14 April 2013

Cyprus bail-in revisited: consequences for small economies

1. The news

European Commission draft documents leaked and released on the FT web site are offering a different picture from the previously released details of the bail-in.

First and foremost, in 9 days the bill has spilled over by EUR 6 billion amounting to a EUR 23 billion shortfalls to gap over a 3 years period. The additional burden falls on Cyprus, the total reaching EUR 13 billion.

Second, it will be entirely born by the deposit-equity swap at the new Bank of Cyprus (i.e. post acquisition of Laiki deposits), which nearly doubles to EUR 10.6 billion from EUR 5.8 previously: EUR 5 billion in 9 days (30% of 2012 EUR 17 billion GDP) is quite a number…

Third, Cyprus will sell “excess” gold reserves for a total consideration of up to EUR 400 million: I like the term “excess” in a world of ever devaluing fiat currency and “excess” represents 70% of its 13.9 t of gold! Since the leak, Cyprus has denied they intended to sale gold: what is contained in the report is an hypothesis, of course…

Fourth, bond holders under Cypriot law will be “encouraged” to roll over up to EUR 1 billion that mature until 2016, meaning that the EZ countries and the IMF will only provide EUR 700 million. In 2011 this “encouragement” was deemed by rating agencies (for whatever credibility they have) to lead to a selective default (rating agencies must have learnt from politicians rhetoric: one meets its commitments or one doesn’t; “selective” is bullshit), not talking about a credit event for CDS. Why what was meant to apply to Greece would not for Cyprus?

Fifth, like all assumptions made about Greece by the EU, the ECB and the IMF proved wrong, these will prove wrong for Cyprus: the economic situation will worsen much more than expected the 8.7% real GDP fall in 2013 and 3.9% in 2014. The debt/GDP ratio will go way above 130% in 2015, and not the 126% projected.

2. Cyprus other route

Cyprus lost its independence, like any over indebted country will, France included, not being able to meet its commitments.

To lose its independence, Cyprus had a better course of action: quickly negotiating joining a ruble zone and offering Russia a naval base in Cyprus plus offshore gas rights. Cyprus would have lost its independence but Cypriots would have been better of.

Geopolitically this would have been a coup for Russia: it will loose its naval base in Syria and would have replaced it with an even more strategically positioned one. Russia would also have enjoyed privileged access to Cyprus gas, further surrounding the EU. This also would have open the way for other disappointed countries with the EU to join the fray like Serbia; and eventually why not Greece. The Orthodox church is a powerful cultural and historical link between all these countries.

Cyprus cannot be kicked off the EU (well, European politicians and eurocrats are used to twist and carve treaties and laws to their own advantage), and therefore it would have allowed Russia to have a foothold in the house.

In any case, this would have been a trump card in the hands of Cyprus in its negotiating positions with the troika.

3. The future of small countries

The crisis has demonstrated that all countries in the EU are not equal in rights despite what is claimed (not surprising, it has always been the case: big boys bullying feeble ones). Rules do not apply the same way depending on size: France has hardly ever abided by Maastricht criteria, and always got away unarmed (we are nearing the end of it, since eventually facts are always right over rhetoric). Greece was slammed (they lied, so they got what they deserved), Cyprus walked over and Luxembourg is bullied.

Cyprus and Luxembourg are criticized for over relying on the financial sector. I do not know what makes Germany, France or the US to impose a business model to small countries whose size limits their ability to enjoy a well diversified economy. If they do not like money fleeing, they should offer a fiscal environment where money is happy at home: there is no tax haven if there is not tax hell. With France’s banks over 3 x GDP (more or less Cyprus post bail-in), the financial sector is much too leveraged. In the case of France, the media are increasingly reporting that young educated French national are going abroad to find a job (40-50,000 in 2012 – when one calculates the heavy cost of education and no return from those leaving the country, it will become unbearable at some point). These larges countries should first put their home in order before lecturing others. A few examples: Delaware money laundering machine where the beneficiary owner of a company does not need to be disclosed or the specific local laws that make it very difficult to get rid off an incompetent board or special protections against takeovers; France with its free zones, special tax treatment of Corsica or no income tax in French Polynesia to name a few; and what about the UK with the Channel Islands, The Netherlands with its holding tax efficient regime, etc.

Small to medium size countries where the financial sector allowed them to prosper are increasingly subject to bullying from large ones, the latter specializing in finding scapegoats for their own economic sins.

We are entering a world where democracy is much talked about as never before, but where reality contradicts the words. Small European countries beware, you have been warned.


European Commission: Assessment of the public debt sustainability of Cyprus

European Commission: Assessment of the actual or potential financing needs of Cyprus

Reuters: Cyprus to sell around 400 million euros worth of gold

18 March 2013

Cyprus bailout: The wrong signal

Cyprus, the eastern Mediterranean island, becomes the fifth country to be rescued: euro zone Finance Ministers agreed on a EUR 10 bn loan; the novelty of the rescue is a tax on deposits with banks in Cyprus to amount to EUR5.8 billions. Mrs Merkel (and nobody contradicted her) found that Cyprus is a centre for money laundering (from Russia and the Middle East) and therefore depositors should be taxed to participate in the bailout; well, if it is the case (and probably it is), the country should not have been admitted within the euro zone in the first place and probably the EU, since these accusations have been running for so many years; by the way, France, the UK, Luxembourg, The Netherlands, Italy, Spain should also be concerned (money laundered via banks and/or real estate). Others explained that a EUR 17 billion loan would overburden the debt/GDP ratio in a way where Cyprus would not be able to repay which is right at 200%. Frankly, EUR 10 billion lending does not change the conclusion anyway, at +/- 150% ratio.
Bank accounts were frozen and the tax will be immediately levied on Tuesday when banks reopen (subject to a positive vote at the Parliament of Cyprus).
The levy is:

6.75% tax on deposits below EUR 100,000

9.9% tax on deposits above EUR 100,000

I would remind the reader that Cyprus banks were meant to go under immediately after the haircut was decided on Greek debt (EUR 4.5 billion loss) and nobody foresaw the problem coming? I do not believe it but since the fiscal situation of Cyprus has deteriorated markedly (oh! Yes, I had forgotten that Presidential elections in Cyprus were held late February 2013…).

Besides the morally disputable action –why punishing the honest citizen who has saved all his life and in addition may have loans on the other side? – It is a very dangerous action sending a clear signal to all European citizens and the rest of the world: Europe is no longer a safe place for depositors; we knew that artificially low rates and rising inflation were in motion to deprive savers, but Saturday’s decision is a leapfrog in the wrong direction. I understand Mrs Merkel who wants to send a tough signal to her public opinion and Parliament. I am not either convinced by the reason given by the Dutch Finance Minister Jeroen Dijsselbloem: “As it is a contribution to the financial stability of Cyprus, it seems just to ask a contribution of all deposit holders”, so what about the Greeks, Portuguese, Irish and Spanish? And what about senior and junior lenders: I would be most interested to see whether they will be hit and if yes, in which magnitude (no details on this-probably banks mainly financed themselves via deposits; I did not look at aggregated Cypriot bank’s balance sheets)?

This is creating a precedent which will hit the confidence in the euro zone institutional environment and safety for depositors. Despites all assurances yesterday and today, particularly in Spain, that Cypus is a special case (it is ALWAYS a special case), residing in a trouble euro zone country, I would be very very worried and would not wait to get most of my saving in a safe place (i.e. outside the euro zone -the nearest is London). No depositor in the euro zone is safe any longer with his savings: each country could impose such a tax for whatever reason, good or bad (remember Roosevelt stealing gold from Americans in April 1933). This would be politically correct: tax all deposits above EUR100.000 in countries receiving EU money, and why not in countries with disastrous public account (France and Italy). Not the way forward for a sustainable fiscal consolidation to create the bedrock of future prosperity.

In the meantime France will not abide by the Maastricht criteria in 2013 (and 2014, I bet), or 8 years over the past 11, without any sanction, despite repeated assurances. Another wrong signal: the rules do not apply the same way to every euro zone country.


Bloomberg: Europe Braces for Fresh Turmoil With Cyprus Deposit Levy


Financial Times: Cypriot bank deposits tapped as part of €10bn eurozone bailout


11 March 2013

The Airline Industry: Challenges, Economics and Innovation

The Airline Industry: Challenges, Economics and Innovation


The Airline Industry: Challenges, Economics and Innovation

Energy is at the center of human life and the harnessing of electricity is probably of the same magnitude as the harnessing of fire: there would be no modern life without electricity.
Since the 19th century’s industrial revolution, fossil fuels together with innovation have been the main drivers of development. Much has been said about climate change, and other side effects on health or how much energy prices can weight on the purchasing power of citizens and hamper economic development.

The airline industry is a point in case where kerosene represents 30+% of all costs, making it hardly profitable. A lot of efforts are made to move as much as possible towards electricity (for example for taxing) by engine suppliers (Safran, GE, Rolls Royce, Mitsubishi Heavy Industries to name the largest players).

1. The airline industry: a few metrics

Air Cargo transported over USD5.3 trillion worth of goods in 2010 or 35% of world trade in value. The air freight industry has grown 3 times quicker than the international trade and 4 times the world GDP for the past 30 years.

Passenger’s traffic has doubled during the past 15 years and will again double in the next 15 years to transport 9 billion customers.

The world airline industry generated USD 637 billion revenues in 2012 and is forecasted to grow 5% a year to 2050.

Boeing and Airbus are projecting the delivery of 28,000-34,000 new airplanes by 2031.

Engines represent c. 20% of the cost of an airplane.

Fuel consumption amounts to 30+% of the operating costs for a total consideration of USD209 billion in 2012.

676 million tons of CO2 emitted in 2011, equivalent to 1.5 billion barrels of oil.

2. Airline industry’s challenges

Environmental concerns project a negative image to the public and induce new and costly regulation (EU).

The return on invested capital is awful compared to the weighted average cost of capital (3.5% investor value loss in 2011): the industry as a whole is a serial destroyer of shareholder’s value.

Fuel cost is persistently high (kerosene x 4 over 10 years).

The industry is not profitable (cumulated P&L between 2003 and 2011 is zero) with net post-tax profit margins forecasted in the very low single digit in 2012 and 2013.

The world economy remains weak and may impair international trade, a key driver of airlines’ growth.

The industry is moving as much as possible towards the use of electricity in airplanes.

3. Innovation
Per minute, most of the fuel is consumed during taxiing (1%) and takeoff to cruise altitude (14%) for a 747 Boeing 8 hours flight time. The ratio is obviously worse for short hauls (majority of flights).

As for any industry, electricity has eventually always replaced fossil fuel for transportation, technology and economics permitting. Electricity is much cheaper than kerosene, the magnitude varying depending on countries. A rough calculation results in a USD 35 billon economy a year to airlines if it were to use electricity instead of kerosene as an energy source, making the industry from one of the economically worst possible to a profitable one on a consistent basis.

For example, SAFRAN, the French engineering company, recently designed an electric system to avoid using kerosene during taxiing.

Research in dramatically improving energy density of batteries is also advancing with Lithium-Air batteries theoretically being able to reach an energy density close to kerosene (we are 5-10 years away). Further down research is also focusing on totally new architecture for quantum batteries.

I came across a video from a TEDx conference held in Geneva in November 2011 about 100% electric turbojets, called Turboarcjet. I found this presentation from a young physicist fascinating even if it is a long way down the road, but I would love to fly with an all electric airplane.



TEDx conference: Empowering the Limitless Mind –“Thinking Outside the Box: Turboarjects”


IATA: Financial forecast and statistical data


Slideshare: Introduction to the Global Air Cargo Market


Jon Petersen: Air Freight Industry – White Paper


SAFRAN: Electric Green Taxiing System


22 January 2013

The Bundesbank repatriates its gold reserves

Germany, the holder of the world’s second largest gold reserve, last week decided to repatriate some of its 3,400 tons of gold not already in its vaults to reach 50% in 2020.

What to make about this?

The FT continues its anti-gold stance along the lines of the barbaric relic and the WSJ cites the pressure of populism.

One may also point at a sensible move to make sure that real assets are held at home. If this is true, it tells a lot about the confidence of the Bundesbank with some of its counterparts…A remake, at the central banks level, of banks distrusting each other during the financial meltdown which led to a freeze of the interbank market?

The most interesting point is that the Banque de France will end up with no German gold and The FED will see its holding decreasing by 30%, for a total consideration of 674 tons or USD 36 billion at current market price, whilst the BoE will stay at the same level. This could be a barometer of Germany’s assessment of its counterparties quality.


Deutsche Bundesbank: Deutsche Bundesbank’s new storage plan for Germany’s gold reserves