Friday, 25 September 2009

In Whom We Trust

25th October 2009

The Malta Independent - Friday Wisdom
Alfred Mifsud

IN GOD WE TRUST is the bold declaration on each US dollar currency note. I always found this motto, which is also the national motto of the United States, somewhat out of place on Caesar’s money and goes against the advice given by the Lord Himself to give Caesar what is Caesar’s and to God what is God’s.

But even beyond this undesirable mix of religion with Mammona’s basic stuff, declaring trust in God on dollar bills implies that we do not trust anyone else. This goes against the very basic concept of such money bills which are nothing else than IOU’s issued under a fiat monetary system which obviously can only work if holders of such bills trust their issuer, the central bank of US.

Fiat money means that the central bank can issue and print as much money as it considers necessary for the execution of its policies without any need to keep any specific reserve or tangible backing for the money its creates. Hence why the system is termed ‘fiat’, as money is created as if by magic without the need to provide any specific backing.

The basic question is whether we should trust the US dollar in spite of the implied warning they carry that we should only trust God.

In my article in this series published at the bottom of the financial crisis on 13 March 2009, I had remarked as follows on this subject:

This will not be without consequences on the US side. Without the Chinese readily financing their deficits, the US will have to finance their own by promoting less consumption and more saving. So US economic recovery can no longer depend on consumer demand and has to switch to export demand which is the other side of the coin of the shift in China from export-led growth to domestic-led growth. For this purpose we have to see a sharp reversal of the strength of the US dollar seen since the financial turmoil began.

If you want a marker of whether there is progress being registered in resolving this crisis, the value of the US dollar is a good marker. If the US dollar keeps strengthening it means that things are getting more serious. If things stop getting more serious we will see the US dollar weakening, eroding the strength it has artificially accumulated these last six months, giving a chance for the US economic engine to shift from consumption mode to productive mode.

At the time this was written, US$ 1.25 were needed to buy e1. Six months later and with the world confident that the financial system has been stabilised and that the economic recession has hit bottom it takes US$1.47 to buy e1. That means a fall of some 17.5% in six months despite various assertions during this time from the Treasury Secretary that the US administration still believes in a strong dollar policy. What the Treasury Secretary probably means but cannot expressly state is that the administration believes in a stable dollar policy but only after the dollar undergoes an orderly re-adjustment of its external value by falling substantially against major currencies to make the US economy export competitive. This will help to address the macro economic imbalances that led to the financial crisis by excessive consumption in the US and excessive savings in China and Japan.

Incidentally crude oil prices at the time was around US$40 and have since increased by 75% to US$70. However because of the fall in the value of the dollar, the increase in Euro terms was ‘only’ 49%!

Coming back to the trust issue, I cannot help noting that a very unorthodox situation is developing in the world of finance which is forcing the unobtrusive development of the fourth branch of government in most large economies. The executive branch, with the explicit or implicit approval of the legislative branch, has used fiscal policy to the hilt in order to stabilise economies from the negative impact of the financial crisis. Space for further fiscal injections is now very limited given that as a result of the huge emergency stimulus injections that had to be made, the public deficits and accumulating debts have reached very worrying levels.

If anything, governments have to worry about how to restore sanity to their finances on a medium term basis.

This leaves the main burden to engineer a recovery on monetary authorities, particularly the central banks of the major trading blocks i.e. the US, the EU, Japan and China.

Central banks are managed by unelected officials who have much more room for manoeuvrability than governments. The president of the United States can respond instantly to a missile attack with America’s military might but he cannot respond to a financial crisis with real money unless Congress acts. The Federal Reserve Bank, America’s central banking system, with no direct accountability to the nation’s voters, did not need anybody’s approval to flood the financial system with fiat money to address the illiquidity created by the banking crisis.

The same applies to the European Central Bank, the Bank of England, the Bank of Japan and the central bank of China. These institutions treasure their independence from the executive branch and proclaim that their freedom of direct accountability to the electorate gives them the facility to do what’s right not what’s popular.

In some ways these central banks have contributed to the financial crisis by focussing their inflation control mandate strictly on retail inflation and disregarded the asset price inflation in equities and real estate that brought two financial bubbles in this first decade of the new millennium. This has to change. In future central banks have to account for asset price inflation in their objectives.

But for the immediate future should we accept to have this unelected fourth branch of government, who did not protect us from the bubbles which have caused so much pain, to be responsible for leading us back to stable non-inflationary growth backed by a well regulated financial system which does not lead us from one bubble to another?

This question is somewhat rhetoric. In truth we have no choice. The central bankers have to make the judgements when to roll back the monetary easing to avoid an inflation explosion but without suffocating the fragile economic recovery. This is not unlike expecting them to perform complicated surgery with a carving knife and a spade. They need not just our trust but also our prayers.


Sunday, 20 September 2009

Bankers` Bonus Bogus

20th September 2009
The Malta Independent on Sunday

As the G-20 world leaders prepare for their next meeting in Pittsburgh, one gets the impression from their pre-summit rumblings that they seem to think the financial crisis that constrained them to take acute measures to save the world’s financial system, following the collapse of Lehman Brothers this time last year, was caused by excessive bankers’ bonuses and that a recurrence can be avoided merely by controlling bankers’ pay packet.

To me this sounds nothing more than politicians seeking scapegoats to cover up their own and their regulators’ failure to keep the financial system on the straight and narrow.

The remuneration paid to some ‘bankers’ remains scandalous by any standard. But one has to define who these bankers were, who were creaming off multi-million dollar bonuses, and why they were being paid so handsomely.

Let it be made clear that the vast majority of bankers earn a normal salary and modest bonuses, if any at all. The banker of all bankers, the chairman of the Federal Reserve Bank of the US, has a salary of less than $200,000 – modest compared to the bonuses paid to lesser banking mortals and rather on the low side compared to the weight of the decisions he has to take.

In reality, those bankers who helped themselves to the millions are not real bankers in the traditional definition of the term. Those who earned these scandalous millions fall into three categories. The most obvious category is that composed of very senior executives of banks who were responsible for the overall remuneration policies of their institutions. This is probably the most offensive category. Rather than controlling their underlings when it came to from excessive risk-taking with the bank’s capital, they pumped their organisation to leverage levels that any real banker would never have allowed. Jimmy Cayne and Dick Fuld, the CEOs under whose watch Bear Stearns and Lehman Brothers collapsed, were no real bankers, but gamblers who brought their experience in poker to investment banking and turned the investment banks with which they were trusted into huge un-hedged hedge funds.

The other two categories of bankers drawing multi million dollar bonuses are middle and low rank operators in the investment banking divisions. Banks without strong investment banking divisions, such as Maltese banks, do not pay multi-million dollar pay packages because, like anything else, bankers’ pay is driven by market forces and it is in investment banking where there is a shortage of talent that, unless paid well, will skip ship to competitor organisations.

The Mergers & Acquisitions (M&A) departments of large investment banks are staffed with highly talented executives, mostly in their late twenties and early thirties, who are experts in corporate finance and who are prepared to spend the best years of their life working 90-hour weeks, under the severe stress of delivery deadlines and often sleeping in a different bed every night because their duties call them to travel extensively. Generally, by the time they reach 40 they are burnt out and either retire completely or move to less demanding jobs.

These executives have never put their organisation at any risk, as they do not use its capital, merely its brand and infrastructure. They earn their organisation lucrative fees and, on a net basis, make a substantial contribution to their banks’ profitability.

Politicians have no business trying to control the remuneration packages of such executives. If they do, what will happen (it is, in fact, already happening) is that such talent will merely migrate to boutique M&A organisations, leaving their banks worse off. It is like meddling with the remuneration package of a hotel’s highly successful and skilled executive chef merely because the hotel is incurring losses in its Rooms Department, in spite of the profits made by the Food & Beverage Division. What solution to the Rooms Department’s problem can the restriction of the executive chef’s remuneration provide? More than likely it will force the executive chef to move to a more successful competitor organisation, compounding the problems of his/her present employers.

The last category of investment bankers that benefited from notorious bonuses are traders, those whiz kids who were allowed to trade the bank’s capital many times over, using overnight money to trade in complex and illiquid securitised assets, booking short-term profits leading to huge bonus claims without any regard for the fact that, in the process, they were stuffing the bank’s balance sheet with toxic assets that ultimately exploded and wiped away multi-year profits in one fell swoop.

There are traders and traders. Traders who make real profits without compromising the bank’s capital and balance sheet are a resource to be treasured. Attempting to cap the bonuses of such talent will lead to its flight to hedge funds and shadow banking organisations that escape the Regulators. We have had an inkling of this just this week, when Barclays announced the hiving off of some £12 billion of assets from its balance sheet to a “detached” vehicle against a 100 per cent loan. There is no evident benefit for Barclays in such a move, except to avoid having to mark to market such assets on its balance sheet, doing away with wide fluctuations in its profit performance. It could well be that Barclays are anticipating the regulatory tightening up of remuneration for traders’ talent and have taken early steps to transfer this talent to such “detached” vehicles, beyond the reach of the Regulators bonus controls.

Regulation of banks’ bonuses could be only a very small part of the new regime required to avoid a recurrent blow-up of the world’s financial system. It should be restricted to senior executive pay. This should be controlled through full disclosure, deferred payment, blocked stock options and claw-back provisions, rather than through quantitative limits. Of more importance for effective regulation are capital requirements, limits on leverage, the outlawing of off-balance sheet assets transactions and controls over the overall size of the institutions to ensure that none of them are too big to fail.

Failure must remain the ultimate punishment for reckless bankers, just as for any other profession. What top management pays to their individual executives should be of no concern to the Regulators, even if it were possible to control such pay polices, which often it is not – as the Barclays experience is already showing. But the consequences of bad remuneration policies should be borne by shareholders, not by taxpayers, and this is only possible if banks are constrained to a size where failure would be possible without causing systemic risk. The Regulators’ primary responsibility is to ensure that taxpayers no longer provide implicit guarantees for reckless bankers. Keeping banks too big to fail, while trying to regulate their remuneration policies, will prove to be a very ineffective solution.


Friday, 18 September 2009

The good the bad and the ugly of the property market lull

18th September 2009

The Malta Independent - Friday Wisdom

I have been careful not to define the current downturn in the local property market as a crisis, merely as a lull. The distinction between a lull and a crisis is that the former is cyclical whereas the latter tends to be more structural.

So far it is fair to define the problem as a lull as it follows a rather long period of strong growth and as yet we are not seeing distressed selling on a major scale leading property prices to drop below their replacement cost. There is nothing however to stop a lull from developing into a full blown crisis if the downturn gets more pronounced and extended.

It would be wrong to attribute the downturn in the local property market to the international financial crisis. Certainly the financial crisis did not help and has deterred foreign buyers from making investments in the local property market at a time when bargains are available in countries where there is a real property crisis like in the UK, Spain and Ireland. But the sources of the local property downturn are more homegrown.

It can be merely defined as an excess of supply from property developments that were initiated years back when the boom was at its peak. This is forcing property units to come on to an over-supplied market that has gone soft. The excess supply is super-imposed on withdrawal of demand from investors who are now holding back waiting for property prices to fall before they make their next move. Purchase of property for investment purposes has largely disappeared and demand for property for own use is low and cannot support prices in an over-supplied market.

Normally a situation of excess supply and falling demand gets equated by a fall in price. So far the fall in prices we have seen has been relatively modest leading observers to believe that developers are holding out and carrying inventory waiting for better times.

It would be unreasonably optimistic however to assume that better times are anywhere round the next corner. Once potential buyers and investors have been put in a frame of mind that waiting can lead to a better deal, demand is unlikely to show up at a tempo which could underpin property prices. The carrying costs of inventory will eventually force developers, often pushed by their bankers who hate non-performing loans more than turkeys hate Christmas, to dump property at distressed prices. This process will be accentuated as many unsold inventory approach the fiscal five year time limit to avoid 12 per cent of the sale price as final withholding tax. The risk of having to pay a turnover related withholding tax on property sales undertaken at little or no profit, will be another factor which could turn a property lull into a full blown property crisis.

Should we let the market to clear itself either through a lull or through a crisis or should the government intervene in order to restore some sort of stability and orderly adjustment without risking a fully dysfunctional property market?

This was the question that Minister Tonio Fenech broached of his own accord when addressing a pre-budget business breakfast meeting this week. Minister Fenech posed more questions than provide answers and attendees were left with the distinct impression that government had no clear idea of what it should do, if anything at all.

The minister tried to put a positive twist on it arguing, quite rightly, that this property lull makes life easier for first time home buyers and makes property more affordable. He said government should hardly be expected to intervene to support property prices when during the boom accusations were made that government is letting property prices rocket up beyond the reach on many first time home buyers, causing social problems. Now that the wheel has turned, government should not be expected to disrupt the market from price falls that restore eroded values to social justice.

What’s good for social justice is however bad for property developers, especially those that bought at the peak of the market and now have to carry unsold inventory incurring finance carrying costs and risking slippage into the 12 per cent withholding tax regime. But business is business, and developers who picked rich rewards during the boom cannot complain when the markets turn against them. So I agree that government should refrain from intervening to interfere in market adjustments which allocate the good and the bad between property developers and property buyers.

What government should not refrain from is intervention to ensure that the bad does not turn into ugly. There would be few winners and many losers if the lull were to turn into a crisis. Passive property owners would suffer seeing the value of their residences fall even though they have no intention to sell. Banks would see an explosion in nonperforming loans and given the exposure of the local banking system to property as security, the stability of the system would be more directly challenged than it has been by the international financial crisis. With a de-stabilised banking system the whole economy would suffer.

So while government should allow the market to undergo the necessary tactical adjustments, it should be on its guard to do what it has to do to ensure that the market remains orderly. And what should it do? In the very least it should extend or lift the artificial five years limit for slippage into the 12% withholding tax regime, which was a tax amendment conceived on the wrong premise that property prices will go up forever without any downward adjustment. Secondly it should freeze for some time all new permits for new development to give time for the market to clear the excess supply which has been allowed to accumulate.

The good and the bad of the property market are fair game. The ugly is to be avoided.

Friday, 11 September 2009

An Anniversary with Moral Lesson

11th September 2009

The Malta Independent - Friday Wisdom

This weekend will be the first anniversary of the collapse of Lehman Brothers who filed for bankruptcy late on Sunday, 12 September 2008. This sent global financial markets into a practical freeze changing the illiquidity problems faced by large international banks into a much more serious insolvency problem.

In biblical terms we speak of the divide between before and after Christ. In financial market terms this divide will probably be before and after Lehman.

Lehman’s collapse created a systemic dysfunction of the financial markets and when the problem of a single institution migrated to the whole system. When this happens it is likely that the main originator of the problem is the regulator rather than the institution. It is the regulators who have responsibility for the whole system and it is their responsibility to set the rules and to monitor and enforce their execution to ensure that no single institution becomes a risk to the whole system.

So the Lehman’s collapse, whilst obviously remaining the primary and direct responsibility of their management who drove the iconic investment bank to the wall, is also a certified failure to the inadequacy of the regulatory regime in the US. Having had a good warning signal six months earlier when the same fate was served on Bear Stearns, who had to be rescued in a panic engineered and state sponsored takeover by JP Morgan Chase, the regulators did not show sufficient enthusiasm and urgency in getting a detailed account of the interconnections and risks involved if the problem of Bear Stearns had to move to the next weakest link leading to a grave systemic risk.

With hindsight it looks almost unbelievable that this time last year, as the US Treasury Secretary was taking the decision that a Bear Stearn’s type of state sponsored takeover deal for Lehman Brothers, as requested by potential suitors Barclays and Nomura, was not on the cards as this would create moral hazard and as he had no real approval to risk taxpayers money on such arrangements ( no such compunction was shown in engineering the Bear Stearns deal) he had no proper knowledge of the consequences of such a decision.

These consequences did not take long to emerge. And the critical nexus was the world’s largest insurance company AIG who as an insurance company, irrespective of the fact that it had a strong and critically important financial products divisions, was not regulated by any of the Federal Regulators but by a small state insurance regulator who had no resources to control the entire world-wide ramification of AIG.

Whilst AIG plea for rescue loans was rejected outright in the crucial week leading to the Lehman collapse on the basis that it was not a financial institution and was not under the responsibly of any Federal Regulator, the tune quickly changed the day after Lehman filed for bankruptcy. The regulators were ‘surprised’ ( proving that they were sleeping at the wheel in the pre -Lehman years) to find that AIG had insured billions upon billions of bank bonds and toxic mortgage bonds through what is technically known as Credit Default Swaps (CDS). If AIG were to default on such CDS’s many of the critically important banks that had exposure to such bonds and toxic assets but were not reserving capital against them on the basis of the hitherto AAA guarantee of AIG, will instantly fall into the soup leading to world-wide financial system collapse.

With or without Congress authority, the Federal Reserve had to operate at the limit of its own role and rules to give emergency loans to AIG so that it can continue to honour its CDS obligations and avoid a wholesale systemic financial collapse. Eventually the US government had to use specially voted emergency funds to recapitalise AIG and bring it practically under State ownership and control.

The Lehman debacle has brought the reality of an untenable situation where profits are privatised and losses get socialised.

There is a moral lesson in all this for us in Malta. Thankfully our banking system was liquid and solvent enough to absorb the crisis effects with relatively little damage. However, over the last year we have seen an untypical interest by Maltese corporates to raise long term funding on the bond capital markets. Lower interest rates engineered by the ECB to cushion the crisis and the general liquid state of our economy gave bond issuers an incentive to switch from fluctuating interest rate bank borrowing to fixed interest long term borrowing on the capital markets.

Currently we are seeing three separate bond issues almost simultaneously floated on the market one of them coupled with an equity IPO. This is all well and good as it adds volume, depth and breadth to local capital markets.

My worry is that the local market is not sophisticated enough to take informed decisions on the suitability of such bonds for retail investors’ particular requirements and many investors are guided solely by the coupon on offer without seeking professional advice to place such coupon in the context of the risk involved.

There is no financial investment without risk. The impression many investors have that bonds are a perfect substitute to bank deposits irrespective of the quality of the issuer is wrong and regrettably our regulators are not doing enough to ensure that the retail market is well informed of this fact, and that in the absence of local bond rating mechanism investors should at least seek professional advice prior to parting with their money.

In this context, our political leaders would do well to exercise a measure of restraint not to substitute themselves for a rating mechanism by giving overt or tacit endorsement to corporate bond issues by untimely visits to the issuer organisation. President Abela’s visit to Palm City project co-owned by Corinthia during his recent visit to Libya was criticised in the local press as an inappropriate endorsement for Corinthia bond issue currently on the market. This was a bit of an unfair criticism as it is normal for the Head of State to visit local investments when visiting a foreign country and the Bond issue has nothing to do with the Palm City project per se, which has been funded by a bond issue under a different corporate name in the past.

Not the same defence can however be made to Prime Minister Gonzi’s visit to Melita Cable this week when he visited their Malta HQ and gave them a solid positive endorsement. At a time when Melita are launching their first corporate bond on the local market it is easy for the unsophisticated retail investor to interpret the prime minister’s endorsement as equivalent to a rating agency investment grade certificate.

Considering the untold damage that would befall the local capital markets if, God forbids, there is ever a default on any corporate bond in public subscription, politicians should be more ethical in allowing their personality to be used for marketing purposes during the launch of such bond issues. There is nothing wrong in a prime minister visiting and encouraging local private corporates undertaking investments for the benefit of the local economy, but the timing must be judiciously chosen not to send unintended messages to local investors.


Sunday, 6 September 2009

Dreaming About Maximising our Tourism Potential

6th September 2009
The Malta Independent on Sunday

To continue with my views on tourism following my column last Friday in the daily version of this paper, I find it almost offensive that a mediocre breakfast in a dull hotel in London, Paris or Berlin costs more than a half board package price in a superior Maltese hotel.

Those who have the slightest knowledge of how tourism works are probably protesting that London, Paris and Berlin are not our competitors, and as far as we are concerned their pricing is irrelevant.

True, our competitors are the Mediterranean resorts and our pricing has to be competitive with such resorts not with prices prevailing in the main European cities. But this is true if one accepts the status quo as an eternal permanent state of affairs.

It need not be totally true for innovators or dreamers who believe they can change the world.

With determination to improve, enhance and build an aura around our tourist product (especially those elements of it which give us a natural advantage if not unique attractions), with learning how to treat the tourist as a valued guest not as an exploitable number, and with massive investment in building a Malta brand to match the up market image we need to create, we can change what now seems immutable.

And change we must if we are to move from being price takers to price setters.

So why have we done nothing about it yet, one could reasonably ask? Do we not believe in our own potential? And if we don’t, how can we persuade others to believe in us?

This lack of self-esteem is indeed the biggest obstacle to set us on a long-term process to maximise our potential.

Let me give a small example of this lack of self-esteem. Take the karozzin service. Properly packaged this should be a premium service. Yet how do we package it?

Spend some time on City Gate bridge where many cruise passengers entering Valletta are a captive market for this service. Instead of a uniformed cab driver ready to deliver service against a well-exposed price list, tourists just a few metres away from the City Gate tourist office are subjected to poorly-dressed drivers rudely touting for business, price haggling typical of a Turkish bazaar and total obscurity as to what exactly is being promised. How long will the tour take? What route will be followed? Will the cab driver act as guide or just drive the cab?

I have no doubt that many potential clients for such service are put off not so much by the price but more by the perception that the process is loaded against the tourist who needs substantial negotiating skills to avoid being had. I would probably gladly pay a higher authorised and advertised price rather than a lower negotiated price, which leaves me with an aftertaste of having been fleeced.

Does it take too much to put an official tariff on cabs, to have drivers wearing an appropriate uniform, to ensure that cab drivers can give a well pronounced guide commentary via a loud speaker or to equip cabs with multi lingual pre-recorded audio service?

Absolutely not, but we take no pride in our product so where it matters, things keep to Third World standards.

It would be disastrous if we try to brand our product before we bring it up to the level that makes it saleable at a premium. Good advertising kills a bad product faster than bad advertising.

But even if and when we find the courage and determination to expose our tourist product to its full potential branding, it is a process that will take years of effort and many millions of investment.

And here we hit cultural barriers. We are impatient. We lack staying power. Our investors, especially the government that invests many millions annually in the industry, want immediate results. Problem is that investments in product improvement and branding are expensive and can only deliver results over the medium to long term if well executed.

Governments argue that in the long term we are all dead. They want results here and now. But here and now results are fickle, subsidy dependent and unsustainable.

To maximise our potential we need to overcome our lack of self-esteem and our short-termism. You could say that we need to be reborn.

Friday, 4 September 2009

Facing Winter without Food

4th September 2009

The Malta Independent - Friday Wisdom

Hoteliers are like ants facing winter without food.

At this time of the year, with August behind us and the tourism season past its peak, hoteliers would normally be counting their treasure and wondering how much of it can stay preserved as true profit when the lean winter months turn cash flow negative. Like ants they work hard in summer, when most of us are holidaying, and store resources to get them over the lean winter months, hoping that at the end of the financial year there will be enough left to justify their efforts and their return on capital. They hope there will be enough resources left to finance further investments to remain fresh and competitive.

This year rather than counting their treasure most hoteliers are scratching their heads and wondering if they have enough oxygen left to get through winter.

Considering how important tourism is for the general economy and for wide distribution of the wealth it creates, the problem is not just owned by hoteliers; it belongs to us all.

This year most hoteliers have probably not been far out in the number of guests staying at their hotel. But they are far out in their profitability. To get close to the numbers in volume terms they have had to discount extensively and all these discounts represent a straight one for one wipe off their bottom line as costs cannot respond in similar matter. The bulk of their costs are payroll, energy and maintenance/supplies. Payroll is a sticky expense with little space for economies except through redundancies or short work-weeks, which cannot be implemented while chasing volumes. Energy costs have gone up and maintenance costs tend to increase during lean periods, as hotels undergo extraordinary jobs during low occupancy periods.

The only solace comes from savings on financing costs as low interest rates make a positive contribution to the bottom line through savings in non-operating expenditure. The low interest rates most depositors are getting on their bank deposits indirectly subsidise the finance costs of business borrowers, not least hoteliers who borrow to finance their asset rich businesses.

The question hoteliers are asking themselves and everybody around them, is whether this is a one-off bad year or the start of a series. Given that tourism is very much dependent on the macro-economic performance of the main EU countries, our hoteliers have to make guesstimates in order to drive their business forward about whether 2010 will see a V shaped recovery from the recession or whether economic performance will be L, W or U shaped meaning that recovery will be slow, and that one should not expect the 2010 financial year to be much better than 2009.

This is a question that is vibrantly debated between economists and investment managers. Hoteliers cannot just debate such semantics. They have to base their business decisions on their view of the world one way or the other. They have to soon decide their rate strategy for 2010. They have to decide what investments are absolutely necessary and most of all they have to know if they have the financial resources, not only to get through next winter, but also through another poor summer after that, if the recovery proves anaemic.

Should government intervene with direct assistance to hotels beyond its contribution to the marketing efforts of the Tourism Authority? Can the government afford it, seeing that its own finances have suffered as well and will be way, way out of the planned deficit for 2009? Even if it can afford it, how can such assistance remain within the limits set by the EU single market, no subsidies, obligation?

These are not easy questions to answer but doing nothing is no solution either. Simply hoping that hoteliers can somehow get through the winter and that next summer everything will be business as usual is management by hope to the point of irresponsibility. We should hope for the best but we have to make back-up plans in case the best proves elusive.

There is no silver bullet. The true solution is resorting to strong international economic growth. But this is beyond our ability to influence. We can only react to, not influence, international economic realities.

Solutions cannot come from a single source. It would be wrong for hoteliers to expect government to come to their rescue. Banks cannot be expected to increase their risk unduly to keep hoteliers afloat during this difficult period. On the other hand leaving hoteliers to their own destiny could involve the death of set-ups that deserve to be assisted and saved.

Those hotels that have not made sufficient profits in the good years and are facing an existential threat from one bad year probably don’t deserve to be rescued. But those that have proven their ability to generate profits during the good times should be assisted if the current bad scenario prolongs.

It is time for the Tourism Authority to start serious consultations with the MHRA to see what sort of rescue packages would be needed if the crisis prolongs beyond next winter. If we let the deserving ones fail who is going to be there to take advantage of the rebound, when finally it comes? The theory that it is the second mouse that eats the cheese could have some short-term appeal but for the long term it does not promote investors’ confidence in the industry.