Monday, 4 January 2010

1,406 reasons to change course

Michael Burke: The number of corporate insolvencies in Ireland has soared to 1,406 in 2009, according to This exceeds the level of insolvencies in 2007 and 2008 combined, which totalled 1,136, with an increase of 82% on 2008 alone. The highest number of monthly insolvencies was in December, at 156, indicating that the decline is on an accelerating trend. This represents a significant deterioration in the outlook for businesses.

The composition of insolvencies is revealing. The problems of the construction sector are well-known, but these now form a minority of the failed business in 2009, approximately one-third of the total. The next 3 largest categories for insolvency are directly related to the slump in consumer demand; services, retail and hospitality, and together these represent 45% of the total. Of the remainder, manufacturing, the motor sector, IT, and transport comprise 18%. There is no employment breakdown of the data, but a reasonable assumption would be that job losses in these latter sectors would account for a greater proportion of the total, owing to greater average enterprise size.

The data are an indictment of government policy and those of the business lobbyists, such as IBEC and their supporters in academia. The nature of the economic crisis in Ireland is a combined property and banking crisis, which has precipitated a slump in activity led by investment. It was not, at the outset, a crisis of falling consumer demand. Banking write-downs of residential mortgage lending are testament to that; running at one-tenth the level of writedowns to failed property speculators. At the end of 2008, personal consumption was declining by 3.6% from the previous year, less than half the decine in the GDP/GNP measures which were down between 7% and 8%. The driving force behind the aggregate decline was an enromous 26.1% fall in investment (gross fixed capital formation), led by but not confined to construction investment.

However, since that time there have been a series of austerity measures totaling 6.4% of GDP, with threats of more to come. This has had a direct contractionary effect on economic activity. Worse, the measures have been concentrated on the lowest paid and welfare recipients, precisely those who are obliged to consume a greater portion of their incomes. As a result, the latest data show private consumption had almost caught up with the rate of decline in GDP, -6.8% compared to -7.4% in Q3 2009. At the same time, the absence of any stimulus measures and against a backdrop of falling demand, investment continues to plunge, down 35% year-on-year in Q3 and is now back to a level last seen in Q3 1998.

Of course, all these insolvent companies will no longer be paying corporate taxes. Neither will their redundant workers be paying income taxes, and many will be obliged to seek welfare benefits. Yet the policy enacted was in the name of fiscal rectitude. The complete failure of that policy, even in its own terms, can be gauged from the fact (as shown in the latest Budget Report) the government's own forecasts for the deficit keep rising.

A rational economic policy would begin with measures to stimulate the economy and staunch the flow of insolvencies, (as has happened all across Europe and in other leading economies), an end to cuts and a major increase in government investment. The government is about to embark on a programme of €54bn borrowing to hand over to bank share and bondholders. The idea that, say, one quarter of that amount could not be borrowed to fund investment is a nonsense. This paper from Lane and Benetrix shows that, even in ordinary circumstances, the multiplier effects of government investment are enormous. The stimulative effects of investment plus the taxes they generate means it is a reckless policy of malign neglect that is currently being pursued.

IBEC's stance is that of the small shopkeeper who hopes to stay in business by cutting staff wages. When replicated economy-wide, this is a policy of contraction. It has already been pursued with disastrous consequences. There are now a further 1,406 reasons why it should be abandoned.


Joseph said...

I thought the writing had been on the wall for some time now.

Businesses (I was one of them) have been holding on and holding on in the desperate hope of some improvement in the economy. It hasn't happened - here or in continental Europe/UK where I have mostly worked in the past 10 years (60% non-Ireland, 40% in Ireland).

I have not earned any fees since September 2008 (and 2008 was also my worst ever year by a long way). I spent all day, every day, in 2009 looking for new business - here and abroad - and didn't find it.

My business account is now down to the last €100 and I am the only one left in the company. I have no option but to give up now. I am about to close down (and I will probably find it's going to cost me more than €100 just to do that!).

I will try my luck at finding a job abroad and save until I can get back on my feet again and start another business - I doubt that it will be in Ireland again though and I'm not sure how I'm going to pay the mortgage here in the meantime.

I can only see an even higher number of businesses closing in Ireland in 2010, particularly over the first half, and the jobless total rising (my wife was also made redundant early last year which hasn't helped).

The complete lack of purpose from this government in terms of stimulating the economy or job growth has truly shocked me and I can only see more of the same coming. I seriously don't think these people know what they are doing. They couldn't manage their way out of a wet paper bag but I guess that should be no surprise as the vast majority of TD's seem to have no business experience and some of them, very little experience of even ever having had a proper job outside of politics.

To coin that wonderful phrase ..... Will the last person to leave Ireland please turn the lights out?

Paul Hunt said...


This seems to be an expansion of your comments on

My comment there in response still stands.

Michael Burke said...


Apologies, I think it got lost in the time of year. The fact that we two were the only contributors to the thread on Irish Economy suggests it wasn't the best time to conduct a debate.

Which is a shame because I think the Lane/Betrix paper in particular should get a much wider airing.It is here.

My understanding was that you reiterested your stance that, while reflationary investment might be desirable, it was ruled by current borrowing constraints.

I didn't think it would add much by my rehashing my view that investment is the only rational way out of the crisis.

Instead I was hoping, and hope still, that the Lane/Benetrix analysis would move things forward, since it shows very significant positive effects on output from an increase in government investment ('multipler effects'). As the authors note, these findings are simply based on the long-run averages for the Irish economy and would be expected to be higher when

a. the output gap is wider

b. interest rates are low, and

c. access to credit is constrained.

Since each of these 3 separate conditions currently applies, it is reasonable to assume the multipliers would be much higher currently than the averages identified in the research.

Furthermore, since the DoF accepts that around 20% of the latest cuts will disappear in the form of lost taxes (only looking at the first year impact) it follows that the multiplier effect would need only be an average of 1:1 over 5 years for the investment to be cost-free, in terms of increased taxes (5 x 1 x 20%). But the Lane/Bentrix research shows the multiplier for government investment to be much higher than 1:1 over an average of 5 years (p.420), even under average conditions.

Therefore the return on the investment is considerably greater than the initial outlay; it is more than cost-free. This is the logic driving the policy of most European governments currently.

As for the piece above, that was a different tack; arguing that current government policy has unnecessarily drawn ever-wider sectors of the econmy into the slump.

It is a pity IBEC cannot defend its own members' interests (een offering 'qualified support' to NAMA while businesses are throttled by lack of credit). IBEC's failure in that regard passes the duty to preserve Irish business to other, more progressive forces.

Paul Hunt said...


Many thanks for your response. I don't think there's any disagreement between us on the requirement for investment - particularly in a broad range of economic and social infractructure. My focus is on the financing of this investment. The NTMA issued almost €30 billion of net new bonds in 2009 to finance a current government deficit, some capital expenditure and bank recap. Without any additional capex beyond that projected I can't see the NTMA issuing less than another €30 billion in net new bonds in 2010 - and that is on top of the requirement to rollover large tranches of short term bonds and commercial paper. There has to be limit on the ability to tax-fund the debt service on this borrowing - and equally a limit on bond buyers confidence that the taxes required may be extracted.

Other approaches to financing infrastructure investment must be considered. Dieter Helm, a UK academic, has published a number of relevant papers recently ( The UK is facing an infrastructure investment requirement of some €600 billion over the next decade. Ireland is probably looking at something of the order of €30 -40 billion. I do not believe that full the financing of this can be secured by government and the service burden loaded on taxpayers. A combination of other options will need to be considered. While I don't go down the road fully with Helm on his options (and preferred option) I think his papers provide an excellent basis for considering the economic and policy issues and it is easy to see where Ireland stands at the moment.

Michael Burke said...

Paul, I will take a look at the Helm piece, thanks.

Ireland's debt issuance is a drop in the ocean compared to the total currently being issued by governments, and generally at very low interest rates. One of the reasons for that is the private sector, both individuals and corporates, are hugely increasing their savings (deleveraging). Additional government borrowing to fund investment is not only necessary, it's preferred by the bond market.

See here

and here

When Germany announced its surprise stimulus package benchmark yields went lower, down to 3.14% in mid-December.

This is because bond investors are all reflationists at heart. No, just kidding.

Their prime concern is getting their money back. They lend to businesses (sometimes over the very long-term), as long as they have a sound business plan which involves productive investment, that is, where the return on capital borrowed is greater than the capital and interest. Currently, they are happy to lend on that basis too to governments, as long as they have a credible repayment, ie reflationary plan.

The dangers for Ireland include being left standing when the global recovery comes, still trying to borrow against a ever-diminishing tax base. Another danger is trying to borrow on behalf of entities which have no prospect of returning capital to investors, like zombie banks, and being told No.

Paul Hunt said...


The NTMA has just issued its review of 2009 (and preview of 2010). It's looking to issue €20 bn in 2010 to cover a projected deficit (current + voted capex) of €18.7 plus €1.2 bn rollover. It has a carryover of €5 bn from 2009 which, presumably, will be swallowed in the bank recap (plus, probably, most of what's left in the NPRF). Since it got away €35 bn last year (to cover deficit of €25 bn (including €4 bn that evaporated in Anglo) + redeemption of €5 bn + carryover of €5 bn), it is possible to see some scope to borrow additionally for more productive purposes. But I suspect the Government will be fixated on recapping the banks - and it may not be able to milk the NPRF dry. In that context it makes sense to look at alternative ways of raising finance for productive investment.

Michael Burke said...

Why pay €5bn for something that's worth nothing in a bank recapitalisation? I know that seems to be the default policy as far as the banks are concerned. While a market economy needs banks, there is no imperative to have bank shareholders, bondholders either. Their value added is clearly negative.

There is a real risk in this of a bond investors' strike. To stretch the earlier analogy; if you asked the bank manager for €1mn for new computer systems to deliver your services quicker, you'd be in with a chance. Ask him for the same, because you have an old mate who's in danger of defaulting on his debts, see what answer you'd get. She might even change her mind about the first loan too.

Separately, she might also take a dim view of any cunning plan you have to sell and lease back your fleet of vans (privatisation) if either the annual costs are higher, or the service worse, or both. But I'm jumping ahead, I haven't read Helm yet.