Cyprus must change or suffer

Harris A. Samaras
-
8

POPULIST like and bigoted demagogic methods embraced by most political parties and trade unions alike, making use of popular prejudices and promises in order to gain power (or remain in power), preying on people’s fears have to stop immediately!

Every day that goes by without the Cypriot government taking action to constructively remedy the economy is disastrous, tarnishing the reputation that Cyprus enjoyed for more than two decades (and worked for so hard) as a solid, reputable business hub and financial centre!

It is clear that the recent downgrades by both S&P and Moody’s are not taken seriously by the Cyprus Government as their only worry and consideration for action is related to the outcome of the coming elections… Shame to the Government but also to all political parties and trade unions whose public declarations and mumbling are gutless, confusing, mediocre and unworthy of whatever they claim to be!

These are times when every cent counts, that is, every cent that one spends, saves or invests. In times like these, advantages that a country like Cyprus offers, (i.e., strong and applicable legislation and sound regulatory system, the lowest corporate tax within the European Union and double-tax-treaty agreements with about 50 countries), should have been attracting investments or should have been encouraging even the most hesitant investor, individual or corporate, to invest in the Island. Instead, Cyprus is downgraded, Cyprus is exposed, Cyprus is not able to convince that it can respond to market dynamics promptly and responsively, worse, Cyprus cannot convince that it can manage its own. How can then Cyprus expect to attract investors? How can a potential investor be convinced that this Country is sound enough to “entrust” her/his wealth or savings?

Lack of vision and sciolism… populism and demagogy, practiced devoutly by political and union leaders… apathy towards the conceptions or misconceptions, evaluations and devaluations that foreign influential nations and professional bodies maintain, estimate or guesstimate for Cyprus… weaken the very foundations of the Island’s existence as a business hub and a financial centre to say the least… Who would want to invest or live in a country that nurtures apathy like it was a virtue?

Cyprus like every other nation has to realize that it exists within a globalized environment characterized amongst other, by unforeseen exogenous-caused risks and increased volatility. Cyprus has to be ready at all times for the worse; it cannot be only seeking for ways to just get by. How will the recent socioeconomic problems of the nearby countries of MENA affect Cyprus? What if Saudi Arabia, the largest oil producer in the world is next? What if Greece will not be in a position to pay off its debts? What if other European partner nations (which are very likely to) follow the path of Greece? What if the U.S. falls into another recession (something that is more than very likely to happen)? What if Cyprus is forced by the EU to raise its corporation tax?

It is all about efficiency and excellence… and there is neither efficiency nor excellence when the leaders of a country are characterized by mediocrity! And mediocrity is contagious! It becomes a way of life and infects all levels and dimensions of a society. Mentality has to change and first the mentality of the Country’s leaders…

If Cyprus is to prosper, it has to strive for excellence, it has to become competitive, and it has to accumulate capital. First and foremost by cutting unnecessary and primitive “non-logical axioms” such is the Cost of Living Allowance (COLA).

COLA has to be eliminated. It only results to large increases in real wages and deterioration in competitiveness of domestic companies, undermining flexibility and competitiveness as it impedes relative wage adjustments across companies and sectors in line with productivity differentials. It imparts inertia to the public sector wage bill, making it more difficult to reverse the excessive growth of public sector wages and salaries. If you add these to a policy (embraced by the governmental and semi-governmental sectors and most financial institutions) that is not based on merit and performance, where people get jobs for life despite their performance, and where trade unions (that are influential and pampered by each and every government in power because of political cost and own benefits) influence management decisions… then you have a formula of self-destruction!

By linking wages to the Consumer Price Index rather than productivity, COLA undermines competitiveness and labour flexibility, in addition to exacerbating the level and persistence of price shocks. Moreover, downward wages stickiness resulting from the COLA may become an impediment to the economy’s ability to respond to the current low-growth environment. In particular, in the presence of long-duration wage contracts the COLA constrains the markets’ ability to correct an overshooting of wages that may result from too optimistic an outlook at the time of the contract’s inception.

Additionally, the social security system has to be restructured. Surplus is currently about 4% of GDP as contributions by employers, workers and the government, exceed outlays. Over the next three to four decades pension outlays are projected to rise by some 10 percentage points as the system matures and demographic changes play out. Unless other area of government spending is curtailed, this would raise total government spending to more than 50% of GDP – a very high level that could be sustained only with a heavy increase of taxes.

A solution: Simply, incorporate the COLA into the basic salary and from that point of time onward base salary increases on merit and performance! In regard to the social security system, bring outlays more in line with contributions, through lower replacement rates and higher retirement age. Freeze salary increments for 2011 and 2012 and increase government employee contribution to pension fund to 4% in 2011 and 5% in 2012.

Corporate and personal income taxes have to remain intact. Income tax evasion should be handled but should not become a “psychosis” by establishing complex legislation and inspection – if procedures do not remain as simple as possible they will scare off investment and eliminate the entrepreneurial spirit that resurrected this country after the Turkish invasion of 1974. Recent studies imply that the size of the black economy in Cyprus cannot be more than 8.5%, one of the lowest in the EU. Given the high tax free income in Cyprus (and the skewness of income distribution) the majority of workers are below the income tax threshold.

A solution: A high tax free income can help not only to reduce tax evasion directly but to also limit the potential tax evaders amongst higher earners. Adoption of such policy will even make tax compliance measures less costly to implement.

Noteworthy, there has been plenty debate lately about tax evasion instead one of finding ways of how tax revenues should be best managed and best directed towards the ever much needed public services improvements.

Additional issues addressed epigrammatically. The banking, tourism and real estate industries have to be reinforced in each and every possible way! Incentives, especially for foreign investors but also for private local ones have to multiply. Prudential controls towards cooperative credit societies should become stricter. Procedures within the governmental machine at every level have to be streamlined and become more responsive. Double tax treaties with more countries are a priority and should be dealt as such. Trade unions should adopt an open-minded policy. More decisive steps need to be taken to eliminate delays related to the issuance of title deeds. Building coefficients in selected areas have to increase. Hospitality and tourism have to be upgraded and better promoted. International hotel chains should be targeted and “invited”. Architectural monstrosity should be eliminated. Architectural uniformity in all areas has to become a way of life. Tradition and heritage has to be protected and better projected. The government should refrain from being involved in business; business should be undertaken only by the private sector – the recent under study project with Qatari Diar for instance should have been considered only on a BOT basis…

Moreover, rumours and proposals for a temporary or permanent hike in the corporate income tax rate, even by a fraction, are disastrous! Rumours and proposals for higher property taxes are disastrous! Rumours and proposals for burdening the banking sector with any form of taxation are disastrous! The current high interest rate regime is disastrous! Rumours and proposals for lifting bank confidentiality to spot tax evaders are disastrous! The temporary reduction in tourism sector VAT rates if not extended is disastrous!

Closing, it is imperative that the Cyprus government and every Cypriot should realize that time is running out, that sacrifices need to be made, that it is not enough to just mend temporarily the current problems, that a spirit of collectiveness, pride and transparency must compliment every effort undertaken. If not, the next global financial tremor will bring devastating effects… Cyprus, a smaller country will be unable to react… and that is when suffering will become a way of Cypriot life!

It is not late!

Copyright © 2011 Pytheas Limited

Further reading

Cyprus must change or suffer!

About the author

Harris Samaras is the Chairman and Chief Executive Officer of Pytheas, an international investment management organization.

Moody’s downgrades three Cyprus banks

David Crowther
-
0

MOODY’S Investors’ Service has downgraded the Bank of Cyprus, the Marfin Popular Bank and the Hellenic Bank following its announcement last week that it had downgraded Cyprus government bond ratings by two notches to A2 from Aa3.

According to yesterday’s announcements:

Bank of Cyprus – outlook stable

Long-term deposits, debt and financial strength downgraded two notches from A3/C to Baa2/D.

The stable outlook reflects Moody’s view that the Baa2 deposit and debt ratings sufficiently capture current credit risks from the bank’s asset quality deterioration, and that, at present, upside and downside risks are evenly balanced.

In their announcement, Moody’s said: “An important consideration that has led to today’s rating action is the increased, and high in absolute terms, level of problem loans (as defined by Moody’s to include all loan past due by over 90 days) that are not covered by provisions. Furthermore, while net problem loans (problem loans net of provisions) are fully covered by tangible (mostly real estate) collateral, the recent downturn in the real estate market has had a negative impact on the liquidity of the market, leading to concerns over the recoverability of such collateral.”

Marfin Popular Bank – outlook negative

Deposits downgraded one notch from Baa2/Prime-2/D+ to Baaa3/Prime-3/D.

The negative outlook on the bank’s ratings primarily reflects the downside risks imbedded in MPB’s operating environment over the next year, which could lead to an erosion of asset quality beyond what is currently assumed under our base case scenario.

Moody’s notes that relative to its capital base, the bank’s exposure to single-party credit-related event risk is large. MPB’s holdings in low-rated Greek sovereign debt of approximately EUR3 billion (90% of pro-forma Tier 1) is the highest amongst Cypriot banks.

Moody’s also notes that, despite some flexibility in its domestic market, the bank’s liquidity and funding position entails some elements of uncertainty due to the significance of its Greek operations.

In their announcement, Moody’s said: “Among the top three Cypriot banks, Marfin Popular Bank’s exposure to Greece (45% of group loans) presents significant downside risks to the bank’s asset quality. As at December 2010, the bank’s non-performing loans had risen to 7.3% from 6.1% as at end-2009.

More positively, however, Moody’s notes the bank’s recently successful capital raising, which has strengthened its capital adequacy ratio to an estimated pro-forma Tier 1 ratio of 12.0%; the rating agency considers this adequate to withstand possible losses arising from the deterioration in the operating environment.”

Hellenic Bank – outlook stable

Deposits, debts and financial strength downgraded one notch from Baa2/Prime-2/D to Ba1/Not Prime/D-.

The stable outlook reflects Moody’s view that the Ba1 deposit and debt rating sufficiently captures current credit risks from the bank’s asset quality deterioration, and that, at present, upside and downside risks are evenly balanced.

In their announcement, Moody’s said: “Although net problem loans (problem loans net of provisions) are fully covered by tangible (mostly real estate) collateral, they comprise a large share of the bank’s shareholder’s equity, with the recent downturn in real estate prices having an impact on the liquidity of the Cyprus property market, leading to concerns on the recoverability of such collateral. Moody’s expects bottom line profits to remain under pressure, primarily due to the bank’s loss-making Greek operations, and high provisioning charges.

More positively, the rating agency notes the bank’s capital raising efforts that have lifted its Tier 1 capital to 12.3%, which is considered adequate to withstand future losses arising from the deterioration in the operating environment. Furthermore, Hellenic’s liquidity position is good, reflecting conservative liquidity management practices, which partly mitigate the bank’s high reliance on offshore deposits.”

Key drivers

In all three cases, the ratings agency said that its key drivers for its rating action were:

  • Its recent decision to downgrade the ratings of the Cypriot government by two notches to A2 from Aa3 and the subsequent repositioning of the country’s systemic support indicator at the level of the national government debt rating of A2 from Aa2;
  • Its re-assessment of the banks’ intrinsic financial strength (as reflected by its standalone BFSR), primarily due to the deterioration in asset quality over the past year, in conjunction with Moody’s expectations of a further deterioration in asset quality.

Bad debts

According to a report in Stockwatch, the decline in the banks’ profitability is mostly linked to increased bad debts due to the financial crisis. The total bad debts of the banks rose to €241.42 million in the fourth quarter of 2010 compared with €169.67 million in the third quarter and €170.36 million in the fourth quarter of 2009.

The bad debts of the Bank of Cyprus surged 85% to €145 million from €78 million in 2009, while in Greece they rose 54% to €184 million from €120 million in 2009. Bad debts in Russia and other countries recorded a slight decrease.

The increase in Marfin’s bad debts increased by 6.1% to €266.1 million from €250.6 million, while the decline in its profitability is mostly attributable to the drop in finance income.

EU Timeshare Directive comes into force

Editorial
-
0

THE NEW EU Timeshare Directive (2008/122/EC) seeks to put right some of the concerns surrounding the 1994 directive. The headline elements are:

  • The cooling-off period will now extend to 14 days across the EU regardless of the country in which the Timeshare is purchased.
  • Long-term holiday products under 36 months (known as Holiday Clubs or Discount Travel Membership Clubs) will now be protected by legislation, as will resale and exchange. This will create a level playing field across Europe’s Timeshare market and ensure that consumers enjoy the same level of protection across the EU.
  • Sellers of ‘holiday clubs’ will also now have to comply with the 14 day cooling-off period rule and fully explain to the consumer what they are actually buying. The consumer will be able to pay the company in equal yearly instalments and have the opportunity to withdraw every year.
  • Buyers of trial packages will also benefit under the new directive.
  • Pre-contractual information will be subject to more detailed regulation.
  • The ban on deposits during the cooling off period will include any advance payment, provision of guarantees and reservation of money on accounts.
  • Member States will face penalties if traders fail to comply with the new directive.
  • Timeshare companies can sign up to new industry Codes of Conduct and Alternative Dispute Resolution (ADR) schemes.

The directive sparked fierce debate across the industry, and on opp.org.uk, with the general consensus being cautious optimism. Here are some of the views on people in the industry:

“With the European Timeshare Directive due to be implemented, it’s likely only committed fractional developers will enter the marketplace. Those bona fide fractional real estate operators who have invested in effective fractional legal documentation will achieve successful sales.”

Piers Brown – Fractional Life

“We believe that the regulation of our industry will bring some consistency and quality in the market, which will help improve consumer confidence. Moreover, the current regulations provide an opportunity for developers to structure products that will provide them with access to incredibly cheap finance. This is an exciting time for our industry.”

Brad Lincoln, CEO, The Best Group

“It will have an effect it will stop some schemes in their tracks … but I don’t think that it will stop serious and reputable developers from investing in a proper fractional project. In fact, over time, it could boost the sector. It will make things clearer in my view, and make the fractional sector feel more consumer friendly. It will make schemes more uniform and bring in concepts such as standard disclosure.”

Eric Gummers, International property lawyer

“There is a serious problem looming. The new directive will have a massive impact on the fractional sector. A lot of developers won’t want to take all of the upfront risk. But, the new regulations have been designed to protect consumers buying into fractional schemes of course, but I have long maintained that timeshare is a type of fractional, but fractional is not necessarily a type of timeshare. Both approaches give owners the right to use a property for a share of the year.”

Peter Esders, Chebsey & Co

Further reading

Directive 2008/122/EC of the European Parliament (English)

Directive 2008/122/EC of the European Parliament (Greek)

Major improvements to Cyprus town planning

Poly Pantelides
-
1

THE CYPRUS Town Planning and Housing department is being reorganised and upgraded, Interior Minister, Neoklis Sylikiotis said yesterday as the department marks 60 years of operation.

The upgrade includes planning, strategic redesigning and control of developments.

“The department has room for a real upgrade of its contributions to create the preconditions for a fair society,” Sylikiotis said.

“The Town Planning and Housing department aims to design, implement and assess the government’s land usage policy, development planning, town planning works, developments’ licence issuing, housing policy and the sheltering of the dislocated,” the Department’s director, Christodoulos Ktorides, explained.

“To promote transparency and educate citizens, we have asked local authorities to publicise proposed bill amendments… for the first time, all local authorities are asked to arrange for public discussions before processing any proposals to amend bills,” said Sylikiotis.

Parliament has currently two bills to consider relating to urban consolidation and the transfer of development rights. Their aim is to ‘activate’ unused land and introduce mechanisms for ‘active town planning’, Sylikiotis said.

A bill modification on town planning legislation is also in the works to update ‘Plan for the Island’, Sylikiotis said.

Plan for the Island was adopted in 1974, two months before the Turkish invasion and was frozen until 1990. It was originally put forward during British colonial rule to deal with problems to do with population increase, urbanisation and tertiary industries’ activities.

About 3,200 development applications were processed within 30 working days by making use of a new self-check process, Sylikiotis said. This self check process will be used on larger-scale and more complicated developments from March 14, he added.

“Our goal and vision for the next decade is to apply and establish Active Town Planning to achieve the strategic aim to have liveable communities,” said Ktorides.

cmc

Fragile recovery in European residential property

Nigel Howarth
-
3

RECOVERY is underway in the majority of European housing markets, but uncertainty remains in the region, with considerable performance variations, says the latest RICS European Housing Review launched earlier today in Brussels.

While housing markets were experiencing rising prices in Belgium, France, Germany and the Nordic countries during 2010, other markets were still facing problems. Ireland, Hungary and Cyprus experienced significant falls through the year and in the UK, Netherlands, Poland and Italy prices were slightly down.

On the other hand, in Spain, Greece and Portugal last year’s falls were quite moderate despite their economic problems, and the Baltic States are progressively recovering.

Though most European markets are stepping out of the crisis, the research reveals that the future of the European housing is still uncertain and full recovery will depend on many different factors.

Unlike previous housing market upturns, this time the recovery is led by price increases, while other market indicators such as housebuilding supply and sales are still low across Europe, with some exceptions. Also many countries continue to face important mortgage constraints. While interest rates remained low during 2010, markets are likely to be very sensitive to any interest rate increases.

The report’s author, Professor Michael Ball, said: “Full recovery will not occur until housing markets are fully functioning again: with plentiful mortgage finance, revived housebuilding and extensive market turnover throughout all sectors. However, the residential sector in Europe is far from following the long term standstill that the US housing is experiencing.”

[youtube=http://www.youtube.com/watch?v=tRekWdUrVUk&w=470]

Recent market performance in Cyprus

The slowdown in the housing market observed from 2009 continued in 2010. The new RICS Cyprus index reported that apartment prices were 9% down in the first nine months of 2010 and houses prices down 5%, with the overall fall expected to be 7% for the year. This was around the level of the previous year and there is little prospect of a significant pick-up in the market in 2011.

The housing market is actually a series of sub-markets. The biggest division is between the holiday-second home areas and the five main towns where most Cypriots live. The available house price indices refer to the domestic rather than the second home market. House prices in tourist areas are difficult to generalise about, but prices in these market sectors have been much more volatile than in the urban areas of the country: rising more in the boom but now falling much faster. Local experts suggest that prices in these areas have dropped by approximately 20–25% for good quality/ good locations, 30–35% for good quality/ secondary locations, and 40–50% for bad quality/ secondary locations.

Other indicators are mixed. Mortgages have been expanding quite rapidly at double digit rates. Growth has been encouraged by accession to the Euro, lower mortgage interest rates and by an economy that, although it has slowed, has weathered the global slowdown comparatively well. Transactions data from the Cyprus property registries have been the starkest indicator of a sharp decline. The biggest fall-offs were related to foreign buyers, whose presence in mid-2010 had dropped by 80% from the peak.

Building permits, a forward indicator of housebuilding, showed a relatively moderate fall to September 2010 of 9% year-on-year. Housebuilding levels from 2005 to 2008 were extremely high, peaking at 22.8 dwellings per 1,000 population in 2008, but building began to fall off after that and has still not bottomed out. Excess supply is particularity apparent in the holiday homes markets.

Further reading

RICS 2011 European Housing Review – Executive Summary

St George coastal works under scrutiny

Bejay Browne
-
4

Peyia sea cavesPARTS of the Paphos coastline are being irrevocably destroyed by development according to the Green Party and a Peyia councillor.

Councillor Linda Leblanc, also a Green party member and she told the Cyprus Mail: “This area of the St. George coast used to be a beautiful pristine example of coastline, but work being carried out by a developer has destroyed all that.”

The Green Party is insisting that the work being carried out is illegal as it encroaches onto the protected coastal area, despite the fact that the developer says he has all the necessary permits from the town planning department.

Leblanc said: “The problem is that they have excavated a couple of metres down on the coastal area right next to the sea. They have also built an ugly concrete retaining wall and backfilled it with red soil.”

Leblanc also pointed out, that water pipes which have been put in at the luxury villas being built by the developer are illegal as they will run into the sea. “The sea here is clean and beautiful and this in not acceptable,” she said.

The local councillor added that the district office had previously described the area as a green area, but she that to the best of her knowledge, a green area could not be right next to the sea, as this is designated as a protected coastal zone.

“The protected coastal area and a green area are not the same thing,” she underlined.

As this development is the first large scale works to be undertaken in the area, Leblanc said the Greens feared the situation would set a precedent for future construction projects.

“We are very worried that this action will be the first of many encroachments onto the protected zone and could cause the destruction of the whole of St. George’s coastline,” Leblanc said.

She said that the Green Party had written a letter to the Paphos district office asking them to clarify what constituted a green area and a protected coastal zone.

According to Leblanc developers must provide a green area in every development but added again that this is not the same thing as a coastal area.

The councillor said: “The damage had already been done to this stretch of coast and the concrete retaining wall extends for at least 30 metres. Many residents both local and foreign have complained to me about what is happening in this area and we – the Greens – are trying to clarify the situation.”

In addition Leblanc said that a couple of years ago, Peyia municipality had officially requested that the beach there be designated a public area.

“If this goes ahead there will probably be more problems and illegal kiosks, as we already see in Coral Bay.”

She continued: “If you care about the environment the future doesn’t look good for this coastline. There are many applications which have been filed to develop this coastline, including the building of another hotel.”

In the meantime, a spokesman in the UK for the luxury development told the Cyprus Mail that all necessary permits were in place and that, ”everything was as it’s supposed to be.”

He also pointed out that the company had given back to the municipality of Peyia, 10 per cent of the land, which is found closest to where the proposed coastal pathway will be constructed.

1...540541542...695Page 541 of 695