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FINANCIAL TIMES FRIDAY APRIL 12 2013

WORLD NEWS

Lisbon faces second bailout risk

Access to debt markets limited Current rescue deal to end next year
By Peter Spiegel in Brus sels, Quentin Peel in Berlin and Jamie Smyth in Dublin

Portugal could struggle to avoid a second international rescue even if it, alongside Ireland, is granted more time to repay its existing bailout loans by eurozone finance ministers meeting in Dublin today. Portugal, which is tussling to meet its deficit reduction targets during a deep recession, would have to raise a lot more in the two years after its planned exit from the bailout programme in 2014 than it did in pre-crisis times, accord-

ing to a document seen by the Financial Times. Yet, it says, at this stage Portugals market access can only be considered limited and opportunistic. Lisbons bailout is due to come to an end in July 2014 and the extension of maturities of its bailout loans is intended to smooth its full return to markets. But it has to raise 14.1bn next year and 15bn in 2015, whereas before the crisis it was typically raising 10bn-12bn a year. Ireland is also facing a big financing challenge. It needs to refinance 20bn a year from 2016-20, which is about 12 per cent of the countrys projected economic output for this year. More time to repay its loans would help, but Ireland has more of a record in re-entering the markets.

Jeroen Dijsselbloem, the Dutch head of the eurogroup of finance ministers, raised expectations of a deal to extend the average maturity of the loans for Portugal and Ireland by seven years to ease their way to re-enter debt markets. I hope that we will be able to finalise that [today], Mr Dijsselbloem said on a visit to Cork yesterday. Some European officials had pointed to German reservations as a potential obstacle to an agreement on extending the loans. The German parliament will have to vote on any significant extension of the eurozone rescue programmes for Portugal and Ireland, with opposition members demanding reassurance that they are realistic and sustainable.

Officials in Berlin say the German government does not have any fundamental objection to measures to ease the repayment terms, but it may face tough questions in the Bundestag over

Cyprus warned
The president of the European Central Bank, has warned Cyprus against sacking the central bank governor, Panicos Deme triades, over his handling of the countrys financial crisis, write Kerin Hope in Athens and Andreas Hadjipapas in Nicosia. In a letter to the Cypriot president, Mario Draghi underscored the indepen dence of central banks.
www.ft.com/europe

the conditions attached to the programmes. A seven-year extension would have to be approved by the full parliament, they said. Both the Social Democratic party and the Greens set tough conditions on the rescue programme for Cyprus, which they are expected to approve next week, and they will want similar reassurances about debt sustainability in Ireland and Portugal. There must be a vote on any extension of the repayment period, and each case is different, one opposition budget expert said. They cannot all be lumped together in a single vote. Government officials played down suggestions that Germany may object to an easing of the payment terms, pointing out that

Wolfgang Schuble, the finance minister, had agreed with all his colleagues to a reassessment being carried out by the European Commission. The SPD and Greens have been very critical of tax dumping in countries such as Ireland and Cyprus, which have traditionally had much lower corporate taxes than the rest of the eurozone. But a new effort to force Dublin to raise its rate from 12.5 per cent seems unlikely at such a late stage in the bailout effort. No one wants to force them into a new programme, the budget expert said. The question is whether they really have advanced as far as they say. We want to be sure there is no danger of another round of bank recapitalisation.

West struggles for inf luence in Kenyattas power game

GLOBAL INSIGHT
against humanity hanging over his head. He is accused of bankrolling ethnic killing squads that were unleashed five years ago after disputed polls that saw him rise to prominence among his Kikuyu community. While he has since taken a stab at statesmanship urging national cohesion in his inauguration speech this week the attack dogs are out with consummate flam. His campaign team, which had British advisers, used the threat of western disapproval at his candidacy to bind support for Mr Kenyatta under the emotive banner of sovereignty. At his inauguration, Indian and Chinese diplomats were on show. Yoweri Museveni, Ugandas president, glowered that backers of The Hague-based International Criminal Court were guilty of arrogance and blackmail. Foreign officials are penned in by such anticolonial rhetoric, which deliberately miscasts Mr Kenyattas adversaries as the west, rather than the five million or so who

Katrina Manson in Nairobi

For years after Kenya won independence from Britain in 1963, its former colonial ruler ran its army, navy and air force. The SAS trained the presidents ethnic Kikuyu bodyguard. That was because throughout the 1960s, Kenyas status as a cold war battleground goaded the west into action. When Russian-backed Somalia supported the secession of a chunk of Kenyas northeast and Kenyan Somalis rebelled, Britain offered Kenya firepower in support. There had been hints Kenya might swing the other way. In 1964, home minister Oginga Odinga negotiated a nine-project deal with the Soviet leader, Nikita Krushchev, and agreed a $15m infrastructure loan with China. For the west, that was not merely a sensible hedging of bets, it was proof of apostasy. The US characterised Odinga as a communist agent. Western support seemed to deliver: at one point, Kenya shut down a Chinese news bureau and expelled Chinese diplomats. Kenya had picked its lane. That polarisation suited Kenyas independence leader, Jomo Kenyatta, as he battled Odinga. Into the bargain, Britain and the US shored up Kenyattas regime as it lurched towards authoritarianism. When the largely nonKikuyu army mutinied in 1964, the British helped put down the revolt. Press censorship and detention without trial crept in; Kikuyu ascendancy blurred into ethnic chauvinism. A generation later, the war on terror has replaced the cold war, western anxiety about Chinas rise continues and the west finds itself outmanoeuvred for domestic political gain once again. Kenyas new crop of political leaders, drawn from independence dynasties Kenyatta and Odingas sons, Uhuru and Raila respectively, are Kenyas new president and presidential runnerup is adroit at exploiting global faultlines afresh. Uhuru Kenyatta is just as deft at playing international politics as his father, even with an indictment for crimes

Not all strikes and siestas: Spain fights to restore image

National brand Damage to the marca Espaa is having an effect on an intangible economic asset, writes Tobias Buck
Spains economic crisis has destroyed millions of jobs, ravaged the public finances and forced thousands of companies out of business. But government officials warn that the crisis has also caused lasting damage to that most intangible of economic assets: Spains national brand. For the government of Mariano Rajoy, restoring the marca Espaa to its former glory has become an important policy goal and constant preoccupation. The term is mentioned frequently in official speeches and statements most recently last week, when a judge decided to formally declare the King of Spains younger daughter a suspect in an embezzlement case. Jos Manuel GarcaMargallo, the foreign minister, was quick to highlight that the news was bad for the marca Espaa. Annual rankings of national brands confirm that the outside world sees Spain in a less favourable light than it used to. The country ranked only 19th in a list of the most admired national brands published last year by Future Brands, a consultancy. In 2009, at the start of the economic crisis, Spain occupied 10th place. A country brand study by Anholt-GfK Roper noted Spain, along with Japan, suffered the sharpest drop of all countries surveyed last year. In an attempt to reverse the slide, the Spanish government has created a special office to promote the national brand, and a High Representative for the Marca Espaa to oversee the campaign. Appointed at the height of the crisis in July last year, Carlos Espinosa de los Monteros says he is convinced that the recent damage to Spains reputation is having an effect on business. Most Spanish executives who work for multinationals or banks have noticed that now they are a bit under suspicion, he says. They find that lenders dont have the same degree of confidence that they used to have. And if they want to expand their activities in Spain, they find opposition, he says. Mr Espinosa de los Monteros admits that Spain has real economic problems, but argues that the foreign media and some analysts have over-dramatised the situation. People think this country is in flames . . . How many times have we had to read that Spain is going to collapse? We committed mistakes, we over-invested, and we overbuilt. But this is not a country that is going to become the poor brother of Europe. A former businessman who held senior posts at carmaker Daimler, Iberia airline and Inditex, the Spanish fashion retailer, Mr Espinosa de los Monteros says he is worried that some of the old clichs about his country are starting to return: People here work a lot of hours but the clich is that here everything is done tomorrow and that people sleep siestas. The governments new focus on branding has

Picture imperfect

Most Spanish executives who work for multinationals or banks have noticed that now they are a bit under suspicion People here work a lot of hours, but the clich is that here everything is done tomorrow and that people sleep siestas People think this country is in flames . . . But this is not a country that is going to become the poor brother of Europe We see there is a reality that is not being perceived
Carlos Espinosa de los Monteros Marca Espaa chief
Bullish: runners flee during the running of the bulls in Pamplona last year, a festival that helped brand Spain as a fun country Reuters

While he has taken a stab at statesmanship, the attack dogs are out
voted for Raila Odinga. Just as in the 1960s, western money is flowing into Kenya and security knits both together. Foreign officials remain intent on protecting western capitals by pursuing threats abroad and Mr Kenyatta reminded them in his inauguration speech that Kenya will remain a key supporter of efforts to stop jihadis. The US has paid for biometric identification at Kenyan borders; Britain trains Kenyan troops who battle jihadis, as well as 10,000 of its own per year in conditions that replicate the Afghan heat. Both run counterterrorism operations from the country. That makes Kenya once again seem indispensable, and this time round too, justice and ethnic chauvinism may be at stake. The withdrawal of several witness testimonies may yet see the ICC cases collapse. One Kikuyu insider expects Mr Kenyattas rule to return to the brutal politics of the 1960s. Western governments will remain keen allies of and investors in Kenya. But they may still find themselves being outsmarted.

Marked down

Countries positions in FutureBrand index 0 Switzerland 5

Germany

10 15 20
France Spain

2009

10

11

12

Source: FutureBrand

attracted criticism and a fair amount of ridicule. The main charge levelled against the campaign is that it fails to recognise the principal reasons for the slide in Spains international standing the deepening economic crisis, the series of political affairs and corruption scandals, and the poor performance of Spains institutions in recent years. The marca Espaa, that thing that was created in a night of passion between a political adviser and a marketing consultant, has been tainted for a long time,

wrote Elvira Lindo in the El Pas daily on Sunday. As they say in marketing: one cannot sell what one does not believe in. To Mr Espinosa de los Monteros, such criticism misses the point. Of course the more we change our reality the easier it is to change perceptions. [But] today, we see that there is a reality that is not being perceived. For all the importance that Madrid attaches to the brand campaign, the office of Mr Espinosa de los Monteros suffers from a quintessential Spanish

problem: lack of funding. [The office] was born in July last year in the deepest moment of crisis and when the scissors were cutting everything, he says. For this year, the marca Espaa has no budget, forcing Mr Espinosa de los Monteros to rely on support from industry and the work of other branches of government. Still, he says he hopes to have enough funding in place to start an international branding campaign at the end of this year. The message, he believes, will be a simple one: Spain is back.

Latvia eurozone hopes adrift on a sea of Russian money

By Richard Milne in Riga

Amid the rush from rival banking nations to attract Russian cash stuck on the stricken island of Cyprus, one name stood out: Latvia. Cypriot lawyers with Russian customers say Latvian banks contacted them soon after the announcement of a bailout for the Mediterranean island. Latvian authorities are desperate to play down the prospects of an influx of money from Cyprus, especially as they are seeking to become the 18th member of the eurozone against the reservations of some already in the single currency. Currently, we dont see any rush of Cypriot money into Latvia. This country is being watched and we are not going to be competing for this money, Valdis Dombrovskis, Latvias prime minister, says. But in some ways a flood of money from Cyprus has already entered Latvias banks. Latvia does not resemble Cyprus by having

a large financial sector or a big government debt burden, having taken care of its public finances following a 7.5bn bailout in 2008. Where it does look somewhat Cypriot is in its thirst for Russian bank deposits. Non-resident deposits, those from non-Latvians, represented 49 per cent of the 12.7bn lats (18bn) total at the end of February, one of the highest in the EU. About 80-90 per cent of those non-resident deposits come from the former Soviet Union, according to the International Monetary Fund. And they have been growing fast: non-resident deposits increased 17 per cent in 2012. The recent acceleration is believed to be mainly due to CIS [ex-Soviet countries] depositors relocating their funds from countries with banks under stress in the euro area, mainly Cyprus, the IMF said this year. The amount of ex-Soviet cash flowing through Latvia has drawn the attention of anti-corruption

campaigners amid allegations that its banks were involved in the alleged fraud revealed by Sergei Magnitsky, the late Russian lawyer. Latvia has had a free ride for some time, says Tom Mayne, an analyst at Global Witness, a Londonbased anti-corruption group. Latvia seems to be very happy to accept this money coming from the former Soviet Union, places that pose a high risk of money laundering. That has to be a matter of concern after Cyprus. The authori-

ties in Riga counter that they have toughened antimoney laundering rules in recent years, while banking regulators imposed stricter capital and liquidity requirements on those banks with high levels of non-resident deposits. The matter is a delicate one, not just after Cyprus bailout, but also because Latvia is applying to join the eurozone from January. The European Commission and European Central Bank are due to give their opinion on Latvias suitability in June, but there is unease

Riga has attracted large Russian bank deposits

Bloomberg

among some eurozone members. On the strict entry criteria such as low inflation and public debt, Latvia passes with flying colours after undertaking one of the biggest austerity programmes of any country following the 2008 financial crisis. But some existing eurozone members are worried about sustainability, a catch-all phrase for worries about inflation after a possible eurozone entry as well as the banking system. We want to be sure we are not creating another trouble zone. But I dont think that will be the case, says one EU ambassador in Riga. The ECB has contacted the Latvian central bank over non-resident deposits and the Latvian side has given its assurances, officials in Riga say. The European Commission warned in January of the risks in a large non-resident banking sector. France is seen as potentially the biggest objector, not least because of Latvias status as a hardcore sup-

porter of austerity. Mr Dombrovskis is heading to Paris this month to meet the French president and prime minister in an attempt to shore up support for eurozone entry. Paris supports Latvia joining the single currency in principle, a French official says. But they add that timing is an issue: France does not necessarily back Latvia entering the eurozone in January. Mr Dombrovskis is optimistic. We are able to demonstrate the sustainability of our macroeconomic situation and are ready to discuss any additional concerns, he says. He also has his work cut out explaining to the Latvian public why, even if the lat has long been pegged to the euro, the country should join a club that treats its smaller members like it has Cyprus. Yes, it requires some explanation, he says. We still think it is a good idea for Latvia to join the euro. Additional reporting by Courtney Weaver in Limassol

Egypt pressed on wheat forecast

By Emiko Terazono in London and Heba Saleh in Cairo

The US has warned Egypt that it is overestimating the size of the next domestic wheat crop in a sign that pressures are likely to mount on the countrys depleted foreign currency reserves. Egypt is the worlds largest wheat importer and the grain is its main food staple. But a currency crisis has hit its ability to import wheat and is threatening the governments supply of subsidised bread, presenting a severe test to Mohamed Morsi, the Islamist president. A report written by the US agricultural attach in Cairo warned that the Egyptian government was overestimating production for the current crop year by as much as a third or more. Egypt has predicted it will harvest 9.5m tonnes of wheat this year but the US

report put its own estimates 10 per cent lower, at 8.7m tonnes, and warned that several knowledgeable interlocutors put the forecast even lower, at 6m-7m tonnes. The government is setting import procurement and wheat stock policies based on significant local crop production overestimations, the US agricultural attach wrote. Failure to buy enough local wheat would not only potentially provoke social unrest in a country where heavily subsidised bread is a mainstay of the diet, but could also force the government to spend scarce dollars on wheat imports. The report warned Cairo was also failing to take into account possible fuel shortages that could affect the distribution of wheat. The Egyptian government dismissed the reports claims.
In full: www.ft.com/egypt