Firm and household credit constraints

The ESRI has just posted two Research Notes on credit constraints. The Note on Measuring Credit Constraints for Irish SMEs shows that finding customers has been the largest problem for SMEs. The analysis suggests that roughly one in nine SMEs faced credit constraints between April and September 2012. Micro firms, those not exporting and those in the construction, real estate, hotels and professional services sectors are most affected. The latest ECB data indicate that in recent months concerns about access to finance have become more wide spread. 

The Note on Younger and Older Households in the Crisis shows that between 2005 and 2010, average income and consumption dropped for younger Irish households, but rose for older households. The Note shows that younger households are most affected by unemployment, arrears and negative equity. It argues that credit constraints arising from these prevent younger households from smoothing consumption. Deleveraging helps to exit credit constraints arising from negative equity.

17 replies on “Firm and household credit constraints”

Thank God for the ESRI – experts in the bleedin’ obvious. So, ‘finding customers has been the largest problem for SME’s’, and consumption has dropped for younger households. The ESRI is right up to form – nothing researched that might frighten the horses.

I think the publications demonstrate how unfit for purpose the monetary system is.

Not everyone’s needs are met and so businesses should not have any trouble finding customers. What customers lack is a medium of exchange to bring it all together.

Where does more of this medium of exchange come from? It comes from bank loans and we cannot ignore that every unit of credit which the SMEs are being starved of would have an even higher debt. Why should an SME or household have to take on more debt for the economy to have more money?

‘From a policy perspective, the analysis suggests that the main burden of the crisis is borne by the younger half of the Irish population, both because young households have been particularly likely to become unemployed in the crisis and because many of them purchased a house/apartment prior to the crash’

I think we could also add insecure terms and conditions to those that are employed. Which results in a lot of young people unable to secure mortgages.

Ah ra shure, let the young take the hit, sure they’ll be grand. Shure isn’t the weather great in Australia.

Commercial property is meant to be a service to enterprise, trade and employment–not so in Ieland where it destroys all three. In a market economy you would expect commercial tenants to be allowed market rents. Unfortunately not so in Ireland, because of an organised cartel which our politicians collude with.
Former Taoiseach Mr Haughey required a minimum of a million pounds per year to finance his lavish lifestyle. Mr Haughey’s bagmen are sovereign landlords-this was the payback. It is institutionalised political corruption. The sovereign by siging these feudal leases,legitimised them and copper fastened them for all commercial tenants, and wasted billions of it’s citizens money. No other government in the world would sign these ruinous commercial leases.

“Also, the fact that consumption has declined by more than income stands in contrast with standard economic theory, which predicts that consumption evolves more smoothly than income (see Friedman, 1957, on the permanent income hypothesis).”

Did Friedman in 1957 imagine credit going nuts?

“It is possible that the high incidence of arrears among young households is related to unemployment.”

Or else moral turpitude. It is a pity emigration was not addressed in the paper.

It seems as though the young are taking most of the hits. They have so much energy if it can only be harnessed

A couple of observations.

1) Petra notes that: “the drop of actual income in the crisis will virtually always be larger than the decline in permanent income”.

I don’t believe that is likely to hold where expectations of permanent income are initially formed under conditions of rapid income growth in an economic bubble, and then revised rationally following the bursting of the bubble. For example, a drop of a couple of percentage points per annum in expections of real income growth will end in a reduction of almost half in expected income after 30 years.

I also don’t think it is likely to hold where expectations of resources available to fund retirement take a big hit largely independent of current income, as has happened in Ireland. Expectations of resources available for retirement have taken a very large hit in many cases, between the collapse in the value of residential property, investment losses that are severe in many cases, expectations for future returns on investments that are much reduced in many cases*, and large increases in the cost of annuities.

2) While Petra presents the analysis as being about age, there may be other interesting ways to look at it. For example, much of the age dimension may actually be less about differences in age, and more about young people being represented disproportionately among groups that have been hit hard by the depression, such as construction workers and workers in retail. To the extent that it is about differences in age, it may be more about new households headed by young people having difficulty in getting a foothold in the labour market, and less about those who are already in the labour market being treated less favourably than their older peers.

*Does anyone really expect the savings glut to ease up on holding investment yields down over the long run?


Regarding point 2. Most public and semi-state bodies I’m aware of offer inferior T&C to new staff. Worse pay, pay-scales, pension arrangements, worse soft conditions, less security (fixed term contracts). Usually to better qualified, more enthusiastic and more able staff. Though of course less ‘experienced’.

The simple reason the state encourages this inequity is that it’s the path of least resistance to getting the wage bill down. Easier to hose to unrepresented or usually yet to be represented than to spend political capital working out an equitable solution with the represented.

The Unions, for the most part seem to be happy to go along with this.

Anacedotally, I know one team in a state organization where the older guys are known as ‘The Whistlers’. The guys that are unioned up, though unable to fulfill their duties. So the younger guys/gals with work ethnic but worse T&C pick up the slack. The guy(s)/gals are percieved to merely whistle and enjoy what is essentially a kind of super social welfare. I doubt or at least hope this isn’t near the norm.

Even if it is, to my mind the issue is more the inequity itself. If there’s anything that really rots organisation it’s treating employees doing the same work differently.

@ Nevermindme: “If there’s anything that really rots organization it’s treating employees doing the same work differently.”

Yes, indeed. Now where did I ‘hear’ that before? Ah yes, Truman Bewley [‘Why Wages Don’t Fall During a Recession’]. But sure who gives a witch’s tit about inconvenient empirical evidence when you have a wonderful theory based on – wait for it! Personal opinion!

@ Brian Woods

What are you on about? Are you saying all is fair among staff T&CS in the public sector, and what imperial evidence have you to support it?

Also, maybe you should try working on your communication skills.

@ Nevermindme: What am I about?

Well, I have this opinion … one should read, and read, and read, else you are poorly informed. And Bewley went out into US workspaces and interviewed lots and lots of working folk – high and low. That’s his report.

Your final sentence – “If there’s anything that really rots organization it’s treating employees doing the same work differently.” – figures prominently in that report. Its factually accurate. But whose reading? Who cares?

My final assertion is a opinion about the actual way many political decisions makers, and their economic advisors seem to behave in risky situations (managing folk in an economic downturn). They appear to make it up as they go along – rather than bother doing some basic analysis and exercising an informed judgement. You simply cannot reduce wages/salaries or ‘worsen’ conditions of employment and NOT expect an unpleasant reaction from those affected and causing long-term institutional damage.

The current so-called austerity policies being pursued by the Irish government – if continued, will worsen our economic and political situation. Our political leaders are mesmerized by the symptoms and leaving the underlying disease (multiple private insolvencies) untreated. The curative thearpy – amputate unpayable debt is dismissed out of hand – for now. But just wait. And make sure your savings are well secured.

I have no intention of ‘working’ on my communications skills. They are. They’re me. That’s it. Have a pleasant evening.

@ Brian Woods

Perhaps the fault with communication is with me, if so, my apologies, it seems like we’re agreed. I thought you were taking issue with my opinion. Maybe you are/were, though you seem to be supporting it, so perhaps you aren’t/weren’t. Or do you have issue with me having what you perceive to be a poorly informed opinion.

@ Nevermindme: Morning! Thanks for the reply.

No offence taken on any account. Your principle point (the hazardous externalities of so-called austerity policies) is so obvious, that its shocking that it remains largely un-noticed by folk who should know, and worse, you get the ESRI (this am) saying we should proceed with ‘consolidations’.

Excuse me, but who are these guys? They’re ‘wrong’ according to the empirical evidence* – its madness (to repeat a failed behaviour, and expect a positive outcome). These ‘consolidations’ will wreak long-term social, political and economic damage on this country – for what? For whom?

* Blyth, Mark. (2013). ‘Austerity: The History of a Dangerous Idea’. Oxford University Press.

@ Nevermindme

This is a point to which I have repeatedly drawn attention but not in such effective terms. The “negotiations” on “Croke Park III”, however, offer some hope as they effectively demolish the idea (a) that the public service is a homogenous monolithic structure (b) that there is any solidarity between unions or (c) between permanent employed personnel and new entrants.


I was expecting your views on the fodder shortage. Overloading the capacities of the system?

@ DOCM: “I was expecting your views on the fodder shortage. Overloading the capacities of the system?”

Below the belt stuff. Unworthy!


My apologies! The point was innocently meant. It is a very telling example of pushing the economic carrying capacity of grazing land beyond its limits.

I was prompted to use it by a conversation with a farmer in a supermarket queue recently who also spoke of the bad feeling being created by the nominally fair “one bale per farmer” emergency aid system being used i.e. the error in management also has social and political consequences.

Ah sure, its the weather! No bother! Though you did provide me with an opportunity to reflect on my postings (nature and length of-). Useful. Thanks!

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