e-squared magazine - issue 1

hedge fundinvesting:

An educated choice

Credit rAting AgenCies:Angels or demons?

Issue 1 • Spring 2011ISSN: 1986-3713 (Print Edition)

ISSN: 1986-3721 (Online Edition)

Cyprus property: A value proposal or a balloon ready to burst?

politiCAl risk: from a footnote in risk assessments to global media frontlines

in times of crisissharpen your tools.

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

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

Editor’s letter 6

Famous quotes 8

News as we have seen them 9

Interview: 11Michael Sarris

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Comment

Matching Netbook Donors 13With Students in Need

Final Salary Vs Money 14Purchase Pension Schemes: A Shift to Certainty

Banking Reform: 15Is Islamic Finance the Answer?

Political Risk: 16From a Footnote in Risk Assessments to Global Media Frontlines

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Regulation

Solvency II: 19An Introduction

Credit Rating Agencies: 20Angels or Demons?

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Real Estate

Cyprus Property: 24A Value Proposal or a Balloon Ready to Burst?

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Analysis

Greek Debt Crisis: 29Is Greece the New Iceland?

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Investing

Angel Investing: 34An Alternative Source of Funds in the Modern Business Environment

Hedge Fund Investing: 35An Educated Choice

Gold: 38A Bubble or a Safe Bet?

FX trading: 41Trading for Everyone

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Future / Green Business

Rewarding Visitors 42For Smart Transportation Choices

Ecuador: 43‘Green’ Extortion or a Step Towards Saving our Planet?

BRICs: 44The Path to the Future

Virtuality: 45The New Era for Modern Business

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Innovation

Social Networking: 46The Hidden Power

Open source software: 48Reduce Costs without Compromising Quality

Top 10 Business Ideas 50for 2010

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World’s Markets 52

Issue One: Spring 2011 5

Economic and Educational Aspects of Modern Business

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E-SQUARED • SPRING 2011

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elcome to the pages of a different economic magazine: E-SQUARED.

Business is all about knowledge. The most educated and the most passionate researchers of the world are the ones who put their skills and their intelligence into practice to break through corporate life and create real value in these troubled times. With technological innovation comes the rapid development of new markets and trends, creating new challenges and opportunities for businesses and professionals that have never been seen before. Nowadays, business as usual is all about doing things differently.

Lost in the complexity of economic detail, we sometimes forget that no matter how challenging the economic environment might seem, it is still driven by people, and people usually apply common sense. This magazine aims to enlighten, in a simplified and understandable way, economic concepts that sometimes seem like dimensions of an unknown world. We have gathered together a group of passionate professionals who enjoy questioning and simplifying topics that every business and every professional should be aware of.

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. The content of this magazine regularly questions normal practices and gives new insights to readers who have the guts to face up to new challenges and a keen desire to learn more.

We would love to hear your thoughts at [email protected]

All the best,

Stavros ViolarisEditor E-Squared Magazine

Editor’s Letter

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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.

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SPRING 2011 • E-SQUARED

Editor’s Letter

ost people have probably heard this phrase many times – mostly referring to the business environment

and the fierce competition that prevails in the market these days. Despite hearing this over and over again, it is not easy to understand its true meaning and what it entails. We shall use a fictional story that supposedly took place in Cyprus in order to put this phrase into context.

Once, there were two friends who decided to publish a new magazine. A new concept, a new idea addressing a niche target market and a clear way to fill the gap in that market. Having decided that publishing a magazine would be ‘cool’ and would professionally develop both of them further while making an impact, they started off by writing some articles.

While researching, reading and writing, they were often entertained by all the effort they were putting into this, with uncertainty about what would happen to all those articles. You see, they did not know much about the publishing industry, the advertising market, the requirements, the income sources or anything to do with the world of media in Cyprus.

This kept going on for some time and as it appeared the work they have done was actually very good. Adding to their work contributions from other professionals and putting everything into context actually produced a great product. So they took it a step further; hired an editor and a designer with the intention to put everything into a meaningful form – done. Next step; talk to a lawyer about the legal requirements – done.

The articles, now in the form of an economic magazine were almost ready but what next? Researching and assessing the characteristics and requirements of the Cypriot market, they concluded that the best way forward would be to distribute it through a newspaper or an established publishing company. “Well, let’s give it a go”, they both thought.

So they approached a media giant. They held a meeting with the marketing manager, giving a presentation about their magazine, how it would satisfy a real gap in the market, how it would differ from everything that was available at the time etc. They guy sounded excited – he said that the magazine and the whole idea was great, it could be easily combined with the current publications of his company and could be the SILVER (or something) edition of one of their existing business magazines. “Nice!” – the two friends thought.

Despite a promise of getting back to them within a week, the big media company never responded until about three weeks later. Their response: “We are not interested. We have decided to publish our own magazine (similar to yours)”. STRIKE ONE!

“Well, the two friends said, this is how the market works, fine. We have an excellent product and we will publish it”. So they started preparations to publish it on their own.

While almost ready to publish, they saw the big media company’s advertisement for their new magazine. Reading it carefully, they could not believe their eyes! The advertisement included all the marketing points they laid out during their presentation, and presented the new SILVER magazine, the FIRST one of its kind to hit the Cypriot market. STRIKE TWO!

What happened was obvious. It was clear that the big media company had ‘borrowed’ their idea, and having more resources than them it was rushing to get it in the market first.

So here comes the phrase “it’s a jungle out there”... The two friends thought that if you play by the rules, you stand a chance of winning the game – what they ignored was that there are no rules. And that business is not a game. “Business is business” many say – but business conduct depends on the ethics and integrity of the business people. And in the world we live in, it really is a jungle out there. •

It’s a Jungle Out ThereM

What happened was obvious. It was clear that the big media company had ‘borrowed’ their idea, and having more resources than them it was rushing to get it in the market first.


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Famous Quotes culture of discipline is not a principle of business; it is a principle of greatness.

-- Jim Collins

have found no greater satisfaction than achieving success through honest dealing and strict adherence

to the view that, for you to gain, those you deal with should gain as well.-- Alan Greenspan

swore I was going to exclusively collect assets and not liabilities for the rest of my life. I swore never to

take gambles I couldn’t back up, or that I couldn’t afford to lose. And, I’ve stuck with that ever since.-- Tim Blixseth

ide diversification is only required when investors do not understand what they are doing.

-- Warren Buffett

e simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.

-- Warren Buffett

ost of the time common stocks are subject to irrational and excessive price fluctuations in both

directions as the consequence of the ingrained tendency of most people to speculate or gamble... to give way to hope, fear and greed.-- Benjamin Graham

never hesitate to tell a man that I am bullish or bearish. But I do not tell people to buy or sell any

particular stock. In a bear market all stocks go down and in a bull market they go up. -- Jesse Livermore

n this business if you’re good, you’re right six times out of ten. You’re never going to be right

nine times out of ten.-- Peter Lynch

ailure is the opportunity to begin again, more intelligently.

-- Henry Ford

customer is the most important visitor on our premises, he is not dependent on us. We are dependent

on him. He is not an interruption in our work. He is the purpose of it. He is not an outsider in our business. He is part of it. We are not doing him a favor by serving him. He is doing us a favor by giving us an opportunity to do so. -- Mahatma Gandhi

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FA customer is the most important visitor on our premises, he is not dependent on us. We are dependent on him. He is not an interruption in our work. He is the purpose of it. He is not an outsider in our business. He is part of it. We are not doing him a favor by serving him. He is doing us a favor by giving us an opportunity to do so. -- Mahatma Gandhi

News as we have seen them


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�European Union The European Union’s foreign policy representative has announced an agreement to start a new round of talks with Iran about the country’s nuclear fuel program.

A statement by European Union finance ministers that bonds issued before mid-2013 would be unaffected by changes to the EU’s bailout program stopped investors selling off bonds in the fiscally weak EU regions.

Germany and France admitted to plans to harmonise tax and labour policies in the Eurozone, saying the financial crisis has clearly shown the necessity to complete monetary union with an economic union.

A permanent EU stabilization mechanism has been agreed by the EU leaders in December 2010; the next step will be the European Council’s amendment of the EU Treaty to provide for this.

Within 2011, Europe is still struggling to find the necessary solidarity to proceed in strong will with measures to fight the ongoing crisis and provide support to some of its troubled member countries.

�CyprusThe political tension on the island is reaching its peak evidenced by daily clashes between representatives of the different parties as the May elections move closer.

The political agenda includes as always the Government’s handling of the Cypriot problem, the ongoing financial crisis with the continuous downgrading of Cypriot bonds and banks by the rating agencies, the immigration policy

and the way to handle the natural gas reserves on the country’s exclusive economic zone.

�GreeceGreece is calling on the European Union to intervene in Turkey’s plans to build a nuclear power station amid the ongoing nuclear crisis in Japan, while Cyprus raised its concerns over the same issue at an EU summit in March 2011.

Alpha Bank SA, Greece’s third- biggest bank, rejected an unsolicited 2.8 billion-euro ($3.8 billion) takeover bid from National Bank of Greece SA, the nation’s largest lender, saying the offer was inadequate.

�United Kingdom

The UK budget for 2011 has been released setting a floor price for carbon and upping the initial capitalisation of the Green Investment Bank. Although largely welcomed by the industry, some point out that it could be too little, too late.

England’s best known historic forests will be protected for future generations under proposals announced by Environment Secretary Caroline Spelman. The transfer of heritage forests such as the New Forest and the Forest of Dean to charitable trusts will mean walkers, riders and cyclists will still be able to enjoy them as they do at the moment.

In his 2011 Budget speech, UK Chancellor George Osborne believes that Britain’s manufacturing industry

has a key part to play in the country’s future economic growth.

�United StatesHigh levels of public debt in the United States as well as in many EU countries triggered an unexpected crisis, causing global markets to crash. Some European countries’ attempts to introduce measures to tackle their budget deficits led to violent public protests. In the US, President Obama’s administration signed the most extensive regulatory changes since the 1930s, as well as announcing a health care reform act.

The political fight in the US continued over whether Congress should raise taxes as part of a national deficit-reduction plan.

Fed’s decision to buy US Treasuries, worth approximately US$600 billion, in an effort to boost the economy and US trade, raised a lot of criticism worldwide, as concerns of an undermined dollar and increased inflation upset the markets once again.Apple overtook Microsoft as the world’s largest technology company.

WikiLeaks came to the centre of attention after publishing a video from a 2007 incident in which Iraqi civilians were killed by US forces. They subsequently released the “Afghan War Diary” and “Iraq War Logs” consisting of tens of thousands of documents not previously available for public view. The elusive mastermind behind the WikiLeaks web site, Julian Assange, was subsequently arrested in the UK after allegations of sexual assaults in Sweden.

After incidents of unauthorised collection of personal data, Google, Facebook and other web companies promised to increase security in order to protect the privacy of their customers.

�RussiaChechen separatists were blamed for terrorist attacks in Russia that killed dozens of people.

� JapanOn March 11, 2011, an earthquake struck off the coast of Japan, churning up a devastating tsunami that swept over cities and farmland in the northern part of the country and set off warnings as far away the west coast of the United States and South America. Recorded as 9.0 on the Richter scale, it was the most powerful quake ever to hit the country.

As the nation struggled with a rescue effort, it also faced the worst

nuclear emergency since Chernobyl; explosions and leaks of radioactive gas took place in three reactors at the Fukushima Daiichi Nuclear Power Station that suffered partial meltdowns, while spent fuel rods at another reactor overheated and caught fire, releasing radioactive material directly into the atmosphere.

Japanese officials turned to increasingly desperate measures, while their American counterparts gave a far more dire appraisal of the dangers.

�China China overtook Germany as the biggest exporter worldwide.

US officials continued to call China to let the yuan rise on every occasion. This issue will be the subject of hard talks during the G20 summit.

Chinese budget airline Spring Airlines will promote the launch of its service between Japan’s Takamatsu and

Shanghai by selling cheaper one-way tickets to a limited number of travellers, Kyodo News wrote.

�Pakistan Terrorist attacks continued to add woes to the country’s unstable political situation.

�SomaliaThe US government announced a security plan for Puntland and Somaliland as part of a larger support approach to ensure stability in Somalia as a whole.

�South AfricaNewly appointed Minister of Sport and Recreation, Fikile Mbalula, plans to address issues of inequality, racism, poor administration and management in the world of sport in South Africa.


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�Mideast2011 started off with the left foot. Christian-Muslim clashes took place in Cairo during the Christmas period and were followed by an unprecedented raise of Muslim populations all over Mideast.

Violent protests and unrest in Tunisia, Egypt, Yemen and Libya (also evidenced

in softer forms in other countries) have had a tremendous impact not just on these countries themselves, with Hosni Mubarak forced to step down in Egypt and Col. Muammar el-Qaddafi drowning Libya in blood, but in the whole European region. These changes will inevitably change the strategic (im)balances in the region as the rise of Muslim anti-West

politicians in power in some of these countries is now more than possible.

The discovery of large quantities of natural gas and oil in the region of east Mediterranean is expected to increase tension between the affected countries - all of which are now taking steps to exploit the reserves falling within their exclusive economic zone. •

One of the F1 Mirage planes that landed in Malta on the 21st February 2011 during the Libyan crisis.

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ichael Sarris studied Economics at the London School of

Economics and received his Doctorate in the United States.

From 1972 to 1975 he worked at the Central Bank of Cyprus and the Bank of Cyprus. In 1975, Michael joined the World Bank. In the course of his career, his work covered a broad range of sectors in Africa, Latin America and East Asia. His duties included the design of overall country strategies, the elaboration of programmes for structural reforms and the development of economic policy dialogue, between the Bank and the national authorities of countries seeking World Bank assistance. At the end of 2004, he retired from the World Bank as a Department Director.

In September 2005, the President of the Republic of Cyprus, appointed him as Minister of Finance, where he served until the change in government in March 2008. During his tenure, Cyprus prepared for and successfully introduced the Euro as its national currency.

Mr. Sarris, Europe has been battling the crisis for quite some time now, and yet it is still not over. What needs to be done?

As was widely predicted, worldwide recovery is taking a slow, painful and hesitant path with unemployment being the most stubborn indicator. Most countries have responded to the crisis with expansionary fiscal policies and banking sector support, leading to larger budget deficits and ballooning government debt levels, including guarantees. This has led to rising debt levels despite the decline in the projected budget deficits complicating recovery with a sovereign debt crisis.

The way to fight this part of crisis has three main areas of needed action; (i) first, dealing with the fallout and the consequences of the ongoing sovereign debt crisis with strong and painful action by the countries most seriously affected, (ii) second, ensuring that in the future economic policies of member countries are consistent with membership in a sound

monetary union and (iii) improving economic governance of the eurozone so as to restore confidence in its financial stability.

Yet, conflicting information about recovery is coming from the euro area regarding the state of the economy. What is your view?

While emerging economies are returning to their pre-recession growth rates, Europe has an uneven performance with some countries performing well while others are struggling. Germany primarily and Austria with Scandinavian countries secondly are examples where exports and domestic demand have recovered. This can be seen as a reward to the good policies they have been following regarding labour costs, fiscal management and competition.

For the troubled European countries facing serious imbalances, the crisis has brought to the surface, pre-existing and homegrown structural problems, including persistent problems of competitiveness. They have also not been careful enough to consolidate their public finances and save money while things were going well and now they are paying the price.

It is this uneven situation between the different countries that is giving conflicting signals to the markets.

The Keynesian economists argue that money supply should not stop

until the crisis is over whereas others stress out the need for austerity and policy tightening. Which view do you support?

There is not necessarily a conflict between the Keynesian way and tight fiscal policy measures. Expansionary policy took place in both sides of the Atlantic and this is what averted a much more serious crisis but today fiscal tightness is a must. When you seem like you do not have the ability to manage debt, your lenders get nervous, the markets get nervous and this creates problems. At some point, countries must begin fiscal consolidation.

With the euro area experiencing one of its most dramatic periods, some fear for the future of the Euro as a currency. Are you also concerned?

I am not too concerned. I strongly believe that the Euro will survive. Many things were not right in the past; weaknesses of the surveillance and enforcement process as revealed during the crisis and too much concentration on public finances instead of the competitiveness of the economies.

These need to be put right now. Better surveillance, better mechanisms that do not create moral hazard and more concentration on labour cost and competition need to be enforced. We need to expand the rules and come up with a better system.

Unemployment is rising and in some countries it is out of control (Spain, Greece etc.). What is your view and how can Europe fight against it?

Unemployment is by far the most painful and socially undesirable outcome of the crisis. There is an increased difficulty in correcting it which underscores the importance of not making mistakes.

Now, employers are reluctant to create jobs, invest and expand their business and I am afraid that it will take a lot of time for the system to recover. What needs to be done is staff retraining, give some flexibility to the labour market and focus on costs and competitiveness. I am afraid that once you have a problem with unemployment you have to wait for a long

Interview: Michael SarrisM

Interview

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haul before returning anywhere close to full employment. And this has been evidenced both in the US and Europe.

Germany and France suggested raising the retirement age to 67 across the whole of Europe. What are your views?

This is part of the approach Germany and France are taking for achieving fundamental changes and structural reform. In Germany the view that for Europe to survive, everyone needs to be a bit more German is widely accepted. The increasingly ageing population and unsustainable pension systems all over Europe suggest that there is no alternative to a gradual increase of the retirement age. My view, is that an increase of the retirement age is feasible everywhere. This could only help the systems adapt to the longevity and the other long term problems faced by the pension systems.

How can the growing gap within the euro area between the traditionally strong economically countries and those which are not very competitive be minimised?

The gap in the competitiveness of the economies is one of the strongest outcomes of the crisis. It was pre-existing, but now it came into the surface. It highlights the links of the product costs and labour productivity with competitiveness. The only way to bridge the gap is to keep inflation as close to your comparative economies as possible, invest in research and technology, and plan a strategy well ahead.

How would you rate Greece’s efforts so far in reducing its public debt and achieving fiscal reform?

I believe that Greece is making a remarkable and unprecedented effort. The size of the adjustments required is enormous, especially considering that Greece is a member of the eurozone and does not have the flexibility to devalue its currency in order to contribute to macroeconomic adjustment. Given that, proceeding with adjustments on salaries, benefits and restructuring the whole system takes time and requires strong will by the people to change their mentality. But change is happening. If Greece manages to return to positive growth early, creating the required surpluses and starting to repay its debt then it will speed up the process. Right now, there is an economic

and social revolution happening in Greece. Keeping our fingers crossed, we hope that the transition will not be too dramatic.

Many economists argue that restructuring of Greece’s public debt should have already happened. Do you think that Greece will ultimately make it or are you one of the believers that restructuring is inevitable?

A debt restructuring is not necessarily opposed to a successful way out for Greece. Greece will ultimately find its way, but many sacrifices will need to be done. Right now, Greek debt is trading well below par. I believe that it is possible for market based ways to be used to allow Greece buy back some of its debt at discount. This may not be officially called “restructuring” but some sort of equivalent that the markets would be willing to accept. The alternative would be for Greece’s lenders to wait to maturity with the serious risk of them losing out.

How stable is Cyprus’ economy now? Do you think the crisis is over?

We have seen some positive signs. Despite these, those studying the economy; advisors, investors, lenders and everyone assessing the Cypriot economy have serious worries on the medium prospects of the economy. This can be seen from:

1. the credit rating agencies’ assessments, and

2. the interest rates and the prices at which Cypriot government bonds are trading. These are only better than Greece, Ireland and Portugal, and higher than Spain.

Basic indicators say that things are not right. This is based on the unsustainability of public finances, the low competitiveness of the Cypriot market and, as a consequence there is a focus on the size of the banking sector with its current exposure to Greece. These, in my opinion, are reasons for concern and require urgent action.

Do you consider Cypriot banks to be problematic?

Financial services, including the banking sector, are key reasons behind the economic growth and the increase in the standard of living in Cyprus. Cyprus proved out to be too small for the size of the banks, so expansion came naturally with Greece being a natural destination. As such, Greece’s problems have an inevitable

impact on Cypriot banks. Cypriot banks however are very well protected. They are highly regulated, they receive regular guidance from the Central Bank and they maintain a very responsible approach. I agree that they are exposed, maybe overexposed to Greece, but that was part of their growth strategy. Now it is an opportunity for them to change.

What would you rate as more concerning in an economy: public debt, low productivity or political instability?

Productivity and competitiveness are key fundamentals that need close attention. They are the toughest to improve but there is a need for them. Debt is not a bad thing on itself – it is a natural way whereby money goes where rates of return are higher. Putting debt into projects that are profitable expecting a high return is good, the problem lies in using debt to consume. Political stability is again critical. It is a necessary condition for sustainable growth, and helps in attracting and maintaining foreign investment. In 2008 and 2009 we witnessed a big crisis, with 2010 being a year, as some argue, of return to stabilisation. What will happen in 2011?

I believe that in 2011 we will see a protracted period of slow, uneven growth within the EU community and globally. Much will depend on the overall stability as well as the effects of higher energy costs which are expected due to the current situation. Strong economies are able to absorb higher energy costs while weaker ones will probably face some additional issues. In addition, there will be a crucial dilemma as inflation will begin to increase as a result of the amount of money that was pushed into the markets. This can only be dealt with through increased interest rates and contraction measures, which is not what you would want to do right now.

Thank you very much •

See the next issue for more exclusive interviews

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sense of personal connection often plays a key role in motivating

charitable donations, as nonprofits are increasingly recognizing.

Much the way DonorsChoose lets philanthropists choose a particular school classroom to help with a donation of specific learning supplies, so Belgian YouBridge (youbridge.org) aims to create a more personally connected version of One Laptop Per Child (laptop.org).

YouBridge seeks to help close the digital divide by offering a transparent online platform whereby donors are connected and involved with the specifics of their computer donation. Potential donors begin by choosing from among more than 100 financially disadvantaged students currently profiled on the site; student locations include Bangladesh,

Kenya, Rwanda, Sudan, Tanzania and Uganda. Once donors select one to help, they use YouBridge to pay EUR 190 to donate a netbook, which normally would have a selling price of EUR 350, the organization says. YouBridge has partnered with Close the Gap for distribution to universities overseas; universities pay EUR 25 per netbook and then distribute the computers to students, who may use them until they graduate. Meanwhile, recipient students and donors immediately connect online to “share information, ideas and dreams,” in the site’s own words — participating university partners even offer a typing course for help with that, where necessary.

Charitable organizations have long employed letter-writing as a way to connect donors and recipients, but the

immediacy and ongoing nature of a direct online link is bound to increase that sense of connection to new heights. How long before this becomes a standard part of the world of giving? •

Matching Netbook Donors with Students in Need Source: www.springwise.com

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a fresh view on modern economics

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Final Salary Vs Money Purchase Pension Schemes - A shift to Certainty

n the past couple of decades there has been a rush by employers to close their final salary (or defined

benefit) schemes to new employees. This essentially means that an increasing number of employees will have to rely on money purchase (or defined contribution) schemes to obtain their future retirement income, either through a scheme set up by their employer or through a personal pension plan.

In “Pensions in Peril: The decline of the final salary pension scheme”, published in March 2002, the TUC calculated that there were at least 1.8 million fewer employees in defined benefit occupational pension schemes than there were a decade ago. And that was back in 2002. As the trend continues, it should be considered fairly certain that the vast majority of future pension schemes will be set up as defined contribution arrangements..

Dynamics and risks comparisonThe simplest definition of a final salary scheme is that it is an arrangement whereby the employer promises to pay the employee a compensation package upon retirement based on a pre-determined set of rules (e.g. salary on retirement, years of service etc). On the other hand, in a money purchase scheme, the employer does not make an explicit promise for future benefits. It provides an adequate range of investment options and education to the employees and the employees themselves are responsible for selecting their preferred investment universe. As pensions professionals are acutely aware, the essential difference between the two types of pension schemes lies with the investment risk. In a final salary scheme, the employer is obligated to pay to the pension scheme’s employee the promised compensation as defined by the scheme rules, irrespective of the performance of the invested assets. Even in the event of underperformance due to external and often unforeseen market factors, the employer will have to use the company’s resources to cover any resulting deficit. In contrast, a money purchase scheme makes no such promises; the employees receive a compensation package that reflects the performance of their own investment choices. The shift from final salary schemes to money purchase schemes is therefore mainly driven by employers’ increasing appetite for transferring the investment risk of their pension schemes to the beneficiaries – in other words, the employees.

Does it make sense?Why has this trend developed in the past two decades? What has changed so radically that employers now feel so uncomfortable with their ability to secure their employees’ pension? The rationale behind this trend can be explained in three dimensions:

1. Deterioration of company financials: Pension scheme deficits eventually lie in a company’s balance sheet. The ever-increasing nature of a scheme’s liabilities combined with

poor investment performance and changing demographics (increase in population life expectancy) can create a large obligation that could take years to eliminate.

2. The size effect: Some pension schemes have become extremely large compared to the size of the sponsoring company. This can be explained by a range of reasons such as past company success. Therefore, small percentage losses in the scheme’s investments could lead to a huge deficit for the company. Furthermore, cash requirements to meet regulator demands for such schemes create an additional burden for the sponsoring company. The accounts of companies going bankrupt because of underfunded pension schemes are numerous.

3. The increased uncertainty: In a highly dynamic and changing world, companies have become so diversified and so complex that they feel they have no room in their corporate structure for an added source of uncertainty. Managing the firm’s finances by considering the dynamics of its pension scheme can become an overwhelming task with onerous consequences for those who get it wrong. Evidence confirms that investors take into account a company’s pension scheme when assessing its risk. Boards are therefore keen to carve out the risk of their pension schemes to save time, resources and the associated frustration.

Nothing is a panaceaThe shift from final salary arrangements to money purchase ones has been gathering pace and is now the norm for new schemes. The rationale behind this move can largely be explained by the increased uncertainty and complexity of modern corporate economics. In that context, the shift makes full sense. However, companies that still offer attractive final salary scheme arrangements can differentiate themselves in the market place. Running a successful pension scheme can actually reduce the cost of capital and increase the company’s market capitalisation. On top of that, it could be a good marketing point in attracting talented employees. Take a step back and think: What would you choose?•

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Banking Reform – Is Islamic Finance the Answer?

T he recent turbulence in the financial world has shaken investors’ confidence and demonstrated, in a rather

convincing manner, the need for reform in the banking system. The failure of governmental interventions to prevent the system from collapsing has made the regulators stand up on their toes and start searching for solutions to the increasingly complex world of banking.

Islamic finance refers to a special system of banking or banking activity that is consistent with the Islamic law (Sharia). The basic principle behind it is the notion of profit or loss sharing. A bank is prohibited from charging or suffering interest fees for lending or accepting money respectively. Instead, it must use other ways, without explicitly making a profit to satisfy its customers’ needs. Imagine a buyer who goes to a bank and asks for a mortgage to finance the purchase of her house. A traditional bank would give her a loan and request installments of payments for the loaned amount plus interest. An Islamic bank would do something different; it would use its own money to buy the house and then resell it to the customer at a higher price. The customer would then pay in installments for the higher purchase price. The bank would still make money, but without explicitly charging interest. In cases of late payment, the Islamic bank is not allowed to charge additional penalties. The way to secure its investment must be by seeking stricter collateral. This is just an example of the approaches used in such business transactions. The logic behind all of them is always the same – that the bank must share the risk and return with its business partners, in this case the customers.

Islamic banking has been in place for the past 30 years. It is now estimated that Islamic finance institutions manage approximately US$800 billion of funds worldwide. Although this is a small portion of the assets managed by financial intermediaries globally, the growth rate is impressive. It is forecasted that by 2013 this could reach up to US$1.85 trillion. What is particularly interesting is the fact that its growth has gone beyond the Muslim world into developed Western economies. London is a sound example, with almost all major banks setting up subsidiaries to accommodate the demand for Islamic finance. Regulatory and professional bodies have already sprung up to address issues of accounting and auditing standards to Sharia compliance. Thomson Reuters has announced plans to launch an Islamic Finance Internet portal, and financial publications’ coverage of the developments in the area admit that Islamic banking is the new “hot topic” in the City.

It is now estimated that Islamic finance institutions manage approximately US$800 billion of funds worldwide

Why is Islamic finance growing so fast? Could it be the answer to the flawed traditional banking system? Suggestions that the sub-prime crisis would never had happened under the Islamic banking system are gaining wider acceptance every day. “Profit is a vital element of Islamic business dealing, but it must be derived from trading activity. Profits derived from uncertainty are off limits. Therefore, it can be argued that toxic debt of the kind that triggered the global credit crunch simply could not occur within the Islamic system,” states John Willsdon, a leadership and development specialist at The Chartered Institute of Management Accountants (CIMA), in his article in the Sunday Times.

The notion of ethical fairness is of vital important in the Islamic business framework. As such, the innovative ways that traditional banks seek to legally override the regulations and take excessive risks could never be used in an Islamic bank as a matter of principle. Considering the uncountable time and resources spent trying to effectively regulate and reform the banking system, the principle-based notion upon which Islamic finance banks do business sounds more than attractive.

Islamic finance is growing massively. Whether this could be the answer to the traditional banking system’s flaws is still to be seen. What can be said with certainty, however, is that Islamic finance will soon arrive on the main streets of many countries. The challenge of operationalising the equity considerations of Sharia could determine the global financial centres of the future. •

15Comment

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olitical risk means the difficulties that organisations,

governments or investors face as a result of political decisions taken in a country in which they operate, trade or invest.

Typically these include the risks of strategic failure and financial or personnel losses as a result of non-market-related factors. Governmental instability, socio-economic conditions, conflicts, corruption, military in politics, religious and ethnic tensions, and bureaucracy are only some of the considerations that fall under the term political risk.

Economic research attempting to analyse political risk and its effects, particularly on foreign direct investments (FDI), has been ongoing for many years. The results indicate that there is a negative link between institutional uncertainty and private investment, a positive relationship between FDI and intellectual property protection, and a negative impact of corruption on FDI flows.

Despite the publication of findings such as the ones laid out above, it is rather astonishing that political risk has received relatively little attention in risk assessments performed by governments, investors, corporations and other institutions in the past decades. In most cases, political risk was only taken into account in risk assessments concerned with emerging, not developed markets. However, the 2008 recession has

changed the way modern economics are viewed by the financial community.

Nowadays, political news are a key driver of developed markets, and “political risk is everywhere,” as a Goldman Sachs note proclaimed recently. The debt condition of some of the Eurozone countries, like Greece, Spain and Portugal, Dubai’s debt restructuring in 2010, China’s clash with the US over trade and currency, and BP’s disastrous oil spill, are only a few examples which had a significant impact on the global markets.

Public debtThe financial turbulence caused by the news of Dubai’s debt restructuring was just an alarm bell. Following that incident came Greece, Ireland, Portugal, Spain and other European economies. Preventing default for these countries involves drastic

reduction of spending, enforcement of tough measures and a demonstration of monumental commitment and discipline – mostly due to the limited amount of time in which actions need to be taken – all the while maintaining the ability to access international markets. These situations have raised two fundamental questions: can governments really push through harsh measures despite the public’s resistance, and would other countries be willing to step in and help the troubled economies survive?

Taking Greece as an example, let’s focus on the first question. We are all aware of the strikes that paralysed the country and the violent riots that took place, leading to the tragic deaths of three bank employees on the 5th of May 2010.

These actions demonstrated the nature and force of public resistance that other governments may have to face when

P

Political Risk: From a Footnote in Risk Assessments to Global Media Frontlines

Comment

17


trying to push through tough measures. Reaction in a softer form has already been evidenced in other countries, with recent strikes in Italy, France, Germany, UK and Spain in response to the announced government plans and reforms. One thing is certain: more resistance is sure to follow. The second question was partly answered when Greece and Ireland managed to forge a deal with the EU and IMF. The help, however, was not unconditional, as we now see tight control and oversight by the IMF and their EU partners on every step these countries are making. Looking at the global sphere, echoes of the European story can already be heard in the United States and Japan, two of the largest economies in the world. Each of these countries has enjoyed long periods of economic growth. However, they both suffer from high debt levels, which could mean that sooner or later they

will be subject to market pressures to get their finances under control.

Public debt in any of the above cases can only be reduced through austerity measures and tight budgetary control. These decisions do, however, have political ramifications. The implementation of a well-thought-out economic plan is as important as its development. Failure on a political level to implement economic decisions

imposes a significant risk, which cannot be captured by fundamental economic models.

US vs. ChinaAnother interesting example of political risk in practice is the long-lasting tension between China and the US over Beijing’s tight control on its currency. China’s decision to tie its currency value to the US dollar has had a chain effect on the US economy, as it artificially binds the dollar within limits that would otherwise not exist.

In June 2010, the publication of China’s decision to allow greater currency flexibility led to a mini-rally in global stock and commodity markets for about a week. Nevertheless, US president Barack Obama is still under pressure to take a tougher line towards China on this matter. The fact that China is the biggest buyer of US corporate and government bonds makes the situation more complicated.

BP oil spillThe disastrous oil spill in the Gulf Coast and the tension this has engendered

between the US and the UK is another significant event we have seen in the past year. Obama’s officials have been pushing for a tough line against the oil giant, with Barack Obama intervening to force BP to set aside at least US$20 billion in an escrow account to fund the clean-up and relief efforts. Meanwhile, UK Prime Minister David Cameron cautions that should the restitution be set too high, the company’s future could be jeopardised.

“Nowadays, the global political scene affects the international markets more than ever before.”

The political tension between the two countries and the extent to which this took hold in the media had a number of economic implications. BP’s share price reached a record low, losing more than half of its market capitalisation within days. The effect on the world’s biggest stock markets was substantial.

Further, the temporary ban on deep sea drilling by the Obama administration inevitably affected the price of crude oil, with a chain effect on economies worldwide. All of the above factors indicate that political risk considerations in developed countries can be just as important as in emerging nations.

ConclusionNowadays, the global political scene affects the international markets more than ever before. It would not be news to politicians that voters would hold them responsible for any bond market crash, economic scandal, or the country’s public debt. In Britain, for example, the bond market’s instability and the country’s record deficit dominated last May’s election campaign, causing a change in the government coalition.

Today, there is an increased sense that markets will move on political news more quickly than ever before. Now more than ever, the entire global political structure is challenged, as a lot of countries are going through a process of unprecedented economic change. A big question looms: will things ever be the same again? •

Political Risk: Comment

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19


olvency II is an item that is on the headlines of almost every

economic journal, and yet many people ask what it is and what the fuss is about.

Solvency II is a new EU regulation, to be implemented from 1st January 2013, regarding insurance companies’ solvency capital requirements. It aims to replace the old prudential regulation (Solvency I) and impose a new regulatory framework on insurance companies. The fundamental purpose of this regulation is to protect policyholder interests and prevent a financial crisis in the European insurance industry through the imposition of stricter risk-based capital requirements.

The new solvency system aims to create a more proactive way of thinking about risk by the insurance policy providers. Under the provisions of Solvency II, capital requirements will be based on an estimate of probable future developments, not on a historical data basis like the previous system. Therefore, risk assessment and management will need to be an ongoing process, as new events and therefore new risks and new business plans affect insurers’ future financial positions.

Effect on insurance companiesThe implementation of Solvency II will be a step forward, as applying a risk-sensitive platform better reflects the real risks being taken by insurers. As a result, insurance companies will need to change their whole attitude towards risk and introduce a new way of thinking internally. They will be required to implement sound economic risk-management practices in order to be in a better position to anticipate and handle adverse events. Significant

resources will need to be devoted to the identification, measurement and proactive management of risks.

Effect on policyholdersAs a result of the increased capital requirements, the profits of the insurers will need to be higher than current levels in order to provide similar returns to their current or required returns. This will typically mean greater costs to the customers through higher premiums.

Policyholders, meanwhile, should be willing to pay higher premiums in return for increased security. At the end of the day, every risk should be insurable at the right price and the guarantee of certainty in an adverse situation should define the price consumers have to pay.

The marketSolvency II aims to increase the transparency of company policies in the insurance sector, resulting in greater market discipline and ensuring the soundness and stability of the sector. The increased transparency, in combination with increased reporting requirements, should help regulators identify more

quickly difficulties faced by the insurers. As a result, regulators will be in a better position to take the right steps in advance to protect the insurance industry. The new system should also result in greater product transparency due to a more competitive market, which will allow prospective and current policyholders to make more informed decisions.

Compliance with the new solvency regime should reduce the likelihood of the insurers getting into financial difficulties and in effect reduce the possibility that policyholders will lose out. The new system should bring greater confidence in the robustness of insurance products and will probably give more choice to consumers. This can put downward pressure on the prices of mass retail lines of business, such as household insurance and motor insurance.

The effectiveness of Solvency II is yet to be seen. How insurers will manage to implement the new regime, and how this will affect the industry, particularly on the pricing and transparency of products, is what policyholders are essentially asking for. •

Solvency II – An Introduction

S

Solvency II aims to increase the transparency of the companies in the insurance sector, which will result in greater market discipline and will ensure the soundness and stability of the sector.

Regulation

Credit Rating Agencies: Angels or Demons?

lot has been said in the past few months about credit rating agencies and their role in the recent

economic crisis. Many people claim that the three big rating agencies – Moody’s, Standard & Poor’s and Fitch Ratings – were too late in spotting the US mortgage bubble that sparked the recession, or the imminent demise of Lehman Brothers, as well as other events that crashed the markets, such as Dubai’s debt restructuring.

Recently, they have also been under fire by EU leaders, as they played a rather suspicious role with their downgrading of Greek and Spanish sovereign debt, which let the Euro slide against the dollar in a record low.

Looking at these agencies’ objectives and roles – those being to independently and objectively alert investors, issuers, investment banks, broker-dealers and governments, and give them an indication of the relevant credit risks – one could argue that they failed. No one claims that they should predict the future – they simply cannot – but they should at least warn the stakeholders after the first signs. Otherwise, they serve no purpose.

In order to understand the influence and power these agencies have over global economies, just look at the effect of their downgrading of Greek debt and the situation that this brought down on Greece, with Greek government bond yields reaching remarkable levels of over 11%. At the corporate level, the lowering of a company’s credit score can have a number of implications: interest rates for the company go up; contracts with financial institutions are affected, and in general, expenses are increased in response to the decreased credit value.

Market participants argue that credit rating agencies do not downgrade companies promptly enough. This was evidenced in numerous cases, the most sound being Lehman Brothers and Enron. Many believe that the problem lies with the fact that credit rating agencies have close relationships with the management of big organisations, opening themselves to undue influence and loss of objectivity. In addition, the fact that they are being paid by companies to rate their products sparks concerns over independence and is clearly a sign of conflicts of interest. On top of that, their methods and models are far from perfect. In many cases, they have made errors of judgement in rating structured products, particularly in assigning AAA ratings to structured debt that later went default.

20 Regulation

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Credit Rating Agencies: Angels or Demons?

That aside, the largest agencies are generally conceived as agents of globalisation and Anglo-American market forces, and hence politically prone. As such, they are considered inappropriate authorities for assigning sovereign credit ratings, as they could be driven by political incentives, particularly since all the big agencies are US-based.

Of even more concern is the lack of strict regulation of the operations and management of these agencies. Currently, the only attempts to regulate and set an ethical framework for them have been in some sections of the Sarbanes-Oxley Act of 2002, the SEC’s published concept release called “Rating Agencies and the Use of Credit Ratings under the Federal Securities Laws” and the International Organization of Securities Commissions (IOSCO) “Code of Conduct for Credit Rating Agencies”.

Credit rating agencies have been in the frontline in the past months, with inquiries being made by the US Congress’s Financial Crisis Inquiry Commission (FCIC) over their role in the financial crisis.

EU leaders, including German Chancellor Angela Merkel and President of France Nicola Sarkozy demanded a review of the credit ratings’ operations and the creation of a new EU state-backed agency to break the oligopoly of the top three US-based agencies.

In addition, the European Commission proceeded with the establishment of a central European Union regulatory body, the European Security Markets Authority, which would take on the oversight of the existing rating agencies. The new authority will be armed with power to fine individual national offices of rating agencies or even stop them from issuing ratings should they not satisfy the authority’s rules.

These are clearly positive steps towards establishing a stronger regulatory environment. They will definitely give more confidence to investors and the public. We hope they will also make the credit rating agencies refocus on their original goal, away from political games and economic conflicts. •

Regulation

Credit rating agencies have been in the frontline in the past months, with inquiries being made by the US Congress’s Financial Crisis Inquiry Commission

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Real Estate

“A man and his wife had the good fortune to possess a goose which laid a golden egg every day. Lucky though they were, they soon began to think they were not getting rich fast enough, and, imagining the bird must be made of gold inside, they decided to kill it. Then, they thought, they could obtain the whole store of precious metal at once; however, upon cutting the goose open, they found its innards to be like that of any other goose.”

- Moral of the well-known story from Aesop; do not be greedy or you might lose everything.

For the past decade or so, property development and real estate has been the goose with the golden eggs for the developing Cyprus economy, based mainly on UK investors and taking advantage of the power of the pound over the euro. Villas, flats and other luxury establishments were offered to the retired English pensioners as a ‘second home’. Construction and real

estate accounted for about 29% of the country’s €15.6 billion economy in 2007 and the industry employed 1 in every 10 Cypriots.

The recession that is still dragging on has changed things. The current status of the Cyprus property market is in flux, and a summary of recent developments follows here.

A glimpse in the pastFollowing on from the Turkish invasion in 1974 and the forceful displacement of approximately 300,000 people from the northern part of Cyprus and their settlement in the south, all the attention was placed on the internationally recognised part. Economic growth and prosperity has followed in the 80s and 90s, which inevitably included the development of the real estate sector.

More recentlyDuring the 90s, Cyprus was considered a haven for the mainly British and other northern European buyers. Sun,

sandy beaches and good food could not be any more ideal for their retirement or a dream holiday home. In addition, strong local demand for land as well as for holiday homes, in combination with the solid demand for sea-side properties in Limassol, particularly by wealthy foreigners who based their companies in the island, seemed to boost the property market even further.

All these factors led to an astonishing demand for properties on the island, which unsurprisingly led property prices to boom. Cyprus property prices in 2008 have almost doubled since 2004, including a 19% increase in 2007.

Seizing the golden opportunity, a large number of independent developers and contractors of all sizes emerged, developing luxury complexes and villas on almost every hilltop in Paphos and on sea-side areas in Limassol and Protaras.Problems however are never too obvious during good times. As such, there was not too much noise about the problems

25


Real Estate

of the industry, such as the non-issuance of property titles, the lack of control over developers’ activities and the unacceptable delays (in many cases of years) by government departments in granting planning and construction permits.

In addition, the property market on the island depended heavily on UK buyers, with Britons accounting for about 10% of all new home purchases and two-thirds of all foreign home purchases, indicating an overreliance on a single market.

Then came the recessionThe UK was one of the first markets to be hit by the recession in early 2008 after the initial blow in the US. As a result, the pound weakened against the euro, and the British, in fear, held off their investments and spending as UK unemployment reached record highs.

With the pound staying weak against the euro for most of 2008-2009, UK investors were less willing – or less

able – to use their equity to buy property abroad.

On top of that, with Cyprus officially entering the recession, the real estate market was further hit as local investors, banks and organisations held off their investments and projects in response to the uncertainty in the market. Reacting to ‘reduced liquidity’, banks stopped lending or increased their requirements for lending to developers and buyers,

making financing an additional burden for everyone.

This has been the scenery in the market for most of 2009 and 2010. During this time, the residential market has experienced price declines in all major cities, especially in the tourist areas of Paphos, Larnaca and Famagusta. This decline was officially confirmed by the Cyprus Central Bank, which, in its six-monthly bulletin, reported that prices had decreased overall by 8% during 2009.

TABLE 1: VALUATION YARDSTICKS FOR THE HOUSING MARKET

Price/Rent ratio Gross Rental Yield5 20 Very undervalued

6.7 15 Very undervalued8.3 12 Undervalued10 10 Undervalued

12.5 8 Borderline undervalued14.2 7 Fairly priced16.7 6 Fairly priced20 5 Borderline overvalued25 4 Overvalued

33.3 3 Overvalued40 2.5 Very overvalued50 2 Very overvalued

Source: Global Property Guide

26


Today, property developers, especially in Paphos and Famagusta, are offering up to a 30% discount from the pre-recession prices in a desperate attempt to sell the hundreds of unsold properties they have stacked up. Supply is further enhanced by the hundreds of second-hand properties that display a “FOR SALE” sign all over the tourist areas, mostly put up by UK owners who want to take advantage of the strengthening of the euro against the pound.

In contrast to the other cities, Nicosia and Limassol still hold their ground. This is due to the fact that they are mostly supported by strong demand in the local residential market, as well as by a strong market for commercial properties, the values of which never stopped increasing.

These market trends have been reflected by RICS Cyprus on its most recently published index (Q3 2010):

“Residential prices for both houses and apartments fell on average by 1% and2% respectively during the third quarter of 2010, with the greatest falls in Larnaca, nearing 5%. Prices in the commercial property sector fell even further across all cities with the exception of Nicosia by an average of 2.6% for retail and 2.3% for offices. In Larnaca, retail values fell by nearly 12% on the quarter, while office values fell by around 6%. Only warehouse values remained stable across all regions during this quarter. In general, rents are continuing to fall, with the largest drop on houses (1.8%) and retail units (1.7%).”

Valuation of real estate – the methodsLand and property are essential parts

of the production of a country. As with any other asset, their value is derived by the use to which it is put, in addition to the law of demand and supply. The basic valuation methods that can be used for property are the following:

• Comparable method: this method is used for non-specialised property, and value is derived by comparing with previous sales of similar properties.

• Investment / income method: this method is used for commercial and residential non-specialised properties that are giving or aim to give future income to their owner. The property value is derived based on the yield or return the property gives back to the owner in comparison to the original investment value.

• Accounts / profits method: this method is used for trading properties (specialised) other than normal shops where rent is not an indication as they are not held as investments. This method is used to come up with an estimate for rent which is then applied using the investment / income method.

• Development / residual method: this method is used for development land or properties under development; value is estimated in contrast with the level of development and uses the estimated sale value at the end of it.

• Contractors / cost method: this method is used for properties not sold or bought in the market and is only used for accounting purposes.

• Rules of thumb: Market participants develop high-level valuation yardsticks through experience (market consensus) e.g. rental yields valuation yardsticks (see Table 1).

The big question - Is real estate overpriced?Valuing real estate is a challenging task. Given that there are a number of valuation methods, each inevitably giving different results, identifying the most appropriate method to use is not easy. The opinion of RICS Cyprus is that the investment yield, which is the most widely used method worldwide, is not ideal when looking at property values in Cyprus. Their argument is based on the fact that most offices and houses in Cyprus are directly owned by their occupants, which, in our opinion, is not 100% accurate. Looking at the dynamics of the market today, it is clear that small enterprises and young people are moving towards the leasing option as they can no longer afford to buy their own properties. As such, although there is no definitive answer as to which valuation method is the most appropriate, using the investment method to examine the status of real estate in Cyprus today can give useful insights.

A brief comparison of the yields that Cyprus commercial properties offer against the average yields in the European commercial property space over the past ten years gives no indication of a bubble on the prices. Cyprus commercial property seems to be priced at reasonable levels, and, on average, the return on investment is comparable to the European property market.

What about residential property? Looking at the Table 2, Cyprus is ranked 8th from the bottom among 35 European countries. Of course, different geographical markets have different risk profiles and therefore differences in yields should be expected. However, if our argument holds and residential property buyers in Cyprus are indeed moving more and more toward the leasing option, the yields of Cyprus properties should converge towards the average yields of other European countries.

After the ratification of the Lisbon treaty, the EU is becoming more integrated

Initial yield

Nicosia Larnaca Limassol Paphos Paralimni Cyprus

Retail 6.7% 6.9% 6.3% 4.8% 5.2% 6.1%

Office 4.6% 5.9% 4.4% 4.2% 4.7% 4.8%

Commercial property yields. Source: RICS Cyprus property index Q2 2010

Real Estate

27


than ever and large differences in yields should only be expected on a temporary basis. Will the yields of the Cyprus residential property market converge to the EU average? That is indeed a big question and there is no easy answer. What can be concluded with certainty is that, following the EU integration, the Cyprus property market will become more efficient and any differences in prices not justified by the fundamentals of the market should disappear.

The futureWhat’s in store for the Cyprus Property market in the future? Of course, no one can predict for certain. Multimillion euro projects have been announced in the past few months which will, if they proceed, no doubt

boost the property market and the Cyprus economy as a whole. However, many more projects are on hold either by their initiators or due to government delays in granting the relevant permissions.

Foreign investors are now more aware of the problems they could face if they invest in Cyprus. Therefore, many choose to invest in the safer choices of Turkey, France or even the Baltic countries. Since we cannot afford to lose the goose with the golden eggs, decisive and responsible actions need to be taken to bring back confidence in the market, both by the government and companies. Markets move fast; if we fail to take action, we will inevitably lose the goose. •

Country YieldMoldova 11.18Ukraine 9.09Hungary 8.29

Macedonia 7.38Turkey 6.1Serbia 5.98Croatia 5.61

Romania 5.54Belgium 5.31

Netherlands 5.04Poland 4.88Portugal 4.71

Slovak Republic 4.7Austria 4.48

Denmark 4.42Germany 4.4

Italy 4.4Latvia 4.21

Bulgaria 4.16Slovenia 4.02

Switzerland 3.96Finland 3.94

Czech Republic 3.8Estonia 3.61

United Kingdom 3.59Lithuania 3.53France 3.45Cyprus 3.21Russia 3.15

Luxembourg 2.88Malta 2.71Spain 2.69Greece 2.36Andorra 2.24Monaco 1.24

Residential property yields. Source: Global Property Guide

Country City Prime yieldOffice Retail

Germany Frankfurt 5.3% 5.1%Munich 4.9% 4.8%

Hamburg 5.6% 5.3%Berlin 5.3% 5.4%

UK London 5.1% 5%

Birmingham 6.1% 5.2%

Manchester 6.2% 5.1%France Paris 5.3% 5.3%

Lyon 7% 7%Sweden Stockholm 5.5% 5.5%

Italy Rome 6% 5.5%Milan 5.6% 5.4%

Netherlands Amsterdam 6.5% 5.6%Spain Madrid 5.4% 5.6%

Barcelona 5.5% 5.9%Belgium Brussels 6.2% 5.3%

Commercial property yields. Source: JPMorgan Asset Management – Feb 2010

Real Estate

TABLE 2: Residential property yield

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LANDTOURIST HELLAS provides the following important services in order to secure the interests of our clients:• Legal searches of properties to secure a clean title with no legal or other hidden problems.• Professional Indemnity Insurance covering every client up to the amount of €1,700,000 Euro.• Full support throughout and after the transactions.• Finally, our firm has as a primary target the client, investor or collaborator to meet in our premises a friend,

a proper consultant as well as a person that can fully trust.

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29


ack in November 2009, when Greek Prime Minister George Papandreou admitted that

the Greek economy is “in intensive care,” only a few expected an extensive period of agony and frustration regarding the near future of the nation’s economy. The possibility of Greece defaulting on its debt did not look high at all, as the credit ratings agency Standard & Poor’s ruled out the possibility that the country would go bankrupt.

Greek Debt Crisis -

B

Analysis

30


“Although the public finance situation is worrying, we will maintain our [A -] credit rating,” said Marko Mrsni, a Standard & Poor’s analyst, in an interview with Kathimerini newspaper. A few days later, a dramatic shift would bring a new era to European economics…

As the Fitch rating agency downgraded Greece’s long-term debt from A- to BBB+ on the 8th of December 2009, all opinions seemed to converge: Greece was officially in big trouble. The agency cited the cause as “the weak credibility of fiscal institutions and the policy framework … exacerbated by uncertainty over the prospects for a balanced and sustained economic recovery.” In other words, the problems that Greece faced were anything but superficial and there was a difficult and doubtful path to recovery. Meanwhile, the thunderstorm had just begun. The head of the European Central Bank, Jean-Claude Trichet, urged Greece’s Prime Minister to enact “courageous” measures. With the highest debt ratio in the Eurozone now being revealed, finance minister Giorgos Papaconstantinou admitted that “the fiscal situation is dramatic.” Analysts around the world were now publically discussing fearful scenarios that Greece’s situation could cause significant hurdles and postpone what seemed to be an early European economic recovery. Markets around the world were selling off, reflecting investors’ added uncertainty on the future of the Greek economy. The world media covered the Greek economic outlook in their frontpage headlines. Could a Eurozone country go bust? Would Greece be the new Iceland?

EU in a vital dilemma – the Euro zone’s biggest challenge ever Once the possibility of an economic problem is identified, central banks and governments take precautionary actions to mitigate its future effect. Even a small delay or hesitation by the policy makers can allow the problem to spread across the whole economy, affecting even its healthy cells. The contagious nature of capitalist economies calls for immediate and decisive action. But what happens if the problem existed for more than 10 years? It appeared that Greek officials had been falsifying the economic data given to the European Commission for the past 10 years. The policy is that any economy with a deficit of more than 3% is put into probation by the European Union. In other words, the European Union makes sure that prompt action is taken by the member countries before the deficit becomes big enough to threaten the economic health of the Union. The revelation of a deficit that was higher than 12% shocked the European policymakers. Greece was on the edge of the cliff and the European Union could either save it or let it fall.

The dilemma that the European Union faced was unique. By bailing out Greece, all other European countries’ taxpayers would be paying for the irresponsible fiscal policy of Greece. Money would be injected into the system, Greek debts would be monetised and the Greek government would spend the money to pay off its obligations and secure support among its population. Prices would start going up and there would be a flow of money to other European countries. Costs would increase without a corresponding increase in the income of the European taxpayers. It would essentially be a constant transfer of purchasing power to Greece from the rest of Europe. However, this prospect was the least that the

European Union would have to worry about. By bailing out Greece, it would create strong incentives for reckless fiscal behavior within the Union, which could become a threat to the existence of the common monetary policy.

On the other hand, what would be the ramifications of letting Greece default on its debt? The impact on the Eurozone could be massive:

1. Contagion: The market confidence would be shaken and doubts about other troubled economies within the EU. (Portugal, Spain, Ireland) would create a chain effect that would drop these countries further into a recession (or even default) during a period when the EU was struggling through a slow and painful recovery;

2. Counterparty losses: Large European banks held significant quantities of Greek debt (in Germany it was estimated to be around €30 billion). A potential default of Greece would result in huge losses for these institutions, some of which are very thinly capitalised, possibly to the extent of requiring government intervention to offset the losses;

3. Higher long term borrowing costs: The actual default of an economy that accounts for around 3% of the EU GDP would refute the notion that any country within the EU is “too big to fail.” Investors would value the possibility of default of other European countries as being much higher that it was considered until now, and long-term borrowing costs would increase. This would slow economic growth and increase unemployment all over the Union;

4. Euro credibility: The European Union has struggled for 20 years to establish the Euro as a credible currency in the world markets. A possible devaluation would undoubtedly impact the role of the Euro as a reserve currency. As savers moved away from the Euro, market nervousness would create great instability in its price. The future credibility of Euro would therefore be tainted by the Greek crisis.

That is still not the whole story. A lot of countries have initially been skeptical of joining the Euro. The loss of control over monetary policy was a major concern, but the security of the European Union and the stability it could offer counterbalanced these concerns. By leaving Greece helpless, no one else would feel safe. Could we see countries voluntarily exiting the EU? Currently, no mechanism exists to exit the Euro without exiting the EU. That would lead to the end of the Euro and potentially to the end of the European Union in its current form.

Greece’s PerspectiveAs the European Union was looking into the best course of of action to deal with the crisis, the Greek government was analysing its options from a whole different perspective. The situation was critical and every passing day without decisive corrective action was making things worse. The Greek stock exchange was having an endless downward rally and the long-term government bond spreads were at a record high. The market was viewing the country as being one step away

Analysis

31


from defaulting. Greece needed to act fast and government officials were analysing two main options:

1. Greece to exit the Euro zone and return to drachma: This would allow a devaluation of the currency and would make Greece a cheap investment region. Foreign capital would flow in large quantities to stimulate growth and give life to the wounded domestic businesses. Employment would go up and the increased output would increase the GDP and help reduce public debt. Confidence would go up and this would give the economy the boost it needed to start recovering. However, this option was soon rejected. The Greek economy, as every developed one is, depended heavily on the financial health of the banking system. A rapid change of the currency would make the banks insolvent and the banking system would collapse. With it, Greece’s economy would also collapse. In addition, since there is no mechanism in the foundation treaty of the EU for exiting the Euro, Greece would have to exit the European Union as well. The political ramifications of such an action would be uncountable.

2. Greece to refinance its debt with a (relatively) cheap loan from the EU or the IMF: Given the urgency of the situation, this seemed to be the best option. The refinancing would give Greece time to take corrective action through its fiscal policy and a structural reform. However, the debt provider would impose strict measures for reduction of the deficit to ensure that the borrower remained solvent. Actually, this was exactly the excuse the Greek government

was looking for. It was the best way to ease the public rage for potentially increased taxes, salary reductions and public sector redundancies. And even though there was absolutely no guarantee that the refinancing of the debt would drive Greece out of the crisis, it was surely its best chance. And the tricky bit… Greece had to find a debt provider.

Convergence, austerity measures and public’s reactionThe situation in Greece was not something completely new. There have been numerous examples in the past where troubled economies came close to defaulting. In most cases, international help stepped in and default was avoided. The classic example is the 1994 crisis in Mexico where the US led an initiative for a $50 billion bailout. Why did they do it? Why did they put their taxpayers’ money at stake to save a troubled foreign economy? The answer is simple; the financial ramifications for the US economy of a potential default of Mexico were much greater than the bailout package money. Modern economies are interrelated and the financial problems a country faces are contagious and affect other countries as well. Strong economies are therefore keen to help troubled countries and financial help is something common and rational in modern economics.

However, the situation for Greece was different. The EU was still struggling to get out of a long and painful recession and the public was not viewing bailing out Greece as the best use of their taxes. The Greek Prime Minister, George Papandreou, was desperately trying to secure a deal with the EU countries. The key player was Germany. The biggest burden of a

Analysis

32


potential bailout would fall on them (as the biggest economy in the EU), and without their consent, no help would be given. The German Chancellor, Angela Merkel, got carried away with a political game trying to capitalise on the public’s negative opinion of Greece and with regular public statements she disregarded the possibility of Germany stepping in with help. Her public statements added more uncertainty to the markets and made the Euro a target for speculators. Hedge funds were betting heavily against the Euro and the currency’s value was slumping. The spreads of long-term Greek bonds were having a rally and this made a potential bailout even more expensive for everyone. On top of that, turbulence was evident in the European markets as the possibility of the Euro collapsing was now more than possible.

After days of negotiations with EU leaders, the US, the IMF and other countries (at some point the newspapers were talking about a deal between Greece and China), the Greek Prime Minister managed to secure a deal only days before Greece would have been declared insolvent on its debt obligations. On 2nd May 2010, a loan agreement was announced between Greece, the other Eurozone countries, and the International Monetary Fund for €110 billion. The interest for the Eurozone loans was 5%. At the same time, the Greek government agreed to impose a range of painful austerity measures, which included:

• Introduction of a limit of €1,000 to bi-annual public sector bonus, abolished entirely for those earning over €3,000 a month;

• 8% cut on public sector allowances and a 3% pay cut for DEKO (public sector utilities) employees;

• Limit of €800 per month to 13th and 14th month pension installments; abolished for pensioners receiving over €2,500 a month;

• Return of a special tax on high pensions;

• Changes to the laws governing lay-offs and overtime pay;

• Extraordinary taxes imposed on company profits;

• VAT increase to 23%, 11% and 5.5%;

• 10% rise in luxury taxes and additional taxes on alcohol, cigarettes, and fuel;

• Equalisation of men’s and women’s pension age limits;

• General pension age was not to change, but a mechanism was to be introduced to scale them to life expectancy changes;

• Creation of a financial stability fund;

• Increase of the average retirement age for public sector workers from 61 to 65;

• Reduction of public-owned companies from 6,000 to 2,000.

The austerity measures proposed were hard. The public in Greece resisted the measures with strikes and protests in which thousands of people participated. The frustration at the anticipation of the difficult years to come was obvious and unfortunately in some cases violent. But there was

no turning back. The loan was a lifesaving injection, but if change were not implemented quickly, Greece would only have postponed the inevitable.

Recovery or a deadly spiral?Assuming that everything works well, Greece should be able to put its public finances in order. The plan is to bring down the 13% deficit to an acceptable 3% by 2012. To do this, tight fiscal policy and drastic structural reform is required. For the first requirement, the Greek government is committed to its debt providers and will follow the austerity measures. For the latter, things are a bit more complicated. Despite the Greek government’s commitment to promote rapid structural reform, the only way to achieve this in practice is through public consensus. The initial reaction of the public is not optimal. People feel that the measures are unfair and that they are not the ones to be blamed for the irresponsible and, in many cases, corrupt, policy making. And they are right. However, there is no other way forward. Public strikes and protests are understandable, but if they continue indefinitely, they will slow down growth, affect vital areas of the Greek economy (e.g. tourism, which accounts for approximately 20% of the GDP), and the objectives of the austerity measures will not be achieved. Increasing tax rates but reducing taxable income is like taking money from one pocket and putting it into the other, or even worse.

In addition, increasing the taxes during a recession does not always lead to optimal results. In fact, according to Lord Robert Skidelsky at Warwick University, increasing taxes and cutting all social and capital programs during an economic downturn is exactly the wrong policy to follow. Added taxes increase costs for businesses, reduce the investment incentives, with a subsequent increase in structural unemployment. When the

Analysis

33


length of unemployment is considerable, people lose their skills and become unemployable. GDP decreases (or at least there is no growth) and recovery is held back.

If Greece continues on a downward spiral, fresh international help might be required. A new international loan is highly unlikely. “Some countries, especially Germany, may say ‘enough is enough’,” warned Daniel Gros, director of the Brussels-based Centre for European Policy Studies. The economic sphere, especially in a highly dynamic and changing world, is extremely complicated and the side effects of a specific policy are highly unpredictable. However, as already stated, the route Greece went through was more of a necessity than a choice.

3 Lessons to be learned – a link to the Cyprus economyWhen and how Greece will get out of the crisis are questions no one can confidently answer. We can, however, take away some valuable lessons as to what to do, or rather what not to do, to avoid ending up in Greece’s situation.

1. Lesson No 1: Public debt and large deficits are the best way to destroy a country’s economy. The instability created by a large deficit will have a destructive chain effect on the economy as a whole and will, sooner or later, lead to a downturn. Given the pace at which the Cyprus deficit is increasing, policy makers must act quickly if they do not want to end up negotiating bailout packages with Angela Merkel.

2. Lesson No 2: Responsible fiscal policy makes a difference. Spending public money irresponsibly and without clear targets for long-term growth will put the macro stability of a nation’s economy at stake. The consequences of a fiscal policy might not be obvious in the short or even medium term, but they will definitely be clear in the long term. In Cyprus, spending is driven by the unions and by short-term political objectives rather that by the long-term wellbeing of the economy.

3. Lesson 3: Get the basics right. The structural problems Greece faces, combined with irresponsible fiscal policy, are what created this crisis in the first place. The highly inefficient public sector, the overwhelming number of public companies and the bureaucracy around investing has held growth back. These are exactly the main areas of change that the EU and the IMF imposed as part of the bailout agreement. Greece will have to promote change fast and in a painful way. Cyprus faces similar problems. The system must be modernised to become competitive and overcome the challenges of a globalised and unrestricted world. Money moves fast in the modern world. Foreign investment can move to more efficient and more profitable countries in the blink of an eye. And as Greece learned the hard way, do it yourself or the time will come when it will be imposed on you. •

Analysis

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34 Investing

M ost readers have probably never heard the term ‘angel investing’. The term, or strictly speaking

the activity, has been performed for decades in most developed economies, particularly in the United States, Canada and the U.K. It has also in the past few years made its way to almost all EU and Asian countries.

Assume you are part of a young enterprise that is trying to expand or develop, or an entrepreneur with a great idea that could prove to be very successful if implemented and marketed well. Now suppose you do not have the necessary funds to do so. What are your options? Contributions from friends and family? Government and EU grants? Bank loans and perhaps venture capital or other investment funds? An alternative often missing from that list is angel investing.

What is angel investing? Angel investing is the provision of funds, management expertise and business and social contacts by wealthy, successful individuals to potential high-growth companies or entrepreneurs, usually in exchange for a stake in their business. Desire to invest in start-up firms or in the early formative stages of emerging ventures is the main motivator of angel investors.

Some argue that angel investing is no different from venture capital. Both business angels and venture capital funds invest in private companies and then have to wait for a liquidity event like a trade sale or a stock listing to get their return. The difference is that the venture capital sector is more organised, more rigorous in its approach and more standardised. On the other hand, angel investing is more flexible and often leads to non-standard business arrangements between the entrepreneur and the investor. In addition, research has indicated that business angels invest in about 1 in 3 investment opportunities they are presented with, in contrast with venture capital funds,

which typically invest in approximately 1 in a 100. The difference is due to the fact that business angels invest in smaller, less complex companies, which are easier to analyse. They also invest their own money and so they do not need to justify their decisions to anyone.

Performed at a venture’s early stage, angel investments are by nature risky. They require money, time, business acumen, and a great deal of commitment by both the entrepreneur and the investor. This is one of the main reasons why nowadays business angels are organised into networks from which they gain access to a great bank of knowledge. Through these networks, they gain opportunities for potential cooperation and co-investment, allowing them to participate in larger deals and spread their risks.

Another dimension of the challenges faced by business angels is the lack of available deals and investment opportunities. This is matched with the problem faced by young enterprises, namely, lack of funds. Combining the two needs, angel networks become the meeting point for investors searching for investment opportunities, and for entrepreneurs reaching out to satisfy their financial needs.

In the current financial environment, with uncertainty still in the air from the ongoing recession, obtaining funding is more difficult than ever. This is particularly the case for start-up enterprises with no significant track record. So next time you need funding, you now have an additional option – try out angel investing.... •

Angel investing is more flexible and often leads to non-standard business arrangements between the entrepreneur and the investor.

Angel Investing: An Alternative Source of Funds in the Modern Business Environment

35


Investing

edge fund investing is by far the most controversial alternative

asset class of the past decade. The huge growth of the market combined with the unique features of hedge fund investing have attracted the attention of the investment community around the world. The statistics confirm this convincingly. Between 2000 and 2009, the number of global hedge funds has almost doubled whereas the assets under management have more than quadrupled. The results in the European Market are even more astonishing with the number of hedge funds increasing from 42 in 2000 to 382 in 2009.What has driven this extraordinary growth? With the exception of 2008, a year where the stock and bond markets crashed, the global hedge fund industry has performed extremely well. Given that the equity market has traditionally given an average return of around 7%, with bond investments offering even lower yields at a range of 3-5%, a 10-year average return of hedge funds of more than 10% sounds outstanding. This is not even the full story. Evidence suggests that the diversification benefits of hedge funds are remarkable due to their low correlation with other asset classes. The 2009 Deutsche Bank Alternative Investment survey shows that for 72% of investors, diversification to other asset classes is the main benefit of investing in hedge funds.

Note, however, that looking at the numbers as a stand-alone measure to assess the performance of the hedge fund industry does not tell the full story. The statistics show only the performance of the hedge funds that were not liquidated and therefore suffer from survivorship bias. Data suggests that there are an increasing number of liquidated funds.

Assuming that in a number of these funds the investors would have lost part or all of their money, it becomes obvious that the reported return statistics are misleading. In addition, the increasing number of liquidations combined with recent fraudulent revelations in the industry (e.g. the case of Bernard Madoff) has created uncertainty in the industry. It is clear that investors are asking for more transparency

from hedge fund managers. Hedge funds are heavily unregulated vehicles and under the shield of proprietary investing, they give minimal information to investors about the investment strategies used. Hedge fund managers can be lured to take undue risks in search of higher absolute returns with, sometimes, catastrophic results for their investors.

Investing in hedge funds is the trend of the past decade. They offer exposure to special investment strategies and skill-based techniques with the potential for exceptionally good returns. They do, however have risks attached that cannot be ignored. The lack of regulation of the hedge fund industry combined with the tendency of hedge fund managers to take unwarranted risks can lead to shattering results for investors. Performing due diligence checks, understanding the investment philosophy and track record of your manager, and assessing the reputation

of the manager in the industry are only some of the tasks an investor should consider performing before investing in the hedge fund industry. Getting most of these tasks right could substantially reduce the risk of your investment and hopefully protect you from seeing your chosen hedge fund liquidated. •

Hedge Fund Investing: An Educated Choice

HDiversification to other asset classes

80%70%60%50%40%30%20%10%0%

% of RESPONDENTS

MAI

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Lower volatility to other asset classes

Absolute returns

Long-term out performance of other asset classes

Better sharpe ratio

NA/ Prefer not to answer

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Higher volatility to other asset classes

What are the Main Benefits of Hedge Fund Investments?

Source: 2009 Deutsche Bank Alternative Investment Survey

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What FIVE Factors are Most Important when Assessing a Hedge Fund Manager?

Global Hedge Fund Returns

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2004 9.3 2009 19

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38


f all precious metals, gold is the most popular investment.

It is the safety net to which investors normally turn when there is uncertainty. Investment demand, and hence price, rises when people worry about inflation, deflation or currency instability. Personally, I cannot remember a single year in the past decade that did not have concerns and uncertainty around inflationary pressures and currency value fluctuations. Do the numbers confirm this observation? Gold has risen from $255 an ounce in 2001 to a new high of over $1,400 in November 2010. With an annualised return of over 18%, gold is by far the best-performing asset of the last 10 years. The continuous demand due to the increased uncertainty of the past decade has driven the price of gold to its current levels.

Have investors missed the train? Is the rally in gold’s price nearing its end? When it comes to investing, there are no definitive answers. No one can be sure if the market forces have created a bubble around the price of gold or if the 10-year rally has just been a warning of what will come in the future. All we can do is go back to the fundamentals and assess the attractiveness of gold as an investment option. There is no doubt that people have traditionally turned to gold in times of uncertainty. If people continue to do that and if there is an incremental rise in uncertainty within the financial world, gold could continue to offer attractive yields.

As for the first question, there are no signs to suggest investors have missed their opportunity. The yellow metal remains an indisputably good portfolio diversifier owning to its low correlation to other classes and its tendency to perform well in either inflationary or deflationary environments. In a deflationary environment, things are a bit more complicated and the way the investment community interprets certain events will determine the actual demand for gold. A few topics discussed in the world’s biggest economic forums are significant factors:

1. Is the recent weakness of the Euro a result of a longer-term fundamental bearish direction or is it purely the result of fiscal issues faced in Greece and other peripherals?

2. Are we heading for a “double-dip” recession or is the biggest economic crisis in decades finally over?

3. Will China continue its monetary tightening in 2011 and going forward?

4. Will the radical socio-economical reforms attempted by the new UK government have a positive or a negative effect on the future of one of the biggest financial centres of the world?

These topics are analysed and discussed daily by the world’s most high-profile economists and investors. Even so, the predictions are not clear, and in some cases contradictory.

Gold is a great diversifier. Holding the yellow metal as part of a well-balanced portfolio at all times sounds like a sensible and easy decision to make.

However, speculating on the future direction of gold’s value is not an easy task. Bradley George, manager of the Global Gold Fund, estimates that $1,000 an ounce will become the long-term floor for the price of gold, and investment demand will force a peak in gold’s price over the next few months. Others point out that gold’s price is still below its early inflation-adjusted high of the early 1980s and therefore a further increase in price should be expected. Meanwhile, sceptics suggest that no investment can continue an “abnormal” rally for an extensive period of time and point out that prior to 2001 gold spent 20 years going nowhere.

The investment decision always comes down to the people who actually have the money to invest. Gold has always been a popular investment, backed by fundamentals that appear to be strong, at least in the foreseeable future. However, fundamental analysis itself is not always as good as... gold. The timing of the investment is, to a great extent, what determines the return. •

Gold – A Bubble or a Safe Bet?

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41


he foreign exchange (forex or FX) is the largest and most liquid of the world’s markets. It has a huge

trading volume. According to the Bank for International Settlements, as of April 2007, the average daily turnover in global foreign exchange markets was estimated at $3.98 trillion. It also has continuous operation, great geographical dispersion and low trading costs relative to other major markets in terms of fixed income, equities and commodities. The most attractive feature of all? Everyone can trade FX from the comfort of their couch!

The primary use of the foreign exchange markets is to facilitate international trade by allowing businesses to convert their currency to other countries’ currencies. However, due to the uniqueness of the market forces that drive the foreign currency movements, forex trading has become the most popular trading activity within the investment community. Thousands of people around the world have set up personal forex accounts and trade in the foreign exchange market regularly. Some of them, the most talented, will ultimately become professional traders. Even if that does not happen, being an above-average trader can offer a little extra money.

Determinants of exchange rates – theories and practice:A number of economic theories attempt to explain the foreign exchange fluctuations. The most popular ones are the international parity conditions model, the balance of payments model and the asset market model. The problem with these models is that they give an economic justification of where the currency values should move and not where they will actually go in practice. Conventional wisdom has shown that there is no simple matrix of factors that directs supply and demand for any given currency. Attempting to predict the foreign exchange movements based on fundamental models is a task that has proven impossible.

The elements that affect the currency values in practice fall into three broad categories:

1. Economic factors: fiscal and monetary policy, budget deficit, structural reform, regulation etc;

2. Political conditions: level of political risk (see article on Political risk);

3. Market psychology: psychological factors that give rise to rational or irrational group behaviour.

Finding a way to promptly evaluate the effect of daily news in the context of the three categories above is what differentiates profit-making FX traders from losers. Technical analysis and other algorithmic trading tools are very popular and have proven to be highly effective in this respect when used correctly and in combination with fundamentals.

How does it work?Everyone can start trading FX by following a set of simple steps:

1. Choose the right brokerage firm (you should choose a well-established, well-known, reputable broker);

2. Open up a demo account to familiarise yourself and see how it works;

3. Start trading.

Traders Action GBP USD

You purchase 10,000 GBP at the GBP/USD exchange rate of 1.38

10,000 -13,800*

A week later, you exchange your 10,000 GBP back into US dollars at the exchange rate of 1.46

-10,000 14,600**

You earn aprofit of $800 0 800

As simple as it may sound, making money through FX trading is a difficult and challenging task. The market is very competitive and if you try getting in without being properly prepared and educated, you can be sure that other market participants will profit from your ignorance. You should trade for at least 6-12 months in a demo account before even considering trading with real money. Remember that if you are not successful in a demo account, there is no reason why you would be successful when real money is at stake.•

Useful websites to visit:

• www.forex.com • www.Easy-Forex.com

• www.xe.com • www.forexdaily.net

FX Trading – Trading for Everyone

T

* GBP 10,000 x 1.38 = US $13,800 ** GBP 10,000 x 1.46 = US $14,600

Investing

42


e have seen a variety of perks bestowed upon drivers of

electric and hybrid vehicles, but the Charles Hotel in Cambridge, Mass., may just go further than we’ve ever observed. Not content to offer just free charging for such vehicles — as the Sea-Tac Airport and at least one McDonald’s have both been known to do — the hotel has developed an array of integrated benefits for consumers who make smart transportation choices of many kinds.

To be sure, there is a free charging station in the hotel’s Charles Square Garage for drivers of electric and hybrid vehicles, as well as free bicycle parking for those who travel on two wheels. But the benefits are far more numerous than that. Working with Propark America, the garage now uses NanoMAX, for example, a new, patented detection system that measures the size of vehicles entering a parking facility and adjusts the parking rate accordingly. Smaller, environmentally friendly vehicles are assessed a smaller rate as a reward to the driver for operating a vehicle that has a lesser impact on the environment.

The garage also has a special area reserved for guests who drive smaller vehicles such as Mini Coopers and Smart Cars; in addition to specially

marked parking spots, the section is adorned with high-resolution wall graphics, colourful floor coatings and energy efficient lighting. A tire inflation station lets visitors fill their tires for maximum fuel efficiency, while a free bicycle lending program for guests of the hotel provides Electra Amsterdam Classic bicycles with handlebar-mounted basket, helmet, lock and a map to local bike trails.

All of which is a lovely illustration of an old expression: If something is worth doing, it’s worth doing right. Scattered efforts targeting one type of vehicle or another are certainly better than nothing, but there are multiple ways to help the environment. It’s this kind of integrated and full-service approach that’s likely to make an impression — and a difference. •

Hotel Rewards Visitors for Smart Transportation ChoicesSource: www.springwise.com

W

Future/Green Business

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Patsalides & Associates

43


asuni National Park, in the eastern corner of Ecuador’s Amazon region, was named a UNESCO

biosphere reserve in 1989, and is nowadays considered one of the most bio-diverse places in the world.

Unfortunately, the Ihapingo-Tambococha-Tiputini (ITT) oil block is located under the park’s area, with an estimated 950 million barrels of oil in the ground, worth approximately US$10 billion. That is a lot of money, and yet Ecuador’s government has taken a huge commitment not to extract this oil, aiming to defend the culture and the indigenous people living in the region and protect the unique biodiversity in the area.

The oil in the ground represents a wasted financial opportunity for Ecuador, one that a poor and indebted country is finding hard to lose. In the current economic climate, and considering mankind’s overreliance on oil, the commitment taken by Ecuador is becoming hard to keep. Arguing that the preservation of Yasuni would benefit all mankind, Ecuador is now asking for compensation from the Western world for not drilling the oil in pursuit of an admittedly unique agreement.

Should Ecuador decide to drill the oil, it could potentially receive US$10 - $15 per barrel (net of drilling and transportation costs). As compensation for not doing so and preventing deforestation, for the loss of culture and human lives and for avoiding a massive 450 tons of carbon emissions, Ecuador is asking US$5 per barrel, totalling approximately US$4.6 billion. Should an agreement be reached, the indefinite moratorium would be assured by a legal agreement and by international safeguards. The earnings from investing the US$4.6 billion would be used to reduce the country’s heavy debt and put towards socio-environmental investments.

Some critics say that Ecuador is only trying to get these funds from the Western world because it is finding it hard to extract the oil anyway. Crude oil is difficult to extract and pump over the Andes; extraction would pollute water and air, cause deforestation, destroy biodiversity, threaten the livelihood of local tribes and release huge amounts of CO2, causing large damage to the country.

On the other hand, Ecuador’s government is arguing that it could easily reach an agreement with an oil giant and proceed with drilling, ignoring all the environmental consequences. After all, Ecuador is not producing huge amounts of gases, and is not obliged under international treaties such as the Kyoto Accord to reduce its emissions.

It is generally accepted that developed countries which produce vast amounts of greenhouse gases are essentially responsible for climate change and hence should be held responsible for its future costs. Regardless of the true motives behind Ecuador’s proposal, keeping the Yasuni oil in the ground would be a huge positive and forward-thinking initiative. Should an agreement be reached, the so-called Yasuni-ITT initiative could be a model that could be used in other similar cases, and an important first step towards fighting global warming.•

Ecuador: ‘Green’ extortion or a step towards saving our planet?

Y


44


nvesting in emerging countries has been a major topic of

discussion in the 21st century. Attractive returns combined with the “abnormal” growth these countries have seen in the past decade has attracted the interest of many multinational corporations seeking to expand, as well as all sorts of international investors, hedge funds, pension funds, private equity houses, major banks and wealthy individuals. The question is, has their era gone or is there more to come? Let’s visualise the future and see where Brazil, Russia, India and China (collectively known as the BRIC countries) will be by 2050:

• At the moment, the size of the economies of BRICs is estimated to be 15% of the size of the G6 (in US dollars terms). By 2025, they could reach half the size of the G6 and by 2040 they are estimated to surpass them. China’s economy is the largest of the BRICs and will probably surpass that of the US. The ranking projections for 2050 could be surprising to some but not less than real China, the USA, India, Japan, Brazil, Russia and the UK will form the new G6. That means that by 2050, four out of the six largest economies worldwide will be the ones that today we consider emerging markets.

• Their growth in annual spending would be four times larger than that of the current G6 economies.

• Their currencies could strengthen by 350% as they converge towards the values predicted by the Purchasing Power Parity (PPP).

• BRICs are expected to experience a higher population growth than the G6 although their per capita income (with the exception of Russia) will remain below that of G6 economies.

Having noted the projections of economic growth, capital spending, exchange rates and demographics, one can see why BRICs will dominate the world. What actually drives this tremendous growth? The answer is given

by elementary economics. The growth rate in a country has three elements:

1. Technological progress: this is the main reason for the projected growth in BRICs. The technological gap between developed and emerging countries is so big that when the technological advances are adopted by BRICs, the increase in productivity will be astonishing. Increased productivity will increase investment and the gross domestic product (GDP) will go up.

2. Growth in capital: as emerging countries force structural reform, foreign capital will flow freely and the increased investment will result in higher levels of GDP.

3. Employment growth: as their population grows at a higher rate than that of the developed countries (excluding China), BRIC labour will be able to produce higher levels of real GDP.

So are the BRICs the way to go? Should people invest in BRIC

economies? The answer is, as always, “it depends.” The projections are based on a set of assumptions that could fall apart in a dynamic and changing world. On top of that, an investor needs to assess the ability of an emerging country to sustain its economic growth at a high rate in the longer term. Macroeconomic stability, workforce education, institutional efficiency and open trade are the main factors that determine the degree of growth sustainability.

At the moment, none of the emerging countries has shown its commitment to all four conditions. Brazil faces significant challenges due to its poor fiscal policy and high inflation levels. Russia is struggling to reform its financial institutions, legal and healthcare systems and the governmental agencies. China still imposes significant barriers to the free float of capital across its borders and India has a very poor educational system. Will they eventually get it right? Well, that is what will determine the return on your investment!! •

BRICs: The Path to the FutureI Having noted the projections of economic

growth, capital spending, exchange rates and demographics one can see why

BRICs will dominate the world.



Virtuality: the New Era for Modern Business

he term virtual office, meaning the effective utilization of office space and shared use of

communication technologies in the work environment, has been around for many years now. In simple words, virtual office providers rent to small companies and sole traders office space by square feet or by desk, as well as communication services such as Internet access, answering services, call forwarding, voicemail and fax. The service can also include receptionists and virtual assistants as well as the use of a professional address, reception courtesies and business meeting space on demand.

The greatest benefit for companies using a virtual office is the reduction in overheads without the compromise of professionalism. As a matter of fact, the significant reduction in costs is the main reason why the virtual office trend has been booming in the last decade or so.

The idea of virtuality has now developed further, evolving into the concept of Virtual Company, and it is thriving, especially in the US. So look out – it is coming soon to Europe.

How does a virtual company work?There is no single office space, and the employees of the company are essentially free to work from anywhere they like as long as they are provided with the resources to communicate, collaborate and effectively complete their tasks.

Minimal overheads are not the only advantages of this settlement. The environmental impact is also minimised, both due to reduced office space waste and power consumption, as well as by eliminating the need for employees to commute. After all, no one likes spending hours of time on the roads. Research has indicated that employees are more productive and happy when they are allowed to work from home.

The sound benefits of virtuality have already created a new era for small and medium companies. Will larger corporations follow?

Big companies will probably struggle to follow the same operational logic. There are, however, a few simple concepts they could take away and use:

• Use e-mail for almost every communication you can, and motivate your recipients to do the same;

• Do not print paper copies of documents whilst maintaining an electronic archive;

• Automate tasks as much as possible – utilising computer based applications will free up your employee’s time. However, you need to ensure all your systems are easy to use;

• Create and use on-line documentation and data repositories – store your company’s documents,

reports and forms, as well relevant e-mail correspondence online. This way, you can access them at any time during the day at your leisure (under this we could propose cloud computing, but more on that on a future issue);

• Create a flexible workforce that can adjust to different tasks as required;

• Use communication technologies – audio-conferencing, video-conferencing and e-mail can facilitate work but personal contact should not be eliminated because at the end of the day that is what really makes a difference;

• Motivate employees, customers and suppliers to do business electronically;

• Promote a flexible work environment - this means giving your employees the choice to work at alternative locations as well as allowing flexible working hours;

Being a virtual company has a lot of benefits, but is not easy to achieve, especially for large organisations. Every company is unique, and as such it should build its business model based on its industry, competition, corporate culture and management style. Becoming a virtual company, or working towards that, is not a matter of following a set of rules but rather a continuous process. The first steps are easy, so go ahead and add some virtuality to your company’s repertoire. You can only benefit from it. •

T

45Future/Green Business


Social Networking: the Hidden Power he rise and spread of Internet use has, no doubt, brought tremendous growth in technological

advancement and innovation. It has managed to connect people globally under a common platform for communication. As a part of this process, we have witnessed a remarkable growth in social networking in the past decade or so.

This phenomenon initially started with online chat applications such as MSN Messenger and ICQ. It subsequently moved to the next level with personal sites whereby individuals could make connections with other users based on one or more specific types of interdependency: friendship, kinship, common interest, financial exchange, business contacts, sexual or other relationships.

Nowadays, updating your status, responding to messages and posting news and feeds on social networking sites such as Linkedln, MySpace, Twitter and, above all, Facebook, are daily activities for millions of people across the globe.

In order to understand the power and influence these tools have, let us take for example the most widely used platform, Facebook. President Obama used it to get elected. Dell will recruit new hires with it. Microsoft’s new operating system borrows from it. Starbucks has essentially 10 million ‘fans’ on Facebook and uses it for online promotion and marketing. There is no question that Facebook, with over 500 million users worldwide, has made an impact.

What do these numbers mean in business and sociological terms? Clearly, brands and personalities have turned to social networking sites to market their products, enhance their image, and communicate with their customers and fans. These tools therefore help to affirm brand loyalties.

Social network analysis, drawing on modern sociology, communication studies, economics, geography and organizational studies, aims to measure social capital, the value that an individual gets from their social network.

In order to understand this concept, let us use a simple example. Looking at the connecting lines in any corporation’s organisational chart, it is clear that these connections do not typically represent how people really relate. When one considers all of the invisible relationships, the old formal chart is relatively useless compared to the resulting tangle. The new network gives information that can potentially improve productivity, collaboration and efficiency.

The new network would give information that could potentially improve productivity, collaboration and efficiency.

As such, applying the concept of social networking in the framework of a business community can enable firms to take advantage of the benefits of such networks. The real value of creating and supporting a business network comes from understanding who goes to whom for information, who energizes others or saps their strength, who has access to certain knowledgeable and powerful people, who inspires others and who becomes a bottleneck in the organisation because they have too much on their hands – not who hangs out with whom at lunch.

The Internet and the move towards electronic means of communication have unlocked the potential for information sharing and highlighted the true power of information. Applying social networking in a business framework can therefore be used to the benefit of organisations.

So go ahead and use the hidden power of social networking – but be careful, as there is a thin line that could easily be crossed. Individuals tend to become overly protective if they feel their personal life is being invaded and this can then eliminate all the benefits. •

T

46 Innovation

48


roprietary software varies as to operating system, application

packages and generic or specialised applications. Most of these programs are typically developed for and pushed at the market by large corporations. Their costs range from a few hundred Euros for the simplest and most common packages to thousands of Euros for the more complex and specialised packages. Considering the acquisition costs, along with the yearly subscription, upgrade and support costs, and the fact that nowadays companies rarely have the ability to operate without computer intervention, IT software represents a significant financial burden for every modern enterprise.

The recent economic crisis has forced many company boards to consider cost-cutting measures, a lot of them inevitably linked to IT. This decision causes a lot of problems for the operational efficiency of the companies, problems which could have been prevented if the companies were taking advantage of open source software.

Open-source software, being free to use, can indisputably help enterprises reduce their IT costs.

A bit of HistoryThe label “open source” was first adopted by members of the free software movement at a strategy session held at Palo Alto, California, on January 1998, in reaction to Netscape’s famous announcement of a source code release for Navigator. Ever since, the term has become widely used.

Open source software is loosely defined as software that follows the following principles:

• Free redistribution;• Source code must be included;• Must allow modifications and

derived works;• Integrity of the author’s

source code;

• No discrimination against persons or groups;

• No discrimination against fields of endeavour;

• A single license must apply to all users;

• License must be technology-neutral.

In essence, it is software that is free and allows other users to modify, customise and enhance it to better suit their needs. These stipulations are all based on a culture of sharing found and created content and technological information.

The concept of free sharing of information existed long before the computer era. With the advancement of IT technology and especially theInternet, however, open source development boosted the creation of open source communities all over the world, leading to the development of a huge variety of open source operating systems and application packages.

Why open source software?The apparent advantage of open source software packages is the fact that they are available gratis or at minimal cost. Even bug fixes and upgrades are typically offered free of charge by the communities of programmers involved in the open source projects.

In addition, the free access to the source code and the right to modify it allows for unlimited tuning and improvement of the software product itself, which enables programmers to adapt it to changing conditions and continuously port it to new hardware. The involvement of large programmer communities leads to the rapid implementation of new features and security fixes. Combined with the invaluable source of technical knowledge that these communities offer, this results in an extended lifetime for the software. On top of that, there is no single entity on which the future of the open source software depends, as opposed to the conditions of proprietary software. As

such, there is no reliance on a single software manufacturer for upgrades and continued development.

In terms of delivery, there are fewer conflicting priorities, as there are no marketing pressures. There are no precise delivery dates or features that must be supported, and everything is delivered when it is ready, and when the development team feels that its quality is good enough. Another dimension to be noted is that people work a lot harder on projects they like. Being the product of highly motivated groups working essentially for free, open source software packages are often superior to their comparable proprietary ones.

There is, however, a flip side to everything, and in this case, a lot of people say, “it is too good to be true – there is no such thing as a free lunch.”

The biggest concern relates to software maintenance. If you are using commercial software, the vendor has an obligation to assist you in a timely manner. With open source applications, you may find difficulties obtaining support. In addition, some open source projects stall and die, so you might be left using an application that is full of security bugs, with no one to fix it. The only solution is to pay a developer to fix the software.

Criticism also comes over the portability and compatibility of open source software and the formats in which users can save their documents.

In practiceCompanies worldwide have recently started using open source software, from operating systems all the way to simple applications, more extensively.

A quick browse through the websites offering open source software can convince even the most demanding user that there is a free software package for almost anyone’s needs. Indeed, for every standard software package, there is an open source alternative.

Open Source Software:

P

Reduce Costs Without Compromising Quality

Innovation


49

With the plethora of open source applications available, it is easy to conclude that there is no need to pay for software ever again. That is only partly true, as you will probably pay for the advantages in time – time to set it up, time in modification and time in troubleshooting. That is why the process of selecting your software package needs to be rigorous and carefully thought out:

• Is the software well established or still in it’s infancy?

• Are there regular updates, patches and new features?

• Is there a support forum? • Are the support forums active? • Do forum participants help each

other out? • Are reputable companies using

the software? • Is the documentation complete

and coherent? • What are the general costs with

hiring contractors who are familiar with the software?

At the end of the day, even if you do not go 100% open source, utilising a hybrid approach can only benefit your organisation. Using open source

software for all the standardised tasks in your workspace while using commercial software only where needed (i.e. for specialised functions) can definitely reduce your costs without compromising functionality, automation or efficiency. After all, operational effectiveness and budget sanity is what can keep you going in troubled times. •

Useful Websites: sourceforge.netwww.myopensource.orgwww.osalt.com

Innovation

To find out about sizzling advertising opportunities, please contact:

[email protected]

50


t was a huge challenge to pick just 10 from such a wide range of innovative concepts. We hope you’ll

find this selection as inspiring as we did!

1. Small-scale food production using membership modelsThe past year or two saw a huge increase in innovative, upscale mobile food purveyors working from trucks and selling everything from premium ice-cream to Korean BBQ tacos. Requiring an even lower investment, the next wave could be small-scale culinary subscription services, which allow fledgling entrepreneurs to get a foothold in the food business, and create a steady income and a loyal client base for future business activities.

2. Low impact advertisingRealising that green concerns are here to stay, British media agency Curb offers nothing but low-impact advertising. Its first service used rainwater to clean logos into grubby pavements, and was quickly followed by other techniques that use sand, sea water, grass, glow-in-the-dark funghi and more to broadcast their clients’ messages in an earth-friendly manner.

3. Health tracking devicesFrom wireless headbands that track sleep patterns to wearable gadgets that track every move, an increasing number of options is available for people who want to track their own health-related behaviour. Recording and relaying detailed information that was previously only available through medical monitoring, most of these devices aren’t yet available worldwide, which creates a host of opportunities for distributors and localized versions.

4. Sample stores, cafes & vending machinesSophisticated sampling—dubbed tryvertising by trendwatching.com—isn’t new. On the rise, however, are dedicated spaces that facilitate sampling by a variety of brands, attracting consumers through the irresistible offer of free goods. Following sampling stores in Spain, sampling cafes in Tokyo and sample vending machines in Belgium, we suspect this concept will spread even further in 2010.

5. Discreet rooftop solar panels and wind turbinesWhile most homeowners would in theory like to generate their own wind or solar power, many are put off not just by cost, but by the aesthetic impact of wind turbines and solar panels. Aiming to resolve that problem are smart engineers who are creating new options that blend in with their environment. Two promising examples: rooftop wind turbines that almost disappear along the apex of a sloping roof, and solar panels shaped like traditional clay roof tiles. Plenty of opportunities here over the next decade, both in distribution and in the development of similar products.

6. Rotating retail at airports and in mallsPop-up, temporary retail is still going strong, but a new alternative has entered the game: rotating retail. Two spottings: opening soon in Glasgow Airport is Planeshop, a permanent store that brands will take over for a limited

I

Source: www.springwise.com

Innovation

51


Innovation

time, including changing the shop’s exterior graphics to match their identity. And in the Netherlands, BrandNew Stores aims to turn those fleeting pop-up shops into a chain concept, creating fixed spaces where brands can temporarily present themselves in a regular retail environment.

7. Remote farming for consumersAccording to Wikipedia, farm simulation game FarmVille has become the most popular game application on Facebook with 73.8 million active users in January 2010. Offering consumers a way to remotely control a patch of land that will actually provide them with an edible harvest is a new Italian start-up: Le Verdure Del Mio Orto, which lets anyone build an organic garden right from their web browser. As the produce grows, it’s picked and delivered to the customer’s door within 24 hours. Weekly deliveries are part of the package.

8. Connecting creative consumers with local fabricatorsA partnership between New Zealand-based Ponoko and North Carolina-based ShopBot Tools, 100kGarages is a community of workshops distributed around the world that are equipped with the digital fabrication tools needed to precisely cut, machine, drill or sculpt the components of virtually any creative project. The network allows designers or consumers

turn their ideas into physical products, and creates new business for small workshops.

9. Paying consumers to promote products they use and loveAs trendwatching.com pointed out in its sellsumers briefing, selling is the new saving: a recession-induced need for cash plus an ever-growing infrastructure are fueling concepts that help ordinary consumers make money instead of spending it. One of the easiest ways to do so is by taking on the role of marketeer for products they already use and love: from promoting concerts by their favourite bands, to helping small companies launch new products.

10. Single-use toilet bag turns human waste into fertilizerWhile this is a numbered list, we love all of these ideas equally. So, last but not least, a potential solution to a problem that 2.6 billion people have to deal with: no access to a toilet. Designed for use sitting, squatting or standing, the single-use, biodegradable plastic Peepoo bag is lined with a urea-coated gauze layer that disinfects all waste. Used bags are odour-free for at least 24 hours and are safe for burial underground. Within two to four weeks after use, their contents are converted to high-quality fertiliser—something that’s also rare in many areas and could become a source of income and further enrichment for individuals or villages.•

Selling is the new saving: a recession-induced need for cash plus an ever growing infrastructure are fueling concepts that help ordinary consumers make money instead of spending it


8,810

9,310

9,810

10,310

10,810

11,310

11,810

12,310

12,810

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

DOW Jones

8,810

9,310

9,810

10,310

10,810

11,310

11,810

12,310

12,810

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

DOW Jones

8,810

9,310

9,810

10,310

10,810

11,310

11,810

12,310

12,810

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

DOW Jones

8,810

9,310

9,810

10,310

10,810

11,310

11,810

12,310

12,810

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

DOW Jones

8,810

9,310

9,810

10,310

10,810

11,310

11,810

12,310

12,810

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

DOW Jones

8,810

9,310

9,810

10,310

10,810

11,310

11,810

12,310

12,810

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

DOW Jones

8,810

9,310

9,810

10,310

10,810

11,310

11,810

12,310

12,810

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

DOW Jones

10,500

11,000

Shanghai

8,500

9,000

9,500

10,000

10,500

11,000

02-11 02-11 01-11 12-10 12-10 11-10 10-10 09-10 09-10 08 -10 07-10 07-10 06-10 05-10 05-100 4-10 03-10 02-10

Shanghai

8,500

9,000

9,500

10,000

10,500

11,000

02-11 02-11 01-11 12-10 12-10 11-10 10-10 09-10 09-10 08 -10 07-10 07-10 06-10 05-10 05-100 4-10 03-10 02-10

Shanghai

8,500

9,000

9,500

10,000

10,500

11,000

02-11 02-11 01-11 12-10 12-10 11-10 10-10 09-10 09-10 08 -10 07-10 07-10 06-10 05-10 05-100 4-10 03-10 02-10

Shanghai

8,500

9,000

9,500

10,000

10,500

11,000

02-11 02-11 01-11 12-10 12-10 11-10 10-10 09-10 09-10 08 -10 07-10 07-10 06-10 05-10 05-100 4-10 03-10 02-10

Shanghai

8,500

9,000

9,500

10,000

10,500

11,000

02-11 02-11 01-11 12-10 12-10 11-10 10-10 09-10 09-10 08 -10 07-10 07-10 06-10 05-10 05-100 4-10 03-10 02-10

Shanghai

4,500

5,000

5,500

6,000

6,500

7,000

7,500

8,000

02-11 02-11 01-11 12-10 12-10 11-10 10-10 09-10 09-10 08-10 07-10 07-10 06-10 05-10 05-100 4-10 03-10 02-10 02-10

Frankfurt

4,500

5,000

5,500

6,000

6,500

7,000

7,500

8,000

02-11 02-11 01-11 12-10 12-10 11-10 10-10 09-10 09-10 08-10 07-10 07-10 06-10 05-10 05-100 4-10 03-10 02-10 02-10

Frankfurt

4,500

5,000

5,500

6,000

6,500

7,000

7,500

8,000

02-11 02-11 01-11 12-10 12-10 11-10 10-10 09-10 09-10 08-10 07-10 07-10 06-10 05-10 05-100 4-10 03-10 02-10 02-10

Frankfurt

4,500

5,000

5,500

6,000

6,500

7,000

7,500

8,000

02-11 02-11 01-11 12-10 12-10 11-10 10-10 09-10 09-10 08-10 07-10 07-10 06-10 05-10 05-100 4-10 03-10 02-10 02-10

Frankfurt

4,500

5,000

5,500

6,000

6,500

7,000

7,500

8,000

02-11 02-11 01-11 12-10 12-10 11-10 10-10 09-10 09-10 08-10 07-10 07-10 06-10 05-10 05-100 4-10 03-10 02-10 02-10

Frankfurt

3,000

3,160

3,320

3,480

3,640

3,800

3,960

4,120

4,280

4,440 Paris

3,000

3,160

3,320

3,480

3,640

3,800

3,960

4,120

4,280

4,440 Paris

3,000

3,160

3,320

3,480

3,640

3,800

3,960

4,120

4,280

4,440 Paris

World Markets: World Indices

52 Markets

Figures and statistics from AG Financial Network


8

2,075

2,325

2,575

2,825

1,575

1,825

2,075

2,325

2,575

2,825

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

1,575

1,825

2,075

2,325

2,575

2,825

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

1,575

1,825

2,075

2,325

2,575

2,825

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

1,575

1,825

2,075

2,325

2,575

2,825

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

1,575

1,825

2,075

2,325

2,575

2,825

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

1,575

1,825

2,075

2,325

2,575

2,825

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

8,500

9,000

9,500

10,000

10,500

11,000

02-11 02-11 01-11 12-10 12-10 11-10 10-10 09-10 09-10 08-1 0 07-10 07-10 06-10 05-10 05-10 04-10 03-10 02-10

8,500

9,000

9,500

10,000

10,500

11,000

02-11 02-11 01-11 12-10 12-10 11-10 10-10 09-10 09-10 08-1 0 07-10 07-10 06-10 05-10 05-10 04-10 03-10 02-10

8,500

9,000

9,500

10,000

10,500

11,000

02-11 02-11 01-11 12-10 12-10 11-10 10-10 09-10 09-10 08-1 0 07-10 07-10 06-10 05-10 05-10 04-10 03-10 02-10

8,500

9,000

9,500

10,000

10,500

11,000

02-11 02-11 01-11 12-10 12-10 11-10 10-10 09-10 09-10 08-1 0 07-10 07-10 06-10 05-10 05-10 04-10 03-10 02-10

8,500

9,000

9,500

10,000

10,500

11,000

02-11 02-11 01-11 12-10 12-10 11-10 10-10 09-10 09-10 08-1 0 07-10 07-10 06-10 05-10 05-10 04-10 03-10 02-10

8,500

9,000

9,500

10,000

10,500

11,000

02-11 02-11 01-11 12-10 12-10 11-10 10-10 09-10 09-10 08-1 0 07-10 07-10 06-10 05-10 05-10 04-10 03-10 02-10

6

4,000

4,300

4,600

4,900

5,200

5,500

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6,100

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

4,000

4,300

4,600

4,900

5,200

5,500

5,800

6,100

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

4,000

4,300

4,600

4,900

5,200

5,500

5,800

6,100

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

4,000

4,300

4,600

4,900

5,200

5,500

5,800

6,100

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

18,000

20,000

22,000

24,000

16,000

18,000

20,000

22,000

24,000

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

16,000

18,000

20,000

22,000

24,000

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

16,000

18,000

20,000

22,000

24,000

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

Hong Kong

London

Tokyo

Nasdaq


53Markets

Figures and statistics from AG Financial Network Figures and statistics from AG Financial Network


54 MarketsMarkets

1,950

2,100

2,250

2,400 Athens

1,200

1,350

1,500

1,650

1,800

1,950

2,100

2,250

2,400

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

Athens

1,200

1,350

1,500

1,650

1,800

1,950

2,100

2,250

2,400

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

Athens

900

1,020

1,140

1,260

1,380

1,500

1,620

1,740

1,860

1,980

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

Nicosia

900

1,020

1,140

1,260

1,380

1,500

1,620

1,740

1,860

1,980

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

Nicosia

1,290

1,050

1,090

1,130

1,170

1,210

1,250

1,290

07-10 07-10 08-10 09-10 10-10 10-10 11-10 12-10 01-11 02-11 02-11

Bombay




Markets 55Markets

1.26

1.30

1.34

1.38

1.42

1.46

1.50

1.10

1.14

1.18

1.22

1.26

1.30

1.34

1.38

1.42

1.46

1.50

1.10

1.14

1.18

1.22

1.26

1.30

1.34

1.38

1.42

1.46

1.50

1.10

1.14

1.18

1.22

1.26

1.30

1.34

1.38

1.42

1.46

1.50

1.10

1.14

1.18

1.22

1.26

1.30

1.34

1.38

1.42

1.46

1.50

1.10

1.14

1.18

1.22

1.26

1.30

1.34

1.38

1.42

1.46

1.50

1.10

1.14

1.18

1.22

1.26

1.30

1.34

1.38

1.42

1.46

1.50EUR/USD

02-11 02-11 01-11 12-10 12-10 11-10 10-1 0 09-10 09-10 08-10 07-10 07-10 06-10 05-10 05-10 04-10 03-10 02-10 02-10

EUR/USD

02-11 02-11 01-11 12-10 12-10 11-10 10-1 0 09-10 09-10 08-10 07-10 07-10 06-10 05-10 05-10 04-10 03-10 02-10 02-10

EUR/USD

02-11 02-11 01-11 12-10 12-10 11-10 10-1 0 09-10 09-10 08-10 07-10 07-10 06-10 05-10 05-10 04-10 03-10 02-10 02-10

EUR/USD

02-11 02-11 01-11 12-10 12-10 11-10 10-1 0 09-10 09-10 08-10 07-10 07-10 06-10 05-10 05-10 04-10 03-10 02-10 02-10

EUR/USD

02-11 02-11 01-11 12-10 12-10 11-10 10-1 0 09-10 09-10 08-10 07-10 07-10 06-10 05-10 05-10 04-10 03-10 02-10 02-10

EUR/USD

02-11 02-11 01-11 12-10 12-10 11-10 10-1 0 09-10 09-10 08-10 07-10 07-10 06-10 05-10 05-10 04-10 03-10 02-10 02-10

EUR/USD

09 2

0.94 EUR/GBP

07 4

0.76

0.78

0.80

0.82

0.84

0.86

0.88

0.90

0.92

0.94 EUR/GBP

0.70

0.72

0.74

0.76

0.78

0.80

0.82

0.84

0.86

0.88

0.90

0.92

0.94

02-11 02-11 01-11 12-10 12-10 11-10 10-1 0 09-10 09-10 08-10 07-10 07-10 06-10 05-10 05-10 04-10 03-10 02-10 02-10

EUR/GBP

0.70

0.72

0.74

0.76

0.78

0.80

0.82

0.84

0.86

0.88

0.90

0.92

0.94

02-11 02-11 01-11 12-10 12-10 11-10 10-1 0 09-10 09-10 08-10 07-10 07-10 06-10 05-10 05-10 04-10 03-10 02-10 02-10

EUR/GBP

0.70

0.72

0.74

0.76

0.78

0.80

0.82

0.84

0.86

0.88

0.90

0.92

0.94

02-11 02-11 01-11 12-10 12-10 11-10 10-1 0 09-10 09-10 08-10 07-10 07-10 06-10 05-10 05-10 04-10 03-10 02-10 02-10

EUR/GBP

0.70

0.72

0.74

0.76

0.78

0.80

0.82

0.84

0.86

0.88

0.90

0.92

0.94

02-11 02-11 01-11 12-10 12-10 11-10 10-1 0 09-10 09-10 08-10 07-10 07-10 06-10 05-10 05-10 04-10 03-10 02-10 02-10

EUR/GBP

1.40

1.44

1.48 EUR/YEN

1.20

1.24

1.28

1.32

1.36

1.40

1.44

1.48

02-11 02-11 01-11 12-10 12-10 11-10 10-1 0 09-10 09-10 08-10 07-10 07-10 06-10 05-10 05-10 04-10 03-10 02-10 02-10

EUR/YEN

1.20

1.24

1.28

1.32

1.36

1.40

1.44

1.48

02-11 02-11 01-11 12-10 12-10 11-10 10-1 0 09-10 09-10 08-10 07-10 07-10 06-10 05-10 05-10 04-10 03-10 02-10 02-10

EUR/YEN

1.20

1.24

1.28

1.32

1.36

1.40

1.44

1.48

02-11 02-11 01-11 12-10 12-10 11-10 10-1 0 09-10 09-10 08-10 07-10 07-10 06-10 05-10 05-10 04-10 03-10 02-10 02-10

EUR/YEN

117

121

125

129 EUR/CHF

105

109

113

117

121

125

129

02-11 02-11 01-11 12-10 12-10 11-10 10-1 0 09-10 09-10 08-10 07-10 07-10 06-10 05-10 05-10 04-10 03-10 02-10 02-10

EUR/CHF

World Markets: Currencies


56


Markets

70

75

80

85

90

95

100Crude Oil

65

70

75

80

85

90

95

100

02-10 02-10 03-10 04-10 04-10 05-10 06-1 0 07-10 07-10 08-10 09-10 09-10 10-10 11-10 11-10 12-10 01-11 02-11 02-11

Crude Oil

65

70

75

80

85

90

95

100

02-10 02-10 03-10 04-10 04-10 05-10 06-1 0 07-10 07-10 08-10 09-10 09-10 10-10 11-10 11-10 12-10 01-11 02-11 02-11

Crude Oil

65

70

75

80

85

90

95

100

02-10 02-10 03-10 04-10 04-10 05-10 06-1 0 07-10 07-10 08-10 09-10 09-10 10-10 11-10 11-10 12-10 01-11 02-11 02-11

Crude Oil

65

70

75

80

85

90

95

100

02-10 02-10 03-10 04-10 04-10 05-10 06-1 0 07-10 07-10 08-10 09-10 09-10 10-10 11-10 11-10 12-10 01-11 02-11 02-11

Crude Oil

65

70

75

80

85

90

95

100

02-10 02-10 03-10 04-10 04-10 05-10 06-1 0 07-10 07-10 08-10 09-10 09-10 10-10 11-10 11-10 12-10 01-11 02-11 02-11

Crude Oil

1,245

1,310

1,375

1,440 Gold

1,050

1,115

1,180

1,245

1,310

1,375

1,440

02-10 02-10 03-10 04-10 04-10 05-10 06-1 0 07-10 07-10 08-10 09-10 09-10 10-10 11-10 11-10 12-10 01-11 02-11 02-11

Gold

1,050

1,115

1,180

1,245

1,310

1,375

1,440

02-10 02-10 03-10 04-10 04-10 05-10 06-1 0 07-10 07-10 08-10 09-10 09-10 10-10 11-10 11-10 12-10 01-11 02-11 02-11

Gold

1,050

1,115

1,180

1,245

1,310

1,375

1,440

02-10 02-10 03-10 04-10 04-10 05-10 06-1 0 07-10 07-10 08-10 09-10 09-10 10-10 11-10 11-10 12-10 01-11 02-11 02-11

Gold

1,050

1,115

1,180

1,245

1,310

1,375

1,440

02-10 02-10 03-10 04-10 04-10 05-10 06-1 0 07-10 07-10 08-10 09-10 09-10 10-10 11-10 11-10 12-10 01-11 02-11 02-11

Gold

1,825

1,900 Platin

1,450

1,525

1,600

1,675

1,750

1,825

1,900

02-10 02-10 03-10 04-10 04-10 05-10 06-1 0 07-10 07-10 08-10 09-10 09-10 10-10 11-10 11-10 12-10 01-11 02-11 02-11

Platin

1,450

1,525

1,600

1,675

1,750

1,825

1,900

02-10 02-10 03-10 04-10 04-10 05-10 06-1 0 07-10 07-10 08-10 09-10 09-10 10-10 11-10 11-10 12-10 01-11 02-11 02-11

Platin

1,450

1,525

1,600

1,675

1,750

1,825

1,900

02-10 02-10 03-10 04-10 04-10 05-10 06-1 0 07-10 07-10 08-10 09-10 09-10 10-10 11-10 11-10 12-10 01-11 02-11 02-11

Platin

Silver

15

18

21

24

27

30

33

02-10 02-10 03-10 04-10 04-10 05-10 06-1 0 07-10 07-10 08-10 09-10 09-10 10-10 11-10 11-10 12-10 01-11 02-11 02-11

Silver

15

18

21

24

27

30

33

02-10 02-10 03-10 04-10 04-10 05-10 06-1 0 07-10 07-10 08-10 09-10 09-10 10-10 11-10 11-10 12-10 01-11 02-11 02-11

Silver

World Markets: Commodities


57


Ten Year Government Bond Spreads as at 28/2/2011

Country Latest Spread vs Bund Spread vs T-Bonds

Australia 5.51% +2.27 +2.03

Austria 3.69% +0.45 +0.21

Belgium 4.29% +1.06 +0.82

Canada 3.35% +0.11 -0.12

Denmark 3.28% +0.04 -0.19

Finland 3.44% +0.20 -0.03

France 3.64% +0.40 +0.16

Germany 3.24% N/A -0.24

Greece 12.06% +8.82 +8.58

Italy 4.81% +1.58 +1.34

Japan 1.29% -1.95 -2.19

Netherlands 3.42% +0.18 -0.06

New Zealand 5.63% +2.39 +2.15

Portugal 7.53% +4.29 +4.05

Spain 5.36% +2.12 +1.88

Sweden 3.37% +0.13 -0.11

Switzerland 1.85% -1.39 -1.63

UK 3.75% +0.52 +0.28

US 3.48% +0.24 0.00

World Markets: Bonds

Eurozone Benchmark Yields as at 28/2/2011

Maturity Yield 1 Week 1 Month

1 Month 0.71% 0.62% 0.68%

3 Month 0.57% 0.52% 0.62%

6 Month 0.79% 0.80% 0.71%

2 Year 1.58% 1.55% 1.35%

3 Year 1.85% 1.78% 1.72%

5 Year 2.47% 2.37% 2.38%

10 Year 3.24% 3.14% 3.21%

15 Year 3.70% 3.59% 3.69%

20 Year 3.79% 3.69% 3.79%

30 Year 3.69% 3.60% 3.68%

Markets

*N/A = Not available



GDP (current US$)GDP growth (annual %)

Unemployment

Imports of goods and services

(% of GDP)

Exports of goods and services

(% of GDP)

Central government debt, total (% of GDP)

2009 2009 2008 2009 2009 2008

Argentina 307,155,148,184 0.9 N/A 16 21 v

Australia 924,843,128,521 1.3 14.9 N/A N/A 18.1

Brazil 1,573,408,702,182 -0.2 N/A 11 11 58.5

Canada 1,336,067,710,612 -2.5 7.1 30 29 N/A

China 4,985,461,200,586 9.1 N/A 22 27 N/A

France 2,649,390,172,579 -2.6 37.9 25 23 72.2

Germany 3,330,031,687,465 -4.7 53.4 36 41 42.6

India 1,310,170,500,357 7.7 N/A 25 21 54.9

Indonesia 540,273,507,315 4.5 N/A 21 24 N/A

Italy 2,112,780,152,061 -5.0 47.5 24 24 106.6

Japan 5,068,996,399,491 -5.2 33.3 12 13 N/A

Mexico 874,809,714,008 -6.5 1.7 29 28 N/A

Russian Federation 1,231,892,982,497 -7.9 N/A 20 28 6.5

Saudi Arabia 369,178,666,667 0.1 N/A 43 53 N/A

South Africa 285,365,879,676 -1.8 N/A N/A 27 N/A

Dem. Republic of Korea N/A N/A N/A N/A N/A N/A

Turkey 614,603,094,839 -4.7 26.9 104 23 44.5

United Kingdom 2,174,529,808,278 -4.9 25.5 57 28 57.3

United States of America 14,119,000,000,000 -2.6 10.6 47 11 54.6

Greece 329,924,054,829 -2.0 49.6 29 19 114.8

Cyprus 24,910,267,726 3.6 16.9 58 47 85.9

Source: http://data.worldbank.org *N/A = Not available

World Markets: G20

58 Markets

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