EU's Financial Woes 

Sovereign debt crisis to derail world growth?

THE sovereign debt crisis contagion is spreading in Southern Europe (see charts), from Greece to Portugal, Spain and Italy, where government debts and budget deficits are high.

Investors have sold government bonds in those countries as perceived default risks have risen.

This has resulted in the rise in the yields of government bonds resulting in higher borrowing costs for the government and private sector as loans are often tied to the risk free rate of government bonds.

Countries that faced sovereign debt crisis earlier, like Iceland, Ireland, Hungary and Latvia, had to reduce their budget deficits by raising taxes and cutting government spending, resulting in economies going into recessions.
For example, austerity measures in Ireland have resulted in the economy shrinking by almost 12% in the last two years.

Unfortunately, those countries in the eurozone cannot print money like the US, UK and Japan to finance their deficits through the monetisation of debt as they have given up control of their monetary policies to the European Central Bank.

Leaving the eurozone and devaluing their currencies will likely lead to an Argentinian-style loss in confidence and massive fund outflows.

Large budget deficits were the cause of the problems faced by these European countries but still they are likely to resist ceding control over matters like government spending and taxation to the European Union authorities.

As the European monetary union is facing tremendous stress, can the currency union survive where there is no fiscal union or discipline?

Austerity measures are being forced on these Southern European countries at a time when economic conditions are terrible.

For example, following the collapse of the Spanish property bubble which decimated the construction and real estate industry, Spanish unemployment has exceeded four million, representing an unemployment rate of close to 20%.

Cutting Spanish government spending to reduce its 11.4% budget deficit as a percentage of gross domestic product can only worsen unemployment.

The downgrading of the sovereign debts of Southern European countries is also fuelling the contagion and capital flight.

The sovereign rating of Japan, with an extremely high debt to GDP of close to 200%, is at risk with S&P placing a negative outlook on Japan’s double A sovereign credit rating.

Strangely, these agencies have continued to maintain the triple A ratings of the US and UK, even though their budget deficits are very high, estimated at US$1.6 trillion of 10.6% of GDP for the US.

This is despite the fact that the US unlike Japan cannot rely on domestic savings to fund its borrowings. But then, these were the same agencies that maintained AIG’s triple A rating even when it was guaranteeing large amounts of risky subprime loans.

Even the US is facing constraints on the size of its budget deficits as a popular revolt against large deficits are being organised and the loss of the 60-vote Democratic majority in the Senate means that Republicans can now block spending bills.

The world is depending on fiscal stimulus to sustain growth as highly geared Western consumers are still deleveraging and are reluctant to borrow more despite low interest rates.

If enough countries withdraw fiscal stimulus because of the sovereign debt contagion, world growth will stall, plunging the world into a double dip recession.

This possibility cannot be fully discounted as the GDP of all the Southern and Eastern European countries combined is estimated by the International Monetary Fund (IMF) at US$9.1 trillion in 2008, more than twice the size of the Chinese economy.

Already, it would appear that government spending cuts and loss in confidence in the euro has permanently damaged European growth for the next two years.

The EU’s economy, with an estimated GDP of US$18.4 trillion in 2008 is larger than the US economy at US$14.4 trillion.

US and Chinese manufacturing will also be adversely impacted as demand from Europe will decline and a weaker Euro makes US and Chinese exports less competitive.

To prevent this contagion from spreading, the European central bank would have to guarantee the sovereign debt of these affected countries.

Excessive speculation should be curbed to prevent a downward spiral like what happened during the Asian crisis.

Speculative attacks during the Asian crisis ended when speculators who short sold were killed off by the superior buying power of the Chinese and Hong Kong authorities which also changed rules on short selling.

Presumably, Germany and France with the support of other major powers (US, China and the UK) could do the same. That of course would be premised on Greece cutting its budget deficit; probably a foregone conclusion as funding problems will curb spending.

Sounds familiar? The similarities to the Asian financial crisis are as follows: austerity measures were imposed when the economy was hurting and the flight of short-term funds resulted in higher interest rates.

Like Tun Mahathir Mohamad, the Greek prime minister is already blaming unscrupulous hedge funds and speculators for its predicament.

A withdrawal of fiscal stimulus would slow world growth and increase the chance of a double dip recession.

Corporate earnings and the stock market are likely to be adversely impacted. On the flipside, a weak economy will allow interest rates to remain low for a longer time.

The inability to fund fiscal stimulus through government debt may also increase the temptation to print money to finance the deficits, especially if deflationary pressures arise from a slower growth (exacerbated by lower commodity prices and excess capacity).

If such a downturn is moderate, it could lead to better fiscal discipline and a more rapid private sector adjustment; Asian countries hit by the Asian financial crisis (including Malaysia) have weathered the current downturn better as their financial systems are more stable now, budget deficits can be funded by domestic savings, asset bubbles have been better contained and borrowings are funded mainly by domestic sources.

In an environment of weak growth and low interest rates, stick to defensive sectors with steady demand like healthcare (rubber glove companies), utilities, tobacco and telecommunications.

A high dividend yield should also be welcomed as interest rates are likely to remain low due to slower growth and deflationary pressure.

Source: Starbiz ● Choong Khuat Hock, head of research at Kumpulan Sentiasa Cemerlang Sdn Bhd.

A new wire twist on silicon solar cells

CHICAGO--U.S. researchers have devised a way to make flexible solar cells with silicon wires that use just 1 percent of the material needed to make conventional solar cells.

The eventual hope is to make thin, light solar cells that could be incorporated into clothing, for instance but the immediate benefit is cheaper and easier-to-install solar panels, the researchers said.

The new material, reported on Sunday in Nature Materials, uses conventional silicon configured into micron-sized wires (a micron is one-millionth of a meter) instead of brittle wafers and encases them in a flexible polymer that can be rolled or bent.

"The idea is it would be lower-cost and easier to work with by being more flexible than conventional silicon solar cells," Michael Kelzenberg of the California Institute of Technology in Pasadena, who worked on the study, said in a telephone interview.

Solar cells, which convert solar energy into electricity, are in high demand because of higher oil prices and concerns over climate change.

Many companies, including Japanese consumer electronics maker Sharp and Germany's Q-Cells SE, are making thin-film solar cells using organic materials such as polymers, but they typically are less efficient at converting solar energy into electricity than conventional cells using silicon.

The study is among the latest to combine the flexibility of the new organic or carbon-containing films with the high efficiency of silicon, which is heavy and stiff.

Kelzenberg said the material uses about 1/100th as much silicon per cell area as a silicon wafer.
"It is potentially a route to bypass many of the costs associated with producing solar cells," he said.

He said a big problem with working with silicon wafers is they are fragile.
More testing is needed but Kelzenberg said the material would be about 15 percent to 20 percent efficient, about the same level as solar cells used on roofs to heat homes.

A similar effort is under way in the lab of John Rogers, a professor of materials science at the University of Illinois-Urbana-Campaign, who is working on ways to make inorganic materials more flexible.

While many companies are investing in organic solar cells--basically materials like plastic that contain carbon--Rogers said these materials have relatively low performance, less long-term reliability and an unproven cost structure.

"We like the inorganics--trying to adapt them and use them in nonstandard ways," Rogers said in a telephone interview.

Last year, his team reported on a new manufacturing process that creates thin arrays of solar cells that are flexible enough to be rolled around a pencil and transparent enough to be used to tint windows on buildings or cars.

"We can make them stretch like a rubber band or bendable like a sheet of plastic," he said.
He is founder of a start-up semiconductor company called Semprius in Durham, N.C., that last month announced a joint effort with Siemens to develop large systems for utility-scale power generation.

"The same technology they are using to make these rigid utility-scale modules could be used for flexible devices as well," he said.

Rogers said that the company has funding from the U.S. Department of Defense and the CIA.
Story Copyright (c) 2010 Reuters Limited. All rights reserved.

Up close and personal with Amway chairman Steve Van Andel

The Amway Corp chairman talks passionately about the subject closest to his heart – Amway

Alticor Inc chairman Steve Van Andel cuts a tall, commanding but tired figure walking into the room for this interview.

He just got off a flight from the US after which he was whisked off almost immediately to attend a morning-full of celebrations to commemorate the opening of Amway Malaysia’s new RM100mil headquarters.

Alticor is the parent company of the Amway group of companies.

As children, all we had to do to see the business was to go down to the basements – STEVE VAN ANDEL

“I need a Coke, some sugar to get me going,” he says before settling into this conversation with StarBizWeek last month.

Call him a typical American in this regard but it appears he is soon recovered from his fatigue and starts talking passionately on the subject closest to his heart – Amway, the abbreviation for American Way – the direct selling company his father co-founded more than five decades ago.

The lanky, soft-spoken, 54 year-old Steve is the son of the late Jay Van Andel who passed away in 2004, the man who established Amway together with his childhood friend, Rich DeVos.

Van Andel and DeVos senior started their business venture in 1959, selling vitamins and biodegradable soaps to their community in the small western Michigan town of Ada from their home basements.

“As children, all we had to do to see the business was to go down to the basements,” Steve reveals.

Sales were so good that the pair eventually established plants to manufacture their own products.

Over the decades, both men worked hard to build their business – now still headquartered in Michigan – to become one of the most well-known brands in the US.

It wasn’t always a smooth path. And Steve, who joined Amway right after college knows this better than anyone else.

“We’ve had our difficult times but which business doesn’t?” he says.

Steve took over from Jay in 1995 as head of the group after the latter retired.

He now jointly heads the conglomerate together with Doug DeVos who is president of Alticor.

Since taking charge, the second generation bosses, both of whom are the eldest sons of the founders and extremely close pals just like their fathers, have taken the small town entrepreneurial legacy many steps further – expanding globally at a rapid pace and continuously introducing innovative products of a wide variety to the markets.

In 2008, Alticor’s businesses recorded global sales of US$8.2bil, making it the world’s second largest direct selling company after Avon Products, Inc.
Not surprisingly, China is its biggest market right now, owing to the huge population there, unlike in the earlier days when sales were largely domestic, Steve says.

“We are also seeing great growth in Russia and India, I think the fact that we are now so spread out really helps us sustain sales, even in difficult economic times.

“It’s an adventure every time you venture into a new country,” he says.

Amway makes money from selling its products to the growing number of its distributors globally who in turn sell them to customers.

From simple household and health food products, its product categories have grown to include beauty and wellness and skincare products over the years.

Raised in a strict Christian family, Steve is quite obviously the chip of the old block, where his personal character is concerned.

Dad, Jay who died a billionaire once wrote in his autobiography that “the greatest pleasure comes not from the endless acquisition of material things, but from creating wealth and giving it away; the task of every person on earth is to use everything he’s given to the ultimate glory of God.”

Steve likes to believe that he is very much in tune with his dad’s values.

“The idea of providing our distributors an opportunity to make their own money, build their lives and to achieve personal success is what keeps me motivated every single day,” he says.

Some have even become millionaires and I’d like to think that we had a role to play in that.

“It’s really about giving back,” he says.

“To me, our company has grown by leaps and bounds, and really, the most important thing to us right now is that we do our part in helping people change their lives for the better,“ Steve adds.

Amway now has more than 3 million distributors or sales reps around the world, he says and the business continues to grow as “it is an opportunity for individuals from any walk of life, to build the kind of life that they want and dream of.”

Because after all, my dad and Rich started the company with a very basic notion – that everyone, regardless of their monetary position or educational background – could strike it out on their own and be their own boss,” says Steve.

People in developing nations, such as Vietnam, China and India, have slowly been taking to Amway’s direct-sales concept as a way of earning an income and building their wealth, where in previous times, such a thought had never occurred to them, he adds.

Like his father in more ways than one, Steve is also past chairman of the US Chamber of Commerce, the world’s largest business federation representing millions of businesses in the US.

He still sits on the board.

In addition to the chamber board, Steve is also on the board of the Centre for International Private Enterprises, Michigan National Bank Corp, Grand Rapids John Ball Zoo Society and the American Management Association’s Operation Enterprise, amongst others.

Obviously, the business of Amway which is privately held, yes Amway in the US has never gone public – has made Steve a well-off man but not one to forget his roots, he says he continues his father’s community works up till today, dedicating time and effort to the renewal of his hometown, among which the products are the Van Andel Institute, a major health research centre and the Van Andel Museum Centre, both community projects that the people of the town enjoy.

“I’ve travelled the world over,” Steve says at the end of this interview but it is apparent where the heart of this true-boy of West Michigan lies.

“Both our families (Van Andels and DeVos’) are products of Western Michigan and we will never ever forget that,” he says.

Source: By YVONNE TAN
yvonne@thestar.com.my