The new Euro deal – not the whole bazooka

What Are We To Do by LIN SEE-YAN

 Link between joint liability of debts and good behaviour is missing

AP Photo logo AP Photo  A beggar sits in Via Montenapoleone shopping street in downtown Milan, Italy, Tuesday, Dec.13, 2011. Further signs of stress emerged Tuesday to indicate that Europe’s most recent summit agreement to get the euro countries to bind their economies much closer together has only made limited progress in pulling the continent out of its debt crisis. While figures showed that Europe’s banks parked more money at the European Central Bank than they have at any other time this year, Italy’s borrowing rates in the markets ratcheted even higher and back towards the levels that forced Greece, Ireland and Portugal into seeking financial bailouts.

The euro “Merkozy” deal agreed last weekend targeting deeper euro-integration was a step in the right direction but did not offer the big bazooka that could really ease market tension. It’s only part of the solution Europe badly needed: it’s not even the solution markets are waiting for.

So far, wanting “more Europe” has come slowly, and grudgingly; but crucially, lacked proper leadership to deal with a truly systemic crisis. What’s paralyzing the euro-zone is a flaw buried deep within the monetary union’s structure what one writer identified as “the unresolved conflict between the needs of the euro and the independence of its members.” Put differently, the link between joint liability of debts and good behaviour is missing.

Looking back, all those wasted years of skirting the underlying problems, causing rising budget deficits and building massive debt exploded in late 2009 when Greece first toppled into crisis. The euro-zone tried to stanch the problem with a bailout in May ’10 to no avail because Greece is bankrupt; and did nothing to squelch contagion. By this summer, Ireland and Portugal had collapsed into bailouts as well; with Italy and Spain now at risk of default.

Leaders had pressured countries into gut-wrenching austerity and reform arrangements to stabilise their debt and cut deficits in the hope of rebuilding investor confidence. That strategy failed. Other agreements have also drifted. The 2nd Greece bailout in July came to naught, while the plan to boost the firepower of EFSF (European Financial Stability Facility) has since faltered.

Frustration is building. It culminated in last week’s summit, with high hopes to marshal the might of the entire euro-zone a US$13bil economy to provide an extinguisher powerful enough to put out the debt fire. But all it did was inject more painkillers; not a cure.

The new deal bears the hallmark of yet another in the series of half-measures that doesn’t address increasingly vulnerable banks; or go far enough to instil confidence in the euro-zone’s battered debt markets; and certainly didn’t convince S&P from putting the debt of 15 European economies, including Germany, on negative credit watch, and Moody from cutting the credit ratings on France’s top three banks. Sure, there has been progress but not enough to provide a defining resolution. Leaders are flirting with risk as Europe is going into recession. We have seen this movie before. The deal involves a promise by everyone to be a little more German about their spending and debt. The consensus now is that the 17-nation euro-zone bloc’s GDP growth will contract by up to 1% in 2012, sharply below this year’s already poor growth of 1%.

There was little in the deal to address the drastic loss of investor confidence. Euro-zone borrowing costs have resumed rising this week. Stock markets have retreated after an initial relief rally as optimism faded. The euro had since sunk below US$1.30, some 12% from its peak in May. The new “comprehensive” set of measures making-up the euro-zone’s “fiscal compact” failed to calm markets; it included the following:-

  • Constitutional amendment to balance the fiscal budget. The European Union’s (EU) Court of Justice would verify that each country had a compliant debt brake in its laws, but with no oversight from Brussels.
  • The new “stability union” will adopt a “golden rule” to ensure structural deficits (i.e. adjusted for boom and bust of economic cycles) below 0.5% of GDP. For breaching the 3% of GDP deficit limit, nations will suffer “automatic consequences,” unless member states vote to block them.
  • The 500-billion-euro European Stability Mechanism (ESM) to replace the existing bailout fund (EFSF) will be set up in March ’12 (instead of 2013).
  • A 200-billion-euro contribution to the IMF (International Monetary Fund) for on-lending to enhance the firepower of ESM to help Europe.
  • No more “hair-cuts” for private holders of dodgy euro-zone sovereign debts.
  • New treaty to change EU’s foundational pacts. With UK’s rejection, 17 euro countries and up to 9 of 10 EU nations not using the euro will form a separate pact outside the EU structure.

Prior to the summit, ECB took two decisive steps to shore up the euro-zone: cutting interest rate to a record low of 1% to soften the looming recession, and crucially extending longer-term liquidity to Europe’s cash-starved banks. Reserve ratios were also lowered. But ECB managed to avoid mounting pressure to buy more troubled states’ bonds.

As I see it, on the moral hazard side, there is no multi-trillion bail-out funds and no promise by ECB to become lender of last resort to monetise everyone’s debt, at least for now. However, the use of the European Court of Justice as final arbiter of rectitude is far from persuasive. Much of the new deal is reflective of the failed “stability and growth pact” that was around when the euro was launched, and which both Germany and France breached shortly thereafter.

Such rules will inevitably be broken because when it comes to fundamental rights to tax and spend, governments will always follow the dictates of national electorates rather than Brussels. No court has the political legitimacy to confront Italian or French unions when there is social unrest in the streets over budget cuts; the court won’t have the stomach to enforce its decisions. When German rectitude faces Italian or Spanish politics, we know who will get the upper hand.

Yet, for me, the irony is that EU had already agreed less than three months ago to rules that do much of what the new deal is now seeking to accomplish. They did so without having to endure the ordeal of changing EU treaties. The “six pack” arrangements were approved after nearly a year of tortuous negotiations. In broad strokes, they would have already established the framework of a more integrated EU.

How to revive confidence? The big problem lies in economic growth, or the lack of it. Most Europeans still believe in the direct linkage between spending and economic growth. So, the balanced budget requirement will work only with tax increases eternally matching higher spending. This implies a “long-term austerity gap.” As of now, Europe needs major spending cuts and fiscal reform. But politicians outside Germany are hoping ECB will eventually come to the rescue. At present, the ECB stands firm and won’t play ball. So the political pressure mounts.

The new deal simply means continued austerity in the euro-zone’s periphery without any offsetting impact of devaluation or stimulus at the core. Unemployment already at 10.3% will continue to rise, placing pressure on households (and youths in Spain, youth unemployment approaches 50%), governments and banks. Anti-European sentiment will continue to grow, and populist parties will prosper. Violence and social unrest will prevail.

Unfortunately, the new deal has no place for institutional changes to avert such a scenario. I am afraid if such changes are politically not possible, then the euro is doomed. It’s a matter of time. As post ’08 record shows, the biggest deficit in Europe these days is in ideas to spur growth and in the lack of political will to enact them. Already, in France, its Socialist Party presidential candidate is picking up on this undue emphasis on austerity; stressing Europe’s need for growth to get out of the crisis: “if there is no growth, none of the objectives will be reached.” Alas, Europe’s present leadership seems to have no stomach for this option. So I am afraid we are stuck with more summit sequels and the certainty of more uncertainty. Investors’ confidence will not return.

Looks like the euro-zone firewall still looks inadequate. As of now, plans to leverage the EFSF are mired in technical details. The combined size of EFSF and ESM is capped at an insufficient 500 billion euro. An infusion of 200 billion euro through the IMF is not game changing. Even so this measure is controversial.

ECB has indicated that earmarking is illegal. Moreover, IMF’s shareholders aren’t uniformly keen about directing cash to rich Europe. The US has parliamentary problems; so do Germany, Austria, Czech, Poland and Ireland, not to mention Holland and Finland. Pressure by S&P to downgrade and by Moody’s, including denying the likes of France AAA rating, has been priced-in to some markets. Nevertheless, there is still potential to shake prices. Further definite downgrades will take another leg down. Moreover, euro-zone is facing significant risk of a recession next year and a credit crunch. Another shock may be needed to get European politicians to all read from the same page.

Already, euro-zone also faces imminent acute funding problems. Member states need to repay over US$1.2 trillion of debt in 2012, mostly due in first half-year. In addition, European banks, heavily dependent on state largesse, have US$665bil of debt coming due by June ’12.

On Germany’s insistence, ECB won’t be allowed to unleash US-style quantitative easing or heavily buy up bonds or even issue euro-zone bonds which I consider critical. Many believe Germany will eventually relent. Its Chancellor has political problems. So, euro-zone’s big test still lies ahead. One thing is clear. The market is weighing in. So long as Spanish/Italian bonds cost more than 6%, the crisis is not fixed; confidence has not yet returned. The refinancing calendar of Europe’s sovereigns is onerous. Pressure will continue to be daunting as long as ECB is not lender of last resort.

The real problem is Europe’s banks remain locked-out of traditional funding markets, leaving them reliant on ECB which is playing it cool. Faced with funding freeze, banks will shrink their balance sheets and strangle growth by not lending. The situation is serious. Euro-zone banks can’t raise cash and won’t lend to each other because of counter-party risk. On top of it all, last week’s “stress tests” suggested Europe’s banks are short of 115 billion euro (up from 106 billion euro in October). No one knows who is really solvent anymore.

For Asia, the growing uncertainty is killing. The series of sequels following each European summit leaves a trail of deals, but not the cure. Investors are growing more nervous in the face of rising risk of recession. As the economic outlook for Europe worsens, Asia’s exporters will experience and expect continued weakening demand. Most exposed will be trading hubs like South Korea, Hong Kong, Taiwan & Singapore. In 2010, Korea’s exports were equal to 45% of GDP, with Europe as its second largest importer. But regional powerhouses, China, Japan and India, are also taking a hit. China is most exposed. Exports accounted for 36% of GDP in 2010 and Europe is its biggest destination (19%). So far, their huge domestic market has shielded them from Europe’s lack of growth, more than their smaller neighbours.

Export focus also matters. European slowdown is already affecting services exports from Hong Kong and Singapore. More cautious consumers in Europe undermine demand for Korean and Taiwanese consumer electronics. China’s dominance at the lower end of the value chain is largely immune to shifts in the economic cycle. But what’s worrisome is the continuing kick-the-can-down-the-road attitude of Europeans which works to prolong the crisis, and translates into reduced investment and employment in manufacturing capacity. The longer the crisis is left unresolved, the worse the impact on Asia.

Lord Keynes wrote in 1921: “about these matters the prospect of a European War, the price of copper 20 years hence there is no scientific basis on which to form any calculable probability whatever. We simply do not know.” And Keynes is right. While the euro enjoys widespread support, spending more money to save it doesn’t.

Germans resent seeing their hard earned cash diverted to rescue Greeks, perceived to be irresponsible. Recent polls show that more than 50% of Germans reject euro-bonds, and 59% oppose further bailouts. We are now stuck with the classic dilemma with austerity politics bringing no growth and no framework for common financing, continuing political intransigence has left politicians with the option to continue kicking-the-can-down-the-road. Like Keynes, we just don’t know how and how far euro-zone politicians will go towards assuming joint liability for debts (euro bonds). At some point, Europeans have to make the fateful choice between national sovereignty and the euro’s well being. Time is of the essence for a real breakthrough. In his recent book, Harvard’s psychologist Steven Pinker argues that mankind is becoming steadily less warlike and predicted that “today we may be living in the most peaceable era in human history.” For now, Pinker offers comfort that we won’t go to war over it he is right.

> Former banker, Dr Lin is a Harvard educated economist and a British Chartered Scientist who now spends time writing, teaching & promoting the public interest. Feedback is most welcome; email:


Different breed of entrepreneurs


Photo courtesy of Technorati

The old school and new school think, feel and act differently – all in the name of business


SOME 50 odd years ago, my partner’s father, Ang Toon Chew was staying in a hotel in Johor Bahru when he bumped into two reputable commodity traders whom he had heard of by reputation but never met before. That was the first time he had come face to face with Robert Kuok and Tan Chin Nam. They were among the early batch of famous entrepreneurs trading across Bangkok, Singapore and Kuala Lumpur.

From this chance meeting, they created a business alliance that spawned many joint ventures and collaborations. Together with a few other associates, they created their own business empires by being pioneers in many industries. They pooled their financial resources in those days when capital was scarce and stayed united through a maze of cross holdings that were complemented by complete mutual trust.

Right after Malaysia gained independence, the Ang family initiated the setting up of Petaling Garden (PGB) and together with all their business associates pooled an initial paid up capital of RM1mil. In the early 60s, this capital enabled PGB to buy many pieces of land that finally became Section 5 & 6, Gasing Hill and Section 17. Ang’s son, Ang Guan Seng was tasked to manage this company and he stayed there for almost 50 years and was believed to hold the record as the longest serving Managing Director of a Public listed company in Malaysia.

Robert Kuok managed the sugar and flour business and set up Shangri-la Hotel, again with these few close associates. Datuk Tan Chin Nam set up Ipoh Garden (IGB) and went on to own one of the most successful racing horse stables in the world. Their billion dollar empires were built brick by brick and often side by side. Just pure collective blood, sweat and tears.

I have admired a few master entrepreneurs in my short career and all of them tend to be “old school”. Nothing against the young entrepreneurs, as it takes more than one or two successful business ventures to earn the “master” accolade. The old Master has tasted more failures than success, cheated by those that he trusted and has sailed through countless economic storms and business cycles.

The entrepreneurs of yesteryear grow commodities, built factories that produce useful merchandise, built homes and create jobs. They work with the government to build a nation. Entrepreneurs nowadays create shareholder’s value, just numbers on a piece of paper as it is the easiest route to instant riches.

I admire Robert Kuok for his vision. His ability to see beyond communism and poverty. His courage to commit himself to the Chinese market way before anyone else did. His code of honour in his dealings earned the trust of the Communist Government. This master entrepreneur will eventually build over a hundred hotels and malls in many cities across China on prime commercial land that costs him zilch.

I admire Tan Sri Quek Leng Chan for his non sentimental predatory instincts. Buy companies, build the business and sell for 10 times what he paid for. His negotiating skills are legendary. Just ask EON Bank. Take it or leave it. All young entrepreneurs should learn to study his poker face. Just don’t blink first.

I admire Datuk Tan Chin Nam for his flamboyance. His gung ho enthusiasm made the “old school” look sexy. He built the first condominium in Malaysia when land was in abundance and Mont Kiara was still a rubber estate. He ploughed everything into the development of Mid Valley during a major recession to be the owner of the largest shopping mall in Malaysia.

Datuk Tan was well known for his charming disposition. He romanced Australia in the 70s and the 80s and was the leading Malaysian investor in properties and race horse breeding. His horses won the Melbourne Cup numerous times. He was on buddy terms with the first Prime Minister, Tuanku Abdul Rahman and was a proud friendship and business ambassador for Malaysia.

I admire my late partner, Mr. Ang Guan Seng for his generosity. Ever willing to help his friends and suppliers, he has helped many small entrepreneurs to become self made millionaires. He showed me the virtues of patience and humility, and taught me how to value friendship and properties. Honesty and integrity builds confidence among your business associates and bankers.

Now that my mentor is gone, I am truly on my own. Whenever in doubt, I always find comfort from his words of wisdom. The constant reminder to be thankful for what I have and to have survived the many mistakes that I have made.

Nostalgia aside, let’s compare the “old school” with the “new world” entrepreneurs.

Highly educated and tech savvy, the “new world” entrepreneur is impatient to build his business empire. To fast track his ambitions, he engages the financial market to raise funds. With a suave personality and refined marketing skills, he entices fair weather fund managers to invest in his company with promises of enhanced shareholder values.

His reduced shareholdings is compensated by rising valuation but he is now exposed to takeover bids.

The old entrepreneur always works silently with the government and would avoid confrontation. The new entrepreneur derives his courage from his political affiliation. The emergence of sovereign funds like PNB and Khazanah has complicated the political equation. Throw in the ambitious GLCs and we have a battlefield where confrontation is unavoidable.

New entrepreneurs engage in marriage of convenience. Old entrepreneurs still believe in the institution of marriage where integrity and friendship are valued highly. The new image is all about high profile personal branding. The old stays anonymous and feels more comfortable operating behind the chaotic scenes.

If you believe in the old way of doing business like me, stay away from businesses that has attracted the interests of the powerfully connected funds, GLC’s and politicians. Despite the shrinking economic pie, you can still make a comfortable living without compromising your integrity.

But if you intend to make a billion ringgit within 10 years, go ahead and be a “new world” entrepreneur. Embrace reality with your eyes wide open. Good luck.

l The writer is an entrepreneur who hopes to share his experience and insights with readers who want to take that giant leap into business but are not sure if they should. Email him at

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