If ever there was a divisive term, it’s the phrase “creative industries”.  People just seem to either love it or loathe it. Advocates of  an Irish “smart economy” economic recovery see the creative industries as a collection of innovative business sub-sectors who generate novel intellectual property and redesign/recombine existing technologies into new products that are both intermediate inputs into the economy-wide innovation process and finished products in their own right. At first glance, this doesn’t seem so objectionable. While not being a panacea to the economic travails we’re enduring at the moment, it offers the hope of enhanced productivity and (dare we say it) a “competitive edge” for Irish firms in the domestic economy and in the global marketplace. The creative industries may even generate some sustainable employment, if not directly then indirectly (though nowhere near the number of new jobs we need to absorb our ever-growing dole queues).

Critics of the “creative industries” notion, however, would beg to differ. First, there’s the term itself. Creative industries are generally defined as those industries which generate intellectual property (IP). But this implies, according to the critics, that creative ability is only harnessed for economic gain and that it can be measured in economic terms. What’s more, this established definition can be traced back to the UK’s Department for Culture, Media, and Sport in the mid-1990s – which leads some to dismiss “creative industries” as Blair-era spin aimed at rebranding the economy and producing flattering measures of both current and potential economic activity. A second (perhaps more pragmatic) critique is similar to that voiced on RTE’s recent The Front Line discussion of the Smart Economy idea (May 10th): basing strategies for economic recovery on the creative industries would involve investing serious amounts of taxpayer’s money in R&D activities that may or may not succeed in the long term, and are unlikely to create significant employment in the short-term for the cohort of people (such as construction workers) who have been hardest hit by the recession.

No doubt, the debate regarding the merits of the “creative industries” will rumble on indefinitely. However, we would like to offer a few  suggestions: first, maybe the hostility engendered by a term such as the creative industries could be mitigated if we reframe it as something more limited, such as “those industries that generate intellectual property and other novel products/ processes from existing technologies”, and accept that fact that creative thinking itself will never be amenable to industrial classification. Second, instead of talking in terms of a sub-set of creative industries, we could think in terms of “creative” activities embedded across the entire economy. Thirdly, we think those familiar what are deemed to be creative industries would accept that the industry itself is not one to generate large-scale employment opportunities, but instead is centred on micro-firms and the self-employed. In light of this, it would be wrong to trumpet the creative industries (or smart economy, or “innovation island” etc) as the potential source of short term employment, but rather as a source of differentiation that enhances domestic products and services though novel inventions and processes.

Even if one is not overly enamoured with the idea of the creative industries, it is still informative to have an impression what exactly is meant when we speak of the Irish creative industries.  Established industrial-classification based definitions of creative industries such as those discussed above point to the following as the creative industries sub-set: advertising; architecture; the arts and antique market; crafts; design; designer fashion; film and video; interactive leisure software; music; performing arts; publishing; software and computer services; and radio and television. The Arts Council have estimated that at a national level these sectors generate approximately €5.5 billion in terms of gross value added. A recent report published by Dublin City Council (which we have authored) estimates that, in the Greater Dublin Area, that same subset of industries employ over 77,000 people (59% of Irish Creative workers; 10% of total Dublin employment) and generate approximately €3.25 billion a year for the Greater Dublin Area. [The full report is available from Dublin City Council’s International Relations and Research Office and can also be accessed as a working paper here].

While the sub-set of industries included in this type of estimation is open to debate, the key message is that there is a significant reservoir of creative abilities in place within the Irish economy. The report also indicates that this sub-set of industries appears to be relatively more concentrated in larger urban centres. However, rather than being ammunition for a “Dublin versus the rest of Ireland” argument over job creation, the question facing us is how do we mobilise these creative resources (wherever they are located) to enhance the competitiveness of the broader economy in the medium and longer term.

Declan Curran and Chris van Egeraat


Fine Gael’s claim today that that Irish financial institutions may be exposed to up to  €7 billion should Greece default raises an interesting question: which countries have the largest exposure to Greek debt? According to the Bank of International Settlements, exposure to Greek debt is very much a European affair. The Peterson Institute for International Economics report (based on data from the Bank of International Settlements) that French banks —with €60 billion—have the largest exposure to Greek debt, on an ultimate risk basis (mostly through ownership of Greek domestic banks, such as Crédit Agricole’s controlling share of Emporiki Bank), while German banks with a €34 billion exposure are the other principal eurozone creditor.  The potential losses facing the US are significantly less (€13 billion).

Of the other much-maligned “PIIGS”, Portugal and Ireland could also suffer hefty losses in the event of a Greek default: Portuguese banks have €7.5 billion in exposure to Greece, while Irish banks could be sweating over the fate of €6.5 billion. Of course, given the astronomical sums of money we have already poured into our banking system,  €6.5 billion almost sounds “manageable”.

Declan Curran

Private Banking Sector exposure to Greece by country, 2009 Q4

*Luxembourg and Switzerland figures are combined in Table 1 as the $60+ billion exposure of Luxembourg to Greek debt relates to the 2009 Q4 shift of residence of the European Financial Group (EFG) SA, ultimate owner of EFG Eurobank from Switzerland to Luxembourg. Source: ECB, Bank of International Settlements (BIS), estimates calculated by Jacob Funk Kirkegaard for the Peterson Institute for International Economics.

Gillian Tett, in her book on the global financial crisis entitled “Fool’s Gold”, points to the concept of a social silence (a concept outlined by French anthropologist/sociologist Pierre Bourdieu in his work Outline of a Theory in Practice) as a possible factor in facilitating and perpetuating the global credit boom that eventually burst with the collapse of Lehman Brothers in September 2008. Bourdieu’s social silence, as Tett explains, allows an elite group to control society not just by controlling the physical means of production but also by influencing the cultural discourse. Crucially, influencing the way society talks about itself also influences what is left unsaid – i.e. that which is regarded as impolite, taboo, boring, or taken for granted. Such silences can arise through overt strategies, but often come about less deliberately through social conformity or shared ideology and assumptions. According to  Bourdieu, all that is required for the ideology to establish itself in this way is a complicit silence. Tett speculates that such a social silence may have been pivotal in the general acceptance of the idea that financial markets could regulate themselves. What is more, the opacity that surrounded seemingly sophisticated financial instruments, deterred non-specialists from gaining a fuller understanding of the workings of the financial markets and created a self-contained silo of financial activity and knowledge that only financial experts could penetrate.

To what extent could this idea of a social silence explain the perpetuation of the Irish property bubble and reckless banking  practices of the late 1990s and early 2000s? After all, there does seem to be a general feeling of “we all saw it coming” yet only a handful of commentators warned of the dangers (and they were roundly dismissed as “talking down the economy”). Of course the social silence analogies don’t stop there: it could also be argued that, in the subsequent bust, the quality of debate over the Irish bank guarantee of October 2008, the implementation of NAMA, the capital injections into our ailing banks, whether or not to wind up Anglo Irish, and the risk of an Irish sovereign default has been anaemic at best, with only pockets of academics and media commentators really grappling with the details of these policies (in part, as illustrated by the difficulty in assessing the cost of winding up Anglo Irish bank,  due to a lack of full information).

So, are we trapped in an Irish social silence? And if so, how do we turn up the volume?

Declan Curran

If, like me, you are curious about what exactly €40 billion buys you these days, then perhaps you were keen to see what revelations would be contained in the Anglo Irish Bank Annual Report released today. If so, I strongly recommend you read the Group Chief Executive’s Review (pp. 4-6), where we get a glimpse of Anglo Irish Bank’s future plans. You just couldn’t make this stuff up! At first, I actually thought that maybe Mario Rosenstock had written it. But alas, it would be funny if it wasn’t such a never-ending fiasco. Here are just a few of the pearls of wisdom provided by the Group Chief Executive, Mike Aynsley:

First things first: “The ‘new bank’ will in time be profitable, well funded and maintain strong capital and liquidity ratios.” Thanks, lads.

“Our aim is to create a medium-sized commercial bank with a well contained risk appetite and stable funding base, operating in Ireland, the UK and the US.” Steady on, lads! Wasn’t it that “risk appetite” that got us into this mess in the first place?

Thankfully, however, help is on the way: “The restructured organisation will have a role to play in the national recovery, acting as a domestic and international fundraising platform for the Irish economy and providing commercial banking services to assist Ireland’s recovery and growth”

“Finally, I would like to thank the Minister for Finance”….. so would a lot of subordinated bondholders, I suspect!

Declan Curran

The details released today regarding the first tranche of loans to be transferred to NAMA from the five participating institutions offer plenty by way of headlines:

  • NAMA is to apply an average discount of 47% on this first batch of  loans. These loans, originally worth €16bn, will be bought for €8.5bn.
  • Of the €8.5bn in loans, €4.9 billion relate to assets located in Ireland; €3.2 billion in Britain; and €0.4 billion in other countries. None of this first batch of loans relate to assets located in Northern Ireland.
  • Investment properties make up the bulk of the underlying assets, which account for €5.5bn. €1.3bn is in land, €0.8bn in hotels, and residential property makes up 0.4%.

However, the NAMA release also leaves much to ponder regarding what is to come in subsequent waves.

The following are just a few of the questions that arise:

  1. How representative is this first wave of €16 billion loans of the entire NAMA portfolio? In particular, development land and hotels are underrepresented in this sample. Will their inclusion increase the “haircut” still further?
  2. This first wave of loans only represents the ten largest builders/developers. Do their investments represent better or worse quality investments than those of smaller  developers associated with ghost estates across the country?
  3. Will it transpire that the ten largest builders/developers were required by Irish banks to invest less of their own equity into development projects than smaller developers?
  4. Security for loans: Where the title of the underlying assets is of bad quality, NAMA legislation provides for an additional haircut which would allow NAMA to purchase  loan for a nominal sum. To what extent will NAMA need to avail of this power?
  5. The first wave of loans gives no indication of the expected level of default that NAMA will experience. Does NAMA maintain that the default level will be 20%, as per the NAMA business plan?
  6. How will the geography of the first waves of loans, and in particular the omission of Northern Ireland from this sample, differ in subsequent waves?
  7. The following information has been provided regarding the Special Purpose Vehicle Investors:

“NAMA has secured a combined investment of €51m from three institutions (€17m each) for a 51% shareholding in National Asset Management Agency Investment Ltd, the NAMA Special Purpose Vehicle. The investors are Irish Life Assurance, New Ireland and major pension and institutional clients of AIB Investment Managers (AIBIM). NAMA will hold the remaining 49% but will have a veto over all decisions that are not in accordance with the objectives of NAMA as specified under the NAMA Act.”

What, if any, influence will these three private investors have in the future operations of NAMA?

If today’s exercise in “drawing a line in the sand” was aimed at removing uncertainty, there’s still a long way to go.

Declan Curran

In recent days two conflicting reports have emerged as to the health of the Irish residential property market.

According to the Irish Independent, one of the two Irish home-registration firms, Premier Guarantee, did not register a single house in January. Premier Guarantee’s larger rival, Homebond, only registered 149 houses in January, including just 24 in Dublin.  At the peak of the property market in 2006, Homebond was registering 6,122 houses a month or about 72,000 in a full year. Premier, the smaller of the two registration services, was registering about 2,117 houses per month, or almost 25,000 per annum. Of the 149 houses registered with Homebond in January, 62 were in Cork, 16 in Kildare and 24 in Dublin. In most of the other counties there were less than three houses registered, with many counties only registering a single house. Premier Guarantee and Homebond provide structural defect cover for new homes in the first 10 years after construction. The number of new homes registered with these firms is regarded as a reliable indicator of Irish housing starts.

However, data emanating from Property website Myhome.ie identifies a threefold increase in the number of ‘sale agreed’ second-hand homes in January compared to the same time last year. According to Myhome.ie, 658 properties reaching sale agreed status in Dublin last month compared with just over 200 in January 2009. Similar trends were seen in Kildare, Wicklow and Meath.

These conflicting reports raise a number of questions about the underlying trends at play in the Irish residential property market. The Myhome.ie data may be capturing some pent-up demand among a cohort of buyers, who are eager to snap up what they perceive as bargains in the Greater Dublin Area. If so, is it only a matter of time before this pent-up demand is expended? In that case, is the Myhome.ie data indicative of a dreaded “dead cat bounce”, prior to a prolonged property market slump? Even if Myhome.ie has uncovered positive property trends in Dublin, Kildare, Wicklow and Meath, the residential property market outside of Leinster may be in a far worse condition than the Myhome.ie figures suggest.

One may be tempted to withhold judgement until a detailed property price index is released. This may take longer than expected:  the Permanent TSB / ESRI House Price Index  will now be issued on a quarterly basis rather than the current monthly format. The reason cited for this? low sample size.

Declan Curran

International evidence (World Bank and Financial Stability Institute) shows that for NAMA-style agencies engaged in either rapid disposal of assets or managing impaired assets to enjoy even limited success, a confluence of benign conditions is required. In the case of both rapid asset disposition agencies (Mexico, Spain, USA, China, Korea, Malaysia) and restructuring agencies (Finland, Sweden, Japan), the crucial factor required for a favourable outcome is a strong recovery, both in the property market and the wider economy.  Other favourable factors include (more…)

The chief executive of the National Asset Management Agency, Brendan McDonagh, has stated that the organisation would be adopting a ‘hard nosed” approach in dealing with major borrowers. Apparently, work has already been completed on the top ten borrowers in the country who had the most complex loans with multiple institutions and, in Mr. McDonagh’s words, NAMA has held ‘open and frank’ discussions with members of the construction industry. But what do we know of NAMA’s approach to dealing with the banks  availing of the scheme? (more…)

Adding to the flow of pessimistic predictions for 2010 is Kavanagh Fennell’s insolvencyjournal.ie.  Statistics compiled by insolvencyjournal.ie find that over 1,400 Irish companies were declared insolvent in 2009 – on average four companies a day. The 2009 total represents an 82% increase on 2008 insolvencies (773) and a 287% increase on the 2007 figure (363). Ken Fennell of insolvencyjournal.ie predicts that this rate of insolvency will continue into 2010, with a peak mid-year followed by a gradual reduction in the last quarter of the year. Not surprisingly, the construction industry was by far the worst-affected sector in 2009, with 453 construction companies declared insolvent, representing over 30% of the year’s insolvencies. While failures in the sector dipped in November, the number of construction companies going bust peaked at a year-high figure of 49 in December. That said, the onset of NAMA appears to be putting a floor under the construction sector. According to Ken Fennell: “We’ve seen a bottoming out in construction, you wouldn’t expect to see the same level of collapses there again, especially with Nama coming.”

The insolvencyjournal.ie statistics also highlight the precarious position of the services sector. After construction, the services sector was the next hardest hit with 278 insolvencies – almost 20% of the total. A further 201 companies in the retail industry collapsed in 2009, reflecting the impact of the downturn on consumer spending. High numbers of insolvencies were also recorded in the hospitality (154) – suggesting that 2010 could see a shakeout of hotels and leisure facilities.

Source: www.insolvencyjournal.ie

And what of our much-maligned bankers? As one would expect, they appear to be boxing clever in the run-up to the NAMA tsunami: while receivership cases surged in 2009 as banks moved to recover debt (124 receivers were appointed in 2009, an 118% increase from 2008), banks cut back on receivership appointments in the last month of 2009 – reducing them  from 13 in November to 7 in December. The NAMA game of “cat and mouse” continues.

Declan Curran

Two recent data releases show just how cold the climate has become for both SMEs and home owners.  On the SME side, a report commissioned by the Department of Finance has found that banks are refusing more loans to small and medium businesses than they are reporting. The five banks surveyed – AIB, Bank of Ireland, Anglo Irish Bank, National Irish Bank and Ulster Bank – report refusal rates of 14% but the report undertaken by accountancy firm, Mazars, suggests the real figure is 18%. The report points to inadequate recording of refusals by frontline bank staff as a reason why refusal rates have been underreported. This also raises the question of what constitutes a “refusal” – for example, if a bank offers a borrower a lesser sum than originally requested, or less favourable lending facilities, is this a refusal? The credit situation facing SMEs may be more precarious than headline figures suggest, particularly as SMEs’ revenues continue to take a pounding. (more…)