Sunday, 28 February 2010

Continued misrepresentation of the Cypriot economic reality

I do not know Mr. Azarides, professor of economics at Washington university. I am sure he is a good economist, but he should not talk about things he has very little knowledge such as the Cypriot economy.

In the article in politis the professor says that the crisis is a joke - Cyprus will be awash with money since sooner or later we will go back to our rapid growth rates. Azarides did not take into account that:

1) people are not interested so much on levels on income but its rate of change. That is what worries us - thus the fact our development level is close to the European average does not affect our psychology and spending patterns.

2) our growth was mainly through catch-up. We were lagging in technical and professional skills. Our rapid growth was mainly due to our relative underdevelopment - we grew rapidly as we were catching up to more developed countries. This is now not the case any more - we are very close to the technical frontier of the world economy.
Thus now unless we increase investment, growth and recovery will be very difficult.

What worries me the most is the fact that we have no new export industry lined up: the tourism industry is in decline and the accounting services have reached maturity, yet there in no new industry to take their place.

Thursday, 25 February 2010

Economics 101: Why the strike action by the petrol stations was doomed to fail.

I know it sounds like hindsight, but I was sure the strike would fail. The reasons can be explained through A-level economics. Petrol stations are facing monopsonistic competition: they are many of them, selling nearly identical products but having some sort of monopoly over a small geographical region. In this sort of competition environment it is impossible to have unified strike action (or to be correct the terminology the action was a lock-out since the petrol stations are employers and not employees).

Imagine you are one of the station owners. You heard about the strike and you see a queue of cars lining up to fill up before the deadline. You make as much as 5,000 euros in a night, a large part of which is profit. You suddenly realise that this what is your short term gain will be someone’s medium-term loss: all these people filling with petrol will not need more petrol for at least two more weeks.

So how do you make a profit over the next two weeks? With all the other stations in strike action you sense that the monopolistic competition has ceased: the monopoly you have over a small geographical region expands to include the whole city, maybe the whole district! The demand for your specific stations will shoot through the roof and the profit you can make is substantial, even if you lower your price to low government price that your co-owners are striking against. So you have a huge incentive to stay open and capitalise on being a true monopoly, if only for as long as the strike action lasts.

Not all station owners think like this, but enough do to leave a couple of dozen stations open. It does not mean that these owners want the lower government price or that they are greedy: maybe they are mired in debt, maybe they have children in college and they see that this short term windfall could tie them over for at least a year. Station owners are not workers who work for a fixed wage; a worker who ignores a strike action stands to gain very little, but a station owner stands to gain all the clientele of the stations that remain closed.

So the first day of the strike 43 station owners stay open: it becomes public knowledge, angering all the other owners who were faithful in the lock-out. They realise that they will miss out on the windfall and that the open stations will profit out of their stations remaining closed. One-by-one the stations re-open, until the leadership realises that they need to suspend the lock-out in order to save face before all the station owners take the unilateral action to open their station.

Ultimately the station owners cannot strike effectively; only the handful mining companies, operating under oligopolistic completion, can enforce such an action.

Thursday, 11 February 2010

Don’t send messages to radio stations!

I am a big fan of “Super Sport Fm”. I like their programmes, especially when you can call and have debates with other fans. That’s why i was upset on the 24th of September 2009. At around 10:30 Mr Kostakis Kostantinou, of the show “Kostakis kai paseis Kuprou”, became very upset from a text message sent to by a mobile phone. The message was sent to the station and not to Mr. Konstatninou’s phone. However, Mr. Kostantinou told the whole mobile number on air and told his listeners “to show the guy who texted what kind of a rotten man he is”.

I was appalled because I quickly realised that if this is legal then the whole system the radio station was based was threatened: an employee released private data sent to in confidence to the station to the public domain. I always thought that your mobile number is kept in confidence and then discarded. I did not like the fact that the person swore at Mr. Kostantinou, but I felt the station had other ways to deal with this, such as blocking the number from sending messages or by Mr. Konstatinou telling him to buzz of by just telling the last 3 digits of his number.

I contacted the radio station and the promised to look up the issue. On the 29th of September the same thing happened again with the same radio presenter. Thus I made a formal complaint to the Cyprus telecommunication authority. I contacted the station again and I was assured that the station realised the error of Mr. Konstantinou and he was told on no uncertain terms never to release information provided to the station in confidence. Thus the station’s response was awesome: they soon realised how this incident could hurt their credibility. The incident never happened again and I soon forgot about it.

Today I received a letter from the telecommunication authority: it argued that there was not violation of the regulatory law and regulations of broadcasting of 1998 and 2000; I am guessing this was because the data protection act was signed in Cyprus much later at around 2006. Thus the authority did not believe the Mr. Konstantinou’s actions fell under their remit.

So I called the new independent service of data protection that was opened recently with so much fanfare. I was put through to Ms Noni Abraam. She was puzzled why i even bothered: since i was not the man whose number was publicly broadcasted: I explained the reason of my concern and asked her if she would report seeing someone steal a car even if it was not hers. I explained that it bothered since it meant that employees of any TV and Radio station could collect private data such as our numbers sent to their shows and sell them to advertising companies or political parties without my consent, and that at no time did any station tell us what it did with the numbers its collects. She answered that although she believes Mr. Kosntatinou acted improperly, she does not believe that radio and television is under their remit.

So there you have it: every time you call or txt on tv the radio station (especially if you add your full name for a competition) then the station has the right to sell off that number database to the highest bidder without consulting you simply because the two independent authorities do not have the teeth / correct attitude and prefer this matter to fall in the no-man’s lands between their remit. I feel that all these new bodies being created are toothless and thus useless and have managed to gain the civil service mentality of “why bother” very quickly.

This is the best description of Cyprus coming out of this example: expect nothing from governmental organisations; except less than nothing from semi-government organisations; and if you want anything done, go to the private sector.

The chief executive of Eurocypria must go.

Eurocypria is a charter airline that is owned by the republic of Cyprus. It had never made money, and it was a great way for the government "friends" in highly paid places. The EU put a stop of that and gave us 10 years to sort it out. The government placed a new executive and set it to work to make the company self sufficient and not dependent in government handouts.

Six years later the CEO Lefteris Ioannou went to parliament this week and demanded a further $35 million euros or the company will close on Friday. What he did was bend all of us over a barrel- it is simply inexcusable for a CEO of a company who had 6 years of government handouts to come to parliament and blackmail the parliament while keeping his job. This is especially true since any hand out would lead to a fine from the European commission as we would be seen as unfairly subsidising a domestic company.

The money should be given on a week by week basis, but only if a parliamentary recovery program is in place. The parliament should also demand the resignation of all the officers of the company. Passing Eurocypria a blank cheque is not the answer: what the government needs to do is similar to the US and AIG by making a step by step intervention by the government to ensure the company manages the handouts correctly; this is the only way forward.

Tuesday, 2 February 2010

Re-hosting an article by the UK Telegraph about the Pension Plan of The Bank of Cyprus

Does the Bank of Cyprus have the answer for the UK's final salary pensions crisis?
More companies are closing final salary pensions to both new and existing members as the costs of running them soars. But some employers, such as Bank of Cyprus UK, are looking at innovative new ways to replace these pensions for workers.

By Tony Pugh
Published: 12:21PM BST 11 Sep 2009


Barclays is just the most recent high-profile employer to announce its intention to close its final salary scheme to existing members as well as new ones. As more companies close their traditional pension schemes, employees are understandably worried. Can they really save enough for their retirement as well as meet those immediate financial demands – saving for the deposit on a home and repaying debt – which compete with long-term savings?

The answer may lie in an innovative alternative savings scheme. It lets workers distribute their combined employer/employee pension contributions between a pension plan for the long term and a general savings plan that can help with more pressing financial needs. As the 200 employees of Bank of Cyprus UK are learning, the scheme's flexibility offers them real choice, not merely the investment choices and limited benefit payment options of the typical defined contribution plan.

The bank called on Mercer's consulting team to help it design the new scheme, which came into being in January of this year. The new pension plan replaced the bank's traditional final-salary pension scheme which closed to future savings at the same time (the scheme had been closed to new entrants since 2003).

The new arrangement consists of a defined contribution pension plan featuring a flat-rate employer contribution of 7.5pc of basic salary, with the bank matching up to 7.5pc of further employee contributions–a potential 22.5pc maximum contribution. That's well above the typical 10.4pc average cited in a Mercer survey of UK defined contribution pension schemes.

In addition, employees have the option to divert some or all of their contributions into a short-term savings plan, linked to the bank's prevailing One-Year Bond interest rate, which will vest (pay out) every three years. Employees can also revisit and change their participation level every three years.

The scheme recognises that employees are at different life stages. While some employees may be focused on maximising their retirement nest eggs, others may prefer to balance their pension provision with shorter-term savings priorities. The scheme meets either need, and as a result Bank of Cyprus UK has seen every one of its employees – from the chief executive downward – voluntarily join either the general savings or pension sections of the plan, or both. Clearly, it's an idea whose time has come.

"We wanted to come up with something fresh and new for all employees going forward," said Tony Leahy, the bank's head of human resources and communications. "For many of our employees, pension savings fell behind other financial priorities, like clearing student debt, or saving for the deposit on a house. We wanted to reflect this in our new arrangements."

Significantly, noted Mr Leahy, more than 80pc of employees have joined the pension plan (of which 20pc have elected to split their contributions between pension plan and savings plan). Also over 85pc of plan members are making personal contributions to the scheme, versus only 34pc who had made such contributions under previous pension arrangements.

"We're also finding that of the 20pc who chose to join only the savings plan, over one-third are over 45 years old," added Mr Leahy. "The indicators are that they're using the plan to fund other more immediate priorities. Originally, we thought that only younger employees would be attracted to the savings plan, but that hasn't been the case–it's attractive to people at every age band, as is the pension element."
Mr Leahy credited this to a combination of good design and good communication. As the plan was being rolled out, each employee received a comprehensive information pack and attended offsite presentations by the bank and Mercer. The presentations outlined the features and benefits, while focusing on the broader topic of financial planning and the benefits of making early provision for retirement savings.
Part of that education included discussion of the tax implications of the new arrangements. Basically, under the savings plan, taxes and national insurance are deferred until the benefits are paid on vesting. Members will receive guidance prior to vesting to help them decide on the most tax-effective means of utilising the accumulated savings in their plan. This may include maximising tax relief by diverting some of their savings back into their pension plan.

For Anastasia Daniel, who works in the bank's marketing department, the plan's flexibility is a key to its success. A mother of two, she has chosen to make all her contributions to the pension scheme – for now. "I am thinking long-term," she said, "but my needs may change, so it's reassuring that I can reconsider every three years."

Ms Daniel admits that the bank's employees were initially concerned about the closure of the final salary pension scheme, especially long-term employees, but added: "We were pleasantly surprised with the outcome."

Other feedback has been uniformly positive, not least of all from trade union representatives and members of the bank's democratically elected Employee Forum group. In one letter of testimonial, the accredited union representative praised the bank's openness with the union about its rationale for change and its desire for a more sustainable scheme, calling it "an innovative arrangement".
The flexibility of design, options available and generous contribution levels make it an attractive scheme which has been well received by the staff." And an Employee Forum representative wrote that it "successfully engaged employees" in responding to a "thorny and emotive" benefit issue.

Clearly, employees understand that companies with final salary pension schemes are facing increasing difficulties in maintaining them. Such factors as increasing life expectancy in the UK and the high volatility of stock markets at a time of global recession have given rise to significant deficits for many traditional pension schemes.

The Bank of Cyprus UK's solution sought not only to address the sustainability of its pension offerings but the inequality between employees, many of whom had joined the bank after the final salary scheme had closed to new entrants in 2003.

"All in all, the new scheme ticks a lot of boxes," says Anastasia Daniel. "It meets the diverse needs of all of us, and is perceived quite positively by the staff. I have recommended it to contacts at other organisations."
Author Tony Pugh is head of UK defined contribution pension services at Mercer. Based in London, he is also consultant to a number of multinational companies, providing advice on all aspects of their pension arrangements.