Namibia’s Changing Tax Landscape – From Simple to Complex

[caption id="attachment_479" align="alignright" width="200" caption="Author: Cameron Kotzé, Partner, Ernst & Young Namibia"][/caption]

The collection of revenue for the Namibian fiscus has been under scrutiny for some time.  Questions have been posed as to whether Namibia should change from a territorial (source) based tax system to a residency based system to increase the potential base from which revenue can be collected.

A study was done more than 10 years ago to advise the Namibian government on changes to the existing tax laws.  This study concluded that the Namibian tax base should be broadened but stopped short of recommending that the basis of the income tax system should change from territorial to residence.  Many of the recommendations made by the advisors have been implemented albeit that it has taken quite a long time get the proposals enacted into law.

One of the recommendations of the study was to simplify the legislation so that every Namibian taxpayer understood the need to contribute tax to the State and how the amount that should be contributed is calculated.  Amendments made to the existing legislation have fallen far short of this goal.  In fact, some amendments that have been made to the Income Tax Act lack clarity and require careful analysis by experienced tax law experts.  Given the technical capability of the current staff of Inland Revenue, the application of some provisions that have been introduced into law is questionable.

The officials at the Inland Revenue office have displayed a pragmatic approach for many years in the past.  This was mainly attributable to the shortage of skilled trained tax professionals in the country.  Namibia’s taxpayer population has never actively pursued complex tax schemes to engineer a low effective tax rate and, coupled with the pragmatic approach of the officials at Inland Revenue, this resulted in a very cordial relationship between the tax collector and taxpayer.  This relationship has been affected in recent times due to the collapse of the administrative capacity of Inland Revenue as well the draconian penalty system for non-compliance.  Late payments of tax attract interest at a rate of 20% per year (calculated daily and compounded monthly at one stage) but the overpayment of tax attract no interest at all and still attracts no interest.  In addition to this, the late payment of tax in some cases also attracts a penalty of up to 100% of the tax payable.  Taxpayers have been confronted with these penalties even in cases where no malice was intended.

It is clear that Inland Revenue is (correctly) seeking to tax income that that has escaped the tax net before.  For example, a few years ago a withholding tax on interest earned from local banks and collective investment funds was introduced.  Apart from a change in the law to subject the interest component of a distribution by a collective investment fund to tax, other interest income was always subject to tax but most individuals failed to disclose the interest income in their tax returns albeit that the banks submitted interest earning declarations to Inland Revenue .  Stakeholders however were not consulted sufficiently prior to the introduction of the tax and those affected by the new tax sought plans to avoid it.  This resulted in Inland Revenue having to refine the rules to ensure they collected the expected tax.

A withholding tax on services rendered by non-residents to residents has also been introduced recently, and applies irrespective of where the services are rendered.  Thus, the source based principle has been extended to catch services rendered outside Namibia, on the basis that the Namibian taxpayer can claim a deduction for the amount paid to a non-resident.  Services rendered within Namibia have always been subject to tax but previously escaped the tax net due non-disclosure by service providers and poor policing mechanisms employed by the Inland Revenue Directorate.  Unfortunately the withholding tax on services legislation has been very poorly drafted and has created a lot of uncertainty amongst many taxpayers.

The income contributed by the mining industry to the fiscus is also questioned by the Government.  Comparative studies have shown that the contribution of the Namibian mining industry in the form of v taxes and levies are amongst the highest in the world.  Some of recent proposals made by the Ministry of Finance would have had a devastating impact on the industry and were withdrawn after robust consultations.  A levy on the export of raw minerals is still under investigation and will be introduced in the future.

A transfer tax on the transfer of shares in property owning companies has recently been proposed.  This proposal will ensure that the effective transfer of ownership of all properties (residential and commercial) will become subject to transfer tax.  The draft legislation is very complex and will probably result in taxpayers seeking various avenues to reduce the tax payable.

A further example of broadening the tax base is the environmental taxes that will be introduced soon.  The basis of the tax is that the polluter (consumer) will pay the tax on goods used which are considered to be harmful to the environment.

Other recent amendments to broaden the tax base include ring fencing of income from loss making trade and gains on the disposal of mineral rights.  The taxing of gains on the disposal of mineral rights is the first move towards taxing capital gains in Namibia.

The study conducted to advise on the changes to the tax laws of Namibia recommended that a capital gains tax should be considered.  This will clearly broaden the current tax base and generate extra income for the fiscus but there are concerns that the introduction of such a tax may not generate sufficient net revenue after taking into account the cost of collection.

Formal cross border thin capitalisation rules will be introduced in the foreseeable future.  This is very necessary as there is uncertainty about Inland Revenue’s formal position on how to calculate a taxpayer’s capital base for purposes of determining whether the thin capitalisation provisions of the Income Tax Act are triggered.  The thin capitalisation provisions became effective in 2005 but the Inland Revenue Directorate has not focussed on this aspect of the law when assessing taxpayers.  There could be a significant opportunity for Revenue to collect extra tax once these guidelines become effective.

Tax incentives are also under consideration.  Inland Revenue holds the view that the current incentives contained in the Income Tax Act have not encouraged significant investment in attracting new investment in the manufacturing industry in particular.  Although this may be true, the question must be asked whether the process that has been followed by Inland Revenue in recognising the incentives has been executed efficiently and equitably.  The perception is that Inland Revenue Directorate made it as difficult as possible for an investor to obtain manufacturing status. The officials involved in the evaluation process lacked the skill to make an informed decision on the nature of taxpayer’s activity and had no clear guidelines to follow when applications were considered.  No plausible reasons for turning down applications were provided to applicants.  Given this background it is no wonder that investors have not queued up to invest in Namibia – the environment is just too uncertain and it is not worth taking the risk.

It is very likely that the export processing regime currently in place will also be phased out.  The impact of phasing out is under investigation and affected investors will have to be consulted before a final decision is taken.  The benefit from having export processing zone status has also not attracted a significant amount of investors to Namibia – mainly due to the compliance burden that the investor has to take on, and limitations where the final product is exported to South Africa.

The possibility of an autonomous Revenue Authority is also under investigation.  The lessons learned by other countries in Africa which have opted for autonomous revenue authorities are compelling, in that revenue collection had increased substantially after creation of such a body.  The culture of compliance by taxpayers had increased dramatically and the tax base had broadened naturally.

What was once a stable and uncomplicated tax environment will be changing and become complex.  This will require a significant lift in the skills level of the staff at the revenue authority.  I believe that Namibia has the capacity to answer to this call and such a change will be good for Namibia’s citizens and those wanting to do business in the country.


Foreign Direct Investments in RSA

[caption id="attachment_494" align="alignright" width="300"] Central Johannesburg[/caption]

By Nataly Marchbank (Senior Manager, International) and Hasinah Essop (Senior Consultant, International Tax) - PricewaterhouseCoopers South Africa

There are many jurisdictions internationally which are popular with multinational groups for the purposes of establishing holding and headquarter companies, for instance Luxembourg, the Netherlands, Switzerland and Singapore. Closer to home, Mauritius has established itself as a favourable jurisdiction for these purposes, especially for investments into African countries.

Until recently, the South African tax and exchange control system has prevented South Africa from being suitable for this purpose. Although one may not  necessarily assume that South Africa's position at the very bottom of the African continent would be an advantage in terms of international business opportunities, it does make the country a very good trans-shipment point between the emerging markets of Central and South America and the newly industrialised nations of South and Far East Asia. South Africa also has world-class infrastructure and is ideally placed for access to countries in the Southern African Customs Union (“SACU”), and the Southern African Development Community (“SADC”), an alliance of 15 countries with a combined population of over 180 million.

In common with almost every business jurisdiction, both on- and offshore, South Africa has hopes of becoming the e-commerce hub of its hemisphere. It seems South Africa has set its sights on attempting to rival the likes of Mauritius in becoming an investment destination of choice for the African continent. The groundwork has now been laid, with the new headquarter company (“HQC”) regime in place. It seems there are some enticing benefits that the HQC regime could offer foreign multinationals, like the readily available wide network of tax treaties and investment protection agreements that South Africa has entered into.

For both international and domestic investors, there are many investment opportunities available in the modern South Africa. The country is the world leader in several specialised manufacturing areas: it produces and exports more gold than any other international competitor, and also exports considerable amounts of coal; and it leads in the field of mineral processing to form ferroalloys and stainless steels. Several other areas, such as tourism, agriculture and livestock development, construction, and the service industry, continue to grow and seem likely to attract substantial foreign investment over the next few years.

In order to promote South Africa as an attractive and suitable holding company and headquarter jurisdiction for investments into, inter alia, the rest of Africa, the HQC regime was introduced by the legislature in 2010. The reason for this newly introduced piece of legislation was that; the South African legislature recognised that there were some barriers when foreign multinationals were directly investing in SA. The obstacles experienced by foreign multinationals were, inter alia, the exposure to South African Controlled Foreign Company (“CFC”) rules; tax on dividends and Transfer pricing issues. The new HQC regime that came into operation for tax years commencing on or after 1 January 2011, seems to have opened some attractive possibilities for foreign direct investments into South Africa and via South Africa.

The newly introduced legislation defines a HQC as a South African resident company that, on meeting three requirements, elects to be treated as an HQC for tax purposes.

Requirement one: Shareholder test

The first of three requirements is that each shareholder must hold at least 10% of the equity shares and voting rights in that company..

Requirement two: Asset test

The second requirement is that at the end of each tax year, 80% or more of the cost of the total assets of the company (excluding cash and demand deposits) must be attributable to (i) any interest in equity shares in; (ii) any amount loaned or advanced to; or (iii) any intellectual property that is licensed by that company to, any foreign company in which the HQC (holds at least 10% of the equity shares and voting rights (referred to hereunder as a “qualifying foreign company”).

Requirement three: Income test

In addition to the above requirements, where the gross income of that company exceeds ZAR5million (approximately GBP400,000) 50% or more of the total receipts and accruals for that tax year must consist of dividends, interest, royalties or fees from a qualifying foreign company; or proceeds from the disposal of any interest in equity shares of a qualifying foreign company or of any intellectual property licensed to such qualifying foreign company.

What are the tax benefits of the HQC regime?

The foreign subsidiaries of a HQC will not constitute CFCs in relation to the HQC (i.e. their net income would not be attributable to the HQC and taxable in South Africa in the hands of the HQC).

Dividends declared by a HQC will not be subject to tax on dividends.  Profits can hence be repatriated to foreign shareholders without any tax leakage.

Interest paid on certain financial assistance to a HQC will be exempt from the future interest withholding tax, which will come into operation in 2013.

Disposals of shares held by a HQC should qualify for an exemption from capital gains tax.

A HQC may use its functional currency for tax reporting purposes and thus avoid potential tax exposures on currency fluctuations were it required to record its transactions in ZAR for tax purposes.

Certain financial assistance to a HQC is exempt from thin capitalisation rules, and transfer pricing rules do not apply to financial assistance by a HQC.

There is no limitation (with regard to thin capitalisation) on the amount of debt funding that is raised for back-to-back loans to its foreign holdings. However, interest deductions will be ring-fenced such that the HQC will only be allowed interest deductions to the extent that it receives interest income. Any excess interest expense shall be carried forward indefinitely.

Significantly relaxed exchange controls may apply to a HQC, provided certain requirements are met. Exchange control regulations may, in future, exclude HQCs from their ambit.

Disadvantages of the HQC regime

Any management fee, interest and royalty income of a HQC remains fully taxable in South Africa at 28% but related expenses such as interest on back to back loans are deductible.

The withholding tax on royalties paid from South Africa to a non-resident will still apply to a HQC. It should, however, be noted that this tax can be reduced to nil in terms of  many of SA’s treaties.

South Africa: is it more attractive than Mauritius?

Because of, inter alia, its favourable tax regime, Mauritius is currently the most utilised holding company jurisdiction for investments into Africa by foreign multinationals. The HQC regime was introduced to attract non-residents wanting to establish a launch pad into the rest of Africa and using South Africa as an alternative. The pertinent question is whether South Africa is offering a better regime than Mauritius.

The comparison with Mauritius indicates that South Africa has more tax treaties (approximately 68 in force) and investment protection agreements compared to that of Mauritius, which is a favourable position to be in. However, the following must be considered when comparing the two countries:

 The all or nothing approach in respect of the requirements to qualify as a HQC renders these requirements extremely onerous.

Items such as interest, royalties, rentals, exchange gains and other forms of income accruing to the HQC are subject to tax at 28% in South Africa, while Mauritius offers an effective 3% rate.

South Africa levies capital gains tax while Mauritius limits the circumstances in which capital gains tax applies.

Conclusion:

It would appear that the government is serious about making South Africa attractive to investors into Africa while being conscious of its position as a member of the G20 and of the views of the OECD. National Treasury has done well to devise a HQC tax regime that reflects a careful balance between providing a facility for the free flow of capital to and from target investments and creating a tax regime that will not be accused of being a harmful tax practice.Bearing in mind South Africa's other advantages as a launch pad to Africa,  its offers the following:

Most modern city of all the other African countries;

It has sophisticated banking, accounting and legal systems in place;

An ease of communications as there are no language barriers in South Africa since nearly everybody speaks English;

Wide range of entertainment on offer that is world-class and renowned;

Wide range of sport on offer such as golf; cricket and rugby;

One of the best places in the world for viewing African wildlife;

Offers a unique mix of culture and beautiful landscapes;

With frequent, direct flights now available, it is easier than ever to get to South Africa;

South Africa has an incredible biodiversity; and

South Africa has a great climate all year round.

The new tax regime combined with the attributes listed above alongside South Africa’s extensive tax treaty network, makes South Africa a very attractive place for establishing regional headquarters.


The Franco-German Relationship Looks Set to Continue but Where Does This Leave the Greeks?

[caption id="attachment_500" align="alignright" width="300" caption="French President Francois Hollande"][/caption]

Newly-inaugurated French President Francois Hollande and German Chancellor Angela Merkel said on Tuesday they want Greece to remain in the euro in a show of unity at their first meeting since Hollande was elected.

“I want to reiterate, and we agreed on this, that we want Greece to remain in the euro,” Merkel told reporters at a press conference in Berlin. "Most of the people of Greece want that as well."

She tried to reassure the Greeks that European leaders would do all they could to help Greece structurally.

The new French Presidents first official trip started poorly when his first aircraft was struck by lightning and he had to board a second plane from Paris this was after he got drenched during his inauguration drive in an open-topped car.

“Maybe this is a good omen for cooperation,” Merkel said

Hollande repeated his call for a growth pact to stimulate the economy that had been part of his election campaign and his inauguration speech before heading to Berlin to meet Merkel.

At their press conference, the leaders acknowledged they had some divergent political views but presented a united front.

Hollande, said throughout his campaign that he wanted to re-negotiate Europe's fiscal pact, the deal agreed by 25 of the European Union's member states to keep deficits in check. He wants to change the focus to growth and away from the austerity championed by Merkel.

[caption id="attachment_501" align="alignleft" width="300" caption="Euro Banknotes"][/caption]

“I believe that we did agree that there is an obligation to work together…We have some common ground, of course we have some different views but that can also be quite fruitful,” Merkel said. “Growth is a general term and I am pleased that we have agreed on talking about the different ideas on growth. Possibly we have some different opinions but I really look forward to our cooperation.”

Hollande has sent what many believe is a signal to the Germans that he wants to foster good relations by  naming Jean-Marc Ayrault, a German speaker, as French prime minister.

“The ties between Germany and France are stable and full of respect,” Hollande said at the press conference.

With Eurozone economies almost flat lining urgent action needs to be taken.

The crisis-stricken Greek economy shrank by 6.2% in the first quarter, increasing the sense of alarm in the country mired in political chaos.

One has to ask the question should the Greeks look to the example of some of the emerging economies that faces serious problems in 80’s and 90’s. Maybe it is time for the Greek people’s sake that they consider the alternatives.


Mexico’s Competitive Banking System

[caption id="attachment_604" align="alignright" width="300" caption="Felipe Calderón, President of Mexico"][/caption]

At the opening of the 75th Banking Convention in Mexico, President Calderon said the country's financial sector is well fortified against external shocks.

ACAPULCO, May 18. - Facing a backdrop of the international financial uncertainty and other countries in economic crisis, Mexico's President Felipe Calderon said "we have a stable and growing economy that creates jobs, attracts investments. We are not afraid of global competition, as we have better infrastructure and our human resources are more competitive and better prepared. "

Calderon launched this meeting of bankers with the news that one of the leading rating agencies, Moody's had lowered its ratings of the debt of Spanish banks two of which, BBVA and Santander, have thriving business in Mexico.

During the inauguration of the 75th Banking Convention, which began yesterday and ends today in Acapulco, Calderon said that the banking system has a capitalization rate on assets of about 16 percent, a level that "is twice the international standard. The Mexican financial system is strong today. "

“The Mexican financial system is strong today”

This, he added, at a time when "the world has seldom seen a financial crisis this prolonged and deep in the largest and most powerful economies."

Promote Changes and Reforms Required

Calderon said the country has all the elements required to make the leap to being a fully developed economy over the coming years, but "that it is still needs to pass several key pieces of legislation to labour reforms, telecommunications and energy, and that the changes Mexico needs cannot be hijacked by special political interests."

He pointed out to nearly two thousand bankers, analysts, academics, legislators and public officials, that if Mexico “follow through with these reforms and perseveres in law enforcement and public safety, this may be the decade of the greatest growth in many, many years."

"Mexico must endure prosperity through the rule of law”

The governor of the Bank of Mexico, Agustin Carstens, concurred:

"Mexico must endure prosperity through the rule of law. So it is important to fight crime, which is a basic obligation of the state, and thus to advance reforms to support to police officers, public prosecutors, and judges. "

On several occasions during his speech, Calderon reiterated the theme that "we must continue to promote and demand the reforms Mexico needs to occupy its rightful place among the world's most developed economies."

In summary Mr Calderon delivered, an upbeat message about the strengths of the domestic banking system which contrasts with Europe’s despair.


KCB CEO Has Been Buying Into the Success He Is Driving

[caption id="attachment_597" align="alignright" width="300"] KCB CEO Martin Oduor-Otieno[/caption]

The chief executive of KCB Group has bought KCB shares in a demonstration of his confidence in the company he leads.

KCB’s annual report shows chief executive Martin Oduor-Otieno bought shares last year.

Mr Oduor-Otieno has been the CEO of KCB Group since 2007 acquired 509,180 shares now valued at Sh12 million, analysts regard this insider buys as symbolic.

“Few people are better placed to evaluate a company’s prospects than those who actually run it, which is why many investors regard directors’ share dealings as a key indicator of future prospects,” said an analysts at Kestrel Capital who sought anonymity.

It’s not clear whether Mr Oduor-Otieno bought the shares through the open market at Nairobi Securities Exchange (NSE) or via KCB’s Employee Share Option Scheme (ESOP) through which staff acquired shares worth Sh18. 4 million at Sh18.62 a piece, according to the bank’s 2011 annual report. Since then shares have risen to Sh23.75.

KCB’s net profit rose 36.7 per cent to Sh2.4 billion in quarter one while Equity’s increased 13.3 per cent to Sh2.6 billion, making it Kenya’s most profitable lender and highlighting the importance of regional operations. KCB looks poised to become Kenya’s most profitable lender.


Brazilian Brands Abroad

[caption id="attachment_583" align="alignright" width="300" caption="Havaianas"][/caption]

Brazilian brands are expanding internationally.

Brazil is rapidly becoming a global powerhouse and “Brand Brazil” has moved on from waxing and micro bikinis; Brazilian brands are starting to go international. Brazil is now seen as chic and consumers globally want to be part of the new Brazilian trends. Companies like Grendene the shoe manufactures now export to over 90 countries and their brands like Ipanema have graced the feet of Gisele Bundchen.

Its plastic shoe brand Melissa boasts designs from top designers including  Zaha Hadid, Vivienne Westwood, Campana brothers, Jean Paul Gaultier, Herchcovitch, and Isabela Capeto. Can’t afford a Jimmy Choo? So get yourself a Melissa! Over the last 25 years 50 million pairs have been sold and over 20 million have been sold for export.

The second Melissa Gallery Store has recently opened its doors in New York. The R$ 5 million investment brings to New York’s Soho district a mix of Brazilian designed shoes and art. The store is also venue for Brazilian artist’s exhibitions. As the first Mellissa Gallery in São Paulo, the US unit brings together the most luxurious products of the brand.

Rosa Cha is fashion house has always bought Brazilian flare into its swimwear collection but its ambitions are very much global.

Amir Slama’s chic swimwear elevates the bathing suit to high-fashion status. Bright colours, splashy patterns, and dramatic cut outs embody the exotic and playful spirit of native Brazil, where he launched the line in 1990 after an abrupt career shift from teaching as a history professor! Twelve years later, he won Brazil’s Designer of the Year award. The Rosa Cha stand-alone store opened in New York in 2008, cementing the brand’s seminal status as a go-to label for attention-getting beachgoers. If you want to look and feel good on the beach this summer I suggest you investigate Rosa Cha.

There is nothing Brazilian sounding about the name Osklen so you might be surprised to learn it is Brazilian and boasts around 40 stores in Brazil as well as international stores in Milan, New York, Lisbon and Tokyo. It was all started by Oskar Metsavath, a doctor who liked sports, but he went on to become distinctive clothing designer with a strong brand identity of relaxed informality. It sells an image of Brazil that everybody finds inviting and attractive.

Havaianas is another of the Brazilian trends abroad. The “flip-flops” (sandals) became a “MustHave Vogue” item and have gold and diamonds exclusive collections. Alpargatas, the manufacturer of the popular Brazilian sandals Havaianas and Timberland seeks to increase from 30% to 40% international sales contributions in the next five years. For the last year, the company reported that 28% of the income revenue was generated from exports. With a worldwide presence and an “always summer” spirit, Havaianas has 281 exclusive stores around the world (presence in 80 countries - 5 continents). In the US alone, Havaianas already has 2,000 outlets and sold more than 200 million pairs in less than a decade.

But it’s not just fashion that is going global from Brazil. Brazil gaining ground in some sectors that one might not expect. Some of the world’s most successful hedge funds are now based in Rio, many having to turn away allocations from foreign investors and in the aircraft sector Embraer is giving Boeing and Airbus pause for thought. For a country that was seen as a basket case economically in the 80’s the impact of the Brazilian economy is going to be much greater than great swimwear and iron ore.


G8: Could the Solution to Growth be Simpler Taxes?

[caption id="attachment_587" align="alignright" width="275" caption="Allister Heath"][/caption]

There has been much talk of the need for growth at the G8 meeting. Could it be that the solution is really quite simple? A recent 400-page report from economists and company directors called for a move from what it described as Britain’s “extraordinarily complex and punitive” tax system to be replaced with a simple 30% flat rate of income tax with a £10,000 personal allowance.  The 2020 Tax commission said the single income tax would allow workers to keep thousands of pounds to spend on the high street. The Chairman of the commission Allister Heath said “a single, much more reasonable” tax could transform economic prospects. They are urging the UK finance minister George Osborne to take the report seriously.

Heath said “It is time for Britain to make a vital choice between tweaking the status quo and letting our economy continue to be crippled by complex and punitive taxes, and drastically changing course with a radical but realistic plan for a tax system for the 21st century”.

Under the plan corporation and capital gains tax would be replaced with a 30% tax on dividends, interest and rent. Inheritance tax and stamp duty on shares would be scrapped altogether.

Politicians should take note; the commission (a joint project between the Institute of Directors and the TaxPayers Alliance) claim their proposals would establish the UK as a global trading hub. Maybe simplifying the overly complex tax systems across Europe is the real long term answer to the European financial crisis. There is no doubting European economies need a kick start and there is much talk of creating an environment where the private sector can take up the slack caused by austerity programmes. Would simplifying the taxation system help drive this much needed growth?

Given its remarkable successes, Hong Kong's tax system tends to support the case for a flat tax. More particularly, the history of Hong Kong's tax system suggests that it is possible to design a flat tax in such a way that it enjoys very broad popular support; but that a flat tax might be feasible only at low level of public spending. It also suggests, however, that a low level of public spending might be politically acceptable if paid for by a flat tax which has very generous allowances and which therefore concentrates the burden on the affluent through a simple and sustainable system .

Well it seems to have served Hong Kong rather well and the Hong Kong tax system has one major advantage over even the most elegant theoretical alternatives. It has been tested for more than 50 years. It works.


The OECD Believes That the Eurozone Crisis is the Largest Single Threat to the Global Economy

[caption id="attachment_592" align="alignright" width="300" caption="Pier Carlo Padoan"][/caption]

The 17 nations that use the euro will see their economies shrink 0.1% this year, before showing weak growth of 0.9% next year, the OECD predicts.

This compares with 2.4% growth in the US economy this year, with 2.6% predicted for 2013.

The OECD also backed calls from some Europeans to combine cuts in spending with measures to boost growth.

"The crisis in the Eurozone remains the single biggest downside risk facing the global outlook," commented OECD chief economist Pier Carlo Padoan.

Late last year, the organisation predicted a "deep recession with large negative effects for the global economy" if the Eurozone did not tackle the crisis.

On Tuesday, it said: "The immediate dangers of such developments have receded somewhat since last autumn, although the dangers have not disappeared.

"Failure to act today could lead to a worsening of the European crisis and spill-overs beyond the Eurozone, with serious implications for the global economy."

'Growth-friendly'

The OECD seems to be backing calls from the new French president to pass measures such as "increasing European Investment Bank funding for infrastructure projects".

They also said that "better use" could be made of the European Central Bank's balance sheets and called for "a further easing in the euro area".

"Fiscal consolidation and structural measures must proceed hand in hand, to make the adjustment process as growth-friendly as possible," the OECD said.

The jobless rate is currently 10.9%, the maximum since the euro was formed in 1999. With further increases predicted in the jobless total this is likely to fuel the backlashes against austerity.

"Elections in a number of euro-area countries have signalled that reform fatigue is increasing and tolerance for fiscal adjustment may be reaching a limit," said OECD chief economist Pier Carlo Padoan.

"Rising unemployment and social pain may spark political contagion and adverse market reaction", with countries outside the euro also at risk of being hit, he added.

The OECD is an organisation that consists of 34 countries, including the US and Western European nations.


Colombia Comes Together to Overcome Its Past

Bogotá Skyline at Night

Maybe the Greeks could learn a thing or two from the Colombians.

The change in Colombia over the past ten years is remarkable. Financially Colombia was the "Greece" in Latin America. Its debt was classified as "junk bonds" by the rating agencies but Colombia did not just face economic problems, drug financed guerrilla forces controlled vast areas of the country.

Young people were leaving in droves and they did not just face Colombia’s economic problems.  Kidnapping was a daily occurrence, nobody dared to go by road from Bogota to Medellin - a journey of less than 150 miles. The murder rate was the highest in the world, including nations at war: 76 per 100,000 inhabitants.

The turning point took place in October 2002 when the newly elected President Alvaro Uribe left the three main guerrilla groups including the FARC in no doubt that he was serious about enforcing state authority.

He authorised Operation Orion and retook control of a neighbourhood in Medellin, 3,000 troops backed by tanks and helicopters took part and after five days of fighting the army has retaken the neighbourhood and the tide had turned. The US poured in $6 billion in money, training and equipment and the popular president now had the tools to win not just the battle but the war. The murder rate is now less than a third of the figure in 2000 and kidnapping rates have dropped by over 90%.

The challenges faced by the economy were no less daunting but the results have been every bit as impressive as the improvements in crime figures.  Public debt is now classified as “investment grade”. Colombia is the only Latin American country not to have asked to renegotiate its debt over the past century. Bogota have never engaged in Keynesian solutions but has relied on consensus within the population and leaders for liberal policies that have unbridled private investment.

This recovery has not led to a social crisis, quite the contrary. The proportion of poor people surviving on less than $ 2 a day fell from 50% to 37% in ten years and unemployment, which hit a fifth of the population, was halved

Alvaro Uribe, President of Colombia 2002-2010, who turned the economic fortunes around by insisting on law and order

The oldest democracy in Latin America is now a favourite for investors; a position that will only improve after the free trade agreement with Washington came into force on the 15th May, after five years of procrastination and 14 refusal from Congress! The European Union are expected to ratify a similar agreement later this year.

The GDP per capita has risen from just over $2000 ten years ago to over $7000 allowing Colombia to apply for membership of the OECD.

Business has not only been benefiting from the improved stability and economic outlook but they have been actively helping Colombia achieve this transformation. Many Colombian companies take their CSR activities very seriously. Pacific Rubiales Energy Corp, the largest independent gas and oil exploration and Production Company in Colombia, for example have built an excellent Social programme that not only provides funding for projects but actively engages staff in supporting their efforts. Colombians are starting taking to take real pride in their countries future.

There are still problems that need to be overcome. The taxation system needs reforming, infrastructure is desperately needed, wealth needs to be dispersed more effectively and crime is still an issue but the overall outlook is very positive and if the number of tourist visiting Colombia each year is anything to go by its not just Colombians who are optimistic.


Brazil Has Reason to be Proud of First-Tier Banks

[caption id="attachment_644" align="alignright" width="143" caption="Wilson Roberto Levorato, Executive Vice President, FEBRABAN"][/caption]

Reported by Marcos dos Santos.

After a period of tension between the banking sector and the Brazilian government, the Executive Vice President of FEBRABAN (Brazilian Federation of Banks), Wilson Roberto Levorato, said recently, during a seminar of financial inclusion in Brasilia that Brazil "is the cue ball."

"Today Brazil is the star of all the (international) participants. We have changes in income distribution, a violent reduction of unemployment and the inclusion of 63 million Brazilians who has begun to consume," he said. "We have had a change of the Brazilian reality," he added.

He also pointed out that the network of banking services has grown by 50% in recent years, and that the number of correspondent banks have recently increased by more than 67%. "Brazil was the country of football, but today is the country of first-tier banks," he said. "Brazil has to be proud of their banks."

Levorato also praised the work of the Central Bank as regulator. "We need better banking regulation in the world. However, Brazil were not directly affected by any sub-prime crisis," he said.

Maybe there are a few things financial regulators around the world could learn from Brazil.


Increased Interest in Poland as a Destination for FDI

Warsaw, Capital of Poland

Despite the global economic crisis 2011 proved a strong year for foreign investments in Poland – projects concluded with participation of Polish Information and Foreign Investment Agency in 2011 grew to 173% of 2010 value

There are some very compelling reasons for this rise these include a stable democracy, strong state and regional support for investments, highly skilled work-force, reasonable costs, a well-established market economy, close and good relationships with other countries from the region and active involvement in the EU, WTO and NATO. There is no question that Poland is the economic and political leader in Central and Eastern Europe. It is a trustworthy and reliable partner for international business. All of these factors contribute to a positive, investor-friendly climate in Poland.

The strong internal economy and not being in the Eurozone had given the Polish government the additional flexibility needed to ensure the Polish economy is well protected against economic shocks. This is part of the reason for Poland being ranked as the 6th best country in the world for FDI by UNCTAD.

Poland’s location, at the centre of Europe, enables enterprises targeting both Western and Eastern part of the continent to do so in a strategic and efficient manner. With four major ports located on the Black Sea international import and export is reasonable and efficient.

The domestic market continues to go from strength to strength and confidence is high demonstrated by a rise in consumer spending of 15% from 2010 to 2011.

GDP was up 4.3%, well above the EC average of 1.5%. Poland is one of the larger EU member states, the 6th most populated country in the Union and the largest market in the region of Central and Eastern Europe. The Polish market is not only large and diverse but it is far more dynamic than other markets in the region. The Polish economy has proved robust enough to not just survive the storm of the first wave of the financial crisis but has thrived over the past few years.

Poland has proven the inherent stability of its economy during the on-going financial crisis and now, as the crisis continues, offer Europe a product which has been lately in short supply - economic stability. Companies which until recently have not made Poland a priority are now to take serious interest in the Polish market.

The view that Poland is a European hotspot for FDI is backed by a recent Ernst & Young report concerning the European investment attractiveness. The report puts Poland is at the forefront of the most attractive investment destinations in Europe.

“Poland: Another strong performer, Poland experienced a rapid rise of 40% in the number of FDI projects that it attracted. This resulted in a rise in Poland’s market share of job creation from 6% in 2009 to 9% in 2010. Poland has attracted investors in automotive (12%) and business services (8%). With strong economic growth prospects, low costs and growing numbers of consumers, Poland is a very attractive investment destination for industrial companies looking to locate in Europe.”

Source: Ernst & Young, European Attractiveness Survey 2011

Poland look set to continue to benefit from the uncertainties facing Europe hopefully the European Cup this year will put a new spotlight on Poland progress.


Share Trading Suspended in the Spanish Lender Bankia, Pushing Spain Ever Closer to Needing a Bailout

[caption id="attachment_662" align="alignright" width="300" caption="Bankia Headquarters. Picture: The Guardian"][/caption]

The Spanish market regulator CNMV said it was "due to circumstances that may affect the normal share trading".

There are reports that Bankia will ask the government for a bailout of more than 15bn euros ($19bn; £12bn) after a board meeting later on Friday.

Bankia, is Spain's fourth-largest bank, was semi-nationalised two weeks ago because of its problems with bad property debt.

The Spanish government has already put in 4.5bn euros in state loans that the government converted into shares in the group in the part-nationalisation process.

Bankia's parent company Banco Financiero y de Ahorros (BFA) has also had its shares suspended.

Bankia was created in 2010 from the merger of seven struggling regional savings banks.

It holds 32bn euros in distressed property assets.

The viability of Spain's banking system is key to whether the country eventually needs to seek a bailout itself from the eurozone and the IMF.


MEED Quality Awards for Projects 2012 Announced

[caption id="attachment_672" align="alignright" width="300"] Sheikh Sultan Bin Tahnoon Al Nahyan honoured with Outstanding Achievement of the Year Award[/caption]

The high standard of nominees and winners for MEED Quality award for Projects 2012 is a testament to the standard of projects taking place in the GCC.

UAE leads winners at MEED Quality Awards for Projects with four regional awards.

Abu Dhabi, UAE; 24 May 2012 – MEED Quality Awards for Projects 2012, in association with Ernst & Young, has announced the winners of its annual search for the region’s best projects.

The UAE led the region with four awards, including Industrial Project of the Year for Emirates Aluminium Smelter Complex, Transport Project of the Year for the Road and Transport Authority’s Dubai Metro Green Line, Metito Social Project of the Year for Abu Dhabi Tourism Development & Investment Company’s Saadiyat Construction Village, and the Emirates Steel Building Project of the Year for Damac’s Ocean Heights.

The highly coveted MEED Quality Project of the Year Award, in association with Ernst & Young, went to Qatar Petroleum and Qatar Shell’s Pearl GTL joint venture project which also won the HLG Leighton Contracting Oil & Gas Project of the Year honours.

The other GCC winners include Saudi Electricity Company’s Riyadh Power Plant #10 in the Power & Water Desalination Project of the Year category; Kuwait Ministry of Public Works Sanitary Engineering Department’s Pumping Station and Waste Water Treatment Plant which won the Water Reuse Project of the Year Award; Petroleum Development Oman’s NIMR Produced Water Treatment Project, winner of the KIMMCO Sustainable Project of the Year award; and the Royal Court Affairs’ Royal Opera House, Oman and Qatar’s Extension to the Qatar National Convention Centre and Link Bridge, joint winners of the Leisure and Tourism Project of the Year award.

“After a rigorous screening and judging process, our esteemed panel of judges has finally chosen the region’s best projects, which stood out from the hundreds nominated to this year’s edition of the MEED Quality Awards for Projects. We salute them for their outstanding achievements in design, engineering and construction, as well as for the economic, social and environmental contributions of their respective projects,” said Edmund O’Sullivan, chairman of the judging panel of the MEED Quality Awards for Projects, in association with Ernst & Young.

MEED Quality Awards for Projects, in association with Ernst & Young, also recognised two outstanding individuals for their contributions to raising quality benchmarks in the projects industry in the region. The MEED Editor’s Outstanding Achievement of the Year was awarded to His Excellency Sheikh Sultan Bin Tahnoon Al Nahyan, Chairman of Abu Dhabi’s Tourism Development & Investment Company; and the MEED Editor’s Award for Leadership was given to His Excellency Majed Ali Al Mansouri, Chairman of the Abu Dhabi’s Department of Municipal Affairs.

Abraham Akkawi, Partner and Head of Infrastructure and PPP Advisory Services, MENA, Ernst & Young, congratulated the winners and commended the MEED Quality Awards for Projects organizers for inspiring projects stakeholders across the region to aspire for excellence in quality. “It is important to recognize quality achievements in the projects industry because of the tremendous economic, social and environmental impact that they have on the GCC as a whole. We commend the winners for ensuring strict adherence to the highest quality standards and may their outstanding practice be an inspiration for others.”

In addition to headline sponsor Ernst & Young, as well as category sponsors Metito, KIMMCO, HLG Leighton Contracting and Emirates Steel; reception Sponsor, Consolidated Contractors Company (CCC); and Official Carrier, Cadillac, the MEED Quality Awards for Projects 2012 is endorsed by the Society of Engineers in Bahrain, Kuwait, Qatar, Oman and the UAE.

About MEED Quality Awards for Projects 2012, in association with Ernst & Young

For a second year, MEED, the leading supplier of business intelligence in the Middle East, will celebrate the amazing success of the projects sector in the GCC at the MEED Quality Awards for Projects 2012. The awards aim to raise standards through benchmarking best practice specified in the project brief and excellence provided in the project delivery. Winning an award will send a message to the market that quality is essential in all parts of the project management process; from design planning to engineering and construction. The 5 criteria are economic impacts, environmental considerations, engineering, design and construction challenges.

About Ernst & Young

Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 152,000 people are united by our shared values and an unwavering commitment to quality. The MENA practice of Ernst & Young has been operating in the region since 1923.  For over 88 years, we have evolved to meet the legal and commercial developments of the region. Across the Middle East, we have over 4,200 people united across 20 offices and 15 Arab countries, sharing the same values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. For more information, please visit www.ey.com/mena

For media inquiries and assistance, please contact:
Anthon Garcia
PR Consultant, MEED Quality Awards for Projects 2012
M: +97150.1398661
E: anthongarcia@yahoo.com


Ugandan Oil PLC is Off the Starting Blocks

[caption id="attachment_683" align="alignright" width="300" caption="Fishermen near an oil rig on the edge of Lake Albert. Photograph: Xan Rice for Guardian"][/caption]

It looks like Uganda and some of the oil companies involved are finally about to reap the rewards that will help transform the Ugandan Economy and some of the companies involved.

Investors have been given the go-ahead to tap into Uganda's oil. The long wait has exposed two sides to the emerging oil industry. This can be clearly seen in Kampala, the new gated compounds in areas such as Kololo are filling up with expat oil workers from the global oil companies with their modern office blocks now croping up along the Yusuf Lule Road. Take a trip downtown and it's a  very different story. The Ministry of Energy and Mineral Development sits in a drab rundown building and it’s from this uninspiring building that the fledgling industry will be managed .

The contrast between the two speaks volumes. Uganda's reserves are not as large as Nigeria's or Angola's, but there is more than enough oil  to have sparked a fresh oil rush making Uganda a test case for the wider region.

Companies are cooperating, Tullow Oil  a London listed company signed two production-sharing agreements (PSAs) with the government, allowing it to complete a deal  with China's state-owned oil group CNOOC and the French oil major Total. The deal, was meant to complete a year ago has opened the door to allow production to start.

The agreement is in line with a wider strategy for Tullow, to graduate from an explorer to oil producer. The combined investment will bring $10bn to the East African country.

The process has not been straight forward, but one should remember this agreement is the first in a country with no record of oil production. But maybe the time taken and the delays bodes well for Uganda and the companies involved. Last October Uganda's parliament voted to delay the completion of the deal until new oil laws were in place - something that would never have happened five years ago when President Museveni, who has lead Uganda for 26years had effectively absolute power. Now, a cohort of new and younger MPs voted in during last year's elections - when 'M7', as he is known, won another term - are challenging the status quo. A cross-party consensus, encouraged by a group of increasingly confident civil society groups, has rallied against the lack of transparency in the oil sector.

New laws dealing with exploration and revenue management are still not in place.However previously there had been an oil sector without accountability. Now MPs are having direct involvement in this sector.

Although the scrutiny from Parliament will almost certainly slow “progress” down, it is the best way to assure future investors that they will have a solid footing in Uganda. As new institutions and laws dedicated to the oil sector are bought in. The minister of energy and mineral development, Irene Muloni, was quoted as saying "Parliament is just doing its work. I don't see the risk; it doesn't prohibit any local or international investors coming to Uganda."

Oil is one of the main topics of conversation in Uganda and many hope that it will be a game-changer. There is a general mood of optimism and although in some ways the fledgling industry has got off to a difficult start one has to remember it is in everybody’s interest to make it work. Of course starting to develop its oil sector has all the challenges of building an industry from scratch. But the rewards are so rich for the oil companies, rushing to a region seen as one of the world's last unexplored frontiers, that a tough investor climate is a small price to pay and patience and understanding how to navigate the local climate is accepted as part of the course. Oil service giants such as Halliburton, Weatherford and Schlumberger that have already 'manned-up' by putting people on the ground can now ramp up their presence in earnest.

There is still an enormous amount of work to do not just in Uganda but the East African region as a whole. The political debate that has started in Uganda bodes well for the increased levels of transparency that will help attract investments. The level of investment required is huge, it is not just a question of extraction, for a landlocked country like Uganda refining for the local fast growing markets seems a natural path.

It's an opportunity that could transform Uganda and the region forever not just economically but politically as well.


Europe’s Depressing Prospects

By Michael Pettis

Normally I don’t like to write about European prospects in the midst of a very rough patch in the market because in that case there isn’t much I can say that isn’t already being said.  I find it more useful to wait for those recurring periods in which the markets recover and optimism rises.  Still, given the conjunction of political uncertainty in Beijing, low Chinese growth numbers, and another round of deteriorating circumstances in Europe, I will spend most of this issue of the newsletter trying to outline the possible paths countries like Spain must face.

For several years I have been saying that Spain would leave the euro and restructure its external debt.  I should say that I specify Spain because it is the country in which I was born and grew up, and so it is also the country I know best.  When I say Spain, however, I really mean all the peripheral European countries that, like Spain, are uncompetitive, have high debt levels, and suffer from low savings rates that had been forced down in the past decade to dangerous levels.

Spain had a stronger fiscal position and healthier bank balance sheets than many of its peers when the crisis began, so any argument that applies to Spain is likely to apply more forcefully to its peers.  As an aside I will add that France is for me the dividing line between countries that will be forced into devaluation and restructuring and those that won’t – in my opinion France could go either way and we will get a much better sense of this in the first year of Hollande’s presidency.

There are two reasons why I was and am fairly sure that Spain cannot stay in the euro (or, which amounts to the same thing, that Germany will leave the euro instead of Spain).  The first has to do with the logic of Spain’s balance of payments position, and the second has to do with the internal dynamics that drive the process of financial crisis.

To address the first, I would start by noting that thanks to excessively loose monetary policies driven primarily by German needs over the past decade, Spain has made itself wholly uncompetitive in the global markets and in so doing has run large current account deficits for nearly the entire past decade.  Its fundamental problem, in other words, has been the process by which its savings rate has collapsed, its cost structure forced up, its debt levels soared, and a great deal of investment directed into projects, mostly real estate, that were not economically viable.  As I have discussed often enough in previous issues of this newsletter, I think all of these problems are related and are the automatic consequences of the same set of policy distortions implemented in Spain and in Germany.

"Germany has a potentially huge debt problem on its balance sheet"

Until Spain reverses its savings and consumption balance and drives down its current account deficit into surplus, which is what a reversal of these distortions would imply, it should be pretty clear that Spain will continue struggling with growth and will continue to see debt levels rise unsustainably.  But the balance of payments mechanism imposes pretty clear constraints on the process of adjustment.  In that sense there are really only three ways Spain can regain competitiveness sufficiently to raise savings and reverse the current account:

Germany and the other core countries can take steps to reverse the policies that led to the European crisis.  They can cut consumption and income taxes sharply in order to reduce domestic savings and increase domestic consumption.  These would lead to a reversal of the German trade surpluses and higher inflation in Germany, the combination of which would allow Spain to reverse its trade deficit and regain competitiveness via lower inflation relative to that of Germany and a weaker euro.

Spain can force austerity and tolerate high unemployment for many more years as wages are slowly pushed down and pricing excesses are ground away.  It can also take measures to reduce costs by making it easier to start businesses, reducing business taxes, and by improving infrastructure, but these latter provide too little relief except over a very long period, especially given the difficulty Spain will face in financing infrastructure and reducing taxes.

Spain can leave the euro and devalue.  This would leave it with a problem of euro-denominated debt, whose value would soar relative to GDP denominated in a weakening currency.  In that case Spain would almost certainly be forced to halt debt payments and restructure its debt.

I want to stress that these are, practically speaking, the only three ways for Spain to regain competitiveness.  There are other ways that could in theory also work, but they are too unlikely to consider.  One could assume for example that the rest of the non-European world – most importantly the US, China and Japan – take steps to stimulate their domestic economies sufficiently to force up consumption and run in the aggregate large and growing trade deficits.  These deficits, whose counterpart would be a very large European trade surplus, would then bail out the whole eurozone by generating GDP growth rates that exceed the debt refinancing rates.

I think most of my readers will however agree that this is pretty unlikely. The rest of the world is also struggling with growth and in no hurry to run large trade deficits.  Another possibility is that we suddenly see a rapid and dramatic move towards full fiscal union in Europe, in which sovereignty, for all practical purposes, is fully transferred to Brussels (or Berlin).  But that probably won’t happen either – the rise of nationalism throughout Europe has made this always-unlikely prospect even less likely.

So we are left largely with these three ways of allowing Spain to regain a cost structure that makes it competitive and allows it to amortize its debt while growing.  Anyone who rules out two of the three ways listed above must automatically imply that Spain will follow the third way.  So which will it be?

[caption id="attachment_697" align="aligncenter" width="460"] Euro Cracking: Telegraph[/caption]

Humpty Dumpty economics

The first way is for Germany to reverse its surplus and begin running large deficits.  This is by far the best way, but I think it is very unlikely.  Berlin has made no indication that it is prepared to do what would be necessary for it to run large deficits and, on the contrary, it is even talking about the need for more austerity.

In part this is because Germany has a potentially huge debt problem on its balance sheet.  As a consequence of its consumption-repressing policies during the decade before the crisis, Germany’s domestic savings rate was forced up to much higher than it otherwise would have been and Germany has had to export the excess capital.  Not surprisingly, given European monetary dynamics, this capital has been exported largely to the rest of Europe in order to fund the current account deficits of peripheral Europe that corresponded to the surpluses Germany so badly needed to grow.

It did this not by accumulating euro reserves, which it could not do anyway, but rather by accumulating loans to peripheral Europe through the banking system.  As a result of all of these loans, Germany is rightly terrified that a wave of defaults in Europe will cause its own banking system to require a state bailout if it is not to collapse, and so it does not want to cut taxes and reduce savings because it believes (wrongly) that austerity will make it easier to protect its creditworthiness.

But German’s anti-consumption policies are leading it towards a debt problem in the same way that similar US policies in the late 1920s created an American debt crisis during the next decade.  In that light I thought this very illuminating quote from then-presidential candidate Franklin Delano Roosevelt might be apposite:

   A puzzled, somewhat skeptical Alice asked the Republican leadership some simple questions:

   “Will not the printing and selling of more stocks and bonds the building of new plants and the increase of efficiency produce more goods than we can buy?”

   “No,” shouted Humpty Dumpty, “the more we produce the more we can buy.”

   “What if we produce a surplus?”

   “Oh, we can sell it to foreign consumers.”

   “How can the foreigners pay for it?”

   “Why, we will lend them the money.”

   “I see,” said little Alice, “they will buy our surplus with our money.  Of course these foreigners will pay us back by selling us their goods.”

   “Oh not at all, “said Humpty Dumpty.  “We set up a high wall called the tariff.”

   “And,” said Alice at last, “how will the foreigners pay off these loans?”

   “That is easy, said Humpty Dumpty. “Did you ever hear of a moratorium?”

   And so alas, my friends, we have reached the heart of the magic formula of 1928.

Humpty Dumpty’s grasp of the balance of payments, it turns out, is no more naïve than that of many European policymakers, and I suppose Germany will follow the historical precedent set by the US – and so many other countries that confuse trade surpluses with moral vigor.  By refusing to take steps that seem on the surface to undermine its creditworthiness, Berlin will only ensure the debt moratorium that will probably demolish its creditworthiness anyway.

And of course without a major reversal of German’s current account position the balance of payments constraint absolutely prevents net repayments from peripheral Europe.  This game will go on as long as the core countries continue financing the periphery, but once they finally stop, the peripheral countries will almost certainly default or restructure their debt.

To take a brief detour before returning to discussing the three paths Spain can take, I think Berlin is betting that if they can prolong the crisis long enough, while pretending that the problem is one of liquidity, not solvency, they can recapitalize the German (and other European) banks to the point where they eventually are able to recognize the obvious and take the losses.  This was, after all, the strategy followed by the US during the LDC Crisis of the 1980s, when it waited until 1989, seven or eight years after the crisis began, to arrange the first formal debt forgiveness (the Mexican Brady Bond).  During that time a steep yield curve engineered by the Fed allowed the US banks to earn sufficient profits to recapitalize themselves to the point where they could finally formally recognize what had long been obvious.

There are at least two reasons however why this strategy won’t work for the European banks.  First, the hole in the European banks’ balance sheets dwarves the equivalent hole in the balance sheets of the American banks during the LDC crisis.  It would take them much longer then seven or eight years to fix the problem.

Second, postponing resolution of the debt crisis is extremely painful for the debtor countries, who have to bear the full brunt of the adjustment that both debtor and creditor countries really need to make together.  This reduces maneuvering space for Europe because the political system in Europe is less able than that of Latin America during the 1980s to accommodate this very painful process.  Well-functioning democracies, after all, make it harder for bankers and elites to force the cost of the adjustment onto the middle and working classes.

Can Spain adjust by itself?

This is also the reason why Spain cannot follow the second of the three paths described above.  The second path requires that Spain bear the full brunt of the economic adjustment, which in reality Spain and Germany should bear together.  Spanish voters, however, will not permit (and rightly so) that Madrid force such economic pain on its citizens in the name of an ideal of “responsible behavior” (i.e. remaining within the euro) that is both mistaken and extremely painful.

The adjustment will require that Spanish wages and prices are forced down substantially until Spain can reverse the higher price differential relative to Germany from which it suffers. Figuring out how to do this is not very hard – we have plenty of historical precedents upon which to draw.  To simplify substantially, there are basically two things that have to happen in order to force a relative decline in prices.  First, unemployment must remain very high for many years so that wages either decline, or rise by less than inflation and relative productivity growth.  This is pretty straightforward.

Second, there must be some way to deal with the real increase in the domestic debt burden.  Why?  Because there are two ways relative prices can be forced down, and both of these result in a real increase in the debt burden.  First, high inflation in Germany can exceed lower Spanish inflation, and second, Spain can deflate.  In both cases the real cost of debt must increase substantially – in the former case because high German inflation will force up euro interest rates so that Spain’s refinancing cost will exceed its domestic growth rate, and in the latter case because deflation automatically increases the real debt burden.

How will we deal with the rising debt burden?  Typically we do so by confiscating the wealth of small and medium enterprises or by confiscating the savings of the middle classes, and usually we do both.

So for Spain to adjust we need both very high unemployment for many years and we need to undermine the middle classes.  Any policy that requires an enormous and unfair burden on both the workers and the middle classes is unlikely to be rewarded at the polling booths.

The huge unpopularity of the newly elected Prime Minister Mariano Rajoy, in that context, should not be a surprise.  I wrote last year just after the election that this would happen, although I thought it would take a year or two before the population really turned on him and made it impossible for him to govern.  But Spaniards, from business leaders down to workers, are furious at the Rajoy government and this anger will continue until either the two major parties eject those of their leaders who continue to demand that Spain behave in a “responsible” way, or harder line extremist parties replace the two parties themselves.

I place the word “responsible” in quotation marks not because I am opposed to responsible behavior but rather because the attempt to tighten the budget and impose austerity in the name of remaining on the euro is being presented as the “responsible” thing to do.  It is, however, no more responsible than the policies France used in the 1920s to revalue the franc to pre-War parity, which were also sold to the French public as the “responsible” thing to do.

In both cases (and in many other deluded attempts to protect hopelessly overvalued currencies underpinned by rising eternal debt), policymakers did not understand that their policies were guaranteed to fail and were based on a misunderstanding of the causes of the underlying crisis.  The responsible thing to do is to acknowledge that the euro is indefensible and that Germany’s refusal to share the adjustment burden, after it absorbed most of the benefits of the mismanaged monetary position it imposed on the rest of Europe, means that Spain will be forced to take on far more than its share of the cost.

But whether or not everyone agrees with my analysis of what really is “responsible” behavior, I think it most people will agree that, rightly or wrongly, Spanish voters are unlikely to accept high unemployment and an assault of middle class savings for many years without rebelling at the polls.  Spain simply cannot accept the full burden of adjustment.

This means that the first two of the three paths I listed above cannot be followed.  If I am right, we are automatically left with the third.  Spain (and by extension many other countries) must leave the euro.  It will be very painful and chaotic for them to abandon the euro, but the sooner they do it the less painful it will be.

The death spiral

I said at the beginning of this newsletter that there were two reasons why I was certain Spain would leave the euro, the first of which has to do with the logic of Spain’s balance of payments position and the second with the internal dynamics that drive the process of financial crisis why I was certain that Spain would leave the euro.  To address the second, I think Spain will leave the euro because it seems to me that the country has already started on the self-reinforcing downward spiral that leads to a crisis, and there is no one big enough to reverse the spiral.

How does this process work?  It turns out that it is pretty straightforward, and occurs during every one of the sovereign financial crises we have seen in modern history.  When a sufficient level of doubt arises about sovereign credibility, all the major economic stakeholders in that country begin to change their behavior in ways that exacerbate the problem of credibility.

Of course as credibility is eroded, this further exacerbates the behavior of these stakeholders.  In that case bankruptcy comes, as Hemingway is reported to have said, at first slowly, and then all of a sudden, as the country moves slowly at first and then rapidly towards a breakdown in its debt capacity.

What is key to understanding the process is to see that stakeholders will behave for perfectly rational reasons in ways that politicians and moralists will decry as wholly irrational.  Rather however than respond to appeals that they stop behaving irrationally, stakeholders will continue making conditions worse by their behavior as they respond the distorted incentives created by the erosion of sovereign credibility.  To do otherwise would almost surely expose them to disaster.

To summarize what the self-destructive and automatic behavior of the stakeholders is likely to be, it is worth identifying some of the major stakeholders and to suggest how they typically react to a rise in the sovereign’s default risk:

Private creditors.  As Spain’s credibility deteriorates, private creditors will demand higher yields on their loans to Spain even as they change the form of their lending to reduce their own risk, for example by shortening maturities.  This has a double impact on making conditions worse.  First, higher interest rates mean that debt rises more quickly than it otherwise would.  Second, shorter maturities and other changes in the loan structure mean greater balance sheet fragility and a rising probability of default.

Official lenders.  As they are forced into providing liquidity facilities, official creditors typically demand and receive seniority.  This of course increases the riskiness for other lenders and creditors by pushing risk downwards, and so worsens balance sheet fragility and increases private sector reluctance to lend.

Depositors.  As the probability rises that Spain will leave the euro, and that bank deposits will be frozen and redenominated in the weaker currency before any abandonment of the euro is announced, depositors respond rationally by taking money out of the banking system.  As they do, banks are forced to contract lending, to increase balance sheet liquidity, and to reduce risk, all of which act as a drag on economic growth.

Workers.  Rising unemployment and the prospects for an unequal sharing of the burden of adjustment cause unions to become increasingly militant and to engage more often in various forms of industrial action, which, by raising uncertainty and costs for businesses, force them to cut output and employment.

Small and medium businesses.  One of the sectors most likely to be penalized in a debt crisis is the small and medium enterprise sector.  Owners of small and medium businesses know that they are vulnerable during a crisis to an expropriation of their wealth through taxes, price and wage controls, and other forms of indirect expropriation.  They try to forestall this by disinvesting, cutting back on expenses, and taking money out of the country.

Political leaders.  As time horizons shorten and politics becomes increasingly radicalized, policymakers shift their behavior in ways that reduce credibility further, increase business uncertainty, and raise national antagonisms.

It is important to recognize the almost wholly mechanical nature of credit deterioration once a country is caught in this kind of spiral.  Deteriorating creditworthiness forces stakeholders to adjust.  Their adjustment causes debt to rise and/or growth to slow, thus eroding creditworthiness further.

The combination of these and other actions by stakeholders, in other words, can’t help but reduce GDP growth, increase debt, and increase the fragility of the balance sheet, all of which of course undermines credibility further, so reinforcing the suboptimal behavior of stakeholders.  All of the exhortations by politicians, the church, public intellectuals, bankers, etc. – and there will be many – that stakeholders put personal self-interest aside and act in the best interests of the nation will be useless.  Slowing this behavior is not enough.  It must be reversed.

But how can it be reversed?  No one is big enough credibly to guarantee the creditworthiness of all the afflicted countries, and without a credible guarantee the downward spiral will occur, more or less quickly, until it is clearly unstoppable.

Only connect…

It is pretty clear that all of this is already happening in Spain and it is also pretty clear that every few months when the government announces the latest batch of economic and debt data, these numbers always turn out to be worse than expected and much worse than originally projected, which is, ironically, exactly what we should expect under the circumstances.  Here is an article from Saturday’s Financial Timesthat shows just how bad it is:

Nearly one Spaniard in four is unemployed, according to data released on Friday, as the country’s economic and financial predicament prompted a government minister to talk of a “crisis of enormous proportions”.  The data from the National Statistics Institute showed 367,000 people lost their jobs in the first three months of the year. That means more than 5.6m Spaniards or 24.4 per cent of the workforce are unemployed, close to a record high set in 1994.

The data, which follow a sovereign credit rating downgrade, prompted José Manuel García-Margallo, foreign minister, to say that they were “terrible for everyone and terrible for the government”.  He compared the European Union to the doomed liner Titanic, saying that passengers would be saved only if all worked together to find a solution.

It is interesting that Garcia-Magallo is openly discussing the possibility of the “passengers” not being saved.  Usually in the beginning of a sovereign debt crisis we spend an unfortunately long time in which policymakers insist that the market is overreacting to bad news and that the problem – inevitably a short-term problem driven largely by illiquidity – can be resolved with patience and hard work.  There is no discussion of contingency plans because the contingency is unimaginable.

At some point however it becomes possible at least to acknowledge formally that policymakers might be forced into the contingency.  Once this happens, the debate becomes much more intelligent and the resolution of the crisis is speeded up.  I have no idea if we have reached that stage in Spain, but in that light I found an articlelast month, by Ambrose Evans-Pritchard of the Telegraph, both very worrying and, at the same time, comforting.  In the article he says:

Articles calling for Spain to withdraw from EMU – or at least exploring the idea – are no longer rare. They are appearing every day.

…What is striking is the response on the comment threads of such pieces. My impression over the last month is that a large bloc of informed Spanish opinion has reached the conclusion that EMU is dysfunctional, and increasingly destructive for Spain. Many posters seem extremely well-informed, using terminology such as “debt-traps”, “internal devaluations”, and “relative unit labour costs”.

Many point the finger directly at Germany, correctly stating that Berlin seems to think it can lock in a current account surplus with Club Med in perpetuity. Clearly, such as an arrangement is mathematically impossible within a currency union – unless Germany is willing to offset the surplus with flows of money for ever, either through fiscal transfers or loans or investment. These flows have been cut off.

Opinion is divided, of course. The pro-euro camp is still a majority. But the smothering conformity of past years has been obliterated.

As recently as six months ago one didn’t discuss in polite company in Madrid the possibility that Spain would leave the euro and restructure its debt.  The prospect was unthinkable and like many unthinkable things it could not be discussed.

This made it very unlikely that anyone except the radical parties of the left or right would be able to control the discussion and of course this was likely to lead to a more disorderly resolution.  But now perhaps things have changed.  If responsible policymakers, advisors, the press, and public intellectuals are indeed discussing and debating the future of the euro now, I am pretty sure that a real and open debate about Spain’s prospects will quickly move the consensus towards abandoning the euro.

And that is why the article is comforting.  The historical precedents suggest that typically policymakers postpone the decision to reverse the monetary straightjacket for as long as they can, and in the process they erect barriers towards such a reversal in the name of shoring up credibility.  These barriers work by increasing the cost of a policy reversal, and the point of this is to improve credibility in investors’ eyes by increasing the cost of “misbehavior” by policymakers.

Mexico did this for example in 1994 when, in order to convince an increasingly skeptical investor base that the central bank would not devalue the peso against the dollar, the Ministry of Finance shifted its domestic borrowing from peso-denominated funding to dollar-denominated funding, which of course would increase the debt-servicing cost of a devaluation for the government.  Unfortunately, when policy is reversed anyway, as was the case in Mexico in 1994, the cost indeed ends up being much higher, and it takes longer for the economy to recover.  In that sense the sooner Spain prepares for an abandonment of the euro the less painful it will be.

But of course it won’t be painless.  Whenever an analyst predicts that Spain will soon leave the euro he is almost always countered by someone who earnestly explains that Spain cannot leave the euro because the process will be too painful.  In 1993-94 of curse we were told that this was why Mexico could not possibly devalue, and in 2000 and 2001 this was why Argentina could not possibly break the currency board. It would have been too painful to devalue.

But of course Mexico and Argentina both did devalue and, yes, it was a very painful experience but they did it because the alternative was worse.  And likewise while it is true that Spain cannot leave the euro without experiencing a very painful process, the point is not that anyone is arguing that Spain should willingly and irrationally choose to endure pain.  Spain will leave the euro because the alternative is worse.

Michael Pettis is a Senior Associate at the Carnegie Endowment for International Peace and a finance professor at Peking University’s Guanghua School of Management, where he specializes in Chinese financial markets. He has taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business.  He is also Chief Strategist at Guosen Securities (HK), a Shenzhen-based investment bank.

Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.

Pettis has been a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.

He can be contacted at michael@pettis.com.


The Euro Crisis Should Distract on Rio+20 Agreement

[caption id="attachment_714" align="alignright" width="300" caption="UN Secretary General, Ban Ki-moon"][/caption]

Much of the world’s attention has been focused on the Euro crisis but this should not be allowed to distract from Rio+20.

Negotiations in the run up to the UN’s sustainable development summit are normally dificult, said UN Secretary General Ban Ki-moon, who is “cautiously optimistic” that an agreement will be reached in Rio de Janeiro later this month.

“This has been a quite difficult negotiating process,” Ban said today. Member states were not able to streamline all the paragraphs in the negotiating text during an extra five-day meeting that concluded on Saturday. “But this is not unusual, multilateral negotiations normally take a long time, it often appears from the outside that no progress is being made until the very last minute of the conference.

Most of the paragraphs have been through extensive discussions and are waiting official approval from heads of state and ministers who will arrive in Rio for the climax of the talks on 20-22 June – 20 years after the original Earth Summit.

The WWF warned that it thinks the talks are facing two outcomes – an agreement so weak it is meaningless, or complete collapse.
“Currently, we are a long way from where we need to be in these negotiations,” said WWF director general Jim Leape. “Heads of state still have a unique opportunity in Rio to set the world on a path to sustainable development – but they need to step up their game dramatically.”

The most recent round of talks in New York split into 19 separate dialogues with internal disagreements on the processes to be followed, according to WWF. “Country positions are still too entrenched and too far apart to provide a meaningful draft agreement for approval by an expected 120 heads of state,” said Leape.

UN member states have identified 26 priority areas, Ban said, such as food security, sustainable energy and water. “It may take time to agree on all 26,” he said, urging countries to come out with their “must haves”. Ban highlighted the need to agree on Sustainable Development Goals, which are a follow-up to the Millennium Development Goals that expire in 2015.

“This is not a treaty negotiation, it’s a political agreement,” Ban said. “For a long time we have tried to consume our way to prosperity ... we need to find a new model.”
It is in the world’s interest that Rio+20 has real impact and if the politicians cannot agree hopefully the increasing efforts of businesses across the globe to act in a sustainable manner will help push the process in the long term.


S&P Surprise Move to Issue Downgrade Warning on India’s Sovereign Debt

Dalal Street

An unforeseen warning by global ratings major S&P on the possibility of India losing its investment grade sovereign rating agitated investor sentiments on Monday, a day that started on a strong note for markets globally after the European leaders agreed to a 100-billion Euro bailout for the Spanish banking system.

The warning that India may be relegated to a junk bond status jolted Dalal Street investors and led to a 225-point fall in the sensex from its intra-day high. However, not everyone sees the warning as negative, institutional players who deal with FIIs, the most influential of the investor groups on the Street, feel the warning could turn out to be positive for the market and the country. "This is a warning to the government to pursue its economic agenda which will lead to faster GDP growth," said Dharmesh Mehta, MD (institutional equity), Enam Securities. "After reading the logic behind S&P's warning, I see this as a positive development for the economy and the market. This would push the government to move faster on reforms, with RBI helping through rate cuts," Mehta said.

Several other top broking house officials and dealers echoed the same view and said for the current week and the next, there are two things that matter the most. First, the Greek elections on Sunday, which is being equated to a referendum to see if its people are willing to be in the Eurozone. And the other one is the monetary policy decision by RBI on Monday.

Expectations are that Greece would leave the currency block, which could be a problem for India as its throws the market into uncharted territory, but given low Indian inflation and lower crude oil prices, RBI would cut rates further, a positive for the market.

Usually, a cut in ratings by a global major leads to outflow of FII money both from the stocks and the bond markets.


African Union Summit Now to Take Place in Ethiopia

[caption id="attachment_733" align="alignright" width="225" caption="Addis Ababa, Capital of Ethiopia"][/caption]

The African Union summit has been moved to the Ethiopian capital after Malawi refused to host the gathering.

Malawi has blocked the attendance of Sudan's President Omar Hassan al-Bashir, who is wanted by the International Criminal Court (ICC). The July meeting will now take place in Addis Ababa.

The AU's Ferdinand Montcho has accused the ICC of interfering in African affairs.

Malawi said it did not want Mr Bashir to attend because he is wanted for genocide and war crimes in Darfur.

However he denies the charges, saying they are politically motivated.

Member states of the ICC - which include Malawi - have a duty to arrest indictees.

"Following the withdrawal of... Malawi to host the 19th AU summit meetings... and after consultations among member states, it has been decided that the 19th summit will be held at the African Union headquarters in Addis Ababa, Ethiopia, on the same dates," the AU said in a statement.

It had asked for the arrest warrant to be deferred and urged Malawi to allow Mr Bashir to attend.

Mr Montcho told the AFP news agency: "This matter of ICC, for me it is nonsense. Every time we want to have a summit they start disturbing us.

"Why should they not let us hold our meeting [without] this cinema, this theatre, this play?"

Donor relations

The ICC's chief prosecutor has called for aid cuts to countries that fail to detain the Sudanese president.

Malawi's President Joyce Banda has said welcoming Mr Bashir to Malawi risked damaging relations with donors.

Malawi recognises the ICC and is keen to ensure that the foreign aid flows that had been restricted after donors accused her predecessor, President Bingu wa Mutharika, of political repression. The former leader died in office in April.

Sudan asked the AU to move the meeting to its headquarters in Addis Ababa after Malawi said Mr Bashir would not be welcome.

Mr al-Bashir, who has been indicted for genocide and crimes against humanity, will see the decision to hold the summit as a diplomatic coup.

Mr Bashir was the first head of state to be indicted by the ICC.


Dimon: Traders at JPMorgan Chase may face Bonus Clawbacks as Punishment

[caption id="attachment_756" align="alignright" width="300"] Jamie Dimon[/caption]

At the Senate Banking Committee on Capitol Hill, Jamie Dimon, 56, the CEO of JPMorgan Chase explained how some of the traders responsible for the losses  would get hit in their wallets.

"When the board finishes its review, which is the appropriate time to make those decisions, you can expect that we will take proper corrective action and it is likely there will be 'clawbacks,' " Dimon told senators.

Sen. Chuck Schumer asked Dimon how the 'clawbacks' -financial jargon for having to kick back cash -would work.

"The board will review every single person involved in this case and figure out what's appropriate," Dimon said.

"The buck stops with me," Dimon told lawmakers.

Un-vetted strategies designed to limit the bank's risk backfired because traders and managers didn't understand the complex new strategies, Dimon explained.

[caption id="attachment_757" align="alignleft" width="150"] Traders at JP Morgan Chase may face bonus clawbacks as punishment for $2bn loss[/caption]

Officially the trading errors cost his bank at least $2 billion, though some estimates put the figure closer to $3 billion.

It is still not known if Dimon himself would face a clawback. JP Morgan's board paid Dimon $23 million in salary and bonuses for his performance in 2011.

Ina Drew, who oversaw the problematic division, got $14 million for 2011.

The bank announced last month that she would retire.

Dimon, who was once a major supporter of President Obama, has broken with the administration over Wall Street reform.

Sen. Robert Menendez (D-N.J.) went after Dimon for lobbying against many of the banking reforms put in place in the wake of the housing crash.

"The American people, after making major investments in your bank and other institutions, are entitled to ensure that they don't have to reach into their pocket again," Menendez said.

Dimon countered that he supported the big-ticket reforms. He noted that poor management - which he blamed for his bank's $2 billion loss - would not be caught by regulations.

[caption id="attachment_760" align="aligncenter" width="460"] Dimon at the World Economis Forum, Davos, 2012[/caption]

Dimon eventually had to apologise for the trading loss.

However all this should be kept in perspective in spite of the loss, JPMorgan Chase recently posted a $19 billion profit.


Barclay’s CEO Bob Diamond Tops the List of High Earners

Bob Diamond, CEO of Barclays

Bob Diamond, the CEO of Barclays Bank, is named as the highest paid CEO of any FTSE 100 listed company in 2011 usingr a new methodology designed to replicate rules being bought in by the government that requires companies to publish one overall figure for executive pay.

Diamond total "realisable remuneration" was £20.9 million, this includes salary and any long-term bonuses that have vested during the year as well as any share options that could be cashed in.

The Manifest/MM&K survey highlights the huge differences in complex pay deals across FTSE 100 companies made up of salaries, one-year bonuses and pay-out from long-term plans spanning three or five years.

[caption id="attachment_777" align="alignleft" width="150" caption="Bob Diamond at the WEF in Davos, 2012"][/caption]

The Barclays long term shareholders meanwhile have not benefitted as £100 invested in the bank’s shares 60 years ago would now be worth just £88. When inflation is taken into account, this really amounts to a complete loss for long term investors.

Recent share price performance has also been dire. Over ten years, the shares have fallen 30% and anyone who bought five years ago would have seen their investment plunge by 76%.

This is in stark contrast to chief executive pay. which has risen by 4,899 per cent since 1979, according to the High Pay Centre.
These stark figures do not seem to have accelerated the reform process which, shareholders, regulators and politicians are still considering if or how shareholder value creation and financial performance should be linked to executive remuneration.

Top 10 Highest Paid Chief Executives

Bob Diamond, Barclays £20.9m

Sir Martin Sorrell, WPP £11.6m

David Brennan, AstraZeneca £11.3m

Sir Andrew Witty, Glaxo £10.7m

Marius Kloppers, BHP Billiton £9.8m

Peter Voser, Shell £9.7m

Sir Frank Chapman, BG £9.6m

Michael Spencer, ICAP £9.3m

Samir Brikho, Amec £8.9m

Dame Marjorie Scardino, Pearson £8.9m

Includes salaries, bonuses and any share options that could be cashed in during the year

Source: Manifest/MM&K


Stuart Gulliver keeps HSBC on Track for Focused Global Growth

[caption id="attachment_780" align="alignright" width="300" caption="Stuart Gulliver, CEO of HSBC"][/caption]

HSBC is one of a hand full of truly global banks with both corporate and personal customers. As globalisation continues HSBC is extremely well positioned to take advantage of the shift of economic power to Asia, with its strong position in Greater China as the leading Hong Kong bank.

HSBC currently employs 285,000 full time equivalent staff in 80 countries (with over 50,000 staff in the UK). However, HSBC’s two home markets – The UK and Hong Kong - account for 43% of pre-tax profits.

This is why CEO Stuart Gulliver is restructuring to exit non-core and less profitable businesses. The group has  already announced 11 disposals and business closures this year, while it has acquired the onshore retail and commercial banking business of Lloyds Banking Group in the United Arab Emirates.

HSBC although global is keeping its focus by not being all things to all people. HSBC now centres on four strategic business units:

Commercial Banking

Global Banking and Markets (GBM)

Global Private Banking

Retail Banking and Wealth Management

[caption id="attachment_784" align="alignleft" width="150" caption="Stuart Gulliver at WEF in Davos, 2012"][/caption]HSBC’s exposure to emerging markets has helped hold up its’ financial performance.

HSBC unveiled pre-tax profits of $4.3billion (£2.66billion) for the 1st quarter of 2012, a 30 per cent increase on the previous quarter but an 11 per cent drop year on year.

The quarterly improvement was driven by a strong performance from  investment banking.

HSBC also noted that revenues have risen strongly in its faster-growing regions, Latin America, Hong Kong and Asia-Pacific, which were up by 7 per cent, 16 per cent and 18 per cent respectively.

Group CEO Stuart Gulliver said: 'Markets remain volatile with high levels of debt and regulatory and political uncertainty in developed economies, contrasting with an encouraging outlook in faster-growing markets.'

HSBC’s global approach seems to be helping to smooth out some of this volatility a few Stuart Gulliver’s peers must be looking on with some envy.