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Fox Business Interview - Egypt and Iraq

Posted on July 2, 2013 at 4:35 PM Comments comments ()

Recent Interview with Fox Business on Egypt and  -

Lingering Crisis in Cairo Dims Egypt's EconomicOutlook  ( Link )

Iraq's Booming Economy Lures Western BanksDespite Security Risks ( Link )

What Will Erdogan Do After Turkey's Taksim Square Protests?

Posted on June 10, 2013 at 7:20 AM Comments comments ()

The prime minister of Turkey is losing his patience!


It has been 10 days since the country's crisis erupted with protests flowing into more than 78 cities and towns. The clashes are now happening for many reasons, although the underlying cause is the growing anxiety of Turkish citizens about losing their personal freedom. Turks all around the country are banging on pots and pans from their windows, a symbolic gesture of support for the young protesters on the streets.


The world is well aware that Turkish Prime Minister Recep Tayyip Erdogan won 50 percent of the Turkish vote in his last election, because he has repeated it at every press event since the first clash with protestors. But doing some loose math, that equates to more than 36 million Turks who did not vote for him. He must broaden his appeal and his constituency, or the fires in city squares are going to spread and the noise from the pots and pans are going to grow louder.



It is clear in retrospect that Erdogan wanted to teach the young upstarts (for whom he has little patience or tolerance) a lesson in Istanbul on the very first night of their protests. He answered with aggressive use of tear-gassing and water cannons. What he inadvertently did was spray water on an oil fire. It spread.


After that first miscalculation, he has made many more. Instead of the conciliatory tone of a modern democratic government, he sounds more and more frustrated and stumped by the growing protests. He is even bristling at the world's negative reaction to his actions. He sounds more as if he was chosen by a higher power, rather than an elected prime minister.



His speeches now promise fire and brimstone to the protestors, their families and supporters, the window pot bangers, markets, private banks… anyone who opposes him. First, he called the protestors' looters, anarchists and terrorists. Then he said that anyone backing them is the same. Now he is admonishing private banks and the markets for taking monetary advantage of the volatility.


He has been quoted as saying he will "squeeze the throat" of speculators in the stock market who are taking advantage of the chaos. Perhaps not the most appropriate choice of words when your economy is dependent on foreign investors. It would seem that the lessons of the 2001 Turkish financial and economic crash have been forgotten.


The smell of a full-on confrontation is in the air if this government continues to escalate its words and actions. But if it scars the youth of the most trusted Middle East democracy, it will never be at peace. If it worries the markets seriously – the party is over.

Eye-Witness Account of Anti-Erdogan Istanbul Taksim Square Protests: The Fight for Modern Turkey

Posted on June 6, 2013 at 7:10 AM Comments comments ()

ISTANBUL – Was this past weekend the beginning of the end of the wait for Turkey's day of reckoning with political Islam? The peaceful youth demonstrations in Tuksim Square in Istanbul quickly became violent due to the excessive force by the government in the form of tear gas and water cannons. We are in our seventh day of violence and it has not only spread into all the main cities like Istanbul, Ankara, Izmir, Adana and Hatay, but over 70 other Turkish cities and towns. There have been over 3,000 arrests, more than 1,500 injured and some deaths. Now Turkey's largest trade union groups are staging a strike. This has been the biggest anti-government demonstration in Turkey in over a decade.


I happened to be in Taksim Square last Friday when the first tear gas canisters were fired into the crowd.


I was with my class of 30 George Washington University Executive MBA students conducting a 10-day Istanbul residency on “Assessing the Business Risks in Emerging Markets.” Our hotel was on the famous pedestrian walk called Istiklal Avenue which leads right to Taksim Square. This avenue has foot traffic of over 3 million people a day on the weekends. Several days into the residency the students and I noticed riot police camped outside our hotel and all the way up and down Istiklal Avenue. Our hotel was an easy 10 minute stroll to Taksim Square. We saw more and more riot police each day with more equipment. But no one – neither foreigners nor Turks – was concerned; we knew there was a peaceful demonstration scheduled on Taksim Square by a group of environmentalists later in the week. We understood all this activity to mean, as did the locals, that we were seeing real democracy at work and that the riot police were there to make sure that the anticipated crowds of young people were kept safe. In fact, the students and I had discussed in class the growing noticeable presence of the riot police. We concluded that Turkey’s future was nearing a tipping point. None of us anticipated that it would arrive within 72 hours.


Last Friday most of the students and I were strolling up and down the Istiklal Avenue with the other foreign and Turkish shoppers during the early evening. All day young demonstrators had been steadily streaming into Taksim, chanting as they made their way toward the main square, all moving in harmony with the shoppers and in a peaceful mood on a beautiful day amid colorful banners.


Suddenly we heard a series of very loud bangs and then momentary silence. Everyone stopped. Then screams and shouts echoed off the cobblestones of the square and pedestrian walk. We were being shoved and pushed as mobs of people started running away from the square in every direction. Most of us ran down Istiklal Avenue toward our hotel. People were in disbelief and panicked. They were running and looking back, running and looking back – at Taksim Square – not believing that the government had fired upon the crowds. The air began to smell funny – of tear gas. People ran into shopping malls, restaurants, stores or any side alley street they could find. Good Samaritan shop keepers pulled shocked foreign shoppers into their stores to keep them safe from the running crowds and the tear gas – including one of my students who shot the video below. You can hear her thanking the shopkeeper for helping her.




The very loud, large bangs that we were hearing are typical of tear gas canisters being fired by police (gun fire has a higher pitch). Few know the difference but the sounds are unmistakable. I had heard them before and so had some of my students with military and security backgrounds. We immediately started running and texting other students to take cover from the gas, not to touch their face and to get as far away from Taksim Square as they could. At some point a helicopter dumped tear gas onto the crowds. Almost no one escaped without teary eyes or burning throats. No one could have imagined this kind of reaction by the government. Turkey watchers such as myself knew that public pressure was building up against the government – but this excessive use of force was an absolute shock.


That initial peaceful demonstration was about the planned commercial development of the Gezi Park- the only large green park in the middle of Istanbul. But the crowd’s frustration amidst heavy-handed government tactics on that first fatal day of what was supposed to be a democratic peaceful demonstration quickly brought to the surface the growing pressures building in Turkish society.



These pressures include the growing perception of government autocracy and intolerance to dissent, the Islamization of Turkey, curbed freedom of the press and general increased government involvement in civilian social issues. For example, last month's regulations on the restricted sale and use of alcohol, more mosques being built and repaired all over Turkey (versus other public projects), government denouncements of public displays of affection, encouragement of families to have at least three children, CNN-Turk and prime-time TV stations airing cooking shows and penguin documentaries during the current Istanbul demonstrations, etc. There is a long list.


The government had believed that it was being very shrewd by slowly chipping away, using rules and regulations, to move the country towards a more conservative social agenda while pressing forward with economic growth. The people, however, are aware that each seemingly innocuous law by itself is changing the social and legal fabric of the country. This popular uprising is unprecedented, unexpected, unplanned and not organized by any entity in particular. The secular Turks are fighting for their personal freedom, sanctity of private lifestyle choices, and their public space. Their message to the government is clear: We are fed up with you. ... You are not listening to us. The peaceful protest which was started by a small group of environmentalists who were trying to stop 600 trees from being cut down in Gezi Park has now evolved into a national protest about getting the government to resign.


How is this possible? Turkish Prime Minister Recep Tayyip Erdogan had nearly 50 percent of the public support in the 2011 elections and his AKP Justice and Development Party has been in power for a decade. Erdogan has won three landslide elections. The Turkish economy has been booming since it crashed in 2001. It had growth rates of 9 and 8.5 percent in 2010 and 2011, but dropped to 2.2 percent in 2012. Expected growth rates until this last weekend were between 3-4 percent for 2013 and 2014. Erdogan has an aggressive economic plan for the country. He has a "2023 Vision" to upgrade the economy with public projects in time for the centennial of Turkey's founding. For example, he wants to build a new $29 billion third airport for Istanbul that could support 100 million passengers annually. He has tripled Turkey's per capita gross domestic product in a decade. He is making a bid to bring the 2020 Summer Olympics to Istanbul.


He was recently in Washington D.C. and was quoted as saying "Turkey's not talking about the world now…[t]he world is talking about Turkey." Well he's right – but the world isn't focused on the topics of foreign investment and business that he had in mind.



The point is that much of the economic planning this government is doing is without much public debate or input. The gray areas of politics and business are still of concern. For example, "the company that won the contract to rebuild Tarlabasi [a neighborhood near Istanbul's Gezi Park] is owned by Calik Holding, whose CEO is Prime Minister Erdogan's son-in-law," according to Foreign Policy. Sounds like business as usual in the region and not the new modern country model for the newly liberated fragile Islamic states.


I wrote an article seven months ago saying that "Turkey could lead the Post-Arab Spring Muslim World." I asked: "Is Turkey's AKP Justice and Development Party elegant enough to realize that it could elevate Turkey to be the standard bearer once more for the Muslim world as chaotic Egypt cannot control itself?" Well the answer to that question was came last Friday; with tear gas, water cannons, press censorship and increasing autocratic rule. The key question is if this event has tarnished Turkey as the beacon of a modern Islamic emerging market?



Secular Turks are angry at Erdogan (whom they believe is intoxicated with power and whose main goal is Islamization) and not towards President Abdullah Gul who is viewed as more moderate. It is widely believed that Erdogan and Gul will compete for the presidency in next year's election. The Erdogan government is only safe if foreign investment keeps pouring into Turkey and growth continues.


Erdogan's worst fears may be coming true as international news channels are showing vivid images that look like Turkey is having its own "Turkish [late] Spring." The truth of the matter is that from one day to the next, given all the media bombardment about unrest in the Middle East, most people cannot distinguish between riots in Manama (Bahrain), Cairo (Egypt) or Tuksim Square (Istanbul). The images are the same: youths are throwing stones while riot police are tear gassing and using water cannons. Foreign investors and market analysts know that what is happening in Turkey is very different than Arab Spring, but they are watching very carefully – as is the International Olympic Committee.


This is a stark reminder that Turkey is still “an emerging market” thus lucrative but volatile. It is also a shot across the bow for many American universities who are on the bandwagon of international student residencies in the fast paced emerging markets. This is a reminder that emerging market uncertainties are very real and universities must be seasoned in the global residency business. My students are lucky – George Washington University excels at it and we had the students who wanted to leave extracted from the area in less than 24 hours from the time the first canister of tear gas was fired.


Turkey has always been seen as the perfect candidate to bridge Eastern and Western markets, however, the rise of modern Turkey (since the early 1900s) has always fallen short in the end. We thought that perhaps it might be different this time. While I write this blog, with my throat still a bit scratchy from the Turkish tear gas, I am feeling cautiously pessimistic. The fight to create a secular modern Islamic democracy with a fast growing free market is still being waged and is far from won in Turkey. This is not going to end anytime soon.

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The Global Economy Remains Shaky

Posted on May 13, 2013 at 11:00 AM Comments comments ()

From US News Blog

Let me start with the good news for 2013. So far, no major tsunamis are anticipated off the coast of anywhere; North Korea has not fired on South Korea; the royal house of Al Saud of Saudi Arabia has not fallen and oil prices have not skyrocketed; we still have enough clean drinking water for now; America seems to be on the mend; the Japanese economy is back in the news; no  big headline news from Egypt, Israel, Palestine, Jordan, the United Kingdom or Brazil; stock markets are booming and Wall Street is back; and the euro zone still has 17 members.

Now for some bad news for 2013: The world economy is slowing down, including China and Germany; Europe is still in decline and has no plan other than to survive its crisis; the American recovery is nowhere near strong enough to carry the world; job creation and income inequality are still in dire trouble in almost every country in the world; the Japanese, much like their American counterparts, have no serious path to budget deficit reduction; we don't know exactly when it will hit us, but we do know extreme weather will come calling; the number of ineffective and bumbling politicians in the developed world seems to be growing; and social insecurity and growth are moving in diametrically opposite directions, as the first is increasing and the latter is decreasing or flat.

Even with the market's new cautious optimism, risk and anxiety have created a "world economy [in which it] is as weak as its weakest link," according to Olivier Blanchard, chief economist of the International Monetary Fund. He also added, "Given the strong interconnections between countries, an uneven recovery is also a dangerous one. Some tail risks have decreased, but it is not time for policy makers to relax."

Confidence is still shaky. So we come into 2013 somewhat battle-weary, knowing that the recovery is still a long way into the future. Now, as we lick our wounds, is the time to get down into the trenches to do some serious work, such as dealing with the tax code and social support systems while trying to restore the confidence of the developed world's embattled middle class.

Major polices have to be enacted. This is not the time for failure of governance. Ambling through is not an option. Real long-term political vision and will is needed to derive real productivity gains and to restore some semblance of social safety for the middle class.

So, in the end, what does all the good and bad news mean for you? Are you "cautiously optimistic" or "cautiously pessimistic"?


Eurozone Austerity May Be Coming to an End

Posted on May 6, 2013 at 11:50 AM Comments comments ()

From US News Blog

There is no question that the extreme austerity debate has shifted in the eurozone. The public debate and policy implementation of austerity seem to have buckled under pressure from anti- austerity protesters. In an earlier column I had mentioned that when French Socialist President Francois Hollande came into power the nature of the European austerity game would change, and it has.

German Chancellor Merkel's repeated public calls to continue strict austerity have been falling on deaf ears. The reason is quite simple: the economic and social pain austerity has created on the ground are too hard.

Some say that modern Europeans in the north and south are now used to a more cushioned life, and the austerity medicine is too much of a bitter pill to swallow. Remember austerity, like development and environmental issues, is a choice of either looking after the working citizens of today or their children's children in the future. The message in Europe is clear: the working citizens of today want to be looked after now.

While, of course, they worry about their grandchildren, their immediate needs overrule that worry for now. Who can blame them? I wager nowadays most working citizens, in most countries, would do the same. This seems to be a public acknowledgment in Europe that extreme austerity has seen its day.

Extreme austerity measures have one concrete result. You are assured that, in the short run, growth will be stifled. The eurozone is yielding zero to negative economic growth. As the International Monetary Fund's Managing Director Christine Lagarde said recently "now might be the time to consider slowing the pace of austerity."

The new buzzwords in Europe are growth and job creation. The European Commission's President Jose Manual Barroso had this to say about austerity: "While I think this policy is fundamentally right, I think it has reached its limits." Of course, the limits he is talking about are not economic but political in nature. Slow growth slows down the race towards a healthy economy and a contented population.

For example, slow growth yields less tax revenue and mandates increased spending on social welfare (worsening fiscal debt) due to the resulting unemployment. Increased unemployment lowers standard of living and political pressure builds.

Today, there is not one single European politician advocating extreme austerity in his or her own country. It should be noted that this is only possible because markets are beginning to ease off their demands for austerity because it has backfired on them.

The European Central Bank has just cut interest-rates again (albeit after 10 months) to boost the eurozone's economic health. At a recent press conference, European Central Bank President Mario Draghi said "weak economic sentiment has extended into the spring of this year (2013)… the cut in interest rates should contribute to support the recovery late in the year... monetary policy status will remain accommodate for as long as needed." Germany, France, Italy and Spain, the four largest eurozone members, all show signs of economic contraction this spring. Draghi repeated his assertion that he is "ready to act if needed" should the eurozone recovery stall.

Has extreme austerity had its day in Europe? In all probability, yes, as the markets are now ready for reinvigorated growth, optimism and exuberance … or at least until the next European crisis or bailout.


China's Communist Billionaires

Posted on April 30, 2013 at 12:45 AM Comments comments ()

From US News Blog

Much has been made of the record China recently broke: it houses more billionaires in its government than any other country in the world. They make up the so-called "Red Aristocracy." So the central question of this blog is: How can you create the world's largest such  collection of billionaires in a communist system?

Communism, you recall, is an economic and political ideological system in which everyone is considered equal. Its ultimate goal is to create a classless and stateless society. A simple explanation of how communism works is as follows: There are no individual property rights and all citizens collectively own the land. The resources derived from the land are centralized. The government then makes sure that the profits from the resources are equally distributed amongst all its citizens, as everyone is considered equal. Thus there is an equal distribution of wealth by the state no matter how hard or little you work because the "means of production" are publicly owned. The primary goal of communism is to prevent the dark negative side effects of capitalism – income inequality.

Ironically, the largest communist country now has a government with more billionaires than any other – it sounds to me like all Chinese are equal but some are more equal than others.

Many of the super-rich Chinese have gained in a system where there is a strong link between politics, business and corruption. It's difficult to tell you exactly how many Chinese billionaires there are because they do not want to be found. Chinese billionaires must have political connections to keep their wealth safe, become politicians themselves or acquire foreign citizenships. For example, it is not very surprising that the Chinese parliament has 83 billionaires (comparatively the U.S. Congress has not a single billionaire).

In essence, the Chinese claim of officially being a communist country is only half true. Politically, China is a one-party system that represents all the people, but economically it is rapidly moving away from Karl Marx's ideal – capitalism is in fact alive and thriving.

Political power and wealth are extremely delicate issues in China and the country's leadership is well aware that if the current income inequality continues to widen, it can be a seriously disruptive catalyst in a country were approximately 800 million (out of 1.35 billion) Chinese live on less than $15 a day. The average per capita income is approximately $6,000 (in nominal terms) and $9,000 in purchasing power parity.

Recent graft and embezzlement scandals and the viral social media tweets about the children of the super-rich Chinese crashing their Lamborghinis and Maseratis have deeply embarrassed the Chinese leadership. The new government under Xi Jinping has "launched a campaign against extravagance and corruption immediately" upon taking office, according to the Financial Times. President Xi is fully aware that if he cannot contain the widening income gap in a population of 1.35 billion, any displays of economic extravagance by the billionaires is perilious, especially in a system were everyone is supposed to be equal.

It will be interesting to see where Chinese communism goes from here. It might be time to call this metamorphosed ideological system something else.


Reflections on Margaret Thatcher's Legacy

Posted on April 16, 2013 at 12:45 AM Comments comments ()

From US News Blog

Margaret Thatcher was the first and only female leader to be democratically elected in the United Kingdom (UK). She was the UK Prime Minister from 1979-1990 (three consecutive terms); Leader of the Opposition from 1975-1979, and leader of the Conservative Party from 1975-1990.

Let me make a disclaimer before I continue: I knew Baroness Thatcher. After she resigned I met her at multiple private gatherings, thanks to my wonderful mentor and friend, the late Sir Alan Walters (Thatcher's Chief Economic Advisor) and his wife Lady Patricia (Paddie) Walters. I had one-on-one conversations with the Baroness Thatcher, but let's be honest, for anyone who knew her, it was a one-way conversation and I was not the one talking (an unusual position for a Professor).

She was a force to be reckoned with. Like most people who engaged her directly, I too felt the need to stand to attention and was captivated by the strength of her convictions. I may not agree with everything the Baroness had to say, but the grocer's daughter was an impressive force – one that simply could not be ignored.

There has been much controversy and many anti-Thatcher demonstrations over the past week in the UK surrounding her funeral. The demonstrators are singing "The Witch Is Dead." Although it is seemingly distasteful to be singing such songs after a death, the reaction is a vivid reminder that she was a fiercely polarizing leader. She was oppositional and contemptuous of everyone who disagreed with her, both in the opposition parties and in her own. 

Let us assess her legacy through a different lens. What could possibly have happened in the UK and the world if there had been no Margaret Thatcher?

Well for starters, the UK would probably still be thawing out from its 35th consecutive "Winter of Discontent." Regular annual strikes by coalminers, public utility and transport workers and truckers and gravediggers would have left millions of people in the dark, in the cold, on foot, scrounging for food and surrounded by mountains of uncollected trash and rotting unburied remains.

Perhaps that is a bit of an exaggeration, but for those of you who do not know UK history, Thatcher was unwavering in her attempts to break the control of the trade unions in the UK. She believed that their leadership damaged the British parliamentary democracy and harmed the economy as the unions held the nation hostage through many strike actions. For example, in 1979, the total number of work stoppages across the UK numbered 4,583 (29 million working days lost).

Secondly, without Thatcher, the USSR (Russian empire) would probably still be standing strong, albeit economically decrepit and politically repressive. Her opposition, the Labour Party of Foote and Kinnock, opposed NATO's (and Thatcher's) stance against 300 new Soviet missiles in the 1980s. If there was no Thatcher, there would have been no Reagan-Gorbachev deal (in 1987) to destroy all of the new Soviet and NATO missiles, a deal that ended the Cold War and paved the way for the collapse of communism (which required the Cold war to stay in play).

Thatcher's close friendship with Ronald Reagan was a grand legacy, as was their shared wariness of communism. Thus, if there were no Thatcher (i.e. no Reagan-Gorbachev deal), the Soviet party-KGB-military cabal would have dispensed with Gorbachev and his reforms, replacing him with a hardliner who would have, in all probability, quashed the democratic movements in Eastern Europe and in the USSR.

Other things Thatcher was responsible for: She won an annual rebate for the UK from the European Union budget, which is still in place. She brought down double digit inflation of the 1970s (which peaked at 18 percent in 1980); by 1984 it was down to 4 percent and has remained low ever since. The current funeral protesters might keep this in mind every time they purchase anything.

Granted, unemployment shot up to 12 percent (currently the EU average) in Thatcher's first term in office due to her privatization efforts and the closure of empty mines and unsustainable businesses; but it rapidly plummeted to 7 percent by the end of the decade.

In 1993 (under PM John Major), the UK embarked on 15 years of sustained growth, broken mainly by the 2008 global financial crisis and ensuing recession. Without Thatcher, the UK in the 1980s and 1990s would have continued on its downward trajectory of the 1970s – and would be significantly impoverished and requiring even higher taxes.

Tony Blair's Labour government was the beneficiary of the Thatcher's conservative reforms. For example, unemployment stood at 6 percent in 1997 when Blair was elected. Blair knew it and that is why he didn't dare change the Thatcher policies. And that is also why, ironically, the conservative Thatcher is credited with having said, "…her greatest legacy was (the Liberal)...Tony!"

What about the Falkland Islands? "You simply do not take what does not belong to you…" - that was her simple rationale for fighting the war with Argentina over the islands. She did not justify her convictions and her actions with official fabricated reports of possible "weapons of mass destruction." Her conviction of what was "right" and "wrong" was reason enough to go to war.

Moreover, the IRA would not have brokered a peace on Good Friday (known as the Belfast Agreement of April 10, 1998) if it was not afraid of Thatcher's ability to act and her unwavering steel backbone. Her comment about the IRA prisoners hunger strike to regain their political prisoner status was, "Crime is crime is crime; it is not political." In turn, (in 1982) a Sinn Fein (an Irish Republican Party) politician declared Thatcher as "the biggest bastard we have ever known".

One thing is for sure: Like her or dislike her, even in death she will not be ignored. Margaret Hilda Thatcher has secured herself a page in the history books, unlike many other leaders who are historical footnotes.


David Cameron's Reckless EU Gamble Will Only Hurt the UK

Posted on April 8, 2013 at 12:00 AM Comments comments ()

From US News Blog

If the United Kingdom's Prime Minister David Cameron wins the next British elections (set for 2015) he has committed to hold a referendum on the U.K.'s membership in the European Union. Cameron's proposal is to hold a referendum in 2017 in the form of a simple "in" or "out" vote for the U.K. regarding its EU membership.

Many inside the U.K. have criticized Cameron for using European membership as a vote-gathering maneuver for national elections in 2015. They say he has turned British membership in the EU into a Labor Party/Liberal Democrats versus Conservative/Tory/euro-skeptic's issue. Cameron's critics say that this is a clear demonstration that he is willing to do just about anything to win the next elections with no regard for the overall national interest of the U.K. Most economists agree that the U.K. is going to see a very difficult few years ahead amidst austerity and lackluster growth rates. Cameron may be using European membership as Plan B, as a lightning rod, to ignite his reelection bid if Plan A (his economic recovery plan) stalls and is does not show results before the elections in 2015.

Many outside the U.K. see this as a forceful play by Cameron to renegotiate the terms of U.K. membership in the EU. Cameron is reacting to the European call for further integration, especially fiscal integration, to help deal with future financial crises, unemployment and growth issues. Cameron wants a new British contract with the EU and if he doesn't get what he wants he is suggesting Britain simply leave the 27-member Union. The Europeans feel Cameron is using threats to strengthen his hand during his attempts to renegotiation an a la Carte style membership especially with regards to future European fiscal integration. Over the last few decades, British influence in EU decision-making has been diluted due to the large increase in EU membership and changes in the Union's voting system.

The arguments Cameron is making are easy to defend considering the mess the euro zone is currently in and the series of muddled financial rescues causing more harm than good in some countries. The financial bailouts saw a noteworthy wealth transfer from the rich north to the poor south within Europe. Also the specter of EU fiscal integration (which might include more social and labor laws moving in a more liberal versus conservative direction) and possible additional wealth transfers from the northern countries to the southern crisis-ridden countries could make for a difficult re-election bid for Cameron in 2015. The British are more likely than not to be outvoted on most issues in any future EU integration talks under the current voting system. Thus, Cameron want to cut a separate deal for the U.K.

Nonetheless a gauntlet has been thrown down and a dangerous and reckless gamble has been undertaken. This could create five years of additional uncertainty for the British in a world where risk, uncertainty and anxiety are fast becoming the new normal. No good can come out this increased uncertainty and anxiety. This is particularly true given the interdependence between the U.K. and the other 26 EU members through trade and commerce. As of 2011, the UK's main export partners were: Germany (which accounts for 11.6 percent of its trade), the U.S. (10.6 percent), the Netherlands (8.4 percent), France (7.8 percent), Ireland (6.4 percent), and Belgium (5.7 percent).

Perhaps Cameron's aides are best advised to remind their boss that "the sun has set on the British Empire." British GNP was approximately $2.3 trillion in 2011, which, compared with other countries, does not look impressive. For example, U.S. GNP is $15 trillion, China $6.6 trillion, Japan $5.8 trillion, Germany $3.6 trillion, France $2.8 trillion, Brazil $ 2.1 and India 1.8 trillion. In fact, the entire EU 27-member nation GNP is approximately $17.6 trillion. There is little doubt that there is not a single European country today that is large or impressive enough by any metric (economic, political, military) to stand alone without the EU behind it's back. In a previous blog post I had mentioned "The Europeans, albeit reluctantly, have acknowledged that alone as singular nation states, they are no longer able to sit at the grown-ups table." The U.K. is not an exception.

This reckless gamble by Cameron can only deter foreign investment and growth in the U.K. in an already anxious global market.


Why the Cyprus Bailout Will Backfire on Europe

Posted on April 1, 2013 at 11:40 AM Comments comments ()

From US News Blog

The Cyprus rescue bailout case is special and different on two fronts. The first is that the bailout literally went after (plundered) foreign investors' money, and the second is that for the first time local depositors are being held responsible for fixing their own banking crisis directly.

On the first issue of the predatory raiding of foreign depositors, I would like to ask the question very few have raised: "What if the large depositors in Cyprus had been French or German?" Would the troika—European Commission (EC), the International Monetary Fund (IMF), and the European Central Bank (ECB)—then have demanded that large foreign depositors take a 40 to 60 percent haircut directly?

It turned out, instead, that the large foreign depositors were mostly Russians parking their money in Cyprus's offshore banking system legally and in some cases for money laundering schemes. Cyprus is, in effect, a smaller, less developed, southern version of a Luxembourg or Lichtenstein money center.

This is what makes Cyprus special and different from Portugal, Greece or Spain. The Europeans, especially the Germans and French, have never wanted this small, offshore, less developed island to be in the big money tax haven business, especially with Russian money. Going after deposits of over euro 100,000 almost guarantees that all Russian investors would be hit and hit hard. Estimated losses are between 60 and 80 percent for these foreign (and local) investors who have uninsured deposits of over euro 100,000. Perhaps Russian paranoia was justified.

Well, nonetheless, the troika has done a good job of making sure that Cyprus can no longer compete with Luxembourg or any other small country offshore tax haven. It is, in fact, no longer a viable place for offshore banking. The unintended consequence of trying to clean out a sketchy offshore banking system is that foreign investors will be very reluctant to invest in Cyprus again for any reason.

This effectively cuts Cyprus off at the knees, as we know that a deep recession and all sorts of socio-economic ills are going to befall the island. The loss of confidence as a safe place for foreign investors is the proverbial death knell for this economy.

The second reason why the Cyprus bailout case is different is that, for the first time, local depositors (taxpayers) are being held responsible for fixing a banking crisis directly. When Dutch Finance Minister Jeroen Dijsselbloem (Chairman of the eurozone finance ministers group) indicated that this particular rescue now "represents a new template for dealing with financial crisis in the eurozone with uninsured deposits bearing some of the cost," he doomed all small southern country banks.

When Cypriots fully reopen their banks and remove their capital controls, all large local and foreign investors will want to flee to safer grounds. This is why Cyprus has become the first country in the eurozone to impose capital controls in order to halt the outflow of money.

There are a few subtleties to note here. Although losses will be experienced by hierarchy (shareholders, bondholders and then uninsured depositors) what has happened is that the principal of moral hazard has been firmly established. For starters, depositors will be forced to swap out their cash deposits for bank shares (equity) for over 60 percent of their deposits. Additionally, instituting capital controls essentially makes captured Cypriot euros different than the euros in the rest of the eurozone (they are worth less due to their inability to travel easily).

Capital controls, although always meant to be temporary, tend to last longer than expected. For example, Iceland instituted them during its crisis and four years later they are still in place. I cannot imagine the Cypriots loosening capital controls anytime soon.

Investors and large depositors do not forgive nor forget these things easily. All off this will make sure that the southern periphery countries of the eurozone will remain weak. Ultimately, this will come back and haunt northern Europeans. This has all but reinforced a two-speed eurozone (North versus South).

The Cypriot government should never have entered into such a deal (although they didn't have much choice) and the EC, ECB and IMF have opened Pandora's box in scaring investors and depositors from putting their money in any southern European bank in the near term. In the end, the northern Eurozone members will have to pay the price for this debacle of a rescue.


Cyprus Undermines Faith of Small Savers in Local Banks

Posted on March 25, 2013 at 2:50 PM Comments comments ()

From US News

Cyprus Trod Where None Had Dared

So we managed to save Cyprus! Early today, they got the euro 10 billion bailout deal at the 11th hour, thereby preventing a Cypriot banking system collapse and a possible eurozone exit. As part of the deal, the second largest bank in Cyprus, Laiki (or Popular) Bank, will be closed and depositors who hold more than euro 100,000 will experience large losses.


Common sense seemed to have prevailed and this new deal safeguards and guarantees all deposits under euro 100,000. In return for the rescue money, Cyprus must reduce both its debt and banking sector, privatize state-owned assets, and put into place structural reforms.


This will not save the Cypriots from a deep recession, soon to be followed by a Greek-style near-term economic and social cataclysm. Much more significant, however, is the fact that this latest eurozone financial crisis and resulting bailout negotiation has all the basic ingredients to generate a new systemic risk in the financial markets—it has undermined the faith of southern small savers in their own local banks. The Europeans might have done some real damage, as the local banking systems in southern eurozone countries could be more or less effectively wrecked for the near-term. Ironically, once again, one of the smallest countries in Europe is the catalyst.



Since the 2007 crash, American and European financial crises management has had two fundamental tenets. First and foremost, the small depositors (US$100,000 or euro100,000 or less) must be protected in any bailout. Second, the troubled banks' investors i.e. the financial institutions which lent money to the banks (usually by buying up bank bonds) typically take the hit (known as a haircut) for their risky investments.


This is based on the straightforward logic that large financial institutions understand and are knowledgeable about the risk off their investments i.e. lending to a bank, and therefore should participate in the pain of a rescue package. The small depositor, however, does not have any notion of how much risk his or her bank is taking at any point in time. Small depositors simply trust their government regulators to make sure that the banks are reasonably safe. Thus, it is unreasonable to hold small depositors accountable for the risky behavior of financial institutional investors and banks.


There are very good reasons why these tenets must never be violated. First, even the hint of the suggestion of using small savers to bail out banking institutions and their shareholders and bondholders is reckless at best. This will result in only one thing: undermining the belief and faith of small depositors in the local banking system. That damage is difficult to undo and has a myriad of negative consequences for an economy. (Not to mention that it is generally perceived as patently unfair to hold small depositors responsible for bailing out large institutional investors.)



The initial Cyprus bailout package last week violated this primary tenet. This is a first for the eurozone. The original agreement mandated that small depositor's savings would be taxed and used in the financing of the Cyprus bailout package. This led Cypriot small savers to take to the streets and demand that their savings not be touched, which in turn led to wholesale chaos, ATM runs and the entire nation's banking system being shut down for a week. The small depositors forced the Cypriot government to renegotiate with the "troika" (European Commission, International Monetary Fund, and the European Central Bank). The final agreement to bail out Cyprus was reached early this morning leaving small depositors safeguarded at least for now.


However, the damage has been done. The invisible line was crossed. Not only will it be a long time before small savers in southern Europe trust their own banks again, but foreign investors will be very reluctant to park their money in Mediterranean banks. In Cyprus, what's left of the euro 31 billion Russian deposits will fly out the moment capital flight restrictions are lifted. No foreign investor is going to take the risk anytime in the near future of parking large sums of money in local banks in Greece, Portugal, Cyprus, or perhaps even Spain and Italy. This effectively bulldozes local banks in the southern eurozone for the near future.