE) is scheduled to report its fiscal fourth-quarter results on Thursday. The consensus estimates from Thomson Reuters call for earnings per share (EPS) of $0.83 and $7.68 bln in revenue. In the same period of the previous year, Nike posted EPS of $0.78 and revenue of $7.42 bln. The company is getting even bigger now. The NBA and Nike announced an eight-year global merchandising and marketing partnership that will make Nike the official on-court apparel provider beginning with the 2017-18 season. This deal will make Nike the first apparel partner to have its logo appear on all on-court uniforms. The deal is reported to be worth over $1 bln. Basically Nike will replace Adidas as apparel provider to the NBA in two years. Both Nike and the NBA do have a history together, as Nike has been a global marketing partner of the NBA since 1992.

WORLD CURRENCIES PER US DOLLAR CURRENCY

CODE

RATE

EUROPEAN

growing US and deflating eurozone. With those dynamics having gone into reverse, currency markets are likely to adjust. As for timing, the “dot plot” made by FOMC members indicates that a US rate hike will come sooner rather than later (we really have no insight as to which month). However, the experiences of the last four rate hike periods has been for the DXY to depreciate in the period following the lift-off in rates—we expect a re-run this time around. The Yellen Fed has thus far managed to shape expectations without causing big shocks, and so the chance of a 2013-style “taper tantrum” experience, sparked by a sudden shift in communication, seems less likely. So long as this pattern continues to hold, then both the fundamentals and the institutional proclivities of this Fed point to the dollar having likely topped out.

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.

The Financial Markets

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

15306.5 1.5783 1.7428 24.2303 6.6494 13.944 1.1221 2.242 276.32 0.62633 3.077 0.3826 18.65 7.7943 3.7171 3.9934 54.4618 8.2211 0.9321 21.55

AUD CAD HKD INR JPY KRW NZD SGD

0.7718 1.2342 7.7525 63.5925 123.69 1104.45 1.4615 1.3382

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

0.3770 7.6107 28690.00 3.7817 0.7080 0.3020 1507.00 0.3850 3.6410 3.7501 12.1525 3.6729

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

1.042 186.04 2.6719

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

Interest Rates Base Rates

LIBOR rates

CCY USD GBP EUR JPY CHF

0-0.25% 0.50% 0.05% 0-0.10% -0.75%

Swap Rates

CCY/Period

1mth

2mth

3mth

6mth

1yr

USD GBP EUR JPY CHF

0.19 0.51 -0.08 0.06 -0.82

0.24 0.54 -0.04 0.09 -0.81

0.28 0.57 -0.01 0.10 -0.79

0.44 0.73 0.06 0.14 -0.72

0.77 1.02 0.17 0.25 -0.63

CCY/Period USD GBP EUR JPY CHF

2yr

3yr

4yr

5yr

7yr

10yr

0.91 1.11 0.13 0.15 -0.72

1.26 1.36 0.23 0.17 -0.59

1.55 1.56 0.38 0.21 -0.42

1.80 1.72 0.54 0.28 -0.23

2.14 1.96 0.86 0.42 0.09

2.45 2.18 1.22 0.62 0.45

Exchange Rates Major Cross Rates

CCY1\CCY2 USD EUR GBP CHF JPY

1 USD

1 CHF

1.5781

1.0731

0.8086

1.4065

0.9564

0.7207

1 EUR 1 GBP 1.1220

0.8913

OpeningRates 100 JPY

0.6337

0.7110

0.9319

1.0456

1.4706

0.6800

123.67

138.76

195.16

0.5124 0.7535

132.71

Weekly movement of USD

CCY\Date

26.05

02.06

09.06

16.06

23.06

CCY

Today

Last Week

USD GBP JPY CHF

1.0881

1.0883

1.1254

1.1224

1.1212

0.7042

0.7155

0.7333

0.7189

0.7109

132.45

135.47

140.04

138.55

138.60

1.0300

1.0266

1.0416

1.0424

1.0389

GBP EUR JPY CHF

1.5781 1.1220 123.67 0.9319

1.5613 1.1224 123.44 0.9287

%Change -1.08 +0.04 +0.19 +0.34


June 24 - 30, 2015

16 | WORLD MARKETS | financialmirror.com

Should Facebook be worth more than Wal-Mart? By Jon C. Ogg Comparing companies by market cap does not always provide a clear picture, but it should offer at least some scope of market perception by investors versus real world finances behind a company. So, what are investors supposed to make of it when they see that Facebook Inc. (NASDAQ: FB) has passed Wal-Mart Stores Inc. (NYSE: WMT) in total market capitalisation? Facebook’s late-Monday trading valued the company at $238 bln, versus $234.5 bln for Wal-Mart. Wal-Mart ranks currently as the 11th largest member of the S&P 500 Index, or tenth in order of market cap if you account for two classes of Google shares. It turns out that going into the weekend, the year-to-date performance of Wal-Mart was -14.25%. Facebook’s performance in 2015 had been a gain of 5.75%. Still, going back a year, the numbers were far more exaggerated: Facebook was up over 28% versus almost a 2% drop in Wal-Mart. Seeing moves like this often make investors scratch their heads. Is it better to occupy everyone’s free time as your business or to sell them all the things they need for their lives? It is not an easy question to answer, but here are some basis statistics and figures on each: Total headcount: roughly 10,000 at Facebook versus 2.2 mln for Wal-Mart; 2014 revenue: $12.46 bln for Facebook vs $485 bln for Wal-Mart;

2014 operating income: $2.92 bln at Facebook vs $16.8 bln for Wal-Mart; Expected 2015 revenue: $17 bln at Facebook vs $488 bln for Wal-Mart; 2014 selling general and admin: $2.65 bln for Facebook vs $93.4 bln for Wal-Mart; 2014 income tax expense: $1.97 bln at Facebook vs $7.98 bln at Wal-Mart; 2015 P/E ratio: 42 at Facebook vs 15 for Wal-Mart; 2016 P/E ratio: 32 at Facebook vs 15 for Wal-Mart; Dividend yield: 0% at Facebook vs 2.7% at

Wal-Mart. Investors simply cannot use many of the traditional metrics when comparing a superhigh growth company like Facebook to a very established retail giant like Wal-Mart. Still, it is always interesting to see some of the most basic data compared to each other when this sort of price action is concerned. The performance disparity here has investor expectations currently at similar levels on each stock. Facebook’s consensus analyst price target implies upside of just over 13% to the stock’s current price. That is

versus a consensus target of $80.50 for WalMart, implying upside of 10.6% on the surface, or an implied expected gain of over 13% as well if you include Wal-Mart’s dividend. Sam Walton and Mark Zuckerberg were two very different people, but they have more in common than most people think — they both took over America. One took over retail, and one took over social media. Now the world’s leader in social media is worth more than the world’s largest retailer. (Source: 24/7 Wall St.com)

Will falling coffee demand hurt Keurig Green Mountain and Starbucks? By William Bias On Monday morning, Reuters cited a USDA report that indicated that forecast coffee consumption in the United States will fall to “23.7 million 60-kg bags in the upcoming 2015/16 season,” which represents a 1.25% decline from the “year that ends in September.” Reuters gave indication of the popularity of single serve pods such as Keurig Green Mountain Inc.’s (NASDAQ: GMCR) K-Cups. People formerly brewing coffee in traditional coffee machines typically utilised more coffee grounds than they needed. The single serve pod enables consumers to make the exact amount needed. This means less waste and a smaller impact on the environment, which caters to the preference of the modern green consumer. If history is any indication, more efficient coffee consumption will only help Keurig. In the most recent quarter, Keurig saw its pod sales increase 7%. A 14% increase in serving volume and a 1% price increase contributed to revenue expansion in that segment. In fiscal 2014, Keurig Green Mountain saw its portion pack sales expand 13%, with an 18% contribution from volume. Keurig coffee also possesses a pretty diverse K-Cup product line, selling teas and hot chocolate, and it will introduce the Keurig Kold system later this year. However, there are indications that this trend may reverse or slowdown. In the most recent quarter, Keurig saw its brewer and accessories sales decrease 23%. In fiscal 2014, the company saw its brewer and accessories sales contract 1%. Fewer people purchasing the brewers could mean a leveling off, or even a decline, in pod purchases over the long term. If domestic demand for coffee continues to decline, Starbucks Corp. (NASDAQ: SBUX) possesses a fairly diverse

product portfolio with its teas, cold refresher drinks, craft carbonated sodas and smoothies that fall within its core competency of beverages. Moreover, the company harbours a strong culture of innovation. Starbucks likes to keep the consumer and the public engaged with new products. Globally, coffee consumption forecasts are trending upward, according to the USDA report, which means Starbucks, with its global reach, will benefit. Conversely, Keurig mostly operates in the United States and Canada. Wall Street feels that Keurig possesses greater potential due to its low valuation. Thomson/First Call has a mean target price of $116.69 per share, which represents a 40% increase over its current stock price. However, Wall Street feels that Starbucks has already run its course. The consensus target price is pegged at $55.40, a mere 2% over its current stock price. (Source: 24/7 Wall St.com)


June 24 - 30, 2015

financialmirror.com | WORLD | 17

The tragedy of the climate commons By Petros Sekeris By now, the danger from climate change and other forms of environmental degradation is so evident that it seems crazy to ignore it. And yet the world has failed thus far to devise an adequate response to the problem. Our first stab at a solution, the 1997 Kyoto Protocol, set only modest goals and failed to include the world’s biggest polluters. The effort in Copenhagen in 2009 to craft a more potent global agreement ended in a breakdown of negotiations. Our collective failure to take action is not the result of having chosen leaders who are insane or irrational. The reason we seem incapable of coming together to protect the climate is known as the “tragedy of the commons”: a shared resource tends to be rapidly depleted because no single actor – whether a country or a person – considers how their actions affect other users. In other words, because you reap all of the benefits, but suffer only part of the costs, you are tempted to over-exploit the resource. And, so far, there is little reason to believe that we are on track to find a way to ensure a happier ending. The soon-to-be-endangered Atlantic bluefin tuna is one example. We have a shared interest in preventing the species from being fished to extinction. And yet individual fishermen have little reason not to catch as many tuna as possible, as any animal that escapes their net will likely end up in another’s. A similar logic applies to

countries considering fishing quotas; as a result, bluefin stocks are running low. One approach to ending the tragedy of the commons was devised some 50 years ago by the economist Ronald Coase. His solution was to assign property rights to the shared resource, compensating the losers. With private ownership established, market mechanisms could restore efficiency. Such a solution might work for fish, provided that migrating populations could be tracked; but it is far harder to apply it to something like the climate. How, after all, would one assign property rights to atmospheric composition? The alternative approach – embodied by the Kyoto Protocol – is to implement quotas limiting individual actors’ permissible greenhouse-gas emissions. Only then is a market created to allow actors to buy the emissions permits they need and sell those they do not use. In theory, this approach provides an incentive for the participants to cooperate, as the arrangement’s breakdown would accelerate the depletion that all have agreed to avoid. In practice, however, these types of deals are difficult to conclude and often are violated. For starters, domestic politics can pose an obstacle to participation in international treaties, especially when policymakers facing re-election are dependent on the support of interest groups with goals that run counter to the public’s welfare. Decisions made during US President George W. Bush’s two terms in office offer an illuminating contrast. In 2001, during his first 100 days in office, Bush blocked or overturned many laws and regulations

protecting the environment, and he put a definitive end to American participation in the Kyoto Protocol. The mining and oil industries – important sources of support for his next presidential election campaign – had gotten their money’s worth. Once Bush’s re-election was secured, however, he had less incentive to seek the support of these powerful lobbies. During his second term, Bush created the world’s largest ocean preserve – a 360,000-squarekilometre area around the Hawaiian Islands. Because Bush was constitutionally barred from seeking a third term, the way was opened for more environmentally friendly policies. Another impediment to cooperation is geopolitical. If conflict over valuable resources is unavoidable, as examples throughout history suggest, there is little reason for a country not to exploit a given resource to the maximum possible extent prior to the emergence of scarcities. To the extent that countries believe that resourcebased conflict is inevitable in the future, negotiations to limit resource depletion become more likely to break down in the short run. Of the two obstacles, domestic interestgroup politics is the more easily surmountable. Over the past two centuries, political leaders have become more accountable to constituencies within and outside of their countries’ borders, and voters have become less susceptible to lobbying groups and the media. Further education of the electorate may be the key to speeding up this process. The geopolitical concerns are more difficult to address. The challenge of

persuading countries to cooperate is similar to the one governments have always faced in inducing their citizens to contribute to the common good; everyone benefits from good roads, but most people would prefer not to contribute to the cost of their construction. According to the American economist Mancur Olson, these types of cooperation problems are easier to solve when there are as few decision-makers as possible. Within a country, the problem is overcome by providing governments with the coercive capacity to collect taxes, redistribute public goods, and mediate conflicts between citizens. By extension, one solution to the global problem would be for all of humanity to be ruled by a universal government, accountable to its constituents, and endowed with the authority to enforce its decisions. Such a scenario is of course extremely unlikely; nation-states will never agree to hand over their sovereignty to a world government. In the absence of alternatives, the best solution, it seems, would be a reduction in the number of actors – a return to a bipolar world in which two superpowers decide for themselves and their subordinates. But, while this solution would contain the problem of the commons, the dangers could outweigh the benefits. Last time, international cooperation was underpinned by fear of blowing up the planet. Now, too, fears of mutually assured destruction could re-emerge. Petros Sekeris is Principal Lecturer in Economics at the Department of Economics & Finance, Portsmouth Business School. © Project Syndicate, 2015. www.project-syndicate.org

Revolution and reaction in biopharming By Henry I. Miller Obtaining medicines from plants is not new. Aspirin was first isolated from the bark of the willow tree in the eighteenth century. And many other common pharmaceuticals, including morphine, codeine, and the fiber supplement Metamucil, are purified from the world’s flora. More recently, scientists have developed techniques that take this process a step further, using genetic engineering to induce agricultural crops to synthesise high-value pharmaceuticals. Known as “biopharming,” the great promise of this technology emerged about 15 years ago, with clinical trials of vaccines and drugs produced in bananas, tomatoes, and tobacco. Unfortunately, progress has since stalled, owing to the vehement risk-aversion of regulators. One early example of biopharming was the production by the biotech company Ventria Bioscience of rice that contained two human proteins, lactoferrin and lysozyme. Once grown and harvested, the rice kernel is processed to extract and purify the proteins for use in oral rehydration solution for treating diarrhea, which is surpassed only by respiratory diseases as the leading infectious killer of children under the age of five in developing countries. The proteins have the same structure and functional properties as those found in natural breast milk, and the process for extracting them is analogous to that used routinely for the production of therapeutic proteins from organisms like bacteria and yeast. Research in Peru showed that fortifying an oral-rehydration solution with the proteins extracted from Ventria’s rice substantially lessens the duration of diarrhea and reduces the rate of recurrence – a near-miraculous advance for people in the developing world.

“The food industry’s worries that biopharmed plants could contaminate their products are overblown. And in any case, the risk can be mitigated in several ways, most obviously by using non-food plants like tobacco” But regulators can undo miracles, and they regularly do. When Ventria approached the US Food and Drug Administration in 2010 for recognition that these proteins are “generally recognised as safe” (a regulatory term of art), it received no response. Without an endorsement by the FDA, the company was unwilling to market the product, and so it remains unavailable, tragically depriving children in developing countries of a life-saving therapy. Even field testing biopharmed plants has proved problematic. In 2003, the US Department of Agriculture announced onerous new rules for testing crops engineered to produce pharmaceuticals. The ostensible objective of the regulation is to avoid contaminating food supplies with drugs, especially when edible crops are used to produce them. But the food industry’s worries that biopharmed plants could contaminate their products are overblown. And in any case, the risk can be mitigated in several ways, most obviously by using non-food plants like tobacco. In fact, even if biopharmed plants were to contaminate food crops, the likelihood that consumers would end up with harmful amounts of prescription drugs in their corn flakes, pasta, or tofu is very small. Gene flow is an age-old process that is well understood by farmers, who grow hundreds of crops, virtually all of which have been genetically improved in

some way with a variety of techniques. As a result, they have developed meticulous strategies for preventing pollen crosscontamination in the field – when and if it is necessary for commercial reasons. Even if some crops were to become contaminated, the chances that active drug substances would be present in the final food product at sufficient levels to have an adverse effect on human health would remain very small. The biopharmed plant would be pooled into a large harvest, where its pharmaceuticals would be heavily diluted. The active agent would then need to survive milling and other processing, and then cooking, and it would need to be orally active, which protein drugs most often are not, because they are digested in the stomach. The chance of all of this occurring is not zero, of course. But, with a combination of factors – including natural selection, farmers’ pursuit of their commercial self-interest, and liability concerns – militating against such a possibility, the odds are very long, and the impact would almost certainly be very low. When you weigh this against the possibility of the development of the drug industry’s Next Big Thing or, at the very least, a new method to produce high-value compounds at low cost, regulators’ preoccupation with such unlikely events appears to be misplaced. Biopharming has much to offer us. If we are to reap what we can sow, however, we will need reasonable, science-based policies from regulators worldwide. Sadly, to borrow a phrase from the late Nobel laureate economist Milton Friedman, that is like wishing that our cats could bark. Henry I. Miller, a physician and molecular biologist, is Fellow in Scientific Philosophy and Public Policy at Stanford University’s Hoover Institution. He was the founding director of the Office of Biotechnology at the US Food and Drug Administration. © Project Syndicate, 2015 - www.project-syndicate.org


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A winning strategy At the beginning of this year, I proposed a strategy for Ukraine that recognised that sanctions on Russia are not enough. They must be coupled with a political commitment by Ukraine’s allies to do whatever it takes to enable the country not only to survive, but to succeed in implementing far-reaching political and economic reforms, despite the implacable opposition of Russian President Vladimir Putin. Sanctions, though necessary, are harmful not only to Russia but also to Europe’s economy. By contrast, enabling the Ukrainian economy to flourish would benefit both Ukraine and Europe. Even more important, sanctions by themselves reinforce Putin’s narrative that Russia is the victim of a Western or Anglo-Saxon plot to deprive it of its rightful place as a great power equal to the United States. All of Russia’s economic and political difficulties, the Kremlin’s propaganda machine argues, have resulted from Western hostility. The only way to counter this narrative is to combine sanctions with effective support for Ukraine. If Ukraine prospers while Russia declines, no amount of propaganda will be able to conceal that Putin’s policies are to blame. Unfortunately, Europe’s leaders have chosen a different course. They treat Ukraine as another Greece: a country in financial difficulties – and one that is not even a European Union member state. This is a mistake. Ukraine is undergoing a revolutionary transformation, and the current government is probably the one best able to deliver radical change. There are indeed some significant similarities between the “old Ukraine” and Greece: both suffer from a corrupt bureaucracy and an economy dominated by oligarchs. But the new Ukraine is determined to be different. By keeping Ukraine on a short financial leash, Europe is jeopardising the country’s progress. In a sense, Europe’s failure to recognise the birth of a new Ukraine is not surprising. Spontaneous uprisings occur frequently; the Arab Spring, for example, spread like a wave across North Africa and the Middle East. But most revolts do not endure; their energy is exhausted quickly – as with Ukraine’s Orange Revolution a decade ago. Today’s Ukraine is one of the rare cases in which protest is transformed into a constructive, nation-building project. Although I participated in that transformation process, I

By George Soros

confess that even I underestimated the new Ukraine’s resilience. Putin has made the same mistake, but on a much larger scale. He has been so successful in manipulating public opinion that he was unwilling to believe that people could act spontaneously. That has been his Achilles’ heel. Twice he ordered former Ukrainian president Viktor Yanukovych to use force against the people protesting in the Maidan, Ukraine’s Independence Square. But, instead of fleeing the violence, people rushed to Maidan, willing to sacrifice their lives for their country. The second time, in March 2014, when the protesters faced live ammunition, they turned on the police, and it was the police who ran away. Such an event can become a nation-founding myth. Putin knows that he is responsible for turning Ukraine from a pliable ally into an implacable opponent, and he has made it a top priority to destabilise the country ever since. Indeed, he has made considerable – though purely temporary – progress on this front. Given that Putin also recognizes that his regime may not survive two or three more years with oil substantially below $100 a barrel, his sense of urgency is understandable. His progress – measurable by comparing the Minsk II ceasefire agreement with Minsk I – can be attributed partly to his skills as a tactician. More important, whereas he is willing to go to war, Ukraine’s allies have made it clear that they are incapable of responding quickly and unwilling to risk a direct military confrontation with Russia. This has given Putin the first-mover advantage, because he can switch at will from hybrid peace to hybrid war and back again. Ukraine’s allies cannot possibly outbid Russia by military escalation; but surely they can outbid Russia on the financial side. European leaders, in particular, have failed to appreciate Ukraine’s importance. By defending itself, Ukraine is also defending the EU. If Putin succeeds in destabilising Ukraine, he may then apply the same tactics to divide the EU and win over some of its member states. If Ukraine fails, the EU would have to defend itself. The cost, in financial and human terms, would be far greater than the cost of helping Ukraine. That is why, rather than dripfeeding Ukraine, the EU and its member states should treat assistance to Ukraine as a defense expenditure. Framed this way, the amounts currently being spent shrink into insignificance. The problem is that the EU and its member states are too fiscally constrained to support Ukraine on the scale needed to enable it to survive and prosper. But that constraint could be removed, if the EU’s Macro-Financial Assistance (MFA)

facility were redesigned. The MFA already has been used to provide modest assistance to Ukraine; but it needs a new framework agreement to fulfill its potential. The MFA is an attractive financing instrument because it requires no cash outlay from the EU budget. Instead, the EU borrows the funds from the markets (using its largely untapped triple-A credit rating) and lends these funds to nonmember governments. A cash outlay from the EU budget would materialise only if and when a borrowing country defaulted. Under prevailing rules, just 9% of the loan amount is charged to the current budget as a non-cash outlay to ensure against this risk. A new framework agreement would allow the MFA to be used on a larger scale and in a more flexible manner. At present, the MFA can be used for budgetary support but not to provide political risk insurance and other investment incentives to the private sector. Moreover, each allocation must be approved by the European Commission, the European Council, the European Parliament, and every member state. The EU’s contribution to the International Monetary Fund’s rescue package in February took until May to process. The strategy for Ukraine that I proposed at the start of the year has run into three roadblocks. First, the debt restructuring that was supposed to account for $15.3 billion of the $41 billion contained in the second IMF-led rescue package has made little progress. Second, the EU has not even started to construct a new MFA framework agreement. And, third, EU leaders have shown no sign that they are willing to do “whatever it takes” to help Ukraine. German Chancellor Angela Merkel and French President François Hollande are eager to ensure that the Minsk II agreement, which carries their signatures, is successful. The trouble is that the agreement was negotiated by the Ukrainian side under duress, and was left deliberately ambiguous by Russia. It calls for negotiations between the Ukrainian government and representatives of the Donbas region, without specifying who those representatives are. The Ukrainian government wants to negotiate with representatives elected according to Ukrainian law; Putin wants Ukraine’s government to negotiate with the separatists, who took power by force. The European authorities are eager to break the stalemate. By taking a neutral position on Minsk II’s ambiguity and keeping Ukraine on a tight leash, Europe’s leaders have been unwittingly helping Putin achieve his goal: financial and political crisis across all of Ukraine (as opposed to territorial gains in the east). Drip-feeding Ukraine has brought its economy to the brink of collapse. Precarious financial stability has been achieved at the price of accelerated economic contraction. Although political and economic reforms are still moving ahead, they are in danger of losing momentum. On a recent visit, I found a troubling contrast between objective reality, which is clearly deteriorating, and the

The ‘Goebbels’ of the Kremlin In Soviet Russia, everybody knew that they were being watched. Any deviation from officially sanctioned behaviour would be treated with suspicion and most likely punished. The Soviet state saw itself as being at war with almost everything – foreign spies, class enemies, people wearing jeans or playing jazz. The regime’s dominant ideology was not Marxism-Leninism, but suspicion and animosity. Not since the early 1980s, before the first rays of glasnost in Russia, have those dark times felt as close as they do now. Protecting society from enemies, foreign and domestic, is once again the order of the day. Indeed, an ethos of perpetual vigilance is central to sustaining President Vladimir Putin’s high popular-approval ratings. And no one plays a more important role in creating the necessary public atmosphere than Vladislav Surkov. Once Putin’s chief of staff, Surkov served as Deputy Prime Minister from 2011 to 2013. He now formally advises Putin on foreign affairs, but is really the regime’s chief

propagandist. He has been credited with the By Nina introduction of the concept of “managed democracy” in L. Khrushcheva Russia, and he played a leading role in nurturing the secession of Abkhazia and South Ossetia from Georgia. More recently, he was a guiding hand behind Russia’s invasion of Ukraine and annexation of Crimea, inspiring the feverish media campaigns that have delivered near-universal public support for these moves. Surkov is the man most responsible for nurturing proPutin sentiment, which increasingly resembles a Stalin-like cult of personality. Surkov is Chechen by descent, infused – like Stalin – with the saber-rattling mindset of the Caucasus. Under his watch, the central focus of the Kremlin’s communication strategy has been to sustain the perception that the West wants to destroy Russia. Thus, the conflict in Ukraine has been framed as a renewed struggle against fascism – and in defense of Russia’s true, anti-Western identity. The supposed threat to Russia today was

underscored for the 70th anniversary of the end of World War II, with billboards springing up across Moscow to remind Russians of the sacrifices that victory required. Like the Nazi propagandist Joseph Goebbels, Surkov is not overly concerned about facts. Emotions are at the core of the Kremlin’s message; indeed, they are the tie that binds Putin to his subjects. This is why Surkov portrays Putin, who recently divorced his wife of 30 years and is rumoured to have fathered several children with a former Olympic gymnast, as an avatar of conservative values, with the Orthodox Patriarch constantly at his side. The Kremlin’s campaign against gay rights has secured the support of the church, while reminding ordinary Russians that the state takes a watchful interest in their lives. Today’s Russian propaganda combines quintessentially Soviet-style heavy-handedness and state-of-the-art technique. There have been no mass purges and few large rallies. Western values may be under assault, but Western goods are welcome. A common sight in Russia is a shiny German-made car with a bumper sticker recalling the glories of World War II: “On to Berlin” or “Thank you,


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for Ukraine

On a recent visit, I found a troubling contrast between objective reality, which is clearly deteriorating, and the reformist zeal of the “new” Ukraine. When President Petro Poroshenko and Prime Minister Arseniy Yatsenyuk cooperate – usually whenever some external financing is to be obtained (the conditions for the IMF-led program, for example, were met in two days) – they can persuade the Rada (parliament) to follow their lead. But such opportunities are becoming scarcer. Moreover, Poroshenko and Yatsenyuk will be competitors in local

elections in October, when opposition parties associated with oligarchs could, according to current public-opinion polls, make considerable gains. This would be a setback, because there has been considerable progress in recent months in preventing the oligarchs from stealing large amounts of money from the budget. The government won a sharp confrontation with the worst and most powerful offender, Igor Kolomoisky. And, although an Austrian court failed to extradite Dmytro Firtash to the United States, Ukraine’s authorities are now

grandfather, for the victory, and grandmother for the tough bullets.” For the last two decades, Russians have been able to travel internationally without restrictions. Now, however, many seem ready to give up this right. Last month, the Kremlin warned the country’s citizens that the United States was “hunting” Russians abroad. A few Russians have

indeed been arrested and extradited to the US: the arms dealer Viktor Bout, for example, who is charged with providing aid to terrorists, or the hacker Vladimir Drinkman, who is accused of stealing millions of credit card numbers. There is no credible threat to ordinary Russians, yet Surkov’s campaign is having a profound impact. Rather than risking mockery with outlandish claims – a staple of Soviet propagandists – that Russia will one day surpass the West economically, Surkov taps a deeper and safer emotion: fear. Whatever Russians think of the country’s economic malaise – GDP is expected to contract by 3.8% this year, while inflation could top 15% – they are assured that they would be much worse off without Putin. And Russians have fallen into line. A few years ago, it seemed that every tenth person wore a white ribbon, a symbol of protest against Putin. Today, one gets the impression that every third Russian is wearing the Ribbon of Saint George, an orange and black symbol of patriotism and loyalty to the Kremlin. Those who do not wear the ribbon can expect to be asked – and not very politely – why they choose not to.

confiscating some of his assets and reining in his gasdistribution monopoly. Moreover, although the banking system has not yet been recapitalised and remains vulnerable, the National Bank of Ukraine is exercising effective control. There has also been some progress in introducing egovernment and transparency in procurement. Unfortunately, efforts to reform the judiciary and implement effective anti-corruption measures remain disappointing. The lynchpin of economic reform is the gas sector. A radical makeover could ensure energy independence from Russia, root out the costliest forms of corruption, plug the largest drain on the budget, and make a significant contribution to a unified gas market in Europe. All of the reformers are determined to move to market pricing as fast as possible. This requires introducing direct subsidies to needy households before the start of the next heating season. Mistakes and delays in registering households could generate a flood of complaints and ruin the governing coalition’s chances in the upcoming local elections. This danger could be removed by assuring the public that all applications will be approved automatically for one heating season; but that may require additional budgetary support. Worse, many within the government are reluctant to move ahead with market pricing, to say nothing of the oligarchs who profit from the current arrangements. Poroshenko and Yatsenyuk have yet to assume joint personal responsibility and overcome all opposition. Ukraine’s reformist zeal could weaken. Given the deteriorating external reality, reform exhaustion in Ukraine is all the more likely if the EU persists on its current course. Radical reform of the gas sector may be derailed, a renewed financial crisis will be difficult to avoid, and the governing coalition is liable to lose popular support. Indeed, in the worst-case scenario, the possibility of an armed insurrection – which has been openly discussed – cannot be excluded. There are more than 1.4 million internally displaced people in Ukraine today; more than two million Ukrainian refugees could flood Europe. On the other hand, the “new” Ukraine has repeatedly surprised everyone by its resilience; it may surprise us again. But Ukraine’s allies – particularly the EU – can do better. By revising their policies, they can ensure that the new Ukraine will succeed. George Soros is Chairman of Soros Fund Management and of the Open Society Foundations. © Project Syndicate, 2015 - www.project-syndicate.org

It is an insidious and effective strategy, one that marginalises dissenters and generates the impression of near-universal support for the regime. On my last visit to Moscow, I noticed that a friend, a singer in the Bolshoi opera, had tied a small Ribbon of Saint George to her white Mercedes. Though she is no fan of Putin, she did not want to stand out unnecessarily. It is through small surrenders like hers that men like Surkov ultimately succeed. Citizens pretending to be loyal build a culture of conformity. With dissent suppressed, the authenticity of citizens’ loyalty becomes irrelevant. Indeed, like Goebbels, Surkov understands that when public life and private expression can be turned into theatre, there is no difference between performance and reality. Nina L. Khrushcheva is a dean at The New School in New York, and a senior fellow at the World Policy Institute, where she directs the Russia Project. © Project Syndicate, 2015 - www.project-syndicate.org


June 24 - 30, 2015

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The Climate Pope By Johan Rockstrom Pope Francis’s just-released encyclical on the environment sends a powerful message not just to the world’s 1.2 billion Catholics, but to the rest of the global population as well. Firmly rooted in science, the teaching document – the most significant from the Vatican in over a decade – recognises the need for urgent action, as the world confronts potentially catastrophic climate change. In 2000, the scientists Paul Crutzen and Eugene Stoermer proposed that human activity, particularly in the developed world, was interfering at the planetary scale, with the fundamental forces of nature – the water, carbon, and nitrogen cycles, the ice sheets, biodiversity, the oceans, and the forests. The changes were so profound, they suggested, that geologists in the future would see a clear break from the previous geological era, the Holocene, to a new one, which they called the Anthropocene. Over the last 15 years, scientific evidence has reinforced the conclusion that human activity is fundamentally transforming the planet. The Vatican has already recognised this view explicitly, with the Pontifical Academy of Sciences referring to the Anthropocene in the proceedings of a meeting held in May 2014. The Holocene, which began 11,700 years ago as the last Ice Age receded, has been a period of remarkable stability. After an age of drastic swings, average global temperatures settled in to a stable pattern within an extraordinarily narrow range of 1 degree Celsius. The relative stability of the climate and predictability of seasons facilitated the emergence of agriculture, which, in turn, enabled the creation of towns and cities. In other words, the Holocene’s defining features are critical to support human civilisation as we know it – a conclusion that the latest encyclical supports. Moreover, as recent evidence indicates, when large natural systems are placed under high levels of stress, they can reach tipping points, at which only a small adjustment is sufficient to trigger their collapse. It seems that many systems are already

nearing that point. Last year, researchers working in Antarctica observed that major parts of the ice sheet appear to be collapsing irrevocably. On the other side of the planet, sea ice is on such a rapid downward spiral that, in just a few decades, the Arctic could be open ocean in the summer. This could drive global temperatures even higher, because the darker ocean absorbs solar heat, whereas white sea ice reflects it. If we do not change our behaviour quickly, we may well lose the environmental stability upon which our planet – and our lives – depends. This is the main message of the pope’s encyclical. Protecting our planet is a moral imperative. As the Vatican has pointed out, the poor are disproportionately affected by the consequences of climate change; for example, some of our activities threaten to undermine food production in the drier – and poorer – areas of the world. But we also face an economic imperative, because reliable access to natural resources is essential for human development and prosperity. And, in fact, increasingly frequent and severe natural disasters carry massive human and economic costs. As the encyclical makes clear, the future does not have to be bleak. We can take this opportunity to build a new future – one in which environmental sustainability supports human progress and dignity. It is business as usual that holds out the bleakest prospect for humanity. The most immediate priority is to tackle climate change and biodiversity loss, which is reaching mass-extinction levels. Global temperatures have risen almost 1C in the last century, placing them at the Holocene boundary. If, as the recently published “earth statement” underlines, temperatures reach 2C above pre-industrial levels, the results could be disastrous. Yet, if current emissions trends hold, temperatures are set to rise by more than 4C from preindustrial levels by the end of the century. According to Francis’s encyclical, the world must work together to reverse this trend, by reconnecting with the biosphere and harmonising their activities with nature. Taking a strong stance that aligns with our planetaryboundaries research, the encyclical underscores humanity’s responsibility to sustain Holocene-era stability in support of world development. But some – such as the recently published “Ecomodernist Manifesto” – are less concerned with the environmental risks

of the Anthropocene, preferring to rely on our technological capacity to adapt to changing conditions. To be sure, technological innovation and development will be vital in the shift to a more sustainable world, particularly by enabling the creation of a zero-emissions society by around 2050. But it will not be enough to support good lifestyles for all citizens worldwide. The global transformation that is needed now must be based not on technological advancement, but on our collective values and convictions – especially our commitment to safeguard the planet’s stability and resilience by protecting the global commons. In September, world leaders will meet to agree on new Sustainable Development Goals, which will guide global development efforts for the next 15 years. Unlike the new targets’ predecessors, the Millennium Development Goals, the SDGs will apply to all countries, and will include an explicit focus on environmental sustainability, in addition to human and economic development. In December, when world leaders meet again to hammer out a climate agreement, the quality of their work will, in many ways, determine the trajectory of the planet. The pope’s declaration echoes the draft text for the SDGs: “the future of humanity and of our planet lies in our hands.” This is more than mere rhetoric; it represents a shift to a new paradigm, in which humans are the driving force behind planetary developments, and thus have a new responsibility of stewardship. Our choices have never been more important. Johan Rockstrom is Professor in Global Sustainability and Director of the Stockholm Resilience Center at Stockholm University. © Project Syndicate, 2015 - www.project-syndicate.org

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Financial Mirror 2015 06 24  

Greece bailout extension on the cards; Grexit: hedging the unknown; Greek gov't debt explained; Cyprus Coop chief quits; Next Troika mission...

Financial Mirror 2015 06 24  

Greece bailout extension on the cards; Grexit: hedging the unknown; Greek gov't debt explained; Cyprus Coop chief quits; Next Troika mission...

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