Let’s say you own a company. It’s a retail company which you set up in 1999. It traded well in the boom, but to grow quickly, you took on debts commensurate with your turnover. Every time that you wanted to increase turnover, you had to rent a new outlet and invest.
This took money – and, while you tried to reinvest cashflow, you needed to go to the banks because the costs of your premises and rents were so huge.
Your turnover hit €2 million in early 2006.You expanded by opening two new outlets to capitalise on the demand and you incurred more debt – but it was manageable because turnover was rising. You employed more and more people.
Trade was good, but your costs were high and margins were still tight.
You convinced yourself that, over time, you would get the systems right and the cost to income ratio would move in your favour.
After all, you were still learning, putting in the hours, but you were building something and you believed in the future. By early 2008, you had six outlets, a turnover of €3 million and debts proportionate to that figure.
You could service your debts out of your cashflow. Then, crash! People stopped buying your wares.
Today, your turnover has halved. You own a company, which has a turnover of €1.5 million, but debts appropriate to a company with turnover of €3 million. What do you do?
Do you borrow more to try to tide you over, so that you incur more debt to pay for already too much debt? Do you close down and sell everything to pay off the debt? Do you slim down and keep two of your six shops, which may trade through the recession? But even if two shops are trading at full tilt, they won’t generate the cash to pay the debts which were incurred for an operation of six shops and a turnover of €3 million.
You go to the bank and explain that there is no cash, and ask the bank to consider some negotiation on the debt.
The bank refuses and claims that it will now go after your other assets.
But you don’t have any. What about your family house? Didn’t you put that up as collateral? Well, yes, but it too has fallen by 50 per cent in value since the peak.
You leave the bank, despondent. Remember you still have three outlets that are trading well, employing people, generating Vat and income tax and corporation tax revenue for the state. You are also taking a modest wage out of it.
The suppliers with whom you have done business are also depending on you, as are their suppliers, and on and on down the chain.
If you close now, the ramifications will be felt far more widely than just your firm. What are your options?
Either you can enter debt renegotiations with the banks and your other creditors where they will get something – not everything, but you all stay afloat – or receivership, where you fold and your creditors get far less in the subsequent fire sale.
The banks refuse to budge, and you don’t want to admit to some of your suppliers that you can’t pay your bill because of the shame of not being able to meet your obligations.
So you try to trade for a bit more, but the figures don’t add up.
Reluctantly, you go into receivership. The receiver tells the creditors to line up in an orderly queue to see what can be salvaged from the business. The banks and the other creditors get much less than they would if you had all done a deal on ‘debt forgiveness’.
The business is closed, the jobs and tax receipts are lost, and all because the ‘legacy debts’ of the boom strangled a good but much slimmed-down business in the bust.
This is a typical example of what is happening all over Ireland now. More significantly, it is also the reason why the state cannot convince any investor that the country is solvent.
The people who use silly expressions such as ‘Ireland Inc’ do not seem to realise that Ireland Inc is only the aggregation of us, the Irish people. If our businesses are going under because of the legacy debts of the boom, our country will also default because of the aggregation of the legacy debts.
Debt forgiveness is essential if the country is to recover. This can be called default, renegotiation or repudiation. Call it what you like but, without wholesale reduction of the legacy debts of the last ten years, the Irish economy will become mired by the politics of retribution and recrimination.
True capitalism is based on the idea of the second chance. All of us who have ever tried something, ever taken a risk, have all failed at some stage.
In my own case, I have written books that sold over a hundred thousand copies; I have also written books that sold poorly. I have presented TV and radio programmes that were successes, and I have been fired from TV and radio stations.
I have invested in companies which have returned multiples of the original investment, but I have also had to write off entire investments because companies went belly-up.
This week in Kilkenny, with another investor/partner, I have put my own money into Ireland’s first economics festival www.kilkenomics.com. If it works, we will succeed; if it fails, we lose.
That’s the nature of capitalism and enterprise.
Failure is part of the equation and there is no shame in failing – the shame is in not trying.
The ability to recover after a defeat, to dust yourself down and to get back up, is based on being ‘allowed’ to do so. If we allow a person to get back up, the only issue then is personal character and whether they want to have a go again.
I talked recently to a receiver who told me that, in his 30 years in business, he has never been appointed to a receivership twice with the same individual.
He told me that, when people make a mistake, such as borrowing too much in the first venture, they learn and don’t make the same mistake again.
He said that most entrepreneurs get back up.
But they are cleverer for the experience of failure.
We all know that failure and success are first cousins.
Therefore, the idea that we can run a healthy, capitalist country without debt forgiveness is ludicrous.
Debt forgiveness is the beginning of the recovery. It will have to start at the firm level and the individual level.
Ultimately, the state will have to renegotiate all its debts.
We will not have a successful fiscal adjustment unless it is accompanied by a national debt amnesty.
This is the way the world works.
The question is not if, but when.
The nature of default is what is important. If we are seen to have tried to pay, but failed valiantly and honestly, then we will get a second chance.
New money and new creditors will emerge; they always do.
The world is full of money. The reason it’s not coming here is that the markets expect a default or some sort of nasty financial event.
Why not bring it on, face the reality, and move on?
That’s what a capitalist economy, an entrepreneurial society is all about. Isn’t that what we are supposed to be?
The Cat is not impressed, old dogs don’t seem to learn new tricks, cats , well we just observe ! , it’s going down and no amount of good money will save the bad. NAMA is a terrible joke. Do we hit the ’70s or the ’50s that’s the one question left for the Cat to ask.
Trying to figure out where the positive concept of debt forgiveness can fit in with the scenario painted by Morgan Kelly in today’s IT?
His piece is scathing, well-timed and frightening. It ends with: ‘…I have to hold up my hands and confess that I have no solutions, simple or otherwise’…and ‘we can only rely on the kindness of strangers’
Great article. Also Morgan Kelly here, http://url.ie/8368 Gradually, thanks in large part to Angela Merkel, a european response to the woes of peripherals like Ireland/Greece is emerging. In spite of ridiculous interventions by Sutherland and John Bruton that every penny of our debt needs to be paid back, there is growing realisation that we have reached the point of no return and we are already in a state of default. The question is not whether we will default, but how we will manage an orderly default. IT would be best if there were a full consensus behind a workable and… Read more »
@ David McWilliams – nicely honest mid-way through the article. Show me a person who hasn’t failed and I will show you a person who hasn’t lived.
Samuel Beckett puts it better:
“Nothing else ever. Ever tried. Ever failed. No matter. Try again. Fail again. Fail better.”
It is in the rising and falling and rising again that we come to know ourselves, embrace the journey, but heed the warnings of the Oracle 1) nothing to excess
2) know thyself.
Capitalist solutions will not work in a creditism system. So David your ideas are not a runner. Spend you time informing the people about creditism WE DO NOT LIVE IN A CAPITILIST FREEMARKET WORLD.
That article could have been written about me David, only the scale was not millions but tens of thousands… I heard it said recently, “at the school of hard knocks, you tend to not get the taught the same lesson twice”… There is no shortage of spirit in this country to start small businesses up again, the problem is that if you have any sort of previous association with a bad debt then you are knocked down and you are knocked down hard. While legally you are allowed to jump back up, dust yourself down and go back at it… Read more »
I actually think that the scale of the liquidation that has yet to occur is preventing any money from flowing into the country. I am also beginning to think that if we do not have a default of the banks, that we will end up an implosion of some sort. Unfortunately because we followed the ideas of Gordon Brown and Dan Boil, we have nationalised bankrupt banks. There is a long list of things that do not work in a functional manner. Everything from a criminal justice system which makes crime pay for the legal profession, to a tax system… Read more »
Sadly the choice made by our gutless and moronic establishment insiders is to save themselves while condemning the state to certain penury.
All the legal advice of the past 3 years has been of €0 value but has come at €m in cost. The Nama budget of €1.6Bn in professional fees is the modern day equivalent of famine exports.
I can see where the article is coming from in so much as something needs to be done, and we are in a vicious circle of one problem feeding directly into and amplifying another, but despite the message about learning, I think the proposals are about rewarding failure directly, not learning from it. The theme recently is generally: “Don’t pay your mortgage, oh, and keep your expensive house. Don’t pay your loans, oh, and keep your business and it’s earnings.” “Save, oh, and kiss your savings goodbye when we leave the Euro. Keep renting, oh, and also bail out property… Read more »
subscribe.
Hi all, Reading David’s article and contrasting that with Prof. Kellys’s one in the Times, there is something I can’t square. David is pushing a mantra of try try try, while Morgan Kelly predicts nothing but financial doom and social gloom. I cant figure out how David can suggest the small start up entrepreneur trys anything – invest savings or take a loan – given if what Morgan Kelly predicts is only partially proved right their business venture will die. Killed by the system being bankrupt, no state business supports, no availability of credit along with higher taxes and rates.… Read more »
David, thanks for clearly outlining the mechanics of business survival through booms and busts. I wonder what are the bankruptcy laws for countries that go bust. UK is 1 year, Germany is 6 and I believe there proposals to bring it down to 6 for Ireland (from 12 I think). If one goes bankrupt, there is have means of directing earnings to one’s benefit without 3rd party oversight. With Olli Rhen about, I think we can safely say we are effectively at this stage already. We have defaulted. All that is happening is receivership. We left examinership mode when the… Read more »
Welching on debts is the last resort for scoundrels.In accounting terms there is always a debit for a credit. If there is a default then there is a loss taken by the lender. If a businessman defaults on debts the banks take a loss when banks take a loss they pass it on to the government who then in turn pass it on to the people. Welching on sovereign debt is immpossible the debt always stays on the books, the lender or bondholder may take an accrual against the debt but will always keep the debt on the books. An… Read more »
Well….it looks like there will be another by-election in December. Possibly two. http://www.breakingnews.ie/ireland/fg-wins-case-to-challenge-by-election-delays-480944.html Waterford is waiting 13 and counting. D-South 8 months. Because of the precendent of the Pearse Doherty case, the ruling for the next two should be faster decisions. Not sure if this is related to the behaviour of the bond markets. (Taoiseach Kennylite or Taoiseach GimmeMore is not exactly inspiring confidence either). For entertainment check Dan Boil’s twitter, where Boil explains that the remaining by-elections should take place at the end of March. Of course, when the Court makes it’s deliberation, and it becomes apparent that the… Read more »
Icelandic ‘Home Guard’ prevents foreclosures
http://www.rte.ie/news/2010/1105/icelandfeature.html
Cemetry White Washing Liquid I agree with the message of David’s article and believe it was written with an ‘accountants mindset ‘ rather than an ‘economist mindset’. Nevertheless he delivered the message very clearly. I would like to ‘shadow think’ on this topic .When I was reading it a number of things came to my mind as follows: 1 Ascendancy Class : When the State was founded De Velera guaranteed the Landed English Ascendancy Class that they could keep their wealth and the State would not demand it .This was a political decision eventhough many of their forebears had aquired… Read more »
@ Gege Le Beau
FG looking for by-elections now after Sinn Fein successfully got the first court ruling reminds me of the kid who robs the orchard after his friends have already gotten away with it.
First will always be first.
Why didn’t FG act first?
Because they’re the same as FF!
Mary Lou got shouted down on tv when maybe she should have been listened to.
Prof Lucy lets over the situation in AIB. (I have watched the deafening silence from RTE and The Irish Times on AIB for months. I remember when AIB got caught as anchor loan provider for the collapsed Stuyesvant Village Property collapse….the IT reported it three days late, and RTE ignored it altogether. The loss was greater than AIB’s capitalization….even back then). Basically AIB needs the state to stay solvent. But the state is not staying solvent because it is spending 20 Billion a year to stand still, before the banks get any money. That 20 billion is the cost of… Read more »
@Deco, yeah fully agree, George Lee should have had the nuts, and the courage of his convictions, and set up his own political party, however him having been utterly insulated against all the economic reality that he was used to reporting upon, within the twilight zone that is RTE, taking a punt on himself was the least likely thing that George Lee was minded to do.
Scanned Morgan Kelly’s article. He left out the fact that IBEC and ICTU run Ireland using proxies in Kildare Street. Heck, it has even got to the stage where Casino Operators from Las Vegas can get a proxy in the Dail, and decide what happens with national policy. Kelly makes one very critical point. He states that we should have used the behaviour of three financial institutions in not disclosing their financial situation to the authorities in a transparent manner, to kick them out of the gaurantee. I have been saying this since the Permo-Anglo loan scandal broke. We had… Read more »
Folks, have a look at both posts here:
http://ireland.inbits.com/
FF agenda
We must stay solvent….first we sell all the silverware….then we suck up all the EU’s €440bn (£383bn) bail-out fund to keep our highly efficient public servants in the lifestyle they are accustomed to and perhaps we could even bankrupt ….Germany !
Debt forgiveness ………….WAKE UP PEOPLE.
Does ‘new money’ mean new investment or a new devalued currency?
David. Final sentence article reads…………. ‘That’s what a capitalist economy, an entrepreneurial society is all about. Isn’t that what we are supposed to be?’ Isn’t that what we are supposed to be? asks David. Isn’t that what we, are, supposed, to, be? Is it? Its what I reckon we are supposed to be. Its what the media tell us we are supposed to be. Its what the politicians tell us we are supposed to be. Its what the banks and white collar classes tell us we are supposed to be. Are we, though, a capitalist economy, entrepreneurial society? The answer… Read more »
Have just finished reading Morgan Kelly’s article. Maybe I have been sleeping under a rock, but I missed all the shenanigans relating to the repayment of 55 bn of senior bank debt during September. Perhaps I need to re-read his article because I am puzzled as to why he accepts the Government’s worst-case figure for Anglo of 34 bn as realistic, especially given the existence of the infamous Promissory Note for 30 bn and my calculations relating thereto on Bank HOLIDAY MONDAY LAST: paulmcd says: October 25, 2010 at 1:10 pm If my calculations are correct, why should hedge-fund managers… Read more »
A huge apology from me to Jim McDaid who has worked tirelessly for years trying to find ever more elaborate ways to spend Lottery money above in Donegal. Jim has decided to call it a day, so in the best traditions of this forum let me ask our resident hostess Miss Gladys Knight and her wonderful Pips to extend the same courtesy to Jim as she did to the Bull/ Johnny Cash on his recent departure to South Kerry.. Gladys extends her apologies for not being able to keep a straight face…….So take it away Gladys and Jim on that… Read more »
Funny story, I was having a nervous breakdown in Newark airport about six months ago; second marriage just broken up; hadn’t slept for a week; waiting 12 hours for a flight back to Mammy in Ireland; next minute I see Michio Kaku walking in my direction, despite my bedraggled state, I had to say something to him – ‘Michio Kaku! I love your books!’. He gave me a smile and a wave at least, cheered me up for about a nanosecond. ‘Parallel Worlds’ (great book) is right. Life is truly bizarre sometimes. Another weird one; spent the whole summer of… Read more »
makings of a great novel there!
Some people might find this interesting.
http://www.independent.ie/business/irish/uk-law-firm-behind-move-to-have-nationwide-wound-up-2412520.html
To be honest, cannot understand why INBS was not wound up on day one. It is NOT of systemic importance. In fact it is only of importance to the Fingers clique….
And Permo is also in a spot of bother. The one bank that did not yet go looking for a capital injection from the state. http://www.independent.ie/business/irish/ilp-falls-16pc-as-yield-on-irish-bonds-tops-8pc-level-2412521.html Permo is border line systemic importance. I think they will cope. In fact they should be commended for not looking for taxpayer support yet – and I have slated them over the Anglo funny business, and the super mortgages. I suspect that Permo have taken a hit as a result of comments by Morgan Kelly concerning the state of the Irish residential mortgage market. I mean they are number 1 in the line of… Read more »
paulmcd,
There’s a preso made by Anglo Irish Bank part of the Government set of archive documents here:
http://bit.ly/9UU9jU
Looking at the spread of the Anglo loan book between US/UK internationally and locally, €34 bn seems about right, means a total writedown of 50% approx, where losses under 50% locally are matched by gains over 50% internationally. A Junior Cert student could do the math!
Those worried about their money or a run on the bank might like to remind themselves of the specific terms of the guarantee scheme for deposits:
http://bit.ly/c4EIas
A little Fianna Fail Fairy Tale from 30 March Last (best read on April 1) http://bit.ly/cR1igN “Our determination to deal with this imbalance in our public finances through firm and decisive action has engendered real confidence in our economy on the international stage. The world out there believes in us and in our ability to work our way through our difficulties and return to growth. Jean Claude Trichet said: “In the case of Ireland very, very tough decisions have been taken by the government and rightly so,” More recently, Mr Trichet’s colleague, Jose Manuel Gonzalez-Paramo on the ECB said: “The… Read more »
11 houses repossesed out of 83 cases listed in court yesterday.
Heard lawyers are going to represent people pro bono and challenge the banks for reckless lending, could be a further game changer. Maybe these are the same people David McWilliams highlighted in a previous article.
[…] Forgive the ‘legacy debts’ and save the economy […]
If Donegal sw returns the FF candidate, it should be kicked out of the 26 counties! Maybe the Brits will take them in ? Good piece about Iceland on world report on rte 1 on sat, ditto Paul Somerville whose podcast was taken off the Marian Finucane site and is now on YOUTUBE.
I think we need to look at the phrase “legacy debts”, and try to somehow see if we can distinguish between those that are a part of the solution and those that are a part of the problem. I’m not for any form of debt forgiveness that provides for some individual who has been hoovering up properties for the last ten years, having debt forgiven and being left with an investment portfolio. That doesn’t make me a begrudger, I just think the message that we need to be left with at the end of all this, is that if you… Read more »
Americans cut through the bull!
Grant, Brynjolfsson Interview About Ireland Debt Crisis
http://www.bloomberg.com/video/64352822/
You hit the nail on the head cbweb. If you are dealing with the County Enterprise Board system, you are in all reality looking at the following obstructions: (1) You have to be manufacturing something to qualify for support. They expect your idea to have high export potential. (2) They have no funds to lend to people because their budgets have been cut. They hide fact this by telling applicants that they actually have funds available if you can match their funds. If you had funds in the first place, you wouldn’t be going to the CEB for support. (3)… Read more »
Did anyone else read this article by John Drennan in the most recent Sindo?
http://www.independent.ie/opinion/columnists/john-drennan/john-drennan-enthusiasm-and-hope-have-collapsed-along-with-economy-2410677.html
“It was a chilling indication of how the terrible failure of our political leaders has created a system of political and administrative leadership that increasing resembles that of a small, none too efficient, fascist state.”
Strong words.
@michaelcoughlan
Thanks for the link Michael, I’m going to research that FirstStep option now. I’ve absolutely no shame in saying that after dealing with the dole office and the CEB system, I’m not a broken man yet but as Justice Kearn’s remarked in his recent High Court judgement, I’m not that far short of it.
Interesting one………not sure how we can go on paying in this climate.
http://www.irishtimes.com/newspaper/education/2010/1109/1224282950573.html
What do you do when you have no money for the prison service anymore ?
http://www.breakingnews.ie/ireland/ahern-greenlights-new-legislation-on-use-of-community-service-orders-481114.html
This is what happens when a state system runs out of money. Dermot Ahern tries to put a spin on it.
Due in part to the ECBs failed policies it now ‘owns’ Irelands economy. In a negotiation with any Irish government over repayment of debt it holds all the bargaining power. It can stop buying government bonds and crash our economy. It can charge us 10% to borrow money if it wants. The ECB can just print more Euros. So they can give the money to Ireland really through a ‘rescue fund’. They will quite rightly point out that Irish doctors and government employees in general might not deserve to earn as much as they do compared to their french counterparts.… Read more »
If I went into a failing company ( which I have ) and found a bunch of ex school teachers , country solictors and mini property tycoons in upper management running the place into the ground . I would sack them . I would hardly pump in a load of cash and say ” see you in 6 months lads “
Can we stem the rotten and dumb argument that huge salaries whether in education, politics, health have to be there to attract the very best because that is what the international market for guys like these is. No, it aint. We are a tiny economy with a tiny population, a GDP that is only 6.8% of Germany’s! These guys are not being recruited to run the public health service of Germany, UK or France. Their salaries should reflect the miniscule population, the smaller public service. Arguably, some of these guys metaphorically are JCB’s when what we need is someone with… Read more »
Astro Nomics : I predicted in a recnt article that the week to Xmas will be °Fire Related ° .Currently there is a vast nuclear train making its way from France to Germany and with more waste uranium than was in Chernoble . Now just suppose someone throws a fire cracker . What will be the relevance of Ireland as a Creditor to ECB ?
Debt forgiveness only for the insiders / elites.
The serfdom class dont benefit from such grace.
Also,
Debt forgiveness must be costed to the beneficiaries of the POnzi property pyramid scam.
That goes without saying though!
It is utterly unacceptable to cost out on debt forgiveness to the non beneficiaries of the bubble pyramid scam of the last 10 years!
While it’s interesting to follow the academic cut-and-thrust on here about how to wiggle gracefully out from under our massive national debt burden (I don’t think we’re going to be able to simply pay it off, not in generations), it’s not actually going to make one bit of difference. We, the people, are not actually in control. We haven’t been for a long time (if ever) in this country. We’ve all contributed thousands of virtual column-inches of opinion to dissecting the faults and failings, proposing our own solutions, hacking at or supporting the efforts of others and so on. It’s… Read more »