30/6/20: COVID19 Impact on SMEs and Employment

Some really good mapping in terms of financial exposures/risk and COVID19 vulnerabilities within the U.S. small and medium enterprises sectors, via McKinsey & Co:

Source: https://www.mckinsey.com/featured-insights/americas/which-small-businesses-are-most-vulnerable-to-covid-19-and-when. Interactive graphs: https://covid-tracker.mckinsey.com/small-business-vulnerability.

Additional: vulnerabilities across jobs https://covid-tracker.mckinsey.com/vulnerable-jobs/industry-occupation.

8/3/2014: Morgan Kelly on the Next Incoming Train...

Superb as he always is, Professor Morgan Kelly gives a public lecture on the state of Irish economy (poor), the evolution of the crisis (currently at a temporary stabilisation), recovery (superficial) and what is coming up (ugly)... https://www.youtube.com/watch?v=8LCofepdUzE&feature=youtube_gdata_player

Morgan delivers in his usual - engaging - manner.

I must say that I do not necessarily agree with all of this, but that is not the point for this post...

26/12/2013: Don't Bank on the Banking Union: Sunday Times, December 15

This is an unedited version of my Sunday Times column from December 15, 2013.


Over the last week, domestic news horizon was flooded by the warm sunshine of Ireland's exit from the Bailout. And, given the rest of the Euro area periphery performance to-date, the kindness of strangers was deserved.
Spain is also exiting a bailout, and the country is out of the recession, officially, like us. But it took a much smaller, banks-only, assistance package. And, being a ‘bad boy’ in the proverbial classroom, it talked back at the Troika and played some populist tunes of defiance. Portugal is out of the official recession, but the country is scheduled to exit its bailout only in mid-2014, having gone into it after Ireland. No glory for those coming second. Greece and Cyprus are at the bottom of the Depression canyon, with little change to their misery.

In short, Ireland deserves a pat on the back for not being the worst basket case of the already rotten lot. And for not rocking the boat. Irish Government talks tough at home, but it is largely clawless vis-à-vis the Troika. Our only moments of defiance in dealing with the bailout came whenever we were asked to implement reforms threatening powerful domestic interests, such as protected sectors and professions.

However, with all the celebratory speeches and toasts around, two matters are worth considering within the broader context of this week's events. The first one is the road travelled. The second is the road that awaits us ahead. Both will shape the risks we are likely to face in the medium-term future.


The road that led us to this week's events was an arduous one. Pressured by the twin and interconnected crises - the implosion of our banking sector and the collapse of our domestic economy - we fell into the bailout having burnt through tens of billions of State reserves and having exhausted our borrowing capacity. The crater left behind by the collapsing economy was deep: from 2008 through today, Irish GDP per capita shrunk 16.7 percent, making our recession second deepest in the euro area after Greece. This collapse would have been more benign were it not for the banking crisis. In the context of us exiting the bailout, the lesson to be learned is that the twin banking and growth crises require more resources than even a fiscally healthy state can afford. Today, unlike in 2008, we have no spare resources left to deal with the risk of the adverse twin growth and banking shocks.

Yet, forward outlook for Ireland suggests that such shocks are receding, but remain material.

Our economic recovery is still fragile and subject to adverse risks present domestically and abroad. On domestic side, growth in consumer demand and private investment is lacking. Deleveraging of households and businesses is still ongoing. Constrained credit supply is yet to be addressed. This process can take years, as the banks face shallower demand for loans from lower risk borrowers and sharply higher demand for loans from risky businesses. On top of this, banks are deleveraging their own balance sheets. In general, Irish companies are more dependent on banks credit than their euro area competitors. Absent credit growth, there will be no sustained growth in this economy. Meanwhile, structural reforms are years away from yielding tangible benefits. This is primarily due to the fact that we are yet to adopt such reforms, having spent the last five years in continued avoidance of the problems in the state-controlled and protected domestic sectors.

On the Government side, Budgets 2015 and 2016 will likely require additional, new revenue and cost containment measures. Post 2016, we will face the dilemma of compensating for the unwinding of the Haddington Road Agreement on wages inflation moderation in the public sector and hiring freezes.
To-date, Irish economy was kept afloat by the externally trading services exporters, or put in more simple terms - web-based multinationals. Manufacturing exports are now shrinking, although much of this shrinkage is driven by one sector: pharmaceuticals.

Meanwhile, the banking sector is still carrying big risks. Heavy problems of non-performing loans on legacy mortgages side, unsecured household credit and non-financial corporates are not about to disappear overnight. Even if banks comply with the Central Bank targets on mortgages arrears resolution, it will take at least 18-24 months for the full extent of losses to become visible. Working these losses off the balance sheets will take even longer.
Overall, even modest growth rates, set out in the budget and Troika projections for 2014-2018, cannot be taken for granted.


This week, the ongoing saga of the emerging European Banking Union made the twin risks to banks and growth ever-more important. The ECOFIN meetings are tasked with shaping the Bank Recovery and Resolution Directive, or BRRD. These made it clear that Europe is heading for a banking crisis resolution system based on a well-defined sequencing of measures. First, national resources will be used in the case of any banks' failures, including in systemic crises. These resources include: wiping out equity holders, and imposing partial losses on lenders and depositors. Thereafter, national funds can be used to cover the capital shortfalls and liquidity shortages. Only after these resources are exhausted will the EU funds kick in to cover the residual capital shortfalls. This insurance cover will not be in the form of debt-free cash. Instead, the funding is likely to involve lending to the Government and to the banks under a State guarantee.

When you run through the benchmark levels of capital shocks that could qualify a banking system for the euro-wide resolution funding under the BRRD, it becomes pretty clear that the mechanism is toothless. For example, in the case of our own crisis, haircuts on bondholders under the proposed rules could have saved us around EUR15-17 billion. In exchange, these savings would have required bailing in depositors with funds in excess of the state guarantee. It is unlikely that we could have secured any joint EU funding outside the Troika deal. Our debt levels would have been lower, but not because of the help from Europe.

This last point was made very clear to us by this week’s events. After all, our historically unprecedented crisis has now been 'successfully resolved' according to the EFSF statement, and as confirmed by the European and Irish officials. The 2008-2010 meltdown of the Irish financial system was dealt with without the need for the Banking Union or its Single Resolution Mechanism.

With a Banking Union or without, given the current state of the Exchequer balance sheet, the buck in the next crisis or in the next iteration of the current crisis will have to stop at the depositors bail-ins. In other words, banking union rhetoric aside, the only hope any banking system in Europe has at avoiding the fate of Cyprus is that the next crisis will not happen.


Second issue relates to the continued reliance across the euro area banks on government bonds as core asset underpinning the financial system. In brief, during the crisis, euro area banks have accumulated huge exposures to sovereign bonds. This allowed the Governments to dramatically reduce the cost of borrowing: the ECB pushed up bonds prices with lower interest rates and unlimited lending against these bonds as risk-free collateral.

The problem is that, unless the ECB is willing to run these liquidity supply schemes permanently, the free lunch is going to end one day. When this happens, the interest rates will rise. Two things will happen in response: value of the bonds will fall and yields on Government debt will rise. The banks will face declines in their assets values, while simultaneously struggling to replace cheap ECB funding with more expensive market funds.

Given that European Governments must roll over significant amounts of bonds over the next 10 years, these risks can pressure Government interest costs. Simple arithmetic says that a country with 122 percent debt/GDP ratio (call it Ireland) and debt financing cost of 4.1 percent per annum spends around 5 percent of its GDP every year on interest bills, inclusive of rolling over costs. If yield rises by a third, the cost of interest rises to closer to 6.6 percent of GDP. Now, suppose that the Government in this economy collects taxes and other receipts amounting to around 40 percent of GDP. This means that just to cover the increase in its interest bill without raising taxes or cutting spending, the Government will need nominal GDP growth of 3.9 percent per annum. That is the exact rate projected by the IMF for Ireland for 2014-2018. Should we fail to deliver on it, our debts will rise. Should interest rates rise by more than one-third from the current crisis-period lows, our debts will rise.


The point is that the dilemmas of our dysfunctional monetary policy and insufficient banking crisis resolution systems are not academic. Instead they are real. And so are the risks we face at the economy level and in the banking sector. Currently, European financial systems have been redrawn to contain financial exposures within national borders. The key signs of this are diverged bond yields across Europe, and wide interest rates differentials for loans to the real economy. In more simple terms, courtesy of dysfunctional policymaking during the crisis, Irish SMEs today pay higher interest rates on loans compared to, say, German SMEs of similar quality.

Banking Union should be a solution to this problem – re-launching credit flowing across the borders once again. It will not deliver on this as long as there are no fully-funded, secure and transparent plans for debt mutualisation across the European banking sector.

Box-out:

Recent data from the EU Commission shows that in 2011-2012, European institutions enacted 3,861 new business-related laws. Meanwhile, according to the World Bank, average cost of starting a business in Europe runs at EUR 2,285, against EUR 158 in Canada and EUR 664 in the US. Not surprisingly, under the burden of growing regulations and high costs, European rates of entrepreneurship, as measured by the proportion of start up firms in total number of registered companies, is falling year on year. This trend is present in the crisis-hit economies of the periphery and in the likes of Austria, Germany and Finland, who weathered the economic recession relatively well. The density of start-ups is rising in Australia, Canada, the US and across Asia-Pacific and Latin America. In 2014 rankings by the World Bank, the highest ranked euro area country, Finland, occupies 12th place in the world in terms of ease of doing business. Second highest ranked euro area economy is Ireland (15th). This completes the list of advanced euro area economies ranked in top 20 worldwide. Start ups and smaller enterprises play a pivotal role in creating jobs and developing skills base within a modern economy. The EU can do more good in combatting unemployment by addressing the problem of regulatory and cost burdens we impose on entrepreneurs and businesses than by pumping out more subsidies for jobs creation and training schemes.

26/12/2013: Ireland's Technical Recovery: Sunday Times, December 08

This is an unedited version of my Sunday Times column from December 08, 2013



In his address to the Rogers Commission investigating the explosion of the Space Shuttle Challenger, Nobel Prize-winning physicist, Richard Feynmann outlined the birds-eye view of the causal relationship between the man-made disasters and the politicised decision-making. Per Feynmann, "For a successful technology, reality must take precedence over public relations, for nature cannot be fooled".

The laws of reality apply to social sciences as well, independent of PR.  Recent events offer a good example. While lacking longer-term catalysts for growth, Irish economy did officially exit the recession in Q2 2013. Yet, the real GDP remained 1.2 percent below the levels attained in Q2 2012. Glass is half-full, says an optimist. Glass is half-empty, per pessimist. In reality, final domestic demand, representing a sum total of personal consumption of goods and services, net government expenditure on current goods and services, and gross fixed capital formation, fell in the first half of 2013 compared to the same period of 2012. This marked the fifth consecutive year of declines in domestic demand. Recession might have ended, but we were not getting any better. The only consolation to this was that the rate of half-annual declines in demand has been slowing down over the last four years.

Data since the beginning of the fourth quarter, however, has been more encouraging and, at the same time, even more confusing. However, as in physics, in economics every action generates an opposite and equal reaction: an economy battered by a recession sooner or later posts a technical recovery.

Thus, the reality of Irish economy today suggests two key trends. One: a build up of demand on consumer side has now reached critical mass. Two: jobs destruction has now run out of steam. Some real jobs creation has started to show through the fog of official statistics. With this in mind, let me make a short-term prediction. While in the long run we are still stuck in the age of Great Stagnation, over the next year we are likely to witness some robust spike in our domestic economic growth.

Consider the data. Based on National Accounts, during the period from January 2008 through June 2013, and adjusting for inflation, Irish households cumulated shortfall in consumption spending compared to pre-crisis trends from 2000 stood at around EUR1,600 per every person residing in Ireland. Over the same period of time, shortfall on fixed capital investment by Irish firms, households and the State amounted to EUR16,400 per capita. In other words, some EUR83 billion of domestic economic activity has been suppressed over the duration of the current crisis. Even if one tenth of this were to come back, Irish GDP will post a 6.75 percent expansion on 2012 levels.

And, at some point, come back it must. Durable goods consumption has been cut back down to the bone over the last five years, as were purchases of household equipment, furnishings and cars. Depreciation and amortisation of these items are cyclical processes and we can expect a significant uptick in demand some time soon. That said, volume of retail sales was still down 1.4 percent year on year in October, once we exclude motor trades, automotive fuel and bars sales.

At the same time, purchasing power of consumers is not increasing, despite some positive news on the labour market front. Deposits held by Irish households were down at the end of September some EUR1.22 billion compared to the same period a year ago. And they were down again in October. Credit to households is continuing to shrink: in 12 months through October 2013, total credit for house purchases was down 3.1 percent, while credit for consumption purposes fell 9.3 percent.

The good news is that we are now seeing some increases in total employment in the economy. As of Q3 2013, some 58,000 more people held a job in Ireland than a year ago. Excluding agricultural employment, jobs growth was more moderate 33,000. These are the signs of significant improvements in the jobs market. However, three quarters of new jobs created were in average-to-low earnings occupations.

On another positive, however, jobs are being created in the sectors that previously suffered significant declines in employment. Key examples here are: accommodation and food services and construction.

In contrast to the employment news, earnings data offers little to cheer about. Average weekly paid hours across the economy have stuck at the crisis low in Q2 and Q3 2013. Average weekly earnings are down 2.4 percent on last year. These pressures on households’ incomes are exacerbated by hikes in taxes and charges imposed in Budget 2014.

Overall, consumption reboot is still being held up by continuous decline in after-tax incomes.

However, pockets of growth in our polarised and paralysed economy are feeding through to the aggregate statistics. This process is aided by the fact that as the rest of the economy has flat-lined, isolated growth in specific sectors and geographical areas became the main driver for national aggregate statistics.

One example of this process is visible in the property markets, where a mini-boom in residential and commercial properties in parts of Dublin is driving restart of the markets in a handful of other cities, namely Cork and Galway. Dublin residential property prices are up 18 percent on crisis period trough. In commercial markets, 2013 is shaping up to be the best year for transactional activity since 2007. On foot of this, construction sector Purchasing Manager Index, published by the Ulster Bank, stayed above the expansion line in September and October.

Another example is continued expansion of ICT services and MNCs-dominated manufacturing sectors. This week's release by the Investec of the Purchasing Managers Indices for manufacturing and services showed that in November, both sectors continued to grow. The series are volatile, but the shorter-term trend since Q2 2013 is now clearly to the upside.

All of which begs a question: Are we about to witness a Celtic Tiger rebirth from the ashes of the Great Recession, or is this a recovery that simply compensates for a huge loss in economic activity sustained to-date?
My feeling is that we are entering the second scenario.

Firstly, Irish economy is not unique in showing the signs of recovery. Other peripheral euro area economies, such as Spain, Portugal and even Greece, are also starting to stir. And all of them follow the pattern of recovery similar to that which took place in Ireland: foreign investors are followed by domestic cash-rich buyers of assets; exports uplifts are slowly building up to support domestic activity.

Secondly, given the extent of economic losses during the Great Recession, we can expect a bounce and this bounce is likely to last us some time. As argued above, over the years of the crisis we have built up a massive backlog of consumer and investor demand for everything – from durable consumption goods to assets, including property. This build up can lead to a rush-into-the-market of consumers and investors in H1 2014.

However, beyond this bounce-back period, serious headwinds loom.
In particular, latest mortgages arrears figures suggest that banks are predominantly focusing on forced sales as the main tool for dealing with the problem. These forced sales are yet to hit the markets. The same data also shows that non-foreclosure solutions are far from being sustainable even in the short-term. Over the last 12 months, the percentage of mortgages that have been restructured and not in arrears remained basically unchanged.

Further into 2014, if wages and earnings continue to decline or stagnate, the next Budget will become an even harder pill to swallow than Budget 2014. This can translate into the renewed decline in investment and consumption in the economy.  Latest exchequer figures through November this year are encouraging on the receipts side, although the safety cushion relative to both 2012 and Budget profile is thin. Tax revenues for eleven months were only EUR214 million (or 0.6 percent) ahead of profile. One third of this ‘over-delivery’ is accounted for by November payments of 2014 property taxes. Meanwhile the expenditure side is also saddled with risks. According to the latest projections from the Department of Public Expenditure and Reform, Government’s total current spending in 2013 will stand at EUR 51.15 billion or EUR2.54 billion higher than in 2007.

In addition to addressing the above spending risks, budgets for 2015-2017 will also have to deal with squaring the circle on temporary public sector pay moderation savings. As these come to an end and as demands from the public sector trade unions rise once again, economy can find itself once again at a threat of renewed tax hikes.

On a greater scale, monetary policies around the world remain a major problem. In the euro area, money supply remains tight despite record low interest rates and unprecedented funding measures that injected over EUR1 trillion worth of funds into euro area banks in 2011-2012.  Irish banks might have received a clean bill of health this week, but they are not in the position to restart lending any time soon. In the US, Federal Reserve's tapering is on the agenda for 2014. If pursued aggressively, it can lead to a rise in the cost of borrowing world wide, potentially inducing a fall-off in the capital markets. For Ireland, this can spell a further reduction in investment as foreign investors continue exiting Irish Government bonds and shying away from Irish private sector assets.

For now, however, the above risks are still to materialise. Before they do, enjoy our technical recovery.


Note: the above article was publish well before the now-infamous The Economist piece calling Irish economic recovery 'a dead cat bounce'. My view, as expressed above is not that this is a 'dead cat bounce' but rather that it is a technical correction up, toward longer-term equilibrium trend. It is quite possible that the recovery will gain momentum and will turn out to be a full recovery, but it is not, in my view, a 'dead cat bounce' (or a recovery that is likely to turn to a renewed downside).

Box-out:

A recent research paper published by the Centre for Economic Policy Research studied interactions between large firms and SMEs in driving regional-level innovation in the US. As is well known, large firms generate spin-out ventures whenever innovations developed at the larger firm level are deemed unrelated to the firm's core activities. Thus, a concentration of larger firms activities in a region can be expected to increase the potential for small spin-outs formation. On the other hand, small firms generate demand for innovation, increasing spin-outs profitability and survival potential. The study finds that differences in innovation output across metropolitan regions of the US over 1975-2000 can be largely attributed to the co-existence of these effects. These findings offer us significant insights into the potential role for business partnerships between Irish SMEs and MNCs in driving innovation-focused growth. For one, the study shows that optimal innovation policies are dependent on the specific stage of innovation culture development in the economy. For example, an economy with a significant presence of larger firms, such as Ireland, should focus on policies designed to stimulate formation of new ventures and spin-outs instead of spending resources on attracting even more large firms. Last week, this column suggested using tax incentives for SMEs and MNCs to stimulate equity investment in entrepreneurial ventures and spin-out. The above evidence from the US suggests that we might want to give this a try.

4/12/2013: Did US banks deregulations spur SMEs productivity?

An interesting study via Kauffman Foundation of the effects of banking sector deregulation and competition on SMEs productivity in the US.

Krishnan, Karthik and Nandy, Debarshi K. and Puri, Manju study, titled "Does Financing Spur Small Business Productivity? Evidence from a Natural Experiment" (published November 21, 2013 http://ssrn.com/abstract=2358819) assessed "how increased access to financing affects firm productivity" based on a large sample of manufacturing firms from the U.S. The study relied on "a natural experiment following the interstate bank branching deregulations that increased access to bank financing and relate these deregulations to firm level total factor productivity (TFP)."

Core results "indicate that firms' TFP increased subsequent to their states implementing interstate bank branching deregulations and these increases in productivity following the deregulation were long lived."

In addition, "TFP increases following the bank branching deregulations are significantly greater for financially constrained firms. In particular, …we show that firms that are close to but not eligible for financial support from the U.S. Small Business Administration (and are thus more financially constrained) have higher TFP increases after the deregulation than firms that just satisfy eligibility criteria (and are hence less financially constrained)."

Overall, the "results are consistent with the idea that increased access to financing can increase financially constrained firms' access to additional productive projects that they may otherwise not be able to take up. Our results emphasize that availability of financing is important for improving the productivity of existing entrepreneurial and small firms."

By proxy, the results also show that increased presence of banking institutions in the economy does contribute positively to productivity enhancing funding availability for the firms.

10/10/2013: IMF's GFSR October 2013: Focus on Lending

More interesting analysis from the IMF's GFSR (previously covered topics: banks and corporate debt overhang are linked here: http://trueeconomics.blogspot.ie/2013/10/10102013-imfs-gfsr-october-2013-focus_10.html).

This time around: lending to the economy. One chart:

Note that Ireland is a euro area outlier in terms of the huge extent of policy supports one demand side for credit and simultaneously above average support on supply side of credit:

Puzzled? Me too. Yes, we have huge number of various programmes, grants, schemes, incentives for funding supply and demand. Most of it is not in the form of credit, but rather equity - e.g. Enterprise Ireland funding. No, we don't have much of credit supply supports when it comes to policies or institutions relating to banks. We have lots of hot air talking about the need for banks to lend, more hot air on various 'checks' as to whether banks are lending or not… etc. So let's take a look at the table where the IMF gets its ideas on the above policies existence:

Per table above, Ireland has produced policies of Household Debt Restructuring. Wake me up here, folks, cause I am apparently living in some different Ireland from the one visited by the IMF. Oh, and yes, we also have put in place new policies on Corporate Debt Restructuring. What are these? Hiding our heads in the sand as companies go to the wall? Or may be these are policies promised on dealing with upward-only rent reviews which have driven thousands of companies into the ditch?

I think the IMF folks need to get out a bit more often… before compiling reports...