E-SQUARED Magazine - Issue 3

Private equity: Why is it so Successful?

intervieW:Manthos Mavrommatis

Issue 3 • Autumn 2011ISSN: 1986-3713 (Print Edition)

ISSN: 1986-3721 (Online Edition)

¤347 billion to Fund Cohesion Within the eu

big MaC index: as Simple as it gets

179 Giannos Kranidiotis Avenue, 2235 Latsia, Nicosia, Cyprus.Τel: 22 741741, Fax: 22 482155, [email protected] www.papaellinas.com.cy

DRIVEN BY PASSION.NURTURED BY VALUES.

POWERED BY RESPONSIBILITY.Founded in 1929, Papaellinas has since grown into one of the most dynamic and respected organizations on the island.

• Pharmaceutical, consumer, cosmeticsand health products

• Leading Distribution and Repacking centre for cosmetics and pharmaceuticalproducts

• New state-of-the art Distribution Centre for consumer goods

• Retail stores in key locations Cypruswide

• Holland & Barret franchisee

• Best Workplace Award 2010

• Award of Social Excellence 2009

I M P O R T I N G ● D I S T R I B U T I O N ● R E P A C K I N G ● B R A N D I N G ● M A R K E T I N G ● R E T A I L I N G

C O S M E T I C S A N D P E R F U M E S

PAPAELLINAS IDEAS VISUALS 3 APRIL:Layout 1 4/16/11 10:49 PM Page 1

179 Giannos Kranidiotis Avenue, 2235 Latsia, Nicosia, Cyprus.Τel: 22 741741, Fax: 22 482155, [email protected] www.papaellinas.com.cy

DRIVEN BY PASSION.NURTURED BY VALUES.

POWERED BY RESPONSIBILITY.Founded in 1929, Papaellinas has since grown into one of the most dynamic and respected organizations on the island.

• Pharmaceutical, consumer, cosmeticsand health products

• Leading Distribution and Repacking centre for cosmetics and pharmaceuticalproducts

• New state-of-the art Distribution Centre for consumer goods

• Retail stores in key locations Cypruswide

• Holland & Barret franchisee

• Best Workplace Award 2010

• Award of Social Excellence 2009

I M P O R T I N G ● D I S T R I B U T I O N ● R E P A C K I N G ● B R A N D I N G ● M A R K E T I N G ● R E T A I L I N G

C O S M E T I C S A N D P E R F U M E S

PAPAELLINAS IDEAS VISUALS 3 APRIL:Layout 1 4/16/11 10:49 PM Page 1

Owner: VSSP Publishing Ltd

Editorial:Suzanne Hocking

Art, Design & LayoutFreshly Squeez’d Design

Printed by: Casoulides Masterprinters

ISSN: 1986-3713 (Print Edition)ISSN: 1986-3721 (Online Edition)

Contact details:VSSP Publishing LtdP.O. BOX 28115CY-2090NicosiaCYPRUS

[email protected]

Published by: VSSP Publishing Ltd © 2011 VSSP Publishing. Neither this publica-tion nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, me-chanical, photocopying, recording or otherwise,

without the prior permission of the publisher.

Whilst every care has been taken to ensure that the data in this publication is accurate, neither the publisher/s, its employees, subsid-iaries, associates and affiliated companies can accept, and hereby disclaim any liability to any third party to loss or damage caused by errors or omissions resulting from negligence, accident or other cause. All rights reserved. No part of this publication may be reproduced or copied without the prior written consent of the publisher. All material has been published in good faith as having been supplied for pub-lication. Views expressed are not necessarily those of the publisher or its employees. The publisher does not endorse any advertising material included in this publication.

Contents..............................................................................................

Editor’s letter 6

Famous Quotes 8

News as we have seen them 9

Interview: 12Manthos Mavrommatis

..............................................................................................

Comment

Hotels 15Organisational Culture

Detection and 17Combating of Fraud

Emerging Economies: 19Leading the World out of the Crisis

Wanted: 20World Financial Stability

Facing the Credit 22Rating Agencies

..............................................................................................

Regulation

Cohesion Within the EU 23The ¤347 billion of Funding

Accounting Regulation: 24Curse or Cure?

..............................................................................................

Real Estate

Major Developments 27in the Real Estate Market

Market Review: 30Where are we Now and Where are we Heading?

..............................................................................................

Analysis

Underground Economy: 33Hidden in the Dark

Greece Time Zero: 36 Rescue That Makes Sense

.............................................................................................

Investing

Big Mac Index: 40As Simple as it Gets

Hedge Fund 44Invests Based on the Mood of the Twittersphere

Gold and the Swiss Franc 45A Shift to Certainty

Short Selling: 46Good or Bad?

Private Equity: 47Why is it so Successful?

..............................................................................................

Future / Green Business

Local Server 48vs. Cloud Server

..............................................................................................

Innovation

No More Printing 49or Faxing, Sign PDFs Directly On-Screen

Guaranteed Sell-Out Gigs 50New Ticketing Service

The Marketing Expert: 51Marketing for the Elderly, The Ueshima Coffee Shops Example

..............................................................................................

World’s Markets 52

Issue Three: Autumn 2011 5

Economic and Educational Aspects of Modern Business

AUTUMN 2011 • E-SQUARED

6

E-SQUARED • AUTUMN 2011

6

s the pages of the third issue of E-SQUARED are being printed, the Greek economy is standing at the edge of the cliff. The Greeks have so far failed to implement

the necessary reforms to get up to speed with their Eurozone partners. A full credit event that will create a new turbulence in the global markets is now almost certain. E-SQUARED suggests a 7-step formula to save the burning Greek economy before it sets fire to the rest of Europe. Our interview comes from within Cyprus, even as concerns about the solvency of the country continue to grow. The Cypriot banks are heavily exposed to Greek debt. Should Greece default, the ramifications to the Cypriot market, already drained from liquidity, will be uncountable. At the same time, the emerging economies seem to be dragging the world out of the crisis. Investors have been making money by investing in gold and the Swiss franc. The underground economy is thriving even in these troubled times and hedge funds are investing based on the mood of the Twittersphere! We hope you find the pages that follow enjoyable and informative as E-SQUARED continues to unveil areas of value as the world goes through a period of unprecedented change.

Editor’s Letter

A

E-SQUARED is not just another economic magazine. It is an alternative for readers who have the passion to explore the dynamics of modern economics.

E-Sqaured_Ad-OUTLINES.indd 1 28/06/2011 15:57

E-Sqaured_Ad-OUTLINES.indd 1 28/06/2011 15:57

8


Famous Quoteseason and judgment are the qualities of a leader. [Tacitus]

very young man would do well to remember that all successful business stands on the foundation of morality.

[Henry Ward Beecher]

uccess or failure in business is caused more by the mental attitude even than by mental capacities.

[Walter Scott]

he hardest thing to understand in the world is the income tax.

[Albert Einstein]

emind people that profit is the difference between revenue and expense. This makes you look smart.

[Scott Adams]

nquestionably, there is progress. The average American now pays out twice as much in taxes as he

formerly got in wages. [Henry Louis Mencken]

orporation: An ingenious device for obtaining profit without individual responsibility.

[Ambrose Bierce]

he invisible hand of the market always moves faster and better than the heavy hand of government.

[Mitt Romney]

nder capitalism man exploits man under socialism the reverse is true.

[Polish Proverb]

ather than love, than money, than fame, give me truth.

[Henry David Thoreau]

t is not how much you make that counts but how much money you keep.

[Robert Kiyosaki investor, businessman and author of best-seller Rich Dad Poor Dad]

othing is easier than the expenditure of public money. It doesn’t appear to belong to anyone. The temptation

is overwhelming to bestow it on somebody. [(John) Calvin Coolidge]

ive me the money that has been spent in war and I will clothe every man, woman, and child in an attire

of which kings and queens will be proud. I will build a schoolhouse in every valley over the whole earth. I will crown every hillside with a place of worship consecrated to peace[Charles Summer] •

R

E

S

T

T

U

R

I

N

The hardest thing to understand in the world is the income tax. [Albert Einstein]

C

U

G

R

News as we have seen them


9

CyprusAn explosion at Andreas Papandreou naval base in July left 13 dead and knocked out the country’s main power plant, triggering blackouts and severely affecting the financial and tourism sectors. However, fast response from the country’s agencies has restored electric power back to normal within one month. The authorities have submitted an application seeking monetary assistance from the European Union Solidarity Fund for direct and indirect damages; response still pending.

The disaster led to an unprecedented political crisis as thousands of outraged protestors ended up outside the Presidential palace demanding the president’s resignation and the punishment of the guilty for the tragedy.

A first package of austerity measures has been passed in August by the government and the parliament amid woes from political parties and trade unions that the package is not adequate. New Finance Minister Kikis Kazamias committed to start negotiations on a second package seeking total adjustments from savings and increased revenues amounting to €750m in an ambitious effort to drop the budget deficit to 2% for 2012.

Following this, credit rating agency Standard and Poor’s stated that Cyprus’ sovereign ratings remained on a credit watch pending the outcome of consultations for the new economic austerity package.

Cyprus is in negotiations with the Russian Federation over a €2.5bl loan in an effort to meet the country’s financial obligations at the start of next year.

Russian Finance Minister announced that an agreement would not be reached until the end of 2011.

Noble Energy has started drilling for natural gas in Block 12 of the country’s exclusive economic zone in September despite strong warnings, war threats and anger from an uneasy Turkey. At this stage, the Republic of Cyprus seems to find strong backing from the EU, US, Israel and Russia all issuing warnings to Turkey over Cyprus’ right for explorations.

Political talks over a solution of the Cyprus problem between Cypriot President Demetris Christofias and Turkish Cypriot Leader Dervis Eroglu continue despite inability to find common ground and convergences towards a viable solution.

The island’s three major banks, Hellenic Bank, Bank of Cyprus and Marfin Bank have posted €35.9 million, €112 million and €196.9 million respectively first-half net losses after taking provisions on a Greek sovereign debt swap.

GreeceMired in recession and deepening poverty, Greece hailed the Brussels €109bn deal as a historic step that offered the first glimpse of hope in a crisis that has dogged the country for 18 months.

Despite that, Greece’s ability to stave off a default keeps on weighing heavily on markets, as Europe’s debt inspectors have doubts over the country’s ability to meet the terms of its bail-out agreement and raise questions on whether the next cash advancement should be given to the cash-stagnant country.

Pushed by continuing worries over the country’s ability to follow the medium term adjustment program, the Greek government announced new austerity measures including the suspension of more civil servants than originally planned, a controversial property tax and imposition of new pension cuts.

George Papandreou vowed that Greece would meet its commitments under the terms of yet another international bailout while anti-austerity protesters are faced daily by Greek police firing teargas.

Greece’s second and third largest lenders, Eurobank and Alpha Bank announced in mid-September their plans to merge in order to better withstand the country’s acute financial crisis. This move would create Greece’s biggest bank, and will see a €500 million investment from a Qatari investment fund, Paramount Services Holding Ltd.

After securing a second rescue package to boost up its debt-stricken economy, Greece has urged its citizens to honour the agreement by repatriating cash moved abroad during the crisis.

USAn agreement was reached in early August amongst leaders of both parties in the U.S. House and Senate to raise the nation’s debt ceiling by $2.1 trillion and cut the federal deficit by as much as $2.5 trillion over a decade. Despite the relief in Obama’s Government, this was followed by a downgrade of the US economy by Standard & Poor’s reflecting the agency’s concerns about the size of the federal debt.

Warren Buffet, founder of Berkshire Hathaway has created a world of criticism over an article he wrote in New York Times essentially stating that the millionaires in the US get too many tax credits and that workers pay a lot more taxes than them, urging the Congress to start asking for sacrifices from them as well.

The U.S. economy is staring down another recession, according to a forecast from the Economic Cycle Research Institute.

BoA has announced yet another credit card fee bringing anger to its customers.


10

TurkeyPrime Minister Recep Tayyip Erdogan achieved his biggest blow yet to Turkey’s secularist military as he took on the armed forces from within their own ranks. Erdogan met with army heads in Ankara to decide promotions for the highest posts. The July 29 resignations of Turkey’s top four generals gave Erdogan unprecedented freedom to steer the process as the army shows signs of buckling under government allegations of coup-plotting.

Turkey’s popularity is growing in the Arab world under Mr Erdogan’s mildly Islamist Justice and Development (AK) party government that shot to power in 2002. Friendship with the Arabs marks a shift for Turkey, which once presented itself as an eastern bulwark of the Nato alliance.

Turkey’s wounded relations with Israel have been strained even further as the row over gas exploration in the eastern Mediterranean has escalated.

PKK attacks have been intensified in the past weeks with the Turkish government announcing major operations against the Kurdish forces in response.

Turkey signed a deal with the breakaway Turkish Cypriot regime to start offshore gas exploration in response to Greek-Cypriot and Israeli oil and gas drilling in the region.

IsraelIsrael started exploratory drilling in its Leviathan block which contains approximately 450 billion cubic meters of gas, enough to support Israel’s energy needs and export for decades.

Palestinian President Mahmoud Abbas asked the United Nations to recognize a Palestinian state despite strong warnings by Barack Obama and the United States.

FranceThe French government lost majority in the senate. The defeat was seen as a heavy blow to President Sarkozy just seven months before he will seek re-election.

As fears about the solvency of Greece grow, Nicola Sarkozy urged for talks and quick action in an attempt to save the Euro as he admitted that “a failure of Greece would be a failure for all of Europe”.

Paris is set for an automobile revolution. All-electric “Autolib’” cars, based on the success of the city’s Vélib’ bike-sharing scheme, will begin to appear on the streets of the French capital in December.

Lyon’s second-in-command police chief and three other senior officers have been arrested over claims by internal investigators that they were complicit in drug trafficking and corruption.

ItalyItalian prosecutor Rosario Cantelmo has announced that over 150 matches in Italy, Spain and South America are being investigated for alleged match-fixing.

The government has pushed through parliament a €54 billion austerity package which will hit pensions, public services and retirement ages, sparking violent clashes between riot police and demonstrators outside parliament in Rome.

The scandal over Silvio Berlusconi’s sex parties continues as investigations bring more stories to the frontlines almost daily.

SpainSpanish region Catalonia says adios to bullfighting.

Sagrada Familia, Barcelona’s intricate temple to God gets final completion date – 2026 or 2028.

Spain saw its borrowing costs surge over the summer, as investors cast a vote of no confidence on the European Union’s attempts to halt the spread of the debt crisis that began in Greece.

Violent riots spread across London and other English cities for days in the one of the worst violence outbreaks in the country for decades.

The British government has offered to pay compensation to the families of the victims of Bloody Sunday.

George Osborne, the Chancellor of the Exchequer, has dampened hopes of tax cuts in this parliament explaining he does not believe you should fund lower taxes through more borrowing.

A ban making it illegal to sell cigarettes from vending machines and requiring landlords to ensure all tobacco

advertising on the machines is removed came into force.

The default retirement age in the UK has been fully abolished after being phased out from April this year. New legislation stops employers from compulsorily retiring workers once they reach the age of 65.

The minimum wage has gone up, with the main rate for adults aged 21 or over rising by 15p to £6.08 an hour.

David Cameron is to unleash a raft of tough measures on the workshy to force them into jobs and break apart Benefits Britain.

United Kingdom

11


GermanyChancellor Angela Merkel achieved a convincing parliamentary majority in a crucial vote on expanding the euro rescue fund.

Germany revisits the dark chapter of its brief colonial history with the return of 20 skulls belonging to genocide victims in a former colony.

German Chancellor Angela Merkel called Israeli Prime Minister Benjamin Netanyahu to ask for a quick return to peace talks - and said she ‘absolutely did not understand’ settlement expansion in east Jerusalem.

A 44-year-old man was arrested suspected of building at least two pipe bombs and leaving them in Berlin parks – one of which seriously injured a gardener.

Teachers at a Berlin high school are threatening to strike if the teenager convicted of brutally beating a man in a metro station in April is allowed to attend classes there.

RussiaRussia moved closer to joining the World Trade Organization after reaching an outline deal with the European Union.

Russia’s leadership pair is set to switch roles, with Prime Minister Vladimir Putin poised to make a comeback as president and Mr Medvedev moving to the Prime Minister role.

Russian Finance Minister Alexei Kudrin has resigned after a public row with President Dmitry Medvedev.

MideastSyrian forces backed by tanks and helicopters continue to storm against anti-government protestors.

Egypt set parliamentary poll dates between November 28 and January 10 with the first session of the new house slated for March 17 2012.

Muammar Qaddafi and his sons refuse to give up despite the NATO support for the Libyan anti-government fighters. The violence continuous as Qaddafi is still to be found.

AsiaTwo underground trains have collided in China’s most populated city, Shanghai, injuring at least 200 people.

Multiple bomb blasts kill many in Iraq, with violence thriving especially in Kerbala. Terrorist attacks continue to cause deaths in Pakistan as the terrorist actions seemed to intensify in the last year.

Japan’s government and the ruling Democratic Party propose plan to raise extra $120bn in taxes to pay for quake reconstruction as the environmental disaster from the tsunami is still causing substantial harm.

EuropeFormer IMF boss Strauss Kahn claimed immunity towards the sexual assault charges against him in civil case. At the same time he stated that the charges against him have impaired IMF’s ability to tackle the global economic crisis.

The European Commission President, Mr. Barosso has called for more economic integration and power at European level, to tackle the crisis in the Eurozone during his State of the Union address in Strasbourg.

The European Commission set out its proposed new financial transaction tax for all EU member states, against strong opposition from the UK.

CorporateHSBC warned that up to 30,000 jobs may be cut across its global empire over the next three years.

Big Four audit firms are to face a massive shake up as the European Commission is pushing for tough rules on auditors’ rotation for big clients as well as increased restrictions for the provision of non-audit services to audit clients.

Microsoft has presented the next generation of its Windows operating system, Windows 8. The new system is planned to come out in 2012.

Google announced that it is acquiring Motorola Mobility for approximately $12.5 billion (or $40 per share) in a strategic move to supercharge the

Android ecosystem and enhance competition in mobile computing.

Eighteen months after Macondo well disaster, BP has expressed interest in searching for new oil wells off the Louisiana coast.

Kweku Adoboli, a UBS trader was charged with fraud and false accounting that may have resulted in a $2.3billion loss for the bank. The chief executive of the Swiss banking giant, Oswald Gruebel resigned in the wake of the trading scandal. The UBS investors have welcomed the Swiss bank’s choice of Sergio Ermotti as his replacement.

BNP Paribas has denied reports that it is in talks about selling a stake to the Gulf state of Qatar

Starbucks is being sued by a U.S. man after his 5-year-old daughter allegedly found a video camera pointed at the toilet in a bathroom in one of the chain’s cafes.

Cypriot insurance firm Interlife has changed its name to Prime Insurance following a merger with Greek insurance firm Demco.

Apple co-founder Steve Jobs has resigned as chief executive of the technology giant and will be replaced by chief operating officer Tim Cook; Jobs said he could no longer meet his chief executive’s duties and expectations due to serious health problems.

A row over phone-hacking by journalists has led to the closure of the infamous News of the World newspaper, and wider questions about press regulation, media ownership, the police, and relationships between politicians and journalists.

The former director-general of Al Jazeera, Wadah Khanfar, announced his departure from the network. His departure was linked with rumours that he had altered Al Jazeera’s coverage at the request of the US government.

12


anthos Mavrommatis was born in Nicosia in 1957. He studied

Economics at the London School of Economics and obtained his MBA from the University of Chicago. Manthos is the president of the Cyprus Chamber of Commerce and Industry (CCCI) since 2005.

Mr. Mavrommatis, the United States have been downgraded for the first time in seventy years. Europe is still struggling and the global economic outlook does not look promising. Where does Cyprus stand?Theoretically Cyprus could have been in a better situation than the United States and the EU because the fundamentals of the economy are not as bad. Government deficit and public debt are not as high as in other EU countries or the States, but what Cyprus lacked in comparison with those countries was until now the lack of determination to deal with these issues in order to put public finances on a viable basis and prove to the markets that public finances are sustainable.

Yet the Cypriot economy seemed to be solid at the beginning of the crisis. The Cypriot Ministry of Finance and the government were stating that the global crisis would not affect Cyprus. Today, the Cypriot economy is one of the most troubled within the EU. How did it end up there?We ended up in this difficult situation because we refused to see the reality from the beginning and our government did not want to accept that the economic crisis was going to affect us in a serious way. A collapse of the real estate sector has reduced government revenues substantially and has therefore revealed the inherent weaknesses of the Cypriot economy that were swept under the carpet all those years because of the high growth rates and the revenues brought in from sales of holiday houses to foreign nationals. Now we cannot avoid the realities of the situation any longer and we have to tackle the underlying structural problems that are more than obvious to everybody.

Some analysts are suggesting that the Cypriot economy is one step away from the EU support mechanism. Do you share this view?

The Cypriot economy does not need to be one step away from the support mechanism. If we take the necessary corrective measures to rectify the structural weaknesses of the public sector, especially on the expenditure side, we can avoid it. One should realise that the automatic ever-increasing increments in public pay and public pensions as well as the substantial increase in social benefits are not sustainable by the Cypriot economy any longer. Therefore if we do not bring those three things under control I am afraid that we will not escape from the EU support mechanism. But this is not a foregone conclusion.

What would the ramification be if Cyprus ended up in the support mechanism, especially in the business world?Well, ending up in the support mechanism would be very bad for the Cypriot business community because it would destroy all the efforts taken in the last decades to promote Cyprus as a reputable international business centre, not only by the businesses but also by governmental agencies like the Central Bank. We have all worked very hard towards this end and we have been quite successful in attracting and registering foreign companies to Cyprus for their international business. Therefore I believe that ending up in the support mechanism would be a very heavy blow to this positive image we have created. Nobody would like to be registered in a country that cannot put its public finances in order and ends up in a support mechanism.

What do you think about the €2.5bl loan that our government is trying to obtain from Russia? Is cheap lending the solution?Acquiring and securing a loan to deal with our liquidity problems and refinancing our

public debt is one thing and it is positive, but the existence of substantial budgetary deficits is another thing. And this is the real challenge; to reduce substantially our high budgetary deficit. A deficit of nearly €800m in the first eight months of 2011 is unacceptable. If we want to reduce our dependency on trying to find ways of refinancing our national debt we should reduce our need for new debt i.e. we should reduce our budget deficits in the next three years as is the stated goal of the Minister of Finance.

The consensus of the general public is that the measures taken so far (and the ones proposed) have only touched the government and semi-government sectors and only lightly the private sector. Do you agree?Absolutely not! The economic crisis of 2008 has evicted a heavy blow for the private sector. This has been both for private employees who have lost their jobs in large numbers as well as for private companies which have seen their profitability reduced substantially. Thousands of them have now turned unprofitable and many were forced to close. During this period, public employees were getting their ever-increasing salaries and pensions as if nothing had happened. This situation has now come to an end and I believe that through the packages of the government public sector workers were taken up to the realisation that first of all they will have to contribute towards their generous pension schemes and secondly that they need to contain their wage increases in the form of the automatic indexation of wages.

Many of the measures affect the income of Cypriot households. Should targeted counter measures be taken for the low income workers?It is true that some measures, like the potential increase of VAT do affect the income of Cypriot households, as they affect the overall society including businesses. These however are necessary steps that cannot be avoided. Taking VAT as an example, we must note that we have the lowest VAT rate in Europe and many countries were forced to increase their VAT rate. So a modest increase of VAT, although it will have negative consequences, is inevitable. The government has already

Interview: Manthos MavrommatisM

Interview

13


Interview

announced support schemes in the region of €10m for the low income workers. So this is a sort of relief from such measures.

What is your view about the workers unions and their role so far in the crisis?The workers unions took a long time to realise the consequences of the economic crisis and what it meant for the Cypriot economy in general. I am afraid their insistence on “acquired rights” that have no resemblance of the realities of the economy is not possible any more. Nobody can be shielded from the effects of an economic crisis as the private sector has seen in reality during the last two years.

Do you share the view that the “retirement age” should be increased to 65?Absolutely yes! I consider that it is a very short-sighted policy by the government to insist in keeping the ability to draw pensions from the age of 63. This should be raised to 65 because it is the only way to make pension schemes viable in the long term. The prolongation of life expectancy makes this increase a necessity and the sooner we realise it the better it will be. Anyway, average life expectancy in Cyprus is approximately 80 years now so even not drawing a pension until the age of 65 still gives people something like 15 years of pension rights.

Mr. Mavrommatis, Cypriot businesses cannot bear the cost of financing and the statistics show that many of them go bankrupt, unemployment is soaring, the inflation is way above the EU average (2.9% vs.2.5% for August) and yet no one seems to be particularly concerned about the growth prospects of the economy. Is recovery possible only through cost cutting measures? What about growth?It is true that the cost of financing in Cyprus is well above the European average. The main reason for this is that the cost of money in Cyprus is high compared to other countries and the EU average. In order for borrowing rates to come down we need bring deposit rates down as well. I believe that both deposit and borrowing rates are very high compared to EU. Both need to come down in order to make the cost of money in general cheaper, not only for businesses but also for households. It will be the biggest incentive for the growth prospects of the Cypriot economy because as long as the cost of money is high, Cypriot businesses will be hesitant in investing and realising

their projects, taking on business risks and materialising their business plans.

Many reports indicate that the Cypriot economy’s competitiveness within EU and globally is declining. Is Cyprus’ role as a financial centre sustainable? If yes, what needs to be done to enhance competitiveness? This is true. The latest World Economic Forum Competitiveness Report has shown a decrease of 7 places for Cyprus and a drop to number 47. In the EU area we now occupy the 19th place out of the 27 member states. This is not good at all and does not help our image as a financial centre. We need to tackle the underlying weaknesses in our competitiveness environment; reduce government bureaucracy, maintain a business friendly environment, increase access to finance and deal with the legitimises in the labour market. If we tackle these issues we will increase the competitiveness of our economy and this will increase our prospects of becoming a more reputable international business centre.

Going back to the business world in Cyprus, what are the challenges faced by Cypriot businesses? What messages are you receiving from them? There are many challenges faced. One may say that the development strategy of the last decades is showing its teeth. For many years we depended on the tourism industry and on real estate development. Both sectors, although they still have a good potential for the Cypriot economy, are reaching saturation level and we cannot expect them to drive the Cypriot economy ahead in the years to come. I believe that we have to promote other service sectors, like the already developed financial, legal and other professional services, or even new service areas like the health and education services.

What is CCCI doing about this?The most important task of CCCI nowadays is to promote Cyprus as reputable business centre where foreign companies can register in a business friendly environment with a low tax regime and high quality labour force. These are the indications for the future, these are the areas where Cyprus can be successful. CCCI puts a lot of emphasis in promoting this image by organising business forums in other countries. This is our role, we take it very seriously and we can be even more successful. The treaties for the avoidance of double taxation we have with many countries are a very useful tool and the low tax burden on businesses is a good

incentive. The high quality, highly educated labour force is again a good selling point. All these constitute a favourable picture for the prospects of the Cypriot economy.

What does CCCI do to encourage entrepreneurship?The biggest challenge in encouraging entrepreneurship lies with tackling government bureaucracy and promoting a more business friendly environment. If the government succeeds in reducing the regulatory burden on businesses (there is a set goal from EU for 25% reduction in regulatory burden in the next few years), this will be a boost to the business community and for entrepreneurs. We know that important investments planned both by Cypriots and foreigners are slowed down in bureaucratic procedures and are prevented from being realised. We need to appreciate how bureaucratic obstacles are restricting the growth potential of the economy and the development of entrepreneurial activity.

Given the difficulties and challenges faced, where do you see the Cyprus economy in the future?In addition to the previous statements that our development model based on tourism and real estate has reached its limit and that we need to invest more in all sorts of services, I believe that the key in the future both for the public and the private sector is to invest in R&D and innovation. We are a country without natural resources and a country without low cost labour. Based on this, we need to invest in R&D and innovation in order to create goods but mostly services of high added value and of high yield that will be sold and marketed to the rest of the world. This is a big challenge because our goods or services are not going to be cheap. If however they include added value to justify the higher pricing, then we can succeed. Many people feel that R&D deals only with the goods and manufacturing which is totally wrong. It equally deals with services. We have seen how successful we are in financial services; we can be equally successful in other areas. So the long term challenge for the Cypriot economy fits in successful investment in those areas that can create high added value goods and services. One may say that apart from services we can invest in other areas such as renewable energies. We can indeed be successful in this regards and we can become a regional centre playing a key role both for EU and for other neighbouring countries. •

Interview

a fresh view on modern economics

Visit us at: www.e-squared.eu

15


here is no sharp demarcation between corporate and

organizational culture but considerable overlap.

Corporate culture is the sum of procedures and customs that distinguish an organization from every other. It has developed since its conception into its present standing and is the organization’s character whose corporate culture influences ethical standards and the behavior of its employees. Its work groups possess their own interrelationships that affect the total organization.

Organizational culture describes individual and group attitudes, beliefs, experiences, psychology and values. These values and norms are shared by employees determine how they interact with each other and with the public and dictate appropriate standards to achieve their goals.

Corporate culture is an organization’s inbuilt characteristics acquired historically over time. Organizational culture is deeper and wider, contemporary and continually being developed.

The structure of a traditional organization is typically illustrated as a hierarchical arrangement of pyramids of little boxes each labelled with the job or jobholder. Managers apparently have close contact only with their immediate subordinates. Decision-making is

influenced vertically, subordinates advising and persuading their managers. Authority flows downwards with those at the top unlikely to know much about the lowest members, their names or jobs and far less, have contact with them; they may not even know of their existence.

Yet, despite the hierarchical structure, there is often close daily contact between some high and low level members. The conventional hierarchical structure does not reflect the way that an organization operates and there is considerable cross-hierarchical communication. A modern organization does not operate in a hierarchical structure; it is a dynamic entity consisting of people, in structures, with tasks to perform and tools to use. Change in any one of the four will affect each of the other three directly or indirectly.

An organizational culture can be developed for a hotel to make it unique and give it an identity. This requires a statement of its philosophy, values, beliefs and overall strategy broken down into specific managers’ objectives.

In effect, it is its Mission Statement, which ultimately determines the degree of success of its operations. It has four main sections > General purpose of the organization > Products, services and price ranges offered > Organization’s primary stakeholders > Responsibilities to the stakeholders.

The statement starts with a clear, succinct description of the enterprise’s reason answering the question, “Why does the hotel exist?”

Everything in the mission statement must be believable, realistic and readily communicated to all levels. The five main components of an organization’s philosophy are people, product, quality, value and profit. A hotel’s most important asset is people, especially its employees. They need to be involved, to work in teams and make commitments. But, everything done inside the hotel costs money: all the managers, accountants, receptionists, chefs, waiters, bar staff, etc., cost. It is only when you go outside and find people who could be guests that you have an opportunity to make money. Products or services satisfy guests’ needs, wants and desires.

Hotel Organisational CultureBy: Kefalas Soteris, Ph.D [Educator–Author-Researcher]

T

Comment

16


• Needs are essential for all guests; they have to be obtained today.

• Wants are not so essential and can be acquired tomorrow.

• Desires are guests’ dreams; they might be realized in the future.

Products are not bought for what they are but for what they do. The handyman doesn’t want a six millimetre drill he needs a six millimetre hole; we don’t buy boxes of matches we buy boxes of flames. And, we don’t hire rooms at a seaside hotel or rents strips of sand on the beach in the summer; we buy dreams. A hotel must satisfy guests’ needs, wants and provide opportunities for dreams to be realized.

Quality is a primary component and a hotel’s products and services must create complete satisfaction for guests. Profit measures the success in fulfilling guests’ demands. Profit is essential

for survival and growth and supplies a financial umbrella for future rainy periods. Neither management nor staff must be content with past standards but must always strive to maintain and improve service and efficiency.

An organizational culture is developed with a Bull’s Eye structure. This is not hierarchical but radial from the centre occupied by the manager communicating outwards to successive rings of employees. Inner ring employees are seen frequently, daily or even hourly. Those seen less frequently occupy outer rings. But the secret of implementing an organizational culture is for all employees to have access to management, the nature of their job rather than hierarchical position dictating the frequency of contact.

Plan your ‘bull’s eye’. List what has to be done daily, weekly, periodically to attract, service, and satisfy guests. At the side of each activity, insert the

employee responsible and grade them AA (above average), S (satisfactory) or NS (needs supervision). Keep things simple, easy to check and straightforward to correct. Double-check your bull’s eye plan:

• Decide what parts of your work are to be delegated

• Divide it into manageable activities

• Balance pleasant and unpalatable tasks

• Select to whom to delegate

• State responsibility employee must accept

• Specify authority being given

• Agree standards of performance

• Stipulate how and when progress is to be reported •

Comment Comment


17Comment

n recent years, scandals with a significant international

impact such as those of Enron and WorldCom have alerted organizations to the significant risk of fraud. Such scandals have also been a stimulus for the enhancement and further implementation of anti-corruption mechanisms within the European Union.

The word fraud encompasses a wide range of irregularities and illegal acts, characterized by deliberate deception or deliberate falsification of data. Fraud may be committed either for personal gain - at the expense of the organization- or even for the benefit of the organization itself.

The main forms of fraud include embezzlement of an organizations’ assets by employees (which is the most common form of fraud), corruption such as bribery, perks, conflicts of interest and even economic extortion for the benefit of the organization or for the personal gain of employees. It also includes the fraudulent presentation of financial statements. This last form of fraud is committed by management in order to present financial statements that do not give a true and fair view of the financial position and performance of the organization thereby misleading its stakeholders (e.g. shareholders, creditors, banks, or even the public as a whole in the case of Public Organizations).

The commitment of fraud requires an incentive emanating either from the personal circumstances of the person committing it, or due to pressure for the achievement of unrealistic goals within the organization or even for the manipulation of financial and other results. Persons who commit fraud are likely to try to justify their actions in a number of ways in order to alleviate any moral or social concerns.

The opportunity to commit fraud stems from weaknesses in the internal control systems of an organization which lack appropriate controls for the prevention

and detection of fraud. Individuals who have a very good knowledge of the systems and procedures of an organization or individuals who are considered very important or irreplaceable are the ones most likely to commit fraud. Opportunities may also appear as a result of weaknesses in internal processes and operations of an organization.

In the case of the Public Sector, the Internal Audit Service of the Republic of Cyprus in its role as the Internal Auditor of the entire Public Sector,

can play a key role in preventing and combating the various forms of fraud in Public Organizations.

Cases of fraud may be identified through our audit work using various methods such as:

• Identification of fraud risks during the planning and performance of an audit, taking into account the operating environment of the audited organization, previous audits and other relevant information.

Detection and Combating of FraudBy: Andreas M Lambrianou, Commissioner of Internal Audit of the Republic of Cyprus

I

18


Comment

• Development of appropriate audit programs for the detection and investigation of fraud which include analysis of possible scenarios and investigation of its symptoms.

• Identification of the symptoms of fraud when encountered during the performance of an audit (eg when evaluating correcting entries, amendments or changes to contracts and documents or even alterations to information systems).

• Collection and investigation of fraud symptoms that are brought to the auditor’s attention irrespective of their size or frequency of occurrence.

In cases of circumstances that raise suspicion of possible fraud or irregularity or significant damage on the assets of an audited organization, or the State, Article 12 of the Internal

Audit Law of 2003, requires the Commissioner of Internal Audit of the Republic of Cyprus,” to act immediately to stop such activities. In such a case, a special report will be prepared and submitted immediately to the relevant authorities.

The Internal Audit Service believes that the most effective way of dealing with fraud in an organization is to prevent it from occurring in the first place, by establishing an appropriate culture and procedures such as:

• Establishment, implementation and continuous monitoring of a culture of honesty, sincerity and morality amongst the employees of the organization under a positive and fair working environment. This can be enhanced with the development of a code of conduct or a code of ethics.

• Assessment of the risk of fraud by the organization and

implementation of policies and procedures that will minimize it to an acceptable level.

• Developing and strengthening supervisory procedures and managerial controls (appropriate management information systems, levels of approvals, etc.) for the prevention of fraud.

Through a scientific, disciplined and systematic approach, and in accordance with the International Standards for the Professional Practice of Internal Auditing, the Internal Audit Service of the Republic of Cyprus can play a significant role in reducing Public Sector costs, in forming and maintaining a positive Public Opinion about the Public Service and in the strengthening of the management and internal control systems of the entire Public Sector. All these can act as a catalyst in the minimization of Public Sector Risks and in the enhancerrent of Public Governance. •

19


Comment

t is no secret that the growth in the emerging markets in the past few years

has been astonishing. A recent report by PricewaterhouseCoopers suggested that the combined gross domestic product (GDP) of the seven biggest emerging economies will exceed that of the G-7, the world’s largest industrialised markets, in 2032 using projected market exchange rates. Using a wider definition of developed economies, it is no surprise that the crossing point comes much earlier, before 2020. And GDP is only a single indicator. The emerging economies are already bigger than the developed countries in some respects and it is clear that the observable trends will continue in the future.

The emerging countries are not just the economies of the future. Leaving the long-term prospects aside, what has been particularly interesting is the impact of the emerging economies in the current financial crisis. In the past three years, the emerging countries have been essentially dragging the world’s economy out of the critical care zone and the recent indicators suggest that they will continue to do so.

The International Monetary Fund’s global forecasts project emerging economies will grow by 6½ percent this year (and an even higher 8 percent in emerging Asia) compared with expected global growth of 4½ percent, said panelist and IMF Deputy Managing Director Naoyuki Shinohara. In addition, with unemployment soaring in the US and fears that a double dip recession is on it way, with Europe struggling to convince the markets that it has a solid economic governance and with investors fearful of the prospect of Greece going into default, the risk of the emerging countries is now perceived to be lower than the risk of the developed world. The AlphaShares China Volatility Index (CHIX) finished July with a monthly rise of 17%; in contrast, the volatility S&P 500 (VIX) soared 53%. “The perception is changing,” said Pankaj Khandelwal, an index

volatility trader at Barclays Capital. “Both the US and Europe have become a little more volatile, and emerging markets have become perceived as a safe haven.” In these tough times, the emerging markets are keeping pace with growth, and at the same time they calm the markets down, as their risk is perceived to be lower than that of the countries of the developed world.

The fact that at the moment the volatility of the emerging markets appears to be lower does not mean that investing in them is a safe bet, however. “It’s not that emerging markets are becoming less risky,” said Mandy Xu, a derivatives strategist at Credit Suisse. “It’s that investors have been embedding more risk premium into the US.” The risks of investing in these economies are well known and they should not be underestimated. As Barclays’ Khandelwal said, “People start to view emerging markets as a safer option in relative terms, but [only] for small periods of time, then it reverses back.”

No one knows the exact timing of when they will bounce back, but what is sure is that they cannot continue having abnormal growth rates and lower risk forever. At the moment, they do the job of keeping the world’s economy breathing. Will they keep the growth pace if a double dip recession hits the US? Will they sustain their low volatility once the European market bounces back? What will happen if none of the above happens any time soon? Difficult questions! Anyone planning to invest should think through the implications thoroughly! •

I

Emerging Economies: Leading the World Out of the Crisis

20


Comment

t is an undisputed fact that the financial world has been

confronted with an unprecedented series of negative shocks over the last three years. The latest events, such as the deterioration of sovereign debt in the Eurozone, the rating downgrade of the US government and consequent increased doubts about US recovery, all came at a crucial point when hope for better days had been increasing. The general outlook for the global economy is not as shiny as initially thought. After the markets cooled in the second half of 2010, the risk that the soft patch would eventually become a ‘double dip’ increased. All of the above concerns contributed to financial uncertainty and volatility for a longer period of time than was initially anticipated. Going forward, the consequences will continue to impact the country and sovereign risk.

Discussions continue daily about the bailout injections and the huge amounts of money pumped in Greece in order to revitalise the severe economic conditions. The sustainability and, most importantly, ‘bankability’ of such actions are still to be determined. A group of experts claim that the introduced actions are not affordable and will not work; the country will need to enter a debt restructuring to avoid further crisis. But what is debt restructuring? What conditions must be met in order for a restructuring to be successful? Is it a panacea for all the well-known financial problems? Does it always work? And last but not least, what if bankruptcy is not an option?

Excessive debt and high leverage increase borrower costs and lenders’ concerns about recouping their capital. As a result, most, if not all, corporate bodies try to avoid these situations. When the concerns about the borrower’s ability to service its debt obligation are related to governments, the situation becomes front-page news. The country’s inability to accomplish its contractual obligations can and does disturb the global financial and economic environment.

What is a Debt Restructuring?A restructuring is a re-organising of a borrower’s debt obligations to its lenders. It comes about as a result of the borrower no longer being able to adhere to the terms and conditions of the agreements in place. Throughout the process, all parties seek ways to reduce the debt size and cost to allow minimal financial toll following a potential bankruptcy. Often it is the debt owed to the banks and other financial providers that gets restructured. In worse situations, the restructuring can also involve a complete balance sheet overhaul from the borrower.

Some claim that restructuring a country’s public debt will be difficult to understand, let alone implement, and

it will not necessarily fulfil the actions required to turn around a heavily indebted government.

Why Restructure?A properly managed and executed restructuring can result in all parties benefitting. The entity being restructured can end up with the feeling that creditors have been acting as a true partner and not just a fair-weather friend. Similarly, the creditors will have taken a crucial step towards establishing a loyal relationship with a financially healthy client who trusts and depends on them. At the end of the day, engineering a robust solution to bring the company or country back on a solid financial footing is something that should be of utmost importance.

Success will serve the interests of all parties. It is accepted amongst restructurers that the sooner the borrower realises, accepts its financial position and proactively approaches the lenders the better. In a ‘perfect world’, the lenders assess the specific proposal and provide their comments before reaching a consensual solution. This is usually the case when dealing with simple capital structures or bilateral facilities. However, the weather is not always sunny and capital structures are rarely simple. The existence of a

Wanted: World Financial Stability

IBy: Antonis Themistokleous, Global Credit Restructuring – ING Bank ND

21


Comment

large number of creditors with different seniority owning parts of tranches and institutions looking solely to their own interests can result in a prolonged, slow-progressing case. As such, negotiations are tough and flexibility is required from all sides.

Maybe Bankruptcy is not an Option?Many people claim that Greece should not be bailed out and that the International Monetary Fund (IMF) should not have allowed the recent cash injections. Historically, sovereign debt restructuring has been a debatable issue. An individual or a corporate entity can file for bankruptcy, which creates a ripple effect in proportion to the size and influence of the party. When countries are in a default situation, then the so-called domino effect comes into play. In such cases, we witness a wave of both financial and macro-economic effects, impeding growth opportunities for other countries facing similar problems.

An example occurred in the late 1990s with the default of the Russian debt, which caused the collapse of Long Term Capital Management (LCTM). It was only after trying to bail out LTCM that the global financial environment had a big shock. Nowadays, bailouts on such a large scale raise understandable concerns. Intensive negotiations are required to reach a consensual settlement of the Greek public debt in a way that allows both parties to benefit.

Is it a Free Fall Then?All of 2010 and the first three-quarters of 2011 can be considered as another crisis period. The recent market developments and further macro-economic global problems have increased speculation about the ability of major corporations and countries to serve their debt obligation. Although the current climate is gloomy, it does not mean we have to switch to depression mode. On the contrary, the necessary steps are being taken towards signalling risks and turning them around, while acknowledging the difficulties of a remedy that must also take into account the larger financial system of which we are a part.. •

The views expressed in this article are the views of the author and do not necessarily reflect the views or policies of ING Bank ND.

All of 2010 and the first three-quarters of 2011 can be considered as another crisis period

22


Comment

uch has been said in the past two years during the prolonged economic crisis about the credit rating

agencies – about their objectivity, the accuracy of their ratings and the impact their announcements have on world markets. A lot of concern has also been raised over the independence of the rating agencies. Their ratings are often linked to political and financial incentives and motivated by large investment banks and hedge funds.

These views recently intensified after the “resignation” of the CEO of Standard & Poor’s, Deven Sharma, only a few days after the rating agency downgraded the “untouchable” creditworthiness of the US.

Despite the fact that credit rating agencies are still trying to shake off the stigma of their delayed reaction to the financial crisis of 2008 (and previous incorrect assessments like the scandal of Enron), markets and investors seem to obey their ratings and announcements faithfully. So who gives such power to the rating agencies even after such a tragic series of errors? Let us try to understand the source of their power, using the examples of the US and the Eurozone.

The US have not yet presented any plan to reduce their huge deficit and strengthen their wounded economy. Instead, they extended their borrowing limit only a few hours before they would formally declare default. On the other side of the Atlantic leaders have not yet managed to present and implement a credible fiscal consolidation plan. Despite the implementation of the single currency, they have not yet managed to create a truly solid European economy with common principles and a viable regulatory framework. Instead, there is a two-tier Eurozone with obvious differences between northern and southern states not only in terms of their debt but also in the crucial area of competitiveness of their economies. During the crisis, European leaders proved unable or unwilling to present an accurate picture of the true problems of the Eurozone. Even as they issue drastic measures, they continue to engage in unprecedented bilingualism and tergiversation.

All these factors led investors to view the rating agencies as the only reliable source of understanding the magnitude of the problems. Therefore, the problem of the financial crisis turned from economic to political, giving undue power to the rating agencies.

By accusing the rating agencies, Eurozone leaders focus the problem on the agencies’ controversial operation and financing, especially their main form of funding, which is from international banks. However, in order to be able to cope with and face the negative credit ratings, they must first solve the political problem. Only then they will be able to create a regulatory framework to govern the operation of the rating agencies or even create a European rating agency, as announced by Angela Merkel and Nicolas Sarkozy.

European leaders need to finally regain their lost credibility, confront the real dimensions of the crisis and agree on a common action plan. If they manage to demonstrate the necessary compassion, unity, honesty and determination, they may be able to face the rating agencies from a position of power.

Unfortunately, the world economy is running at a fast pace and no one has the luxury of losing time. Unless the troubled European countries show the necessary political will to take measures and enhance the competitiveness of their economies whilst achieving growth, the problem will remain, with unforeseeable consequences.

For the troubled Eurozone, the crisis might just be a first-class opportunity to change all the inherent weaknesses that it has had since its birth and come out stronger and unified. •

M

During the crisis, European leaders proved unable or unwilling to present an accurate picture of the true problems of the Eurozone.

Facing the Credit Rating Agencies

23


conomic and social cohesion has been one of the priorities of the European Union for many years.

A more balanced and coherent Europe will promote harmonious and sustainable economic growth and will ensure the long-term stability of the economic system that governs the Union. To this end, the European Commission created the European Regional Development Fund, the European Social Fund and the Cohesion Fund. The massive €347 billion program runs from January 2007 to December 2013 and is designed to fund the economic and social imbalances in Europe.

Some of the many objectives of the program include environmental and administrative efficiency, human and physical capital innovation, knowledge enhancement, reinforcing competitiveness, promotion of entrepreneurship, reduction of unemployment and territorial cooperation. The actual uses made of the €347 billion, however, diverged from the objectives, as people became suspicious. A comprehensive investigation into the EU’s structural and cohesion funds conducted by the Financial Times and the Bureau of Investigative Journalism proved disappointing.

The results of the investigation showed that a big portion of the funds go to multinational giants or to companies that are using insider information and key people to gain advantage in the allocation of the funds or, even worse, to organised crime. In a period of economic crisis where cohesion is of foremost importance, this misappropriation of funds is scandalous. What is even more disturbing, especially in the economic communities of the most wealthy EU countries, is that there are no clear evaluation policies to assess the effects of the funds with any certainty. €347 billion of EU money is being allocated with unclear procedures, in a lot of cases for

questionable uses, and their economic effect is unclear. It is clear that something has to change.

It would be a mistake in principle to suggest that the EU should cut off this program. The objectives are still valid and essential for the long-term development of Europe. After all, no one can underestimate the waste water treatment systems in Hungary, the motorways in Spain and the hundreds of environmental and infrastructure projects that have upgraded the poorer countries within the Union. It is essential, however, to mitigate the inefficiencies, to clearly evaluate and assess the uses of the funds, and any abusers must be caught and punished promptly.

The problem has been identified by the European Commission and is being given the appropriate attention. “We have to be open to different possibilities of how to design the policies but still base them on the generally successful implementation of the policies in the past,” said Mr Barroso. Various countries have expressed different opinions on the size and the uses of the program. The general consensus is that the program should continue going forward. As Fabrizio Barca, a senior Italian Treasury official, stated, “Some think ... that cohesion policy is mostly – if not only – about redistributing financial resources between member states and regions…They have not realised that cohesion policy is, or should be, a policy for development.”

This stance describes an official point of view. Meanwhile, everyone has to realise that we are experiencing tough times. Governments of troubled economies may bid for the cheques blindly without necessarily having a clear justification for claiming the cash. Will the European Commission rationalise the use of the fund or will it use the money as “carrots” to implement its agenda? The outcome remains to be seen. •

¤347 Billion to Fund the Cohesion Within the EU

E

Regulation


ccounting is the system an organisation uses to measure its financial performance by recording

and classifying transactions of value. Accounting also provides ways to present this information that makes it possible to evaluate an organisation’s past performance, present condition and future prospects for decision-making by a range of users. These disparate audiences, both internal and external to the organisation, use this accounting information in different ways. Internally, managers may try to use it to plan and control the organisation’s operations. Externally, suppliers, banks and other lenders want to know whether the organisation is creditworthy. Investors and owners are concerned with the organisation’s profitability and growth. Government agencies are mainly interested in regulating the organisation and the collection of taxes.

Irrespective of use, each and every one of these users need financial information that is relevant, objective, consistent over time and comparable to that supplied by other organisations. Such a requirement implies that accounting, and the statements produced from that activity, should generally conform to certain standard formats and be prepared in accordance with a uniform set of generally accepted accounting principles. In a purely domestic setting, this has generally been the case for many years. Internationally, however, it has been a different proposition for diversity of national legislation, tradition and culture resulted in a disparity of accounting practices throughout the countries of the world.

Accounting, then, should not be considered an exact science. Using identical financial and other data, accountants may legitimately derive a wide variety of results depending on the assumptions they make, the way they interpret the accounting rules, and the areas of accounting or reporting that are not yet covered by regulation or that involve

subjective estimates. Indeed, when considering the financial reporting requirements of an organisation that operates in many parts of our global village, this presents significant difficulties for preparers, auditors and users of these financial reports.

Nevertheless, even though many accounting numbers arise from human judgement, they may still provide a useful financial picture of the organisation. What is certain is users of this information think and act based on that picture. If one accepts that the picture has been constructed with the artist’s concept of reality or purpose it suggests the underlying purpose of accounting is to persuade through presentation; in short, communicate. What seems less clear is what it is that accountants are communicating and to whom?

This dilemma arises because of the vast constituency with whom accountants are trying to communicate. As with any group of reasonable size, the needs of its members are disparate. Consequently, for many years the accounting profession has struggled with a ‘one size fits all’ approach to the determination of accounting standards. Indeed, the on-going transfer from national to international development of accounting regulation is perhaps the clearest example of this way of thinking. This transfer, the harmonisation project, is championed by multinational preparers of financial statements and their auditors. They are not alone at the forefront of the drive for change. Users of the financial information disseminated around the global village have also added their rallying cry to the cause. Now, world leaders, because of the worldwide impact of the current financial crisis, are calling for stronger regulation in financial matters, specifically through the development of a single set of high quality universal accounting standards. The result is that more than 100 countries now require

Accounting Regulation: Curse or Cure?

A

24 Regulation

By: Dr. Geoff Turner


25

or encourage the use of international standards. Where they already have national standards, convergence with international standards is currently in place or underway as it seems to be in the best interests of all concerned. It is against this background that the accountancy profession continues to be bombarded with an ever-increasing number of laws, regulations and other kinds of standards and guidance: a trend that will only continue, if not escalate.

One problem inherent in any top-down approach to the harmonisation of anything, accounting included, is that forced harmonisation requires compromise. If there are three ways to report on a certain item, for example, and if each of the three ways is in widespread use, it must be because a substantial segment of the financial reporting community thinks that each of the methods is ‘the best’ way to report on that item. If accounting harmonisation requires two of the three methods to be discarded in the interests of uniformity, it is fair to say that a substantial segment of that community will have to be content with a method that they deem less than best. Otherwise, they all would have adopted the method voluntarily without the need for forced harmonisation. In other words, sub-optimisation will often be the result if substantial segments

of the financial reporting community have to settle for less than their first choice.

Further, one of the very real dangers inherent in forced harmonisation is that those charged with overseeing the process will make the wrong decision. Even if the decision-makers always choose the method that the majority prefers, which is often not the case, a harmonised system must necessarily ignore or discount the views of the minority. Several other arguments, such as regulations are conceived in crises, regulators are captured by regulatees, and regulators are reactive rather than proactive, have also been made against regulating accounting standards. To these we could probably add a fourth, which is that their own interests, not those of the public, motivate regulators. Do regulators fully understand what all the users need? If not, how can they possibly give them what they want!

Let me make one more significant point about regulation. The literature on development economics and economic systems has been addressing the relationship of central planning to efficiency, innovation and growth for considerably longer than the accounting profession has been pursuing harmonised accounting standards. These investigations suggest that top-down, centrally planned systems are suboptimal because they are structured in such a way that makes it impossible to respond to changing user demands. The continuing push toward accounting harmonisation suggests that the accounting profession has chosen to ignore lessons that have already been learned in other disciplines. A centralised financial reporting system adheres to the same hard rules of economics as do centrally planned economic systems and so a top-down approach to standard setting must be considered structurally inferior to a system that is user driven.

The accountancy profession continues to be bombarded with an ever-increasing number of laws, regulations and other kinds of standards and guidance

Regulation

26


Harmonisation is, of course, only one side of the debate that is promoted largely by those with a vested interest and supported by panicking politicians whose policies arguably led to the present contagion. As with all debates, there is another side and that is the quiet but persistent demand to present financial information in such a way that it may be put to use as a functional decision-making and compliance instrument by stakeholders and the community. The user driven alternative is to provide a framework of acceptable accounting practice and allow users to determine whether the preparer is providing good quality, relevant financial information. All elements of financial reporting from recognition and measurement through to disclosure, the extent of which probably matters the most, would therefore be user focused, responsive to specific user needs and delivered at a cost that preparers would be willing to bear. Over time, certain methods would emerge as being better than others are. If no reasonable and informative method is prohibited, new methods, not now existing, might well emerge to resolve financial reporting issues that the present day regulators choose to ignore or cannot yet imagine.

Of course, such an approach will not always work perfectly and so, from time to time, governments may feel obliged to intervene by introducing new or strengthening existing regulations. Without doubt, such an approach involves a non-sequitur. Just because the user driven approach does not always work perfectly, it does not logically follow that government intervention will make things better. In fact, government intervention may even make things worse. Therefore, the question is not so much whether to regulate but rather who regulates: some quasi-governmental agency or the market? This dilemma remains unresolved for the time being for it is an issue over which there will be no early compromise. Since it is doubtful that uniformity in accounting and auditing rules will secure better quality information, we need to understand how the overall reform should be packaged. This will perhaps be easier if we examine the issue from a different perspective, which is who wins and who loses in an environment of diversity?

Winners from worldwide diversity in financial accounting and reporting practices include, first, the financial analysts who profit from their interpretation of these divergent reports on behalf of brokerage firms, investment newsletters and portfolio investors themselves. National accounting regulators also gain because they have absolute control over national regulation in their respective jurisdictions, which is a source of administrative and political power for them. Accounting professionals are also considered winners because diversity generates fees when clients set up new business units in different territories or when cross-border auditing has to be performed. Finally, business consultants gain from rendering advice because of financial information differentiated by dissimilar regulation.

Portfolio investors stand to lose the most because misunderstandings stemming from diverse reporting practices are likely to reduce their investment returns. Businesses operating in several jurisdictions lose because

complying with varying national accounting standards is costly and often misleading. Consumers and other general markets participants are also likely losers since financial inefficiencies tend to make markets less efficient leading to higher consumer prices. Finally, economic policy makers are negatively affected since they do not have comparable information from other countries requiring them to spend much time and effort in adjusting economic data to a homogeneous or at least comparable basis.

How bizarre that those who least benefit from the harmonisation of diverse national accounting standards are the very people who manage the process. No wonder they have been dithering over a project that in most other industries would have been effectively completed, or trashed if that course of action was deemed to be in the best interests of those concerned, many years ago. This, however, may be unkind. In a continually changing international business environment, difficult conceptual and practical accounting issues often arise. These are usually deep-seated differences of opinion coloured by national traditions, customs, and local accounting dialects, contrasting regulatory philosophies, and in some instances short-term opportunism.

Throughout this debate, the most fundamental of differences seems to lie in the question of the degree of detail appropriate in setting out the standards. Should a standard attempt to describe precisely the application of principle in almost all conceivable cases or simply be clear on the overall principle and provide more general guidance on its application? The latter, supported by precedents determined on a case-by-case basis, has much merit. Such an approach focuses on the strategic rather than the technical merit of the process and seems capable of providing reliability and comparability of information.

In conclusion, it has to be said that impeccable international accounting standards are one thing, enforcement is another. This is a most critical aspect that will ultimately determine the success or failure of the harmonisation process. No international organisation has a mandate or the authority to enforce their standards. That essential role is for the national regulators. Does not this, and the possibility that the concept of a single, universally accepted set of accounting principles is important only in the minds of their inventors, suggest that the most appropriate way to provide investors of all kinds with the information they need would be to replace the present coercive, authoritarian, top-down model with a set of user driven rules or guidelines supported by case studies? •

Portfolio investors stand to lose the most because misunderstandings stemming from diverse reporting practices are likely to reduce their investment returns

Regulation


27Real Estate

xisting legislation concerning the real estate market has recently been amended and while more

changes are expected, the public should be informed. These changes include:

• Reduced VAT for first residence;• Tax Reform – Changes in Immovable Property Tax; • New Foreign Investments in Cyprus; • Abolishment of restrictions on acquisition of 2nd

residence in Cyprus.

Reduction of VAT for first residenceWith the enactment of a Bill on the 26th of August, 2011, the House of Parliament has reduced the VAT for the first residence to 5% (from 15%). Basically on acquisition of a new residence (of up to 200 sq. meters) the purchaser used to pay VAT of 15% on the transaction value and then used to get back 9%-10% through a slow process. However, many people could not actually pay upfront the additional VAT on the purchase price and then claim back 10%.

With this amendment the purchasing cost is reduced (by10%) and in addition the option is given to buyers of houses of over 200 square meters to pay VAT of 5% for the first 200 sq. meters while paying the current 15% for the remaining (this measure applies to homes with a maximum area of 250 sq. meters internally).

In other words, the cost of purchase / loan is reduced from the outset and this is expected to positively affect the real estate market since it is considered a good measure for growth at no cost ! This Law is applicable from 1st October 2011 onwards.

Immovable Property TaxThe Parliament has also amended the Immovable Property Tax. Under the new bands and based on 1980 prices, no tax

is paid for property with a value of up to €120.000 (used to be €171.000).

The table below shows the new amended bands paid per physical or legal entity:

Prices as at 01.01.1980 %

0 – 120.000 0

120.000 – 170.000 4

170.000 – 300.000 5

300.000 – 500.000 6

500.000 – 800.000 7

800,000 and over 8

The Cyprus Association of Valuers and Property Consultants informed in writing all relevant governmental bodies (since 2007), to proceed with a tax reform for the real estate sector. Based on surveys and studies it is indicated that the correct approach is to have, if possible, uniform tax on real estate.

In other words, there is a need to restructure and redesign the overall fiscal framework in order to create a simplified system of taxation for real estate, understandable and manageable by the taxpayer, while being easy for the state to collect taxes.

Unfortunately this was not achieved to date, in contrast since 2004 additional taxes have been imposed on the real estate sector (VAT on new buildings, indirect increase of transfer fees from the increase in prices, etc.) and it is commonly accepted that the property market is overtaxed.

Major Developments in the Real Estate Market

EBy: Charalambos Petrides, BSc(Hons), MPhil, MRICS

28

In addition, the new local plans have incorporated a new tax on property with the introduction a percentage fee for urban development in cases where the planning zoning has been enhanced via the reversion of the Local Plans.

As for the immovable property tax, no doubt the method of taxation is too low and creates disparities between property owners, since it only applies to a small number of properties, about 2% nationwide.

The new Bill (The Immovable Property Tax - Amendment - Act of 2011) although much fairer under all considerations, imposes high rates in our view, especially for properties of a value exceeding €300.000, i.e. 6%, 7% and 8% per thousand, these being much higher than the maximum 4% cap that existed before.

The point is, however, to look at the taxation of property spherical and not piecemeal. We believe that with the implementation of the above Bill compensation incentives should be provided for the property market, for example with the immediate abolition of transfer fees where VAT is levied.

This way, the result will not only be extra taxation income, but a direct incentive for more action in the real estate market with benefits for the economy in general (sales growth, liquidity / market mobility, collection of other taxes, etc.).

Foreign InvestmentRecently there has been increased interest in investing in Cyprus. In Larnaca, foreigners (Arabs) have already purchased a 15,000 square meters plot for the development of a luxury hotel at the cost of €32.000.000. The French Group Bouygeus Batiment International will participate in the development ALAKATI project with capital amounting to €100 million. There is also increased interest from Cypriot and foreign funds for large investments that can be acquired at reasonable prices.

Abolishment of restrictions for 2nd residenceThere is a bill to abolish the restrictions for acquisition of a 2nd residence in Cyprus. Under the current status, every European citizen is entitled to purchase a house and a piece of land. Under the new law, restrictions on European citizens and citizens of the European Economic Area over acquisition of real estate are to be abolished. It is expected that this amendment will positively impact foreign investment in Cyprus in the long-term.

In concluding, I would like to point out that the long-term prospects for the property market are good. However, it is a fact that the real estate market follows the path of the economy that is currently facing various problems. Austerity measures for the consolidation of public finances should be taken so that the property market moves positively in the medium term, giving impetus to the development of our island. •

It is a fact that the real estate market follows the path of the economy that is currently facing various problems

Real Estate


30


Real Estate

Where are we Now?The real estate market faces an extended depression as the current number of sales accounts for approximately 50% of the last decade’s average (data of the Cypriot Department of Land and Surveys). The decrease in the number of transactions is greater in Pafos, Larnaca and the district of Famagusta – about 30% of the volume of transactions of 2007 – with Nicosia and Limassol having a decrease of about 30%-35% since 2007.

Despite the ongoing crisis, about 600 transactions per month are still completed across Cyprus. The transactions concern mostly integrated units in city centres or properties for immediate development / exploitation. The demand for properties out of the city limits and especially for fields in secondary areas is very limited. The average sale price for apartments is between €140,000 and €200,000 and for houses between €350.000 and €450.000 (Leaf Research data).

Since the beginning of 2008 the majority of buyers (about 75%) are Cypriots while the number of foreigners is increasing during the last six months (although starting on a low level). The local buyers take advantage of some “special opportunities” in order to gain property in central areas while some foreigners have begun returning to the island due to lower prices – especially in the districts of Pafos and Larnaca.

Foreign BuyersDuring the last decade, the highest monthly number of transactions took place on September 2007, when 1,927 transactions were completed (data from the Cypriot Department of Land and Surveys). During 2007 and up until September 2008 foreign buyers accounted for 45%-50% of the total buyers and in some areas / districts even more. For example in the period between 2004 and 2007 they accounted for 65% of all buyers in the district of Pafos.

Since September 2007 the number of sales has gradually decreased and now accounts for 600 transactions per month. Foreign buyers now add up to 35% of the total buyers even though they had fallen below 20% during 2009. The reason for the recent increase lies not so much in the increase of interest from foreigners but rather in the decrease of interest from Cypriots.

As long as the foreign buyers continue to face problems in their own economies, the local economy and the real estate market will continue to suffer. Even when things become more stable, we do not expect that they will return in the same numbers.

Real Estate Market Review: Where are we Now and Where are we Heading?By: Pavlos Loizou, MRICS. Lead Consultant / Leaf Research/ www.leafresearch.com

31


Real Estate

The “Freeze” of New Developments and Unsold Real EstateUnfortunately, I have to inform you that this “freeze” will intensify during the following 6 to 12 months. Sales of cement are 8.9% below those of 2010 (and 18.6% below those of 2009) whilst residential building permits have decreased by 30% compared to last year (Statistical Service data). This does not only mean that there is reduced building activity (cement data), but that in the near future this reduction will be even greater since new projects will not start (building permits data).

The issue regarding the absorption of existing real estate units is an important one, but the lack of new developments does not necessarily mean that demand will absorb the existing stock. A large part of unsold properties are situated in “wrong” areas or are not attractive to existing/ potential buyers.

For example, in the period between 2000 and 2010 the number of building units in the district of Pafos doubled (data from the Electricity Authority of Cyprus), with several of these units being targeted towards the “foreign” market. If a couple wants to buy a permanent residence then these estates will most definitely not satisfy them regardless of price. Moreover, let’s not forget that “real estate cannot move places”. If there is demand in Nicosia and oversupply in Pafos, price will make no difference in changing the selection of the buyer. The only result of the lack of development is that groups of the population that look for a certain product cannot obtain it. It is thus apparent that there are opportunities for development even during the depression, and that a complete lack of development can prove detrimental for the wider economy and society.

How are Financial Institutions Handling the Situation?Many financial institutions deal with the current situation with the usual practice of “wait and see”, which on its own might turn out to be disastrous not only to the property owners but to their financiers as well. Idleness will lead to an increase of debt and may also lead to a decrease in the value of property, for example in buildings that are under construction or where maintenance of the structure is needed, etc., resulting in the magnification of the problems of financial institutions. Moreover, it will send the wrong messages to other interested parts, such as

shareholders, workers, etc., as far as liability and the level of control in granting loans is concerned.

Right now, banks are putting pressure on real estate valuers not to reduce the valuations of property so that their loans will seem secure and their profits will not be affected. However, prices in second-rate areas and the value of land is likely to decrease further with recovery a long way ahead. As a result, financial institutions will find themselves under additional pressure as a result of non-performing loans and will need to find more inventive ways in order to get their money back.

The Purchasing Power of Cypriots has ErodedDuring the period 1998-2002, the ratio of the median salary of an average couple to the purchasing cost of a mid-quality residence was 7.0 times. From 2003 to 2005 this ratio increased to 8.3 times due to the increase of the purchasing cost of a residence which was higher than the increase in salaries. This increasing tendency continued until 2008 when the ratio peaked at 10.9. Within a decade the purchasing cost of a residence for the average Cypriot was increased by 60% in comparison to his salary. Looking at the reasons of this increase we note that the building cost was increasing in tandem with salaries (both increased by about 53%) while the price of land increased by 576%.

This increase in price was, and still is, not in alignment to the income of an average couple. As a result, we expect that a significant decrease in real estate prices will continue until they return to the previous average of 7.0 to 8.0 times the median salary.

I would like to stress that if this does not happen, the market will not function correctly as we will be trapped in a vicious circle where buyers will not sell because they “want too much”, buyers will simply not buy because it will be above their budget, and banks will not grant loans due to the fact that they know that prices are arbitrarily high and that if they need to sell the property (foreclose) they will receive much less.

Right now, banks are putting pressure on real estate valuers not to reduce the valuations of property so that their loans will seem secure and their profits will not be affected

32


Estimates – Prices, Financial Institutions and Government MeasuresPrices in second-rate areas and especially the price of the land are likely to decrease further and not recover in the near future. As far as city centers are concerned, the price of commercial property will decrease as well as the rise in unemployment will lead to a reduction in demand for space for processing business activity (offices) and reduction in the purchasing power of consumers (shops). Due to the oversupply of new business units in some cities, for example offices in Limassol and Pafos, we may witness a further reduction in rents in low-quality units since occupiers will opt to move into higher quality units for the same rent they are paying now.

Predictions (2012)Building plots (-) 15%-20%Building fields (-) 20%-25%Commercial plots (-) 10%-15%Offices (-) 10%-15% (cat. A)

(-) 20%-25% (cat. B/C)Flats (-) 10% centre

(-) 20% secondary areas (-) 25% tourist areas

Shops (-) 10% centre(-) 20% secondary areas(-) 30% tourist areas

Fields (-) 30%-40% (in some cases more)

Financial institutions will suffer additional stress due to non-performing loans and will be forced to reevaluate the risk of granting loans to Government and Banking officials since they are now less reliable than before. This will affect especially the Nicosia market where these two categories are concentrated and where the local market relies almost exclusively on them.

As strange as it may sound, I am optimistic about the real estate market. I am not that optimistic as far as the price of property or for overly bold developments that are targeted towards the foreign market are concerned,

but I am positive due to the fact that several owners/investors are looking into different types of projects, such as photovoltaic parks, student’s halls of residence, private hospitals etc. Moreover, I expect that banks will take advantage of the current situation by approaching it as a unique opportunity for setting better practices for the future and strengthening the relations they have with their customers.

Regarding the government’s measures, I am not positive due to the fact that they lack cohesion and are not proposed for the right reasons. Their primary aim is collecting taxes, not solving problems or improving current practices and procedures, e.g. issuance of title deeds, legal framework of common charges, etc. This myopic rationale will not bring the wanted results and will not solve the problems of the real estate market which will simply continue to exist.

The biggest problem of the real estate market is the lack of title deeds, which the government plans to partly solve through the planning amnesty. The amnesty, whose aim is the collection of taxes, provides for high charges for the acquisition of extra “building factor”. For example, for a semi-detached house of 180 sq. meters whose owner has “closed” the veranda of 20 sq. meters, he would have to pay, depending on the area, +/-€600 per sq. meter – thus €12.000 in total. With the issuance of a title deed, he would also have to pay transfer fees, as the estate would have to be transferred under the owner’s name, an additional +/- €20.000. Total cost – in the midst of a recession - €26.000. Further, since the estate will afterwards be registered as a house instead of a plot, the owner would have to pay increased immovable property tax.

This is the reason why only 21% of the title deeds issued in the last two years have actually been transferred to their owners, resulting in lost revenue for the government both in terms of transfer fees as well as immovable property taxes. The big question, which comes from a long existing problem, is who will impose the law in cases where the law is flaunted. What is the true deterrent for not following the law? For my perspective there is none, since the beginning and the end of a good functioning legal system is not the existence but the imposition of law. •

Source: Leaf Research

Right now, banks are putting pressure on real estate valuers not to reduce the valuations of property so that their loans will seem secure and their profits will not be affected

33


he shadow economy, also known as the underground, informal or parallel economy,

has been a major subject of debate amongst leading economists worldwide, with opinions varying over its size, significance and effect on economic growth. Another major topic of debate is the effect of tax policies over the

underground economy. Of much concern is the fact that a prospering shadow economy makes official statistics unreliable, especially in terms of unemployment, labour force, income and consumption, which in turn result in inefficient government policies and programmes which are based on the official statistics.

T

Analysis

HIDDEN IN THE DARK

34


What is the shadow economy? In its simplest form, and although no formal definition exists due to the extensive activities that it entails, shadow economy refers to all activities, both illegal and legal, which would be taxable were they reported to the tax authorities of a country. The different types of such underground economic activity are outlined in Table 1 above. There are many participants in the underground economy: small to medium-sized companies, self-employed individuals, and criminal enterprises. Despite most people’s thoughts being that the underlying economy thrives mostly between self-employed individuals and criminals, a considerable amount of the shadow economy consists of fully legal and registered businesses who participate by hiding part of their income or understating part of their expenses. The drive for this tax advantage can be demonstrated by a simple example – by calculating how a small understatement of sales can lead to a big relative understatement of net profits.

SizeAlthough shadow economic activities have been around and growing for centuries, the recent economic crisis has led to yet a a bigger increase, with governments struggling to control their growth.

The shadow economy is inherently difficult to measure, as people involved in the shadow economy take every effort to avoid detection. Nonetheless, economists and statisticians have made several calculations to estimate the shadow economy’s size. These estimates are clearly very subjective, as they have been based on a mixture of data collection methods and sources: from direct surveys, tax audits, actual transactions, national accounting and labour force statistics, currency demand, and physical inputs such as electricity consumption. A recent estimate of the size of the shadow economy in various countries is summarised in Table 2 below, indicating its magnitude.

1989/90Average

1994/95Average

1997/98Average

1999/00Average

2001/02Average 2003 2004 2005 2006 2007 2008 2009 2010 2011

Austria 6.9 8.6 9.0 9.8 10.6 10.8 11.0 10.3 9.7 9.4 8.1 8.5 8.2 8.0

Belgium 19.3 21.5 22.5 22.2 22.0 21.4 20.7 20.1 19.2 18.3 17.5 17.8 17.4 17.1

Denmark 10.8 17.8 18.3 18.0 17.9 17.4 17.1 16.5 15.4 14.8 13.9 14.3 14.0 13.8Finland 13.4 18.2 18.9 18.1 18.0 17.6 17.2 16.6 15.3 14.5 13.8 14.2 14.0 13.7France 9.0 14.5 14.9 15.2 15.0 14.7 14.3 13.8 12.4 11.8 11.1 11.6 11.3 11.0Germany 11.8 13.5 14.9 16.0 16.3 17.1 16.1 15.4 15.0 14.7 14.2 14.6 13.9 13.7Greece 22.6 28.6 29.0 28.7 28.5 28.2 28.1 27.6 26.2 25.1 24.3 25.0 25.4 25.8Ireland 11.0 15.4 16.2 15.9 15.7 15.4 15.2 14.8 13.4 12.7 12.2 13.1 13.0 12.8Italy 22.8 26.0 27.3 27.1 27.0 26.1 25.2 24.4 23.2 22.3 21.4 22.0 21.8 21.6Netherlands 11.9 13.7 13.5 13.1 13.0 12.7 12.5 12.0 10.9 10.1 9.6 10.2 10.0 9.8Portugal 15.9 22.1 23.1 22.7 22.5 22.2 21.7 21.2 20.1 19.2 18.7 19.5 19.2 19.4Spain 16.1 22.4 23.1 22.7 22.5 22.2 21.9 21.3 20.2 19.3 18.7 19.5 19.4 19.2Sweden 15.8 19.5 19.9 19.2 19.1 18.6 18.1 17.5 16.2 15.6 14.9 15.4 15.0 14.7UK 9.6 12.5 13.0 12.7 12.5 12.2 12.3 12.0 11.1 10.6 10.1 10.9 10.7 10.5Norway 14.8 18.2 19.6 19.1 19.0 18.6 18.2 17.6 16.1 15.4 14.7 15.3 15.1 14.8Switzerland 6.7 7.8 8.1 8.6 9.4 9.5 9.4 9.0 8.5 8.2 7.9 8.3 8.1 7.9Australia 10.1 13.5 14.0 14.3 14.1 13.7 13.2 12.6 11.4 11.7 10.6 10.9 10.3 10.1Canada 12.8 14.8 16.2 16.0 15.8 15.3 15.1 14.3 13.2 12.6 12.0 12.6 12.2 11.9Japan 8.8 10.6 11.1 11.2 11.1 11.0 10.7 10.3 9.4 9.0 8.8 9.5 9.2 9.0New Zealand 9.8 11.3 11.9 12.8 12.6 12.3 12.2 11.7 10.4 9.8 9.4 9.9 9.6 9.3United States 6.7 8.8 8.9 8.7 8.7 8.5 8.4 8.2 7.5 7.2 7.0 7.6 7.2 7.0

(a) Using the currency demand approach and the MIMIC-approach. Source: Schneider, F. (2011), Der Einfluss der Erholung von der Wirtschaftskrise auf die Schattenwirtschaft in Deutschland und anderen OECD-Staaten: Ein (erneuter) Rückgang, http://www.econ.jku.at/531, accessed 03/02/2011, Johannes Kepler Universität, Linz, p. 14.

Table 1: The Types of Underground Economic ActivitiesType of Activity

Monetary Transactions Non-monetary Transactions

IllegalActivities

Trade in stolen goods, drug dealing and manufacturing, prostitution, gambling, smuggling, fraud

Barter of drugs, stolen or smuggled goods. Producing or growing drugs for own use. Theft for own use

Tax Evasion Tax Avoidance Tax Evasion Tax Avoidance

LegalActivities

Unreported income from self-employment. Wages saleries and assets from unreported work relating to legal services and goods

Employee discounts, fringe benefits

Barter of legal services and goods

All do-it-yourself work and neighbour help

Source: Lippert and walker, The Underground Economy: Global Evidence of its Size and Impact. Vancouver, B.C, The Frazer Institute, 1997.

Table 2: The Size of the Shadow Economy, as Percentage of GDP, 1989 - 2011a

Analysis

35


The results of Table 2 indicate an average size of the shadow economy at 13.4% of the GDP of the countries examined – a rather worrying figure. So what drives the shadow economy and why does it keep growing?

GrowthMacroeconomic research and modelling suggests that the major reasons of growth for the shadow economy are the following:

• Increased/High TaxesSeveral studies indicate that the tax regime in a country very much influences the shadow economy. Higher taxes add to the cost of labour and reduce the after-tax earnings of workers. This economic climate gives strong incentives to participate in the shadow economy, especially to workers.

• Increased/High Social Security Payments and Wage RatesAs with taxation, high social security payments and wage rates increase the cost of labour, driving workers (and employers) towards the shadow economy in search of gains to offset the difference between the total cost of labour in the official economy and the after-tax earnings from work.

• Restrictions in the Official Labour MarketGovernment regulatory restrictions such as licence requirements, trade barriers and restrictions for foreigners again are significant factors driving the shadow economy. They too increase the cost of labour, shifting most employees towards the shadow economy, as employers typically shift most of their costs to their employees. Such regulations evidently have a major effect on employers’ costs and workers’ incentives.

• GovernanceLooking at the results of Table 2, shadow economies tend to be smaller in countries where government institutions are strong and efficient. Some even argue that application of the tax system and regulations by governments are even stronger determinant drivers of the shadow economy than taxation.

However, there needs to be a combination of regulations and administration of the law in order to reduce the underground activities. There are numerous examples of heavily regulated economies where lack of administration and supervision has provided a fertile ground for shadow activities, corruption or even organised crime.

Effects of the Shadow EconomyNo doubt, the shadow economy affects many areas. A change in the size of a country’s shadow economy can change the country’s official economy. This change comes in the form of monetary indicators – pushing up the demand for cash (most shadow economy transactions are cash-based) – and influencing labour market participation rates, working

hours and output statistics. With the growth of the shadow economy, production inputs and labour move out of the official economy, depressing the growth rate. These effects make the government statistics less reliable, often causing incorrect economic policy decisions.

Tax evasion caused by transactions in the shadow economy keep government revenue down, which reduces the government’s ability to provide goods and services. This depreciation could lead to increased taxation, which could lead even more people into the shadow market. Further, the shadow market can lead to social transfers, as people who are receiving generous unemployment benefits have no incentives to work in the official economy and instead increase their overall income by working in underground activities.

Some economists argue that a growth in the shadow economy depresses the growth of a country’s GDP. They state that a growing shadow economy reduces tax revenues, stimulating a shrinkage in public spending, which leads to an overall economic decline.

By contrast, others note that the informal shadow economic sector is much more competitive and thus a growth in it will ultimately drive overall economic growth. This opinion is further backed by empirical studies that suggest that much of the income earned in the shadow economy is quickly spent on the official economy, thereby raising consumer spending and giving overall positive effects.

Other views assert that governments are often led to excessive and wasteful spending. Therefore, in that sense, the underground economy is a form of tax protest that forces governments to realise that there is a limit on how much they can spend. Adding to that, many people state that governments often establish unnecessary and inefficient regulation of economic activity, with the underground economy being the result of willing sellers or providers being unable to make legal exchanges with willing buyers or consumers. This stance, however, relates mainly to cases where the ultimate aim is not tax evasion – that would essentially lead to welfare costs.

It is clear that the shadow economy affects everyone. What is unclear and subject to everyone’s own judgement is the conclusion as to whether the shadow economy affects the official economy in a positive or negative way. Theoretical tax and economic models assume that everyone follows the rules. What is ignored is the fact that many otherwise honest citizens are prepared to break the rules in order to evade taxes and are thus, in the process, joining the shadow economy. •

A change in the size of a country’s shadow economy can change the country’s official economy

Analysis

36


Analysis

reece is hitting the global media once again and as

the markets point to a default probability of higher than 99%, fear about the sustainability of the Eurozone model starts to crystallize. E-SQUARED has been pointing out for months that the agreed rescue plan is just the means to an end and not the solution to the Greek economy, which has been heavily infected by decades of irresponsible policymaking. The predictions of the Troika and the IMF regarding the pace structural reforms can take place as well as the sustainability of the rough austerity program have failed. The budget deficit is still unexpectedly high and unstable. Return to growth seems like a far target at the moment. Irrespective of the reasons, internal and external, the imposed recovery policies for Greece have so far failed to meet their targets.

Evangelos Venizelos, the Greek finance minister, has admitted that there is a political and institutional problem in Europe and that policy co-ordination is indeed a difficult task. He stressed, however, that should Europe fail to resolve effectively and definitively the problems of a medium-size economy like that of Greece, it has no future. Indeed, the European leaders seem to agree. In a summit on July 21, they took a bold step in agreeing to provide financing to Greece under terms enjoyed by triple-A rated countries “for as long as it takes” – provided that Greece continues to implement its adjustment policy. There is no doubt that is in Europe’s favour that Greece

survives this crisis. To succeed, sound policies and reforms are needed, but effective implementation is of equal importance.

Monetary tools are not an option given that Greece has decided to stay in the Eurozone, a choice that has been supported by its European partners. As such, the policymaking for Greece focuses on two pillars: fiscal policies and growth.

Fiscal PoliciesAs already mentioned, the fiscal targets have not been met. The weaker than expected economy and the contraction in the revenue base are clearly the main reasons why the austerity measures have not resulted in the desirable progress. The medium-term fiscal program to which the Greek government has committed this summer sets up a solid basis in pursuing fiscal reforms. The fact, however, that it has not attracted the necessary political support, combined with the fairly understandable wide public disapproval, has resulted in a slow and doubtful implementation. The Troika is in the process of imposing new austerity measures and the instability of the political system threatens to set two years of reforms

on fire. Technical assistance is coming from the IMF and Greece’s European partners, but as long as public consensus is not achieved, every effort seems meaningless.

Bob Traa of the IMF offered reassurance that imposition of new taxes is not politically or economically sensible. Increasing taxes on a limited tax base can only reduce revenues at a time where businesses and consumers are desperate for liquidity. Speaking at The Economist’s conference in Athens, the senior IMF representative pointed out the two factors that in the Fund’s opinion are the best bets to achieve fiscal reform.

First, it is clear that efforts to improve tax administration have not produced the desirable results. The underground economy is thriving and the system is unable to determine and collect legitimately owed taxes. Mr Traa is pointing out that it would be virtually impossible for Greece to undertake, in a socially acceptable manner, a large fiscal consolidation without improving its tax administration system. In this respect, so far the government officials have failed.

Second, Mr Traa is urging the Greeks not to be constrained by taboos and move on to close inefficient public

Greece Time Zero: A Rescue That Makes Sense

G

37


Analysis

enterprises and pursue involuntary redundancies in the public sector. It is the Fund’s opinion that the size of the public sector needs to be reduced with the combined benefits of reducing the budget expenditure and at the same time moving productive resources to the more efficient private sector. This of course needs to be combined with privatisations so that funds are also moved to the private sector to match the supply of employability coming from the redundancies.

GrowthIn the growth pillar, things are much simpler in principle. Forget about new growth expenditure coming out of the government’s budget for the simple reason that there is no money to do so. As such, growth can only come through structural reforms. Increasing flexibility and creating a more investor friendly environment in which to do business is the only way forward. Consumption is already stretched and the drivers for a sustainable model can only be investments and exports. Regarding the investments, Greece needs to take away all negative obstacles to doing business and increase transparency through structural reforms. The competitiveness of the country suffers and this is evident from the large trade deficit. Equilibrium will eventually be reached. The question is whether it will come through import reduction and thus the country will become poorer or through the increase in exports by motivating corporations to take risks and do business in Greece. Patience is important, as structural reforms always take time to materialise.

Reforms started strong in Greece, with comprehensive pension and labor market reforms, but they have now become much more incremental. It is important to understand that in order to regain the confidence of the foreign and domestic investors, a critical mass of reforms is needed to transform the investment climate and boost the economy. The government’s diffidence in pursuing reforms with the same stable pace is without doubt one of the major reasons why the country is still, and will remain for at least two more years, in recession. The recent downward revision of the economic outlook in Greece highlights

the fact that effecting a definitive structural transformation remains the overarching challenge facing the Greek government.

From a European leadership perspective, Greece needs to pursue structural reforms at a much higher scale; otherwise, the “unconditional” lending cannot continue. Of course, the threat of stopping the flow of funding in Greece creates turbulence to the markets and makes recovery even more difficult than it already is. Mrs Merkel and Mr Sarkozi should also remember that the medium-term adjustment program was imposed on Greece by the Troika and that the failure in implementation comes partly from the widely discredited way that the program was imposed. As such, the so-far-undesirable result is partly the responsibility of those who had the authority for policy formulation, the Troika.

In the meantime, Greece has a huge debt, which it has to regularly serve, and the mechanics of doing so depend on the success of the adjustment program and the funding support by the Troika and the IMF.

Three Scenarios for the Way ForwardAccording to press reports that have not been refuted, the Greek Ministry of Finance is examining three potential scenarios regarding the way forward: the GOOD, the BAD and the BETTER.

(A) The GOOD - Greece manages to comply with the fiscal policy targets and reduces its deficit according to the Troika schedule. The PSI (Private Sector Involvement in a voluntary bond swap scheme) is a success with 90% participation.

Under this scenario, the next two tranches of the Troika loan (€8bn in September and €5bn in December) are served and Greece stays solvent at least until the end of the year. The deferral of a big chunk of the payments in the

future will be a huge relief for Greece, which will, however, have to produce a surplus of 3% in 2012 to remain solvent. But wait a minute – the most optimistic predictions for 2012 result in only a 2.5% deficit for 2012. If that is the case, a new, third bailout will be required. Then what? A fourth and a fifth? It is not so GOOD for the European fund providers, is it?

(B) The BAD – Greece fails to meet its fiscal targets and the Troika does not give any one of the loan tranches.

Under this scenario, the Greek government will either not pay its debt holders or not pay the public sector pensions and salaries. Needless to say, in either case the government will have to quit, the markets will go crazy and Greece will follow an outright disorderly collapse. We have to agree in this instance with the Greek Ministry of Finance – this is BAD.

(C) The BETTER – Apply a 50% haircut in the existing bonds and refinance through PSI.

In this instance, we will witness a full credit event in the Eurozone. A domino of general destruction including potential defaults will probably follow in the Eurozone banks, including the ECB, which owns €45bn of Greek bonds. There will be unknown economical and political ramifications for the Eurozone’s future. At the same time, any benefits from the fact that Greece is still heavily unstable and deep into recession will be minimal, as the public debt will still be at 100% of its GDP. Is this the better scenario for the Greek officials?

Our ViewGreece’s case in not a simple one. Its problems go deep into the institutional core of the country and massive reforms are required. Fiscal corrections need to take place immediately while the country faces what seems to be the deepest recession in its history. The political tension is increasing

It is important to understand that in order to regain the confidence of the foreign and domestic investors, a critical mass of reforms is needed

38


Analysis

and Greece’s name in the global markets has been negatively marked as a place where you should not carry out business. The solution cannot be simple. E-SQUARED is taking a view and suggests a 7-step formula that can drive the country out of the crisis in a faster and less painful manner.

STEP 1: Create a national unity government – The measures that have been taken and that will be taken are rough. They cannot be implemented if they do not attract the necessary public support. It is inevitable that unless all opposing parties agree to a common adjustment policy, the program will fail. Grounds for achieving such a government do exist, as differences in the approaches of the various parties are not huge.

STEP 2: Fully and immediately implement the medium-term adjustment program – As already stated, there is a critical mass of transformations that need to take place in order for investors to start regaining confidence in the Greek market and become willing to take the risk and invest in the middle of a deep recession. Taking only a few of the measures and at a slow pace can only slow foreign investment.

STEP 3: Improve the tax collection administration system – More taxes cannot be imposed. It is widely accepted that the tax base has shrunk so much that combined with the drain in liquidity an increase in taxes will only result in fewer tax revenues. The only way to move forward is to collect what

it is legitimately owed to the state. Other countries faced similar problems and technical assistance can definitely come from the IMF or the Troika if Greece’s government requests it.

STEP 4: Reduce the size of the public sector by 30% - Involuntary redundancies should take place immediately. It is understandable that unemployment will initially rise, but as productive recourses move to the private sector, growth will be triggered. It is of foremost importance that the fiscal deficit shows signs of improvement immediately.

STEP 5: Move fast into privatisations – The logic of the Greek officials in asserting that they will not sell profitable organisations for a small amount has already collapsed. They need to start giving “teasers” to foreign investors to initiate business in the country. This will never happen by selling at a “fair” price in these uncertain times. Besides, the tax revenue from the profitability of these organisations, the know-how that will start flowing into the country, and the employability of people from the involuntary redundancies will stimulate growth. The recession is deep and it is not an easy task to return to growth. Once the gears start to catch, however, confidence will rise and the economy will recover.

STEP 6: Gain political support and European funds to support the banks – It is inevitable that Greece will sooner or later default on its obligations. This will create havoc in the European banking system unless it is heavily

supported by strong liquidity injections at a Eurozone level. This needs to be agreed at a European leadership level. We believe that it is possible once Greece pursues the transformation described in the previous steps. Europe does not really have a choice and rescuing Greece is its only chance to save the one-currency project.

STEP 7: Only once steps 1-6 are completed, proceed with a 50% haircut – It is a commonly known secret that a haircut will be applied at some point. After all, the markets value the probability of a default, as evidenced by the CDI’s spreads at 99%. The timing, however, is important. It needs to happen at a time where growth is starting to gear up and austerity measures are giving noticeable results. If it happens at a time when investor confidence is at a minimum, i.e. now, it will only create massive turbulence in the markets and prevent foreign direct investment instead of attracting it.

Nothing in economics is simple. There is a divergence of opinions and solutions as to how to drive Greece and therefore Europe out of this crisis. The skill is to find the most economically and socially implementable solution. Past failures should be a guide and the concerns of the public should always be taken into account. It needs to be extensively explained to the public that equilibrium will eventually be reached. Whether this will occur at an ex-Argentinean level or at a European level will depend on the courage of firstly the people and then of the government to pursue change. . •

40


n September 1986, the Economist devised the so-called ‘Big Mac Index’ as a fun way to explain

purchasing power parity (PPP). It compares the price of hamburgers in different countries as a means to test the extent to which market exchange rates result in goods that cost the same amount in different countries. The index has been published every year since then. It has given rise to plenty of food for thought, as well as the term “burgernomics”.

The idea behind the Big Mac Index and burgernomics is simple. It states that in the long run, exchange rates should move towards a rate that will equalise the prices of an identical basket of goods and services (a Big Mac in the case at hand) in any two countries. The index was not intended to be a precise gauge of currency misalignment. Nonetheless, its reliability, ease of use and success has made it a global standard. It is included in economic publications and is the subject of dozens of academic studies.

Many economists surprisingly stated that the Big Mac Index has been quite accurate in predicting long-term movements in exchange rates. For instance, during the launch of the Euro in 1999 when everyone thought it would rise compared to the dollar, the Big Mac Index suggested the Euro was already overvalued. This assessment proved to be true.

Apart from a check on exchange rates, burgernomics can also be used as a check against government inflation statistics. For example, an abnormal rise in the Big Mac Index for a country in contrast to the official consumer price index can be a sign of something fishy.

How it worksThe PPP exchange rate between two countries based on the Big Mac Index is obtained by dividing the price of

a Big Mac in one country (in its home currency) by the price of a Big Mac in another country (in its currency). The value derived is then compared with the actual exchange rate at the day of comparison. If the value is lower, then the first currency is undervalued compared with the second; conversely, if the value is higher, then the first currency is overvalued.

I

Investing


41

Country Big Mac Price Local Currency

Big Mac Price In Dollars

Implied PPP of the Dollar

Actual $ Exchange Rate – July 25th

% Over or Undervalued Raw Index

% Over or Under Valued adjusted for GDP per person

United States $4.07 $4.07 - - - -

Argentina Peso 20.0 $4.84 4.92 4.13 19 101

Australia A$4.56 $4.94 1.12 0.92 22 12

Brazil Real 9.50 $6.16 2.34 1.54 52 149

Britian £2.39 $3.89 1.70 1.63 -4 9

Canada C$4.73 $5.00 1.16 0.95 23 24

Chile Peso 1,850 $4.00 455 463 -2 58

China Yuan 14.7 $2.27 3.60 6.45 -44 3

Colombia Peso 8,400 $4.74 2,066 1771 17 108

Czech Republic Koruna 69.3 $4.07 17.1 17.0 nil 45

Denmark DK 28.5 $5.48 7.01 5.20 35 23

Egypt Pound 14.1 $2.36 3.47 5.96 -42 11

Euro Area €3.44 $4.93 1.18 1.43 21 36

Hong Kong HK$15.1 $1.94 3.71 7.79 -52 -43

Hungary Forint 760 $4.04 187 188 -1 57

India Rupee 84.0 $1.89 20.7 44.4 -53 -8

Indonesia Rupiah 22,534 $2.64 5,543 8,523 -35 24

Israel Shekel 15.9 $4.67 3.91 3.40 15 43

Japan ¥320 $4.08 78.7 78.4 nil 5

Malaysia Ringgit 7.20 $2.42 1.77 2.97 -40 2

Mexico Peso 32.0 $2.74 7.87 11.7 -33 13

New Zealand NZ$5.10 $4.41 1.25 1.16 9 29

Norway Kroner 45.0 $8.31 11.1 5.41 104 46

Pakistan Rupee 205 $2.38 50.5 86.3 -42 16

Peru Sol 10.0 $3.65 2.46 2.74 -10 63

Philippines Peso 118 $2.78 29.0 42.4 -32 33

Poland Zloty 8.63 $3.09 2.12 2.80 -24 21

Russia Rouble 75.0 $2.70 18.5 27.8 -34 10

Saudi Arabia Riyal 10.0 $2.67 2.46 3.75 -34 -3

Singapore S$4.41 $3.65 1.08 1.21 -10 -6

South Africa Rand 19.45 $2.87 4.78 6.77 -29 24

South Korea Won 3,700 $3.50 910 1,056 -14 21

Sweden SKr 48.4 $7.64 11.9 6.34 88 85

Switzerland SFr 6.50 $8.06 1.60 0.81 98 63

Taiwan NT$75.0 $2.60 18.5 28.8 -36 -7

Thailand Baht 70.0 $2.35 17.2 29.8 -42 6

Turkey Lira 6.50 $3.77 1.60 1.72 -7 53

2011 Big Mac Index

Investing

Source: bigmacindex.org

42


Source: www.bigmacindex.org

2011 Big Mac IndexLooking at the recent Big Max Index, the economic barometer suggests that the Euro is again overvalued against the dollar and probably other major currencies. This divergence can be interpreted as a sign of the internal problems within the eurozone, which include the growing gap in the competitiveness of Greece, Italy, Portugal and Spain relative to Germany, the massive debt of these countries (although the US and UK have similar issues) and the political problems within the EU, which are still to be worked out.

LimitationsThe methodology followed for the Big Mac Index has many limitations. In many countries, eating at fast food restaurants such as McDonald’s costs more than eating at local ones. Therefore, using the Big Mac as a basis of comparison is not necessarily accurate. Further, local taxes, levels of competition, and import duties on selected items may not be representative of the country’s economy as a whole.

Burgers cannot easily be traded across borders, and prices are heavily distorted by big differences in the cost of non-traded local inputs such as rent and workers’ wages. In addition, many argue that non-tradable goods and services such as property costs should not be equal in different countries – this being an inherent problem of the PPP theory.

In addition, by comparing only the end price, the index does not take into account the different commercial strategies followed in each country such as the cost of advertising and the market size. For some markets, a low margin might make up profits in increased sales volume.

In an effort to overcome these challenges, the Big Mac Index is adjusted using the relationship between prices and GDP per person in order to give a more realistic comparison.

Although not subject to years of economic research, the Big Mac Index seems to overcome a general problem with official economic statistics. It avoids the need for months of collection of data, dozens of adjustments and hours of hard work. This is perhaps the main reason why economists cite the Big Mac Index as a reasonable and real-world measurement of PPP. Despite being quirky, it is a reliable and timely indicator of global economic conditions. •

If you would like to contribute to the next issue please contact us at:

Do you have something to say?

[email protected]

Investing

Imagine, having the good fortune to spend your time doing the things you are good at and the things you enjoy in life...Increasing the value of your assets and protecting your wealth more effectively takes both new thinking and experience.

There are many questions to be asked before we know what you have accomplished so far and what is needed to bring your wealth to the next level.

Provident Investments provides you with a high level of personal service and financial expertise to help you develop the perfect portfolio for reaching your near and far financial goals.

To increase and protect your wealth, visit www.provident.com.cy or email the word wealth to [email protected] and one of

our certified advisors will contact you.

P.I. Provident Investments Ltd is the Wealth Management Company of Provident Group and operates through Provident Group Ltd and its subsidiaries. P.I. Provident Investments Ltd is registered in Cyprus and is authorized and regulated by the Cyprus Securities and Exchange Commission with license number: 080/07.

NICOSIA City Forum | Florinis Street 11, Office 102 | 1065 Nicosia, Cyprus | Tel +357 22 02 81 60 | Fax +357 22 02 81 61

STOCKHOLM Box 7564 | SE-103 93 Stockholm, Sweden | Visiting Address: Jakobsbergsgatan 9 | Tel +46 8 556 064 00 | Fax +46 8 556 064 19

44


Hedge Fund Invests Based on the Mood of the Twittersphere Source: www.springwise.com

uccessfully predicting the patterns of a financial market

has always been a job for skilled fund managers relying on their own knowledge and experience. Now, Derwent Capital Markets have just launched a hedge fund that uses Twitter to monitor the mood of the market — giving their fund manager an added resource to inform investment decisions.

The London-based investment boutique recently launched the social media-based hedge fund which will consist of liquid equities and equity indices. Software with the ability to analyze the mood and sentiment of tweets will be used in combination with pre-existing trading algorithms, according to a report in the New Scientist. This analysis will then be

able to provide Paul Hawtin, the Founder and Fund Manager, with a better understanding of the overall mood of tweeters, which in turn has a knock-on effect on the market. For example, the New Scientist reports that after a few days of high levels of anxiety on Twitter, the Dow Jones usually falls. In Hawtin’s own words, “For years investors have widely accepted that financial markets are driven by fear and greed but we’ve never before had the technology or data to be able to quantify human emotion. This is the 4th dimension.”

As we emerge from recent economic troubles, any hedge fund claiming to have greater insight into a financial market’s activities is sure to attract investors. Although the tweets of many individual Twitter users may

be of questionable worth when approached in isolation, examining the Twittersphere as a whole can lead to valuable and intriguing insights. How else could you tap into this accumulated wisdom? •

S

To find out about sizzling advertising opportunities, please contact:

[email protected]

Investing

45


Investing

hen the economic climate is going downhill, investors

are always looking for the safest asset to invest. Gold and the Swiss franc have shown a remarkable positive correlation in periods of crisis, which indicates that when investors want to shift to certainty, they turn to these two assets. Gold price reached an all-time peak in the 1980s when the inflationary pressures were particularly worrisome for the world’s economy. At the same time, the Swiss franc was flying high, forcing the government to impose negative interest rates in an attempt to prevent foreigners from opening more bank accounts in the currency.

The recent ongoing crisis in Europe and the US, with the future of the Euro in doubt amid increasing fears that the US will not be able to repay its national debt, investors are again looking for the safest harbor. A fiscal and a current-account surplus, a low inflation rate and a low debt-to-GDP

ratio combined with the historical long-term stability of the Swiss economy have proven adequate once again to render the franc as good as gold in tough times.

The perceived strong correlation between the Swiss franc and gold forces the prices of the two assets to move together. Which one drives the other in the short term is not easy to conclude and is not important from a macro perspective. What is important, however, is that the prices of the two assets are driven by similar dynamics as they both offer certainty. Unless something changes dramatically in the long-term forces driving the prices of gold or the Swiss economy, they should continue to be desirable options from a macro perspective. In the meantime, speculators can continue to measure market sentiment for each in order to take advantage of the short-term convergence in the prices of the two assets. As always, some will get it right, some will get it wrong. •

W

Gold and the Swiss Franc – a Shift to Certainty

46


lot has been said during the financial crisis about short

selling, its role and the potential effects it has on the markets. Short selling has been linked by many to the disruption of the order of the markets through causing panic selling, high volatility, and market crashes. This led to its ban in several cases, the most recent one in August 2011 by four European countries¬, Spain, Belgium, France and Italy, and the subsequent call from Germany on a pan-European ban on short selling.

What is Short Selling? Why is it so Powerful? Is a Full Ban Beneficial? A short sale is a sale of a security that the seller does not own or any sale that is consummated by the delivery of a security borrowed by the seller. Simple? Well, short selling is not complex in theory, but it is a concept that many investors have trouble understanding in practice.

The traditional form of investing is buying an asset, holding it while it appreciates in value, and then selling it for a profit. Shorting is the exact opposite. When short selling a stock through a broker, your broker will lend the stock to you either from his own stock, from another broker or from one of his other customers. Then, the stock is sold and you get the proceeds. The short is finally “closed” when you buy back the stocks and return them to your broker. If the price of the stock has dropped in the meantime, there is your profit. Note that since you do not actually own the stock you are shorting, you are obliged to pay the lender of the stock any dividends or rights declared during the course of the loan.

CriticismLooking at short selling, it is obvious that it is risky. The losses you can suffer are infinite and timing is everything. Even if you are right in thinking that a stock will go down, you do not know when. The uncertainty keeps you exposed to all the risks.

Further, shorting involves using what is called margin trading – using borrowed funds from your broker, who uses the stock as collateral.

An interesting concept linked to shorting is the notion of a short squeeze. This happens when stock prices go up (meaning that short sellers lose money) and then short sellers rush to the market to buy back stock to cover their positions. The increased demand for the stocks drives the stock prices even higher. In cases where billions are being bet, this strategy can drive whole markets up and down.

ProponentsShort selling can be used for two main reasons: speculation and hedging. Despite all the criticism short selling attracts, it is hard to deny its contribution to the markets. Shorting clearly adds liquidity to share transactions and helps drive down overpriced securities by lowering the cost to execute a trade. In addition, it helps in the overall market efficiency by quickening price adjustments.

With the development of stock markets, short selling has become an important component of all stock trading systems. While supporters of short selling state that it increases information efficiency and liquidity of stock markets and improves the risk-sharing mechanism, the downsides and

ease of manipulation make shorting extremely dangerous. The recent financial crisis has been an example, as markets have been manipulated to a large extent. Even though many restrictions have been placed on the size, price and types of stocks traders are able to short sell (with much more regulation to come), it is not clear whether its benefits could outweigh the risks associated with it. After all, we should all hope for the stock markets and the economy to do well, not the other way around.

Useful Concepts: Short Interest is the total number of stocks, securities or commodity shares in an account or in the markets that have been sold short, but haven’t been repurchased in order to close the short position. This indicator can serve as a barometer for a bearish or bullish market.

Short and Distort is when trades take short positions on a stock and then use a smear campaign to drive the target stocks down, manipulating stock prices in a bear market.

Pump and Dump is when traders buy stock, taking a long position, and then illegally issue false information, causing the target stock’s price to increase. •

Short Selling: Good or Bad?

A

Investing

47


Investing

any claim that the private equity (PE) phenomenon is all about big bucks. They assert

that private equity firms only serve the purpose of making their investors rich, that all the private equity managers are interested in short-term exit and not long-term value, that they take excessive fees for what they do and that too many PE unsuccessful deals remain unreported, making the actual results of the industry seem better than they actually are.

However, the report of the Private Equity Index released by the Private Equity Growth Capital Council shows significant positive output and leaves little room for argument. The report states buyout activity of $221 billion, 96 PE-backed IPOs that raised in excess of USD35 billion globally and US exits exceeding $110 billion for 2010. In addition, the average gross leverage ratio of 2.41:1 in 2010, or a 41% of enterprise value above the 10-year moving average of 35%, clearly indicates above average results for the market.

So what drives these stunning results for private-equity-held companies in contrast to public ones or companies under conventional ownership? What was once considered the ‘private’ part of the industry is no longer too difficult to figure out.

The biggest secret lies in the way private-equity-held companies are managed and run. By definition, private equity firms acquire companies in order to sell them or drive them to an IPO in the medium term of three to five years. As such, the main objective set for every target is to acquire, make any necessary changes, grow and then sell at a profit.

So what happens inside each company after acquisition? Knowing that an exit is on the way soon, the managers can no longer resist change – in fact they have no option but to embrace and drive change, as their company’s results at the exit point would very much affect them as well. Further, the management’s compensation is not only a combination of salary and stock options. Management’s salaries are linked to the company’s performance. Often, the management is asked to participate in the deal with their own money, changing their role as they move from a corporate mentality to an ownership mentality.

On another tangent, the fact that these companies are privately held does not require them to declare executive pay. This fact, in contrast to the requirements for public companies, does not deter them (in fear of public outcry) from bringing in star managers with mammoth pay packages, even though the preference is always to buy a company with strong management and keep it.

Being on the board of private companies, the CEO and other executives do not have to deal with the press, analysts,

shareholders and other stakeholders. Rather, being away from these distractions, they have all the time in their hands to focus on the real business.

In addition, the board size of such companies is typically smaller than that of public companies and consists of representatives of the PE owners and industry experts who are there to assist and help form strategy. This configuration makes decision-making and alignment easier, avoiding conflicts of interest and power struggles, as everyone’s role is clear; everyone knows who is in charge – the PE owners, and what the eventual goal is – sale or IPO.

In addition to the capital and management expertise they bring in, the PE owners, due to their extensive network of contacts and associates worldwide, offer a world of connections to their portfolio companies, making business deals and other arrangements a lot easier.

Finally, PE-owned companies are managed for cash, the ultimate metric. It is on cash that their performance is measured. No value is placed on other KPIs, which makes management’s focus clearer and performance easily measured.

A combination of all the above aspects gives results that others find difficult to match. What you can do is take the example and follow it as much as possible. What you can do is simple: Attract the best management and talent; give them strong incentives; remove all distractions from them; make them focus on the business; give them all the help they need and then let them do what they can do. You will be amazed by the results. •

Private Equity: Why is it so Successful?

M

Being on the board of private companies, the CEO and other executives do not have to deal with the press, analysts, shareholders and other stakeholders

48


hen running a small business with more than one person,

you should start considering the benefits of purchasing your first server in order to have the advantage of central file storage, backup capabilities, email and calendaring services, centralized printing, document sharing, security and many other services that will make staff more productive and your business more efficient.

However, the latest trend for these scenarios is cloud computing which offers most of these capabilities. A cloud provider could offer these services over the Internet through a remote data centre on a subscription basis. On this case, the problem is to make the right decision since you need to choose from purchase your own server or subscribe on a cloud based service on a monthly fee subscription basis.

Nevertheless, you should choose one of the two aforementioned solutions. Below are demonstrated the advantages and disadvantages of having your own server.

Advantages• Local security controlled by yourself

or your IT staff.

• Run any application without any boundaries since you have full control.

• Fastest access on your files, backups and printers.

• Local access on the actual hardware in case of failure.

• No need for Internet access in order to access your files.

Disadvantages• Initial capital is very high in relation

with cloud services.

• Maintenance costs might be high in case you have several servers.

• IT support will be required for the maintenance of the hardware and software of your server.

Nevertheless, cloud services have also their advantages and disadvantages. Below are demonstrated their benefits and drawbacks.

Advantages• Stable monthly costs without any

initial capital.

• Limitless expansion of your servers based on your needs.

• Savings on maintenance costs.

• Access to your data from anywhere without any additional cost.

• Pay as you grow schemes which correspond to long term cost savings.

Disadvantages• Not feasible to use any application

that you desire.

• Your data is stored in the cloud provider’s data centre.

• Very difficult to change cloud service providers.

• Accessing to your data might be slow since it is based on your Internet connection

The correct solution does not have anything to do with technology innovation or IT expertise that you or your IT people might have. It is totally based on the way that you do business and what software and data you have. However, most of the times, a cloud based solution is the most appropriate and cost-effective for small to medium size businesses since offers functionality that large corporations are using at a fraction of the real costs.

In order to be able to make the right decision, you need to compare all of the above to the way that your business processes are working. Also, small businesses planning to make investments in IT should ensure they understand the advantages and disadvantages of both solutions (on-premise servers and cloud-based services). •

W

Local server VS Cloud server: What I have to choose? By: Maria Michael,

Sales Consultant, IBSAC Intelligent Business Solutions Ltd

Future/Green Business

49


Instead of Printing and Faxing, Sign PDFs Directly On-Screen Source: www.springwise.com

t’s long been a fact of business life that legal

documents must be printed and signed on paper before they are valid. UK-based Softsign, however, has developed a mobile application that allows users to sign PDF and JPEG documents on-screen with a finger or stylus and then email the legally binding result directly to the recipient.

Now available for iPhone and iPad — an Android version is in the works — Softsign lets users add their signatures to documents by signing directly on the device’s screen with a finger or stylus. No printing, scanning or faxing is required; rather, users can simply keep key business documents on their mobile devices and collect signatures on the go as necessary. Not

only are Softsign signatures legally binding under many jurisdictions, the company says, but they’re also much more environmentally friendly.

The Softsign app is currently available on iTunes for free, but users must pay a one-time fee of USD 4.99 to remove an included watermark from their documents, Business Insider reports. The next version of the software will come at an as-yet-unannounced price, but no watermark will be included. In addition to support for JPEG files, the new version will also add integration with note-taking and archiving app Evernote. Branding opportunities are available.

By late May — two months after Softsign’s launch — some 30,000

copies of the app had already been downloaded. One to try out for your own cost-conscious and eco-minded brand? •

I

Softsign lets users add their signatures to documents by signing directly on the device’s screen

Innovation

a fresh view on modern economics

50


New Ticketing Service Guarantees Sell-Out Gigs Source: www.springwise.com

n innovative new ticketing service in the US,

Ticketometer, hopes to eliminate the problem of poorly attended concerts by guaranteeing artists play to a packed audience.

Poorly attended concerts lose musicians and venues money and are disappointing for fans, but an innovative new ticketing service in the US, Ticketometer, hopes to eliminate the problem by guaranteeing artists play to a packed audience.

First the artist sets up their show on the site by entering the city, date, ticket price and then, most crucially, the “set-off point” — or minimum number of tickets needed to sell to make the show profitable. The artist promotes the show via their website

and social media, and fans purchase tickets through Ticketometer. Once the set-off point is reached the artist is notified to reconfirm the event, and fans are charged. If the set-off point isn’t reached then the show is removed and fans fully refunded.

Gauging interest before an event means musicians can create shows in cities or towns previously thought to be risky, and are in a better position to negotiate with venues. Venues benefit as pre-sold attendance guarantees business, and the concept is risk-free for fans. Though the current site is in beta, more functionality is being added with more connectivity to social media to benefit artists, venues and fans.

By bringing musicians to the places they’re most wanted, Ticketometer

aim to create a win-win situation for all parties involved, saving time and money. Could this idea by expanded to help others in the entertainment industry? •

A

Visit us at: www.e-squared.eu

Our Brand NewWebsite is now LIVE!

Innovation

51


ure, selling stuff to old people is not as cool as selling to youngsters. Young people are more

open to new technologies, new trends, new ways of doing business. If you believe, however, that because the elderly do not hit the pubs every night that they do not spend or are not willing to spend money, then you may want to think again.

The Ueshima coffee shops, a chain that has proven extremely successful in Tokyo, seem like every other coffee shop at first glance. Looking at the details more closely, you will realise that the tables are lower, the aisles are wider, the chairs are of higher quality and the food is different. They serve traditional sandwiches, fruits, salads and nothing too hard or too unhealthy to eat. The staff are willing to carry you to your table if need be and the menus are written in large, easy-to-read letters. The chain has never tried to explicitly market its shops as “coffee shops for the elderly”, but they are undeniably filled with old people. What is even more interesting is that a normal coffee costs around 10% more than a coffee in Starbucks.

Elderly people can be a distinct market. Traditional marketing techniques do not have the same effect on older people as they do with younger people. The direct approach will fail. No one wants to admit that her favourite coffee shop is actually a nursing home. No one wants to hear that it is specifically designed for old people. They will appreciate, however, the comfort and the luxury of enjoying their coffee in a place where they feel comfortable.

The Ueshima coffee shops have realised their advantage, and they have capitalised at a premium on the concept of a coffee shop market for many of the wealthiest individuals, the elderly.

It is no secret that the market for the elderly is growing massively. The accumulated wealth combined with the growing population age renders this market extremely attractive for businesses. Marketing is of foremost importance. As traditional marketing techniques have not and will not work, it is of vital importance for an entrepreneur to know how to communicate with the senior citizen market.

1. Studies have shown that pensioners will not buy products that negatively label older people.

2. Senior people do not think of themselves as old, so attempting to market a product for the elderly will not work.

3. TV adverts do not easily work – the elderly forget them.

4. Word of mouth can be highly effective.

5. Communication through their social activities or their families (children, grandchildren etc.) works well.

These are only some insights. Innovative thinking and open minds can give rise to business ideas that may appear difficult to implement at first glance. Old people are highly capable of being a part of consumer society. They are more open to new ideas than one might think and they do not like to be seen as being different. If you think about it, they are not. Think the way they do and you may be surprised by the opportunities that will open to you. •

The Marketing Expert: Marketing for the Elderly – The Ueshima Coffee Shops ExampleS

Old people are highly capable of being a part of consumer society

Innovation


World Markets: World Indices

Figures and statistics from AG Financial Network

52 Markets

10,650

11,070

11,490

11,910

12,330

12,750

09/101 1/10 12/100 2/11 03/110 5/11 06/110 8/11 09/11

2,470

2,635

2,800

2,965

3,130

09/101 1/10 12/100 2/11 03/110 5/11 06/110 8/11 09/11

5,070

5,560

6,050

6,540

7,030

7,520

09/101 1/10 12/100 2/11 03/110 5/11 06/110 8/11 09/11

2,760

3,030

3,300

3,570

3,840

4,110

09/101 1/10 12/100 2/11 03/110 5/11 06/110 8/11 09/111,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

SUMMER 2011 • E-SQUARED

53Markets


8,370

8,870

9,370

9,870

10,370

09/101 1/10 12/100 2/11 03/110 5/11 06/110 8/11 09/11

2,300

2,400

2,500

2,600

2,700

2,800

09/101 1/10 12/100 2/11 03/110 5/11 06/110 8/11 09/11

4,900

5,110

5,320

5,530

5,740

5,950

09/101 1/10 12/100 2/11 03/110 5/11 06/110 8/11 09/11

17,100

18,560

20,020

21,480

22,940

24,400

25,860

09/101 1/10 12/100 2/11 03/110 5/11 06/110 8/11 09/11


1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

1,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay


54 Markets


Markets


760

940

1,120

1,300

1,480

1,660

09/101 1/10 12/100 1/11 03/110 4/11 06/110 7/11 08/110 9/11

400

590

780

970

1,160

1,350

09/101 1/10 12/100 1/11 02/110 3/11 05/110 6/11 07/110 8/11 09/11

1,050

1,095

1,140

1,185

1,230

1,275

09/101 1/10 12/100 1/11 02/110 3/11 05/110 6/11 07/110 8/11 09/111,050

1,095

1,140

1,185

1,230

1,275

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Bombay

760

940

1,120

1,300

1,480

1,660

09/10 11/10 12/10 01/11 03/11 04/11 06/11 07/11 08/11 09/11

Athens

400

590

780

970

1,160

1,350

09/10 11/10 12/10 01/11 02/11 03/11 05/11 06/11 07/11 08/11 09/11

Nicosia

AUTUMN 2011 • E-SQUAREDFigures and statistics from AG Financial Network

Markets 55Markets


World Markets: Currencies

1.10

1.15

1.20

1.25

1.30

1.35

1.40

1.45

1.50

1.55

09/101 0/10 11/101 2/10 01/110 2/11 03/110 4/11 05/110 6/11 07/110 8/11 09/11

0.80

0.81

0.82

0.83

0.84

0.85

0.86

0.87

0.88

0.89

0.90

0.91

0.92

09/101 0/10 11/101 2/10 01/110 2/11 03/110 4/11 05/110 6/11 07/110 8/11 09/11

1.00

1.04

1.08

1.12

1.16

1.20

1.24

1.28

1.32

1.36

1.40

09/101 0/10 11/101 2/10 01/110 2/11 03/110 4/11 05/110 6/11 07/110 8/11 09/11

100

103

106

109

112

115

118

121

124

09/101 0/10 11/101 2/10 01/110 2/11 03/110 4/11 05/110 6/11 07/110 8/11 09/11

1.10

1.15

1.20

1.25

1.30

1.35

1.40

1.45

1.50

1.55

09/10 10/10 11/10 12/10 01/11 02/11 03/11 04/11 05/11 06/11 07/11 08/11 09/11

EUR/USD

1.10

1.15

1.20

1.25

1.30

1.35

1.40

1.45

1.50

1.55

09/10 10/10 11/10 12/10 01/11 02/11 03/11 04/11 05/11 06/11 07/11 08/11 09/11

EUR/USD

1.10

1.15

1.20

1.25

1.30

1.35

1.40

1.45

1.50

1.55

09/10 10/10 11/10 12/10 01/11 02/11 03/11 04/11 05/11 06/11 07/11 08/11 09/11

EUR/USD

1.10

1.15

1.20

1.25

1.30

1.35

1.40

1.45

1.50

1.55

09/10 10/10 11/10 12/10 01/11 02/11 03/11 04/11 05/11 06/11 07/11 08/11 09/11

EUR/USD

56


13

19

25

31

37

43

49

55

09/101 0/10 11/101 2/10 01/110 2/11 03/110 4/11 05/110 6/11 07/110 8/11 09/11

1,400

1,475

1,550

1,625

1,700

1,775

1,850

1,925

2,000

09/101 0/10 11/101 2/10 01/110 2/11 03/110 4/11 05/110 6/11 07/110 8/11 09/11

1,250

1,365

1,480

1,595

1,710

1,825

1,940

09/101 0/10 11/101 2/10 01/110 2/11 03/110 4/11 05/110 6/11 07/110 8/11 09/11

65

75

85

95

105

115

09/101 0/10 11/101 2/10 01/110 2/11 03/110 4/11 05/110 6/11 07/110 8/11 09/11

Markets

World Markets: Commodities


Silver

Gold

Platin

Crude Oil

13

19

25

31

37

43

49

55

09/10 10/10 11/10 12/10 01/11 02/11 03/11 04/11 05/11 06/11 07/11 08/11 09/11

Silver

13

19

25

31

37

43

49

55

09/10 10/10 11/10 12/10 01/11 02/11 03/11 04/11 05/11 06/11 07/11 08/11 09/11

Silver

13

19

25

31

37

43

49

55

09/10 10/10 11/10 12/10 01/11 02/11 03/11 04/11 05/11 06/11 07/11 08/11 09/11

Silver

13

19

25

31

37

43

49

55

09/10 10/10 11/10 12/10 01/11 02/11 03/11 04/11 05/11 06/11 07/11 08/11 09/11

Silver

57

AUTUMN 2011 • E-SQUAREDFigures and statistics from AG Financial Network

Ten Year Government Bond Spreads as at 30/9/2011

Country Latest Spread vs Bund Spread vs T-Bonds

Australia 4.00% +2.27 +2.23

Austria 2.62% +0.90 +0.85

Belgium 3.65% +1.92 +1.88

Canada 2.06% +0.34 +0.29

Denmark 1.91% +0.18 +0.14

Finland 2.19% +0.47 +0.42

France 2.54% +0.82 +0.77

Germany 1.72% -- -0.05

Greece 22.72% +21.00 +20.95

Ireland 7.72% +5.99 +5.95

Italy 5.52% +3.80 +3.75

Japan 0.99% -0.73 -0.78

Netherlands 2.14% +0.41 +0.37

New Zealand 4.39% +2.66 +2.62

Portugal 11.39% +9.67 +9.62

Spain 5.12% +3.40 +3.35

Sweden 1.63% -0.10 -0.14

Switzerland 0.90% -0.82 -0.87

UK 2.26% +0.53 +0.49

US 1.77% +0.05 --

World Markets: BondsEurozone Benchmark Yields as at 30/9/2011

Maturity Yield 1 Week 1 Month

1 Month 0.18% 0.51% 0.51%

3 Month 0.26% 0.25% 0.39%

6 Month 0.21% 0.23% 0.40%

2 Year 0.45% 0.54% 0.54%

3 Year 0.58% 0.73% 0.72%

5 Year 1.03% 1.08% 1.09%

10 Year 1.72% 1.96% 2.02%

15 Year 2.31% 2.48% 2.67%

20 Year 2.52% 2.68% 2.91%

30 Year 2.52% 2.72% 2.94%

Markets

*N/A = Not available



GDP (Billions of U.S. dollars) (Source IMF)

Real GDP growth

(Source IMF) (1)

Unemployment Rate

(Source IMF)

Imports of goods and services

(% of GDP)

Exports of goods and services

(% of GDP)

Central government debt, total (% of GDP)

Sep 2011 Sep 2011 Sep 2011 Jan 2011 Jan 2011 Sep 2011

Argentina 369.992 4 8.4 15.86 21.56 59.02

Australia 1,237.363 3.3 4.7 22 20 17.63

Brazil 2,090.314 4.2 7 11.11 11.5 68.9

Canada 1,577,04 2.2 6.1 30.5 28.72 81.8

China 5,878.257 9.5 4 22.68 27.16 18,,59

France 2,562.742 2.1 8.2 25.03 23.3 78.07

Germany 3,286.451 1.3 6 36.43 41.38 73.51

India 1,631.970 8.1 25.48 20.11 77.69

Indonesia 706.752 7 5.2 20.77 24.66 28.6

Italy 2,055.114 1.2 7.8 24.65 24.14 115.77

Japan 5,458.797 1.3 4.2 12.83 13.29 217.6

Mexico 1,034.308 3.2 3.5 29.44 28.03 44.94

Russian Federation 1,479.825 3.8 7 20.54 28 10.88

Saudi Arabia 448.380 4.2 43.51 54.71 15.97

South Africa 383.655 3.6 22.3 28.43 27.65 30.84

Dem. Republic of Korea 1,014.482 4 3.3 47.23 51.9 32.56

Turkey 735.487 4.3 8.9 24.64 23.24 45.5

United Kingdom 2,250.201 2.7 6.7 29.91 27.13 68.49

United States of America 14,526.550 3.4 6.1 13.78 11.13 84.26

Greece 305.415 3.3 17.2 25.52 17.93 115.16

Cyprus 23.174 2.7 5.2 51.15 50.76 56.22

World Markets: G20

58 Markets

Source: IMF and World Bank *N/A = Not available

E-SQUARED Magazine - Issue 3

Documents

Transcript of E-SQUARED Magazine - Issue 3