AUTUMN AND CRYSIS AGAIN?

September, 2011

Europe is in debt and is afraid of Chinese aid

The economic situation in Europe is cheerless. The fate of Greece and the European single currency are the subjects of concern of not only European economists and government officials, but the whole world. Although, eurofunctionaries try to keep a good face on a bad game.

“The future of the euro does not cause concern, the European single currency will successfully endure the current difficulties”, — said European Commission President Jose Manuel Barroso. Nevertheless, Chief Economist and member of the Board of the ECB Juergen Stark leaves the central bank. It happens due to the initiated policy of buying the debt of countries in the euro zone by the bank.

There is no unity in the governing body of the Germany, which is European “engine”. Chancellor Angela Merkel said that all the tools would be used to prevent the bankruptcy of Greece. She also called to the Bundestag for voting for the second package of assistance to that country. However, not only the leading parties, but also the German government is not united in an effort to prevent default of the partner. Thus, the economy minister of Germany said that “orderly bankruptcy” of Greece is acceptable in essence. He wrote in the Die Welt that in order to stabilize euro, you could no longer deny any ideas. According to Der Spiegel, Finance Minister Wolfgang Schauble is already developing a plan to prevent “domino effect” in the euro area after the Greek default. France also has difficulties in determination of their position as per Greece issue. In fact over 40% of the Greek debt is in French banks. And because of that their shares are falling in price day by day, while the two large banks (Societe General and Credit Agricole) lowered their credit rating.

What is happening in the meantime in Greece? There is nothing good. There are endless belt-tightening and strikes. Country’s debt exceeds € 340 billion, the yield on government bonds have already exceeded 20%. In these circumstances, the Greek government resolved to carry out more painful measures, damaging itself. For example, it has obliged officials to give the State one month’s salary. And also has imposed on all the house owners a new tax which is € 10 per square meter of living space. But it won’t pull through the impending threat of default. Athens reported that money is enough only for this month. Then the state will have no money to pay public sector wages, even if next tranche of the EU and the IMF does not arrive in time. However, the work of the aborted mission of these lenders will be completed only by the end of September. Whether credit injections will be able to pull Greece through the payment on the growing debt? Are they just prolonging the agony, opening up new spaces for the speculative attacks?

In general, there is no wonder that many European politicians and economists incline to kick Greece out from monetary union and let it cope with all the problems itself. Even if this decision is legally incorrect (the procedure of expulsion from the euro zone is not provided). But the most difficult question is not how to draw this exile, but if it is worth doing and if the expulsion is more expensive than the salvation of Athens from bankruptcy under a monetary union or not.

First, the reverse transfer of Greece from euro to national currency and its subsequent sharp devaluation will not pull the country through the debt. After all, the debt is denominated in euro! In this case the country will remain depressed and unstable part of the European Union. Secondly, the restructuring of debts of the country which announced default, will inevitably cause material losses of states and banks, which lent to Greece. In the case of Greece lenders could lose up to 50% of their investments. Of course, they will outlast this loss. However, thirdly the whole euro area will be endangered in case of default and Greece withdrawal. Indeed, under the influence of this great success speculators will carry out a massive attack on other financially unfavorable EU countries such as Portugal, Spain, Italy, Ireland and then France, whose debt is also more than 80% of GDP. And if for example Italy which is-the fourth largest economy of the EU wavers by this onslaught euro area will probably collapse. No funds will be enough to maintain its financial stability.

Meanwhile, the situation in Italy is not much different from the Greek. Country’s debt reached 120% of GDP (nearly € 2 trillion), and the yield of government bonds is 7%. Berlusconi desperately shreds budget, but financial markets begin to doubt the ability of Rome to service its debts. Milan stock market begins to fluctuate feverishly; shares of Italian banks are falling in price. In general, everything is like in the situation with Greece. And even application for help is not long in coming. But the Italian authorities, in contrast to the Greek applied not to Brussels but to Beijing. In September it was reported that in recent weeks several meetings were held between the head of the Chinese state fund China Investment Corporation Lowe Tsziveem and Italian officials, including Finance Minister Giulio Tremonti. Rome offered fund to buy a large package of Italy debt, and the Chinese reacted to the offer (or the request for help) very favorably. In addition, the Chinese side had offered not only to buy bonds, but also to invest in strategically important Italian companies.

China is quite a real assistant and “savior” of eurodebtors. But this “savior” is not disinterested. CIC assets are estimated at $400 billion, and now it serves Beijing as the important tool of a subjugation of the world. By putting big means in foreign crisis assets, including debt obligations of the states of Europe, China gets the real international power. There are cases when it has been used already — softly but persistant. And the USA, which is the largest debtor of China, is careful of making fatal decisions in foreign trade sphere without thinking about Beijing. Europe has ceased to point Heavenly Empire to the problem of human rights. Big world corporate groups, which have received large orders with an advance payment or credits from the People’s Republic of China, lobby the decisions which are advantageous to Beijing.

In a word, irrespective of the termination of debt crisis, it will inevitably lead to strengthening of positions of China in EU and world economy. Besides, Beijing has seriously pondered on internationalization of the currency. So the inhabitants will soon ponder the subject of storing their savings not in the currency of dollar and euro, but in the currency of Yuan.

Russian Economy is worse than Vietnamese

According to the data of the World economic forum, the condition of the Russian economy is worse, than in the Near East or among the countries BRICS but it is better than the economy of “neighbours”, such as Kazakhstan and Ukraine.

The world economic forum has submitted the annual report on global competitiveness of the countries 2011–2012 (The Global Competitiveness Report 2011–2012). This report analyzes 142 economies by 12 parameters (an infrastructure, the macroeconomic environment, formation, commodity and services market, development of financial market, innovative potential etc.).

According to the rating (WEF), the most auspicious conditions are in Switzerland, Singapore and Sweden. USA has been losing its positions in a rating the third year running. Today USA occupies the fifth place. In the Euro area the leader is Germany (6 place). France has gone down by three lines and occupies 18th place. “Reforms for increasing of competitiveness will play a key role in revival of economic growth in the region and in the solution of key problems: fiscal consolidation and long-term unemployment”, — fund analysts make comments.

China (26 place) continues to be in the lead among large developing economy. Other BRICS countries move multidirectional. For example, the republic of South Africa (50 place) and Brazil (53 place) move upwards in a rating, and India (56 place) and Russia (66 place) lose their positions. Russian economy rose by three positions in rating for the last year. In comparison with the previous year relative position of Russia has considerably become worse on such items as institutes, health and elementary education, efficiency of a labor market, competitiveness of the companies and innovative potential. Improvement has occurred only on two items, such as the macroeconomic environment and technological level.

As well as last year, corruption had been named the basic barrier for business development in Russia, but last year’s problems concerning access to financing and fiscal regulation have given way to state machinery inefficiency and criminality.

Opinion of the IMF head about forthcoming economic crisis

The Managing director of the International Monetary Fund (IMF) Kristin Lagard has declared that risks of recession increase, outweighing inflation threat, therefore the governments and regulators of developed countries should undertake decisive actions to prevent new crisis. According to the head of the IMF, the government should use all the available tools, including nonconventional, and the monetary and credit policy in developed countries should keep “as much as possible stimulating character”. She mentioned strengthening of downward risks in world economy, weakness of economic growth and a poor condition of the state, corporate and consumer finance.

Ukraine: record-breaking gas recovery on the sea shelf

Ukraine started record extraction of natural gas on the Black Sea shelf. “Chernomorneftegaz” extracts more than 2,5 million cubic meters of natural gas per day on the Black Sea deposits, showing such result for the first time in last 20 years. Provision of the necessary facilities of two acting deposits on the Black Sea shelf has allowed to reach record extraction. In the nearest future extraction will continue to grow by bringing into service chinks on new platform BK-1 of the Arkhangelsk gas field and arrangement of Odessa and Bezymyanniy deposits.

More than nowadays “Chernomorneftegaz” extracted only in the mid-eighties when daily extraction from the Black Sea shelf was about 3 million in cubic meters a day. Thus, all the three Black Sea deposits (Storm, Arkhangelsk and Golitsynsky) have been in development condition for decades and are now exhausted. Therefore the long-term increase in extraction of natural gas on the Black Sea shelf is connected with arrangement of new deposits in Odessa and Bezymyanniy. After bringing them into service the Crimean oil and gas extraction company plans to extract annually since 2015 not less than 1,87 billion in cubic meters of gas. The active phase of provision of the necessary facilities of these deposits will begin this year in the autumn when specialists of the company will start building of a 87-kilometer subsea gas pipeline which will connect new deposits with acting system of subsea gas pipeline.

“Chernomorneftegaz” has changed the situation also with results of general extraction since the second part of 2011. Besides the shelf of the Black sea, “Chernomorneftegaz” extracts natural gas on deposits on the shelf of the Azov sea and in an overland part of Crimea which stocks are much less then the Black Sea stocks and are also exhausted. Nevertheless, decrease in extraction within last five years is stopped.

Cyprus obtains Russian credit

In September the Rrepresentative of the Cypriot government Stephanos Stephanou with reference to the Minister of Finance of the island Kikisa Kazamiasa announced, that Cyprus would receive a credit of 2 — 2.5 billion Euros from Russia soon. The main thing is that the Russian credit will be received by Cyprus for 5 years under normal interest rate of 4.5%, but not under overstated European interest rate, which could lead Greece to default. Cyprus Finance Minister stressed that Russian credit would help Cyprus to cope with the gap in budget, which had appeared as the result of an explosion at the military base in Marie and outage of the power plant, which had produced 60% of the electricity of the island, as well as the result of the forthcoming disbursement of the national debt of 1 billion Euros in the beginning of the year 2012. Russian Finance Minister Alexei Kudrin confirmed the fact of granting the credit to Cyprus in September.

The Cyprus economy is undergoing some difficulties at the moment, resulting in a sharp increase of national debt and slowing rates of growth. This happens because of the close economic connections of the island with Greece, where the most unfavorable financial situation among all EU countries has formed recently. According to the European Commission date, published in September, the total national debt of 17 countries of the euro area will make up 88.7% of their GDP in 2012. The amount of the total debt of the euro area rose by one third during the crisis period. The figure was 66.3% of GDP of the euro area in 2007. This data shows that not only the majority of euro-zone countries went beyond Stability and Growth Pact, which limits the national debt for the state of the euro area by 60 per cent of its GDP, but the whole euro area moved beyond the limit permitted by its basic economic documents long ago. This confirms the systematic nature of the current sovereign debt crisis, which has been threatening the very existence of the single European currency for half a year.

Several countries appealed to Russia for a credit during the financial crisis. Russia agreed to assign $ 200 million for Serbia in 2009. In 2011 funds were provided to Belarus through the fund of EurAsEC, which is controlled by Russia. Iceland appealed to Russia for a credit, but the parties failed to agree on the conditions of disbursement.

Greece: problems of the relations with EU creditors

On Sunday in Thessaloniki Greek Finance Minister Evangelos Venizelos said that Greece admitted the difficulties in relations with the EU creditor countries. “The problem is not in our relations with the ‘three’ of creditors (European Commission, European Central Bank and the IMF), but in the attitude of some very important eurozone member-countries”, — he said. Greece, whose national debt is approaching 350 billion Euros, is on the verge of default.

Typically, the countries affected by the debt crisis devalue national currency. It helps them to cope with the budget deficit and gives impetus to economic development. Greece, being part of the euro area, can not carry out such devaluation. No one knows what will happen to the euro, if Greece announces that it is not able to fulfill its debt obligations. Until then, no country in the eurozone declares a default. In September, the Greek government decided to cut the high pensions by 20% and send 30 000 civil servants to the “talent pool” and raise taxes, including lowering the bar of the taxable income level. Greece is expected to receive regular financial aid package at the amount of 8 billion Euros from the EU in October.

Taxes on property in Europe are growing

Under the new law adopted this summer, trusts, created by residents of France for tax optimization, as well as trusts created by non-residents of the country, but containing the French assets, must disclose information to the French tax authorities. For example the tax on real estate in France will be 0.5% of market value. So, for a small apartment in the Paris suburb at the cost of $ 300 thousand Euros per year the one will have to pay 1500 Euros. In case of non-payment on time the one will have to pay 10 000 Euros as a penalty. If there is bigger amount, then one will have to pay 5% of the entire market value of trust assets in France. In this case, both principal and founder of the Trust are responsible for the payment of new tax. Moreover, they are responsible for the providing information to the French tax authorities on the market value of assets, taxable in France. New regulations will enter into force on 1 January 2012.

In connection with the economic crisis in Europe, a number of other European countries increase the rate of tax on real estate. This concerns even Germany, where taxes are already high, and the tax rate on income from the resale of property which is not used for personal residence, reaches 50% of income. In practice, the tax on a one bedroom apartment in Berlin is still around 200 Euros per year.

Greek authorities, concerning about the forthcoming European credits liquidation, has also decided to introduce a new tax on property in September. New tax will be 10 Euros per square meter per year. This led to indignation of discontented population, because many people had lost jobs because of crisis and were not able to pay new taxes. Life in European countries becomes more expensive. Now not only elite real estate, but ordinary apartment becomes a luxury in a number of European cities.

Hong Kong leads among global financial centers

According to the data on the end of September, London and New York remain to be the world’s leaders in banking and other financial services, but Hong Kong is getting closer to the top.

The index, which is published twice a year by Z / Yen group, evaluates 75 cities of the world. For a long time the rating was headed by London, second place was occupied by New York, and other major cities were left far behind.

But this time London and New York are almost equal, received 772 and 770 points out of 1000 possible respectively. Hong Kong lags behind them only by 10 points. It has 760 points and the third place in rating. In March 2009 the gap was 81 points.

“London and New York are loosing their positions. Their competitiveness is not as high as before, while Hong Kong is galloping ahead at full steam,” — deputy director of Z / Yen said. According to his forecast, Hong Kong will overtake the leaders; moreover, soon they will be joined by Singapore, which is now separated from Hong Kong by 32 points. The four biggest financial centers control about 70% of bids in the world.

Shanghai shows strong growth, rising for five lines up to the sixth place. At the moment the top ten financial centers include four Asian cities.

“No wonder that the Asian centers rapidly catch up with the rest. This long-term trend reflects the importance of this rapidly growing market”, — said the chairman of the committee on development of the City of London Stuart Fraser.

London keeps its first place in the field of asset management and providing professional financial services, New York heads the list of indexes on regulatory and banking activity, while Hong Kong has become a major center of world insurance. Cyprus is overtaking the leaders with rapid pace, especially in financial services.

46 million of poor men in USA

At the end of 2010 the number of Americans living below the poverty line exceeded 46 million people. This is stated in an official report of U.S. Census Bureau (United States Census Bureau). During the year the number of poor men in the country increased by 2.8 million people. In total, 15.1 percent of the population lives behind the property line in the U.S. This is 0.8 percentage points higher than a year earlier. Statistics Bureau of the Census indicates that the number of poor in the U.S. is increasing, despite the fact that the country emerges from the recession. The number of poor men in the U.S. has been increasing four years running. In addition, the poverty rate is at maximum level for the whole time of observation, that is, for the past 52 years.

In the Census Bureau’s report it is said that over the last year the number of poor among people younger than 18 years (from 20.7 to 22 per cent) and among Americans who are 18 to 64 years (from 12.9 to 13 7 percent) had significantly increased. However, the level of poverty among the elderly (65 years) remains unchanged at nine percent. In the press release it is also stated that the mean household income was 49.4 thousand dollars in U.S. in 2010. This is a thousand dollars less than a year earlier.

Hong Kong HSBC discharge three thousand employees

European biggest bank HSBC has announced the dismissal of three thousand of its employees in Hong Kong during the next 3 years. This measure will be part of the bank’s ambitious plan of reducing costs. In August HSBC management announced its plans to discharge 30,000 employees around the world, which is about 10% of all staff, by 2013. The company expects to save 3.5 billion Euros in this way.

100 thousand world banks employees expect the reduction

Major international banks intend to carry out global changes and reduce up to 100 thousand people. This decision was taken because of financial activity in the II quarter. British bank HSBC and U.S. Bank of America plan the biggest reduction. 30 thousand employees can be fired from each organization. Swiss bank UBS plans to get rid of 3500 employees, and Barclay’s and Intesa Sanpaolo plan to discharge 3 thousand.

International bank Societe Generale will cut 2000 employees in Russia, and many employees of the bank in Romania, Egypt and the Czech Republic.

Swiss banks are ready to share the information

Switzerland can “open up” the secrecy of bank accounts of wealthy Russians in Swiss banks. Moscow and Bern signed an agreement in late September. Russian Finance Minister Alexei Kudrin told about the essence of this agreement.

“We will receive information on the accounts of persons evading tax, if the courts to search for evasion or money are initiated in due order in Russia ” - he said. Several years ago, Swiss authorities concluded similar agreements with France and the United States. In accordance with agreements of 2009, French authorities received information on the accounts of 3000 French citizens in Swiss banks. In the same year one of the leading banks in Switzerland UBS agreed to transfer to U.S. authorities information on the 4450 clients of the organization. The German Government signed an agreement with Switzerland in August 2011.

Many businessmen prefer to keep their money in Switzerland, as it is considered one of the safest countries in terms of bank secrecy. In recent years, Swiss banks, in particular UBS, are suspected of assistance to those who evades taxes.

The pressure on Switzerland increases due to the crisis. Organization for Economic Cooperation and Development (OECD) even threatened to turn the country into a “black list”. As a result, in March 2009 Switzerland bound itself to respect international standards for banking activities.

It is worth saying that the experts doubt about the effectiveness of the contract between Moscow and Bern on disclose of information on accounts of Russians in Swiss banks, claiming that the move was done “for show”.

In the articles of some analysts, published on this subject, the problem of banking secrecy is examined in detail, and there is stated a logical conclusion that Russia chose completely ineffective methods of the fight against negligent taxpayers.

The fight against those who evades taxes began in April 2009, when all the developed countries were undergoing financial crisis. At the London summit G20 leaders agreed on the measures to combat offshore entities, allowing to hide their income. “Grey” Switzerland immediately began to prepare agreements on the disclosure of banking secrets, and now there are nearly 700 concluded treaties.

Since the disintegration of the USSR, Moscow signed 77 agreements to avoid double taxation, but these agreements do little for exchanging of tax information, because it does not indicate which organizations should provide information about customers.

Then Moscow decided to go on and agreed to conclude agreements on exchange of banking information with the “safe harbors” where deviationists held their assets. At first Moscow arranged with Cyprus and many officials called the conclusion of this treaty “victory”.

However, successful example of Cyprus agreement turned out to be significant in a negative aspect. When the majority of investors in that jurisdiction heard about the forthcoming signing of the agreement, they simply transferred their assets to other “haven”.

Experts say that situation will turn out in similar way in Switzerland. Many businessmen have already withdrawn their assets from the country to offshore companies, in particular in Hong Kong and the United Arab Emirates. These countries, in order to become new financial centers, actively attract customers by means of bank secrecy. Even the central banks have no right to request information about customers. UAE has not signed agreement on provision of banking information with Russia.

Others acted more cunning and transferred assets to the Swiss cantonal banks. In contrast to large multi-branch financial institutions they do not trade on an exchange, open accounts and have no foreign offices, so it is difficult to exert pressure on them. Despite low interest rates these banks are very reliable, and under no circumstances reveal the secret of their customers.

Experts say that there is another method to get round Russian tax authorities. Russian legislation has no fixed concept of trust as a fiduciary management. Therefore, if the competitors, law enforcement or tax authorities try to confiscate the assets transferred in trust, they will be told that there is no property. By passing property in the trust, a citizen refuses a possession of this property; ownership passes to the company and does not extend even to the beneficiary. Likewise is the situation with corporate money, transferred abroad by legal entity.

Experts consider an agreement with Switzerland an enjoyable formality. This agreement will allow Russia to secure a footing in the “white” list of states according to the standards of the Organization for Economic Cooperation and Development.

Withdrawal of assets of tax evaders over the past six months has brought Spain 10 billion euro, the UK expects to enrich itself by 7 billion pounds by the end of the year, and Germany expects to enrich itself by 15-20 billion Euros. According to experts Russian economy receive less by tens of billions of dollars of taxes. On the other hand it gets direct investments; Cyprus keeps one of the leading places in the world in direct investments.