July heat and the world economy and financial problems

July, 2011

How low can fall euro?

Back in June the picture in a pair of Euro/Dollar looked more than convincing: the euro was gowning, and the dollar fell.

It seemed that the growth of the single European currency has no limit, but as it turned out — has limit. As soon as the euro together with the dollar made once again his way for a mark of 1.49, as appeared first Trichet with his comments, and then Greece with his debt, and the question naturally arises, whether will be the end of the fall of the euro...

It is clear that the euro is simply no able to grow so freely that its levels are partly supported by speculators who were pushing the euro up to the mark of 1.4330. But all were aware that this situation is for awhile.

After all, just one behind the other were coming out news about the problems of European countries. First, it was Spain where the old government was gone, and when it the new government came into its power, it was found large debts in the budget.. Today Italy joined this list — Standard and Poor’s is alluding to the fact that the country could follow the example of Greece, Portugal and Ireland and also to fall victim of the ‘debt epidemic‘. Also, Fitch Ratings may downgrade the Belgium ratings from the current level of ’AA +‘, if the country fails to result in deficit to the target level. All these data suggest that in the near future euro await tough times and the situation with euro of the last year, could happen again.

But in the last days of the month the euro has risen in price by more than 20 kopecks.

Saved Greece and the euro

The difficult situation in the euro zone did not became dangerous — European Union leaders and the IMF agreed at the emergency meeting in the last ten-day period of July to provide assistance to Greece in the amount of 109 billion euro. In the rescue operation of the troubled member of EU will take part private investors. Private lenders, for example, have agreed to go to exchange their bonds for securities with longer maturities. The decisions of the EU summit, which will facilitate the debt burden of Greece and Portugal and Ireland, are designed to stop the spread of the debt crisis in Europe. At the same time they can lead to the fact that rating agencies as it is expected will qualify as a partial default of Greece on its obligations.

‘Our meeting was focused. We wanted to restore the financial stability of the euro zone’, — said Herman Van Rompuy, the chairman of European Council at the press conference. He mentioned the ’three important decisions‘ taken by the summit, which received unanimous approval: relief of debt terms for Greece, harmonization of measures to prevent the risk of crisis transmission to other countries, a commitment to improve crisis management in the euro zone. ’For a start, we offer the solution of the Greek problem. We have concluded an agreement on a new program to cover the gap in financing of the debt by means of both the European Union and the IMF.

Two other very important phase of this agreement is to reduce the interest rate on future loans and to extend them for a period of 15 to 30 years ‘- he said. What is the mechanism of salvation? Scheme to support Greece will operate as follows. The European Fund and the IMF will give Athens about 109 billion euros over the next three years, all at 3.5% per annum. At the same time, private lenders will voluntarily exchange for new bonds with longer maturities — 15-30 years.

At the same time the bonds will be of different types — with several kinds of coupons and warranties, some will be guaranteed by the assets that have rating of AAA. However, some lenders will decrease the nominal debt by 20%, according to financial issues. The total amount of private sector participation will be 37 billion euros by 2014, 106 billion to 2019, as calculations show. Although are not fully understood all details of this scheme. According to foreign media, this scheme is supported by HSBC, Deutsche Bank, Munich Re — a total of 30 financial institutions. In addition, it is also expected to reduce the amount of Greek debt of 12.6 billion euros at the expense of buying securities at current low market prices. According to the decision, the European fund would help countries to recapitalize banks, as well as to conduct operations in the debt market. Greek Prime Minister George Papandreou stressed that his country has received the assistance program and a set of measures that create conditions for overcoming the crisis.

‘I am pleased with these renewed commitments of Heads of State and Government of the euro zone to provide the financial stability in the euro zone’ — said President of the European Central Bank (ECB) Jean-Claude Trichet. He identified six points of agreements to resolve the crisis and strengthening the Greek financial stability of the euro zone.

This agreement of Heads of State and Government of the eurozone countries to support the program for Greece, the decision of members of the eurozone and the European Commission to mobilize technical assistance to the Greek Government to implement reforms, the use of private capital in recognition of this special case due to the unique situation of the Greek, increased flexibility of the European Foundation for financial stability, the completion of the legislative package on the competitiveness of the Covenant and macroeconomic controls, to attract private capital to help Greece on a voluntary basis.

The head of the International Monetary Fund Christine Lagarde called the package of measures adopted by the summit in July , ‘global and constructive’. As she said prolongation of borrowing and reduced interest rates, facilitate debt burden of Greece. But the flexibility of the chosen approach will benefit both Portugal and Ireland that are also experiencing economic problems. For the IMF, according to K. Lagarde, it is important that Member States of euro zone have decided to apply more flexible funding arrangements to apply, including an appeal to the secondary market. Against this background, the EU is increasing the number of machines that sell gold. For more than 5 countries, the latter of which became the UK in July switched to an automated sale of gold bullion. Gold is enjoying in recent months, a growing demand among the population because of falling confidence in the European and American currencies.

The Prime-Minister of Greece thanked Putin for his cooperation with the IMF

Prime Minister of Greece George Papandreou during a telephone conversation on Thursday night with his Russian counterpart Vladimir Putin thanked him for the interaction between the two countries through the International Monetary Fund (IMF). Greece is experiencing serious financial difficulties that affected the economy across Europe. Now the country will refinance the 350-billion of debt owed by the 110-billion credit support for the EU and the IMF. The next tranche of EUR 12 billion was received in July in return for the June 28-billion program budget savings by 2015 and 50-billion privatization package.

The two heads of Government expressed their appreciation to the current level of Russian-Greek cooperation in various fields. Papandreou expressed his gratitude to the Russian side for the interaction between the IMF and expressed confidence that temporary financial difficulties experienced by the Greek side, will soon be overcame.

Greek and Romanian companies pay taxes through Bulgaria

An increasing number of Greek and Romanian companies are registered in Bulgaria — one of three countries with the lowest level of taxation in the EU. For example, in 2006, before the accession of Romania and Bulgaria into the EU, only 33 Romanian companies were registered in Bulgaria. And today is already 272 Romanian companies file their tax returns in Sofia. It is substantiated by the fact that Bulgaria has, like Cyprus, with 10% tax on corporate income. And in Romania, this tax is 16%.

There are more companies registered in Bulgaria by Greeks. Last year, more than 2070 Greek companies have filed their tax returns in Bulgaria. A similar tax in Greece is 25%. According to the Romanian tax authorities, this move by companies of their headquarters in Bulgaria is due to a low tax and less red tape for business organization. As experts say another factor, is the macroeconomic stability in Bulgaria and its currency peg to the euro by a fixed rate. In addition, investors are attracted to low wages and low rents for offices. However, according to the Bulgarian Finance Minister Simeon Dzhankova, this situation will not last long, as the expected level of income in Bulgaria in the next two years will exceed the same level of Romania.

Privatization of Sberbank of Russia will be hold on the Russian stock market

Moscow Interbank Currency Exchange Moscow will become the home venue for selling 7.6 percent of Sberbank, which is scheduled for autumn 2011. This was stated by the head of Russia’s largest bank, German Gref, in July at the annual meeting of shareholders of the organization.

‘Privatization will be carried out through public offering on the market. It is assumed that the Moscow Interbank Currency Exchange will be the key base ’, - Gref said, answering questions from shareholders. The administrators of the placement of Sberbank is plan to select in the coming weeks. Gref also said that in July the bank will post Depository Receipts (ADR) on foreign exchanges.

Receipt of the bank will trade on the London and Frankfurt stock exchanges. The head of Sberbank shareholders promised to take steps to help avoid falling shares during privatization. Sberbank, capitalization exceeding $ 76 billion, is preparing for the privatization of 7.6 per cent stake from the total package of 57.6 per cent owned by Bank of Russia. How government will sell a package of Sberbank — in whole or in parts — is not clear yet.

In 2010, Sberbank ordinary shares were the most liquid instrument of the Russian stock market: the average daily turnover on the MICEX on them amounted to 34 percent of the total turnover of the exchange.

Currently, the authorized capital of the Savings Bank has 21.587 million ordinary shares and 1 billion of preferred shares. Denomination of any shares — 3 BR. Sberbank — the largest financial institution, not only in Russia but throughout Eastern Europe. Controlling stake in state-owned bank, and the rest traded on the stock exchange.

Shares of the shareholders of the Savings Bank is currently distributed as follows: Bank of Russia — 57.58 percent, institutional investors — 37.59 percent (33.43 percent — non-residents), non-institutional investors — 4.83 percent (Resident — 4.82 per cent). The total number of shareholders exceeds 245 000 Savings.

Two more foreign banks walk out Russia

Russian daughters of GE Money Bank and Swedish Handelsbanken are considering to withdraw their businesses from Russia. This was announced in the beginning of July from informed sources. According to them, American financial institution is looking for partners now in a number of countries, as well as General Electric intends to significantly reduce the proportion of banking sector assets of the corporation. This intention is related to the conditions of receiving assistance from the state during the crisis.

One buyer of bank assets of General Electric has already been found: financial corporation ‘Otkrytie‘ has agreed to buy the Latvian branch of GE Money Bank. And for the assets of Americans in Russia — GE Money Bank — there is already a contender, but who is interested in the banking business in Russia is still unknown. As for the Russian branch of Handelsbanken (’Svenska Handelsbanken‘), the reduction of staff has already begun there. According to experts, the Swedish bank intends to stop business in Russia by the end of 2011. Foreign banks began to actively walk out of Russia immediately after the crisis — in 2009 and 2010.

In particular, British International Personal Finance, Barclays and HSBC, Spanish Santander and Dutch Rabobank have decided to go away from the local market. In the beginning of 2011 the market tendency has been reversed: foreigners once again drew attention to the Russian market. Thus, the Swedish furniture concern IKEA announced its intention to open a bank in Russia. Nor ‘Svenska Handelsbanken,’ nor GE Money Bank has not been in the list among the largest Russian financial institutions. ’Daughter‘ of American financial institution, summering the results of the first quarter, took place in the second hundred of the largest Russian banks by assets, and ’Daughter‘ of Sweden financial institution — in the third.

Foreign retail banks will return to Russia in 2013. This was stated by Director of Strategy Savings. He also noted that the return is expected after two years of sustained economic growth. A number of large foreign groups rolled up their retail business due to high uncertainty in the Russian banking market. According to the Central Bank of Russia, the share of nonresidents in the capital of Russian banks in the first quarter of 2011 decreased to 27.14 percent. In 2010, several Western banks walked away from the Russian market.

For example, Morgan Stanley sold ‘City Mortgage Bank’ to ‘Orient Express‘. A Dutch Rabobank has received a license from the Central Bank to open branches in Russia, but decided not to use it. Rabobank limited Its Development Strategy by more promising, in his view, countries such as China, Brazil, India and the U.S. In February 2011 British HSBC and Barclays declared its intention to get rid of the Russian business. At the same time Barclays ’go away’ from Russia for the second time. For the first time the bank went away because of the default of 1998. The current solution involves the change in management of the bank, which plans to develop in Russia only investment direction. Despite the mass exodus of foreign banks from Russia, many still remain in the Russian market. In the twenty largest banks are foreign subsidiaries of international financial institutions Unicredit (Unicredit Bank), Raiffeisen (‘Raiffeisen’), Societe General (Rosbank) and Citigroup (Citibank).

Cyprus seeks money for the budget

In the framework of the program of economic recovery and reduce of the budget deficit the government plans to collect over two years 270 million euros.

Out of these, 70 million are to bring to the Treasury civil servants and 200 million — all the companies of the island. Debate on this issue stops neither in Parliament nor among the union leaders.

The state has proposed a two-year program, the essence of which is the introduction of contributions from salaries of employees in state and parastatal companies and services, and the introduction of a new tax on all the companies registered in Cyprus, without exception, which have shown profit for the last three years. Employees who receive more than 1,500 euros a month will be taxed on a progressive scale and profitable companies will have to pay into the Treasury 1,000 euros per year each.

It seems that the trade unions and big business would agree with the proposal, but the opposition criticized it, arguing that egalitarianism hurt the small companies and even the introduction of the new tax will harm the image of Cyprus in the international market. With the growing criticism by opposition parties, the Government’s plans are unlikely to find support in this year.

UK and China signed agreement on taxes

The new win-win agreement for the avoidance of double taxation was signed on June 27, 2011 by the foreign ministers of Britain and China. In general, this is a standard agreement on the OECD Convention. An important feature of the new agreement is to reduce the dividend tax to 5% (from previous 10%) for direct investors, as well as a new paragraph of the Agreement — the exchange of information. The agreement between the two countries will enter into force after it is approved by law and will be operational next year.

Russians are poorer than before.

In the first quarter of 2011, the number of Russians, whose incomes are below the subsistence minimum level, increased from 20.6 to 22.9 million compared to the first quarter of the last year. According to the Federal State Statistics Service, 2.3 million Russians now live below the poverty line. These are new data obtained from national census.

The census, which took place in autumn 2010, showed that the tendency on reduction the number of people living on incomes below the poverty line (in the first quarter 2011 it amounted to 6473 rubles), observed after the crisis, was interrupted in 2011. Rosstat suggests that the number of poor in the country in the first quarter exceeded 16 percent of the total population.

Experts interviewed by the publication, indicate that Rosstat accurately recorded the growth of the poor, but the numbers provided by the department, describing Russia’s poverty, are still estimated as too low.

The growing number of poor is due primarily to the growth at 17 per cent of the subsistence minimum level: from 5518 rubles in the first quarter of 2010 to 6473 rubles in the first quarter of 2011 due to rising prices of food and services. In June, the World Bank , that has also downgraded its forecast for the rate of reduction of the poor, estimates that in 2011 the poverty rate could fall not to 11.2 per cent but to 12.4 per cent.

Ratings agency Fitch raised the rate of Estonia by one more step

International rating agency Fitch Ratings upgraded the long-term rating of Estonia by one step — from ’A‘ to ’A +‘. Rating forecast — ’stable‘. The rating upgrade, as noted by specialists of the agency, is due to the stable growth of the Estonian economy, stable state of the financial system and the constant reduction in the level of debt. For example, in 2010 the national debt in Estonia was the lowest in the EU, amounting to 6.6 percent of GDP. And recently it was reported that in the first quarter of 2011, Estonia became first in Europe to increase GDP: in January-March, the economy grew by 8.5 percent. For comparison, the result of the crisis in 2008, the Estonian economy shrank by 3.6 percent, and in 2009 — by 14.1 per cent. Previous rating increase took place in mid July 2010. Then, Fitch has raised Estonia’s rating also by one step — from ’A-‘ to ’A‘. The reason was the country’s joining to the Eurozone on January 1, 2011.

Chinese tourists spent abroad $ 48 billion

In 2010, Chinese tourists spent on foreign travel $ 48 billion. It is reported by China Daily newspaper with reference to the National Travel Association of China. According to it, 57 million tourists went abroad, that is 20.4 percent more than last year. Every Chinese in 2010 spent abroad more than 800 dollars. For comparison, every Russian spends abroad about 2.2 thousand dollars. At the same time in 2010 out of Russia went on vacation only 12 million people. In the National Tour Association China it was noted that the Chinese in France and the UK spend more than tourists from any other country. It is reported that the growth of spending abroad contributes to the fact that imported stuff inside China is expensive, so the tourists try to buy the goods during the holidays. Some visitors to Paris, for example, already seen in the early morning in the elite ‘Galeries Lafayette’ queue for expensive French perfume, consisting only of the Chinese. According to experts, every outbound tourism from China will increase by 17 percent. If this prediction comes true, then by 2020 the Chinese will spend abroad more than a half trillion yuan (237 billion dollars).

Midland Consult