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By Shavasb Bohdjalian
The European Union is now discussing two options for giving the euro zone rescue fund more firepower — an insurance model and a special investment vehicle (SPIV), a paper obtained by Reuters revealed.
The two options could be twinned and would not require a change to the current framework of the European Financial Stability Facility (EFSF), Reuters said.
The euro zone wants to boost the EFSF's firepower without putting more money into it, while France had dropped its idea of turning the fund into a bank to tap European Central Bank funds. European leaders will decide on which approach to take at the second leg of an EU summit on Wednesday.
Serious divisions still linger, however, over the size of the haircut private holders of Greek bonds will have to accept, with a final decision due on Wednesday. But it is becoming clear that EU banks will need EUR 100 bln in additional capital, which they need to secure from the market before resorting to national governments and then the EFSF.
If the Greek haircut is 50% as many believe it will finally be, then the saving for Greece will be EUR 50 bln but this will force the majority of Greek banks to tap the government for new funds to bolster their capital. It remains to be seen how the situation will be with the Cypriot banks.
Eurozone banks in the meantime have started a programme to reduce risky exposure by selling non-core assets and curtailed lending to companies and private ventures. With all the banks rushing to boost capital, reduce lending and dumping unwanted assets, it is obvious that there is no money left to be channeled into the real economy.
This situation cannot continue for long and business will have to find an effective and realistic way to find new and alternative financing solutions. One of the most effective methods for businesses and private ventures to raise funds and bypass the banks is to go directly to investors and raise money.
The most effective way through which promoters of projects can raise money legally and with full regulatory cover is through an International Collective Investment Scheme (ICIS) set up in Cyprus, which is essentially a regulated private fund operating under the supervision of the Central Bank of Cyprus.
The assets of the ICIS are held by a reputable custodian bank to make sure the promoter does not run away with the assets. The valuation based on which investors enter or exit the fund is calculated by an independent Administrator to make sure the promoter does not make up his own valuation while the overall management of the fund is overseen by a Regulated Fund Management company (such as Eurivex) to make sure the Fund is operating in compliance with its charter, or the Offering Memorandum.
Private investors thus can invest in an ICIS and aim for better return than the miserable bank deposit rate currently on offer, while a promoter looking for financing for a promising venture/project can raise the necessary funds instead of losing the opportunity just because the banks are in no mood to lend.
It’s a win-win situation both for the private investor and the promoter/owner of the project since they operate under a regulated environment, the assets are safe, the valuation is done correctly and the fund operates based on its charter without deviations.
With total annual fees of around EUR 25.000, an ICIS does not come cheap and is only viable for large projects, but the Cyprus regulated ICIS solution is very competitive compared to other jurisdictions and when combined with the double tax avoidance treaties that have been signed with about 50 countries and the low corporate tax rate of Cyprus, then the setting up and operation of an ICIS becomes very attractive.
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(Shavasb Bohdjalian is an approved Investment Advisor and CEO of Eurivex Ltd., a Cyprus Investment Firm, authorized and regulated by CySEC, license #114/10. Eurivex is also active in the management of ICIS and private portfolios. The views expressed above are personal and do not bind the company and are subject to change without notice. Investing in markets and trading on leverage is highly risky and it may not be suitable to all investors since it carries a high degree of risk and you can lose more than your initial investment)
