November 26, 2012
Last week provided a very interesting picture about what is actually happening, not just to the Irish economy, but to the broader European economy, and how the various policy responses over the past few years are affecting us all. The picture is not a particularly pretty one because it shows that money is available to big, government-backed companies and enterprises, but not to small, job-creating entities.
The upshot of this Great Recession will be the hollowing-out of the productive marrow of the economy while, at the same time, large, lugubrious entities will probably survive because they have access to
The story of Ireland is the tale of two sectors. If you are big and have a stream of income – like a big power company with regular payments which can be used as collateral for a new loan, or a bank with paying customers, or even a state with taxpayers – you will get cash.
If you are small with a good business model but facing stiff competition and precious few assets to mortgage, you can forget about it.
So the good news is that there is plenty of money around; the bad news is it is going to the wrong people – or, at least, not going to the right people.
In the last couple of weeks, the Irish state, as well as a few big semi-state companies and a barely breathing bank such as Bank of Ireland – with a mortgage book in tatters – showed that they could borrow money at reasonable rates. The reason is that they all have a stream of income which can be re-mortgaged.
Take the likes of Bord GÃ¡is and ESB, the big, top-heavy industrial conglomerates. They can borrow because they are not far off being monopolies. They can raise their prices and investors know that people will pay, not least because people don’t tend to default on their gas and electricity bills, because they will be cut off.
In addition, in some cases there must be a privatisation play going on, where the lenders are fairly confident that the long-term future for these companies is that they will be flogged in the great
fire-sale that always follows a state revenue collapse. The borrowing today may well be to finance the front-loaded cost-cutting and redundancies which will happen ahead of privatisation.
Certainly, large redundancies in the big banks will demand a huge amount of cash straight away, and maybe the same is in store for the utilities. Just bear this in mind as we move into 2013.
In contrast to the abundance of cash in the conglomerates, out in the real economy, small business is starved of cash. This is a huge problem because it means that there are two realities in Ireland. In
the small company sector, there is an ongoing credit crunch but, in the big conglomerates, there is an abundance of credit.
In terms of recovery, this is not a pretty picture because we know that in the past few years all over the world, small, young companies with payrolls of under 20 are the very companies that are creating
wealth and employment, while large companies have been employment-destroyers.
Contrast the ease with which big conglomerates raised huge amounts of money on the markets last week with the difficulty faced by small businesses to get tiny loans. Survey data indicates that Irish SMEs have the second-lowest approval level for loans in the eurozone behind Greece. One quarter of loan and overdraft applications for small businesses are rejected.
Central Bank figures show that lending to small and medium enterprises fell by â‚¬390 million to â‚¬26.6 billion in the second quarter of 2012, representing a 4.6 per cent fall from June 2011 in lending to
non-financial, non-property SMEs.
Looking at retail sales, we see a small annual rise in the third quarter of this year over the same period last year. But this comes after falls in the first two quarters of the year, and the fact that
retail sales have fallen continuously in every quarter since 2010.
A good barometer of general lending and purchasing is car sales. In the last month, two major car dealerships went into receivership.
And while September reveals a small rise, car sales fell by 5.7 per cent in August 2012 and by 3.2 per cent in July. Overall, in the first seven months of 2012, new car sales were down 12 per cent on last
We can see a dichotomy emerging. There is money if you are big, and no credit if you are small. And we know that small companies are today’s job creators. So the job creators are being starved of the essential lubricant of commerce, while the job destroyers (the big companies laying off people) are fully funded, maybe for the explicit purpose of destroying jobs.
Now, we have to ask: if the big utilities are getting money at decent rates, where is it coming from?
The answer to this is the ECB, and its massive cash for trash scheme, known as ‘LTRO’. A year ago, Mario Draghi was ordained head of the ECB. He immediately set about pumping one trillion euro of cash into Europe’s banks. He accepted ‘trashy’ collateral from the banks and, in return, gave them real cash, so that they could lend to governments or any other reasonably safe investment.
So we had the spectacle of bust banks lending to bust governments – and we called it a success. Now that government bond yields have fallen dramatically as a result of this deluge of cheap cash, the banks that have all this cash are looking for other homes for it.
After all, one trillion euro is a lot of money. If you were to spend â‚¬1 million euro a day, it would take you 2,740 years to spend one trillion. So there is a lot of cash to go around. But the banks don’t want to lend to anything as risky as a small business. They prefer governments and large, semi-state businesses, which have a captive, uncompetitive market.
This is why the large conglomerates are getting money.
The disingenuous reason articulated by those who might like to spin the story is that the access to funds by ‘official’ Ireland is indicative of the economy turning the corner, or something like that. This is rubbish. It is indicative of another misallocation of capital, like the misallocation of capital to the property market in the boom.
More worryingly, it reveals that one part of the economy (the protected, monopolistic part) has ample funds, while the other side (the productive, competitive part) has none.
This development reveals why recessions driven by a credit boom and bust are so debilitating. In the upswing, too much credit goes to the wrong places, and in the downturn, not enough credit goes to the right places.