Introduction
The credit boom led to widespread prosperity. The credit crunch is also not far behind in demonstrating how globalised and hence interdependent economies are. Since the 1990’s, and especially the last decade, foreign investments, debt instruments and credit fuelled expansion has been the norm for most economies. However, the credit crunch faced by organisations such as Lehman Brothers has led to a global meltdown. What started as sub-prime mortgage crisis has led to the credit traps drying up for businesses and also for individuals whose credit worthiness a short time back was beyond doubt.
Some economies have been the worst hit. Iceland is the first country where the government has collapsed and has been forced to resign. The present government is in a caretaker mode with the opposition having unclear answers on how to cope with the recession. Managing inflation during recession is a difficult task (Ethan S. Harris, 193). Ireland has the distinction of being the first country which is part of the euro currency zone that has gone into recession. It may not be the last, however, with Britain already in recession, and the slowdown has severely affected Spain, Portugal, Italy, Greece, Germany and the United States. In fact the IMF predicts that Britain could face the worst recession amongst the most industrialist countries.
The impact of the Irish recession and strategies being adopted by companies to deal with the situation is my focus of research. Ireland is an intriguing case as it was one of the poorest European nations and has gone on to become one of the wealthiest in a matter of two decades. Ireland has experienced double digit growth in the recent past whereas most economies in the recent good times have also struggled to get half of its growth rate. It is important to understand the growth of Ireland, the so-called ‘Celtic tiger’, in the last two decades, the cause and creation of circumstances leading to the credit crunch, and the combined effect of these factors on the Irish economy. This understanding will help drive efforts to understand the manner in which companies are dealing with the recession. Inputs from background research will help identify the research objectives and questions that will be asked to executives of Irish companies.
The Irish economy was an inward looking economy till 1950s (John Bradley 3-46). This changed with Ireland being more outward post this period. This did not immediately lead Ireland to become a big export hub; there was moderate increase in exports. However, the real benefits arose from the investments that were made in the economy. Ireland’s closeness with Europe in the 1960s led to a period of economic boom till the 1980s. But the recession in 1983 again forced a rethink in Irish business and government strategy. The only positive factor for the Irish economy was arguably the re-emphasis on the European integration of markets.
Even though there was political integration, a lot of non tariff barriers led to limited cross border trade and partnerships. The manufacturing sector did share some commonality with trade developing to a certain extent, but other sectors of the economy were yet to start sharing the benefits of European Union membership. A new legislative process was needed to ensure that countries within the European Union (EU) had similar policies to encourage trade, remove protection from key sectors and allow free movement of labour.
In order to get ready for trans-border EU trade, Irish companies and key sectors were asked to assess their readiness for increased competition. It is important to understand how these Irish companies react to increased competition to their services and how they managed to contribute to opportunities across the EU. In general Irish companies benefited for the following reasons: high educational standards, technology intensive investments, lower prices, and high quality of manufacturing. The bigger EU member states also had to forego a lot of their protectionist policies. Customers and businesses chose to shift to competitors that offered better quality at a cheaper price, and Irish and other nations’ companies took advantage of this moment. Irish companies also benefited from the ready availability of credit both within the domestic and the EU market, and have benefited from a reduced transaction cost, the negation of foreign exchange risk while dealing within the EU internal market, price transparency for customers and a stringent overview of public finances owing to the guidelines of the EU.
Successive pro-business governments in Ireland have also continued to attract foreign direct investment. The policies of Ireland have been fairly predictable, but by being predictable, the Irish have also demonstrated the vision, methodology and commitment that investors seek for reassurance. The country was seen as a base for starting business in Europe. It is the country within the EU with the highest percentage of English-speaking citizens. The high level of education also meant that highly skilled labour was available for companies to setup their European bases in Ireland. The largest investor in Ireland has traditionally been United States, mostly because of historic and ancestral loyalties. The second largest investor has been Germany, which has no significant historic or ancestral links with Eire. The lower corporate tax rate in Ireland has also lured companies. A special development agency was setup in Ireland to help the government attract foreign investment, and the agency worked closely with the government in helping it formulating strategies for continued industry growth.
The Celtic Tiger as Ireland has famously grown to be known now faced challenges that cast doubt over the policies that have bought it progress in the last decades. The global business environment has changed in the last six months, and there is a recessionary effect being faced by each country in the world. Some economies have gone into recession and Ireland is the first amongst euro to officially do so. The world faces a challenge that brings back memories of the great depression. However, what has economists worried this time around is the lack of precedence in dealing with a recession that is this widespread in globalised world where the internet can mean information whizzes around the world in seconds. Governments and companies are struggling to estimate the extent of the problem, let alone be in a position to predict a turnaround in the situation based on the steps that they have taken or propose to take. But what is the root cause of the problem that the world and Ireland specifically face?
Literature review
The US economy is supported in large parts by consumer spending fuelled by easy credit. Indeed, US consumer spending has fuelled growth in the Chinese and other economies. The income level of the US consumer might not have grown significantly in the last few years. However, the outsourcing boom and cheap imports of products from countries like China helped improve profitability for the companies and at the same time kept the prices in check. The US consumer continued to borrow more and more prior to the credit crunch (Bernard Baumohl, 88). Sustained growth and lower inflation meant that companies had easier access to credit. The banks passed on the easier credit to customers through what are commonly called as unsecured and secured loans. Unsecured loans allow consumers to borrow less compared with secured loans. The housing construction boom and real estate prices ran parallel to lower interest rates. Many home owners used the opportunity of the housing boom to avail secured loans against these assets. The credit cycle operated perfectly between the retailers/manufacturers providing credit, the customers taking the credit and the financial institutions supplying the credit. However, this cycle got interrupted due to what we now know as the sub-prime mortgage crisis.
Financial institutions give credit based on a credit score and other parameters they may have developed to determine the risk worthiness of customers. As the boom time continued finance managers were tempted to give more credit to existing customers and customers who previously might have been deemed risky based on their credit score. Essentially the credit score required to be eligible for certain loans was reduced to widen the customer base. Financial institutions thereby increased their overall exposure and the risk. These institutions secured their loan books with bigger financial institutions who bought the loans. When the credit cycle got interrupted, a lot of the riskier (i.e. poorer and less financially secure) customers started defaulting, thereby leading financial institutions to book losses. Repossessions started which led house prices to fall. Home owners could not get enough cash for their house when selling, and neither could the financial institutions selling the repossessed homes easily. This whole crisis got known as the sub-prime crisis.
There are certain questions such as why the credit model failed in the US, the role of financial watchdogs, the effect on corporate companies and the chain reaction that has led to a global financial meltdown. What seemed to be an isolated instance of sub-prime crisis first led some companies admitting to exposures; but these companies who had their books exposed to the sub-prime loans where primarily based in US, or sometimes in UK. So what has led the 2008 US jobless figure to rise to 2.8 million, near-complete lack of credit, bankruptcy of iconic names such as Lehman Brothers, losses in the equity market and negative growth in Gross Domestic Product (GDP)?
The growth of mistrust in the financial markets led to lenders distrusting borrowers. The Libor rate, which is the rate at which banks across Europe and US lend to each other, suddenly rose sharply. Cheap credit was suddenly a thing of the past. Higher rates were not just a reflection of the cost of borrowing but also the fact that people were unsure about lending and hence managed to push the rates to unattractive proportions. Bear Stearns was a prime example of the lack of credit with companies and banks falling under the weight of their debt and the negative outlook of the economy. The Federal authorities stepped in to ensure that a suitable buyer was found for the business, but by then it was already being predicted that Lehman Brothers would require more cash than what they had been able to raise in the recent past. Fannie and Freddie were also in trouble as they were the largest mortgage company in the US: they had to write off a lot of debt due to the bankruptcy filing of customers and huge inventory of repossessed homes that were worth much less than the market value they had been secured for. Government intervention did come for Fannie and Freddie, but in the case of Lehman Brothers the government could not find a suitable buyer and neither did it help it by injecting the capital required. The collapse of Lehman Brothers left the market in tatters with confidence in hedge funds and specialist financial institutions taking a big hit. Short selling was still not banned and fund managers who had taken a bearish position on stocks such as Citibank were able to rake in huge profits while the stocks went into a free fall. More than a trillion dollars was wiped out on the stock market.
Slowly and steadily the list of investors hit by the credit crunch grew. More retail investors got caught as they had placed money in the index heavyweights such as Lehman Brothers and Citibank. They were unable to salvage most of their investments. Individuals had started to lose jobs across huge organisations or small firms who acted as suppliers or were linked operationally to the large organisations. Pension funds joined the list of losers as most of them had invested in the equity market in varying ratios. Even city councils back in the UK were not spared with the Icelandic banks going down as they had been attracted to invest in them because of high interest rates: almost a billion pounds in excess cash of various UK councils was held with Icelandic banks. The UK government had to step in and use laws designed for anti-terrorism scenarios to ensure that the money of the councils was still with Icelandic banks and there was at least an opportunity for the councils to get their money back.
With analysts and the retail investors being more critical of companies there was an attempt by them to put a figure to the exact debt, recalculate the assets, come out with fresh earnings guidance, and rationalise their businesses to increase profitability. This further started the process of mass scale retrenchment by companies who did not have direct exposure to the sub-prime crisis but were being hit by either lack of credit or falling consumer confidence. Major international companies which have their bases in Ireland started to lay off their employees; the construction boom fuelled by rising prosperity and cheap credit abruptly ended; the volatility in exchange rates especially the strengthening of the euro hit exports.
But the crisis developed into a recession very quickly for Ireland and it was the first euro economy to go into recession. So why did the meltdown effect Ireland so dramatically and quickly?
Methodology
The dramatic effects can be analysed in the context of what companies were doing that led to or facilitated the crisis and what they actually should have been doing in an ideal scenario. The research forming the backbone of the analysis needs to identify patterns in behaviour of companies’ pre and post the credit crunch. Additionally, information about how companies have managed themselves needs to be assimilated. A survey would help incorporate response from various companies thereby generating enough data to aid pattern discovery. In-depth interviews could help in getting to know the management aspects of a select few companies. The research design comprising of survey and depth interviews will also help create a fine balance between quantitative and qualitative methodologies.
There are difficulties in getting companies to share information regarding management approach pre and post credit crunch. Some of the information is confidential or some of it may not be relevant to the handling of the crisis. There is also uncertainty amongst world and business leaders on effective ways to deal with the crisis. In such a scenario it is difficult to expect the respondents to have clear and concise thoughts regarding what they should have been doing and what they should be doing in these times. Hence, it is important that the sequence of administration of the survey research and the depth interviews are leveraged to draw maximum insights from the research.
The survey was administered first to the respondents and thereafter the depth interviews were conducted. The sequence of the research instruments was determined to give some time for analysis of the survey responses. The responses were analysed to measure the completeness of the survey, the nature of responses and any feedback that the respondents had about the design of the questionnaire. The survey was designed as a quick dipstick study to gauge the feedback of the respondents and fine tune any questions if necessary for the depth interviews. The questions were close ended in nature to ensure that the time required to answer them was kept to the minimum. There was only one question which allowed the respondents to share any specific information that they wanted regarding their companies handling of the recession.
The survey was administered via telephone as it was thought to be a medium which would allow the respondents to be flexible with their time allocation. Also it was possible to give a background of the analysis on the phone. A copy of the survey was sent to the respondents prior to the survey so that it became easier for the respondent to look at available answer options within the questionnaire. The survey was designed in a manner where the respondent could choose not to answer certain questions or give not applicable as a response if necessary. The respondents were chosen in a manner similar to stratified random sampling. Seven respondents were selected across five different industries. The aim was to get at least five respondents to answer ninety percent of the questions completely. The questionnaire was divided in various parts. The initial part was designed to understand the level of impact the companies were feeling due to recession. The respondents were asked to rate the level of impact on a Likert scale. The rating was explained to the respondents. The second part concerned around how quickly the companies were able to see the recession coming. Whether the companies had their own systems and reports in place that pointed to lower sales or pressures on margins or whether there were external sources of information that first pointed to a downturn. The third part of the questionnaire dealt with what the respondents thought in their view the company should not have been doing prior to the downturn. The fourth and final part of the questionnaire dealt with questions of what their companies were doing to get out of recession. The choices that were given to the respondents as part of the close ended questionnaire related to organisational restructuring, cost reduction, lower production, mergers, etc.
The responses were captured in a datasheet and were evaluated to understand if there are any specific questions that get met with a not applicable response from the respondent. This would allow for dropping of the question from the depth interview or rephrasing the question if it was necessary to ask it to understand the Irish recession. The responses provided less clarity around part three of the questionnaire which related to how and when the companies realised that they were in the grip of recession. This section of questions seems important as if the companies didn’t realise what the business scenario is likely to be then the same mistakes can be made by the companies at a later date. It was necessary to probe depth interview respondents on this part of the questionnaire and on the fourth part dealing with the measures that companies have taken to tackle recession. At this point data analysis was not done but merely an understanding of the effectiveness of the research instrument was gauged.
One result of administrating the survey was the development of the research hypotheses. Prior to the survey the hypotheses was loosely structured. The hypotheses was loosely structured as background research and literature review did not provide clear pointers to the reasons, methods to tackle and the potential long term effects of the recession. Some of the questionnaire responses helped to formulate the hypotheses for the next phase of research. The first hypothesis was that the organisations failed to put in policies that would help them deal effectively with a downturn. The second hypothesis was that cost cutting measures alone cannot be the biggest measures to tackle the downturn.
To validate the hypotheses depth interview was chosen as a research instrument because it is a qualitative research methodology that would permit in asking open ended questions. The approach provided the flexibility to have a semi structured format that was more discovery oriented rather than an approach were one went in with a perceptions about solutions and then tries to validate those perceptions. The depth interview provided an opportunity to seek understanding and interpret results. It was not possible to use another qualitative approach such as focus group as respondents might have been unwilling to discuss the financial and strategic details of their companies. Also if a general discussion was sought it might have led some respondents to be less forthcoming in accepting the shortcomings of their companies’ approaches. It was felt that though the depth interview might end up asking sensitive questions about the companies’ strategy the respondents would be willing to share such information as the research is being done for academic purposes and is not commercially motivated. This sort of format also allows the respondent to be placed in the position of an expert where his opinions are highly sought and he is made to believe that his perception and description of the problem are of real value. The recession issue though caused by financial problems has a human face to it and a face to face interview mechanism is the best way to bring out the human element in the problem discussion.
Understanding was needed as the literature review was not conclusive in providing answers to what the companies should have been doing before the downturn or what they should be doing to tackle the after effects of the downturn. Because this approach is conversational in nature it allowed to take a backseat and just listen to a large extent what the respondent had to say. The depth interview was not selected because it offered a quick answer. In fact the depth interview provided responses that were needed to be studied in the large context of the literature review done.
The respondent was selected from two companies having their headquarters in Ireland. Companies that had their bases outside Ireland but having some operations in the region were not chosen as the key decisions might have been made outside Ireland. Companies that used Ireland primarily as manufacturing hubs were also not selected for the depth interviews as they might not be facing demand pressures primarily from the Irish markets. Their customers might be based globally but only because their operations are in Ireland that they would be making some decisions that could be affecting the Irish economy. The two depth interviews were conducted with respondents of an Information Technology and a company based in the Food sector. Financial sector respondents were not selected or sought for depth interviews as there has been much information about these sectors already published in the mainstream media. Selecting the financial or financial services related sector would also limit understanding of what the recession means for varied sectors. Even though it has started as a financial crisis waning consumer confidence has meant that other sectors too are as severely affected by it. Background research also pointed to the fact that the Information Technology Company was going through a rough patch with pressures both on revenue and margins. However, the Food Sector Company was it seems experiencing pressure on margins but revenues were being maintained. This provided a good mix of the interview respondents.
The key influential stakeholders were identified in the two organisations and their time was sought to carry out the depth interview. Questions were based on the responses generated by the survey questionnaire. A set of leading or probing questions and topics were also prepared to guide the conversation forward in case the key questions would fail to excite the respondents or not generate enough information to analyse. The interview preparation was done by having a fact sheet, questions and post-interview comment sheet ready. The fact sheet was used to capture the respondent details, the demographics of the respondent and any other special circumstances that the company or respondent was going through while answering the questions. The comment sheet was used to document in detail the responses and also to highlight a few key points that could be used as a research guide later on. Though both depth interviews took place on different days the respondents were asked the same set of basic questions. This was done to avoid any specific qualitative analysis of the interview prior to the process getting over.
The respondents were assured that their information would be used for academic purposes only and any specific data would be masked to prevent identification of the source. A written consent was taken for conducting the interview. During the interview an attempt was made to establish a rapport with the respondents. An active listening approach was maintained with flexibility given to the respondent to even deviate at times from the core of the topic. This was done as the respondents felt that they needed to provide additional background about their companies operations. Any business environment operation information that the respondents gave was noted. Care was taken not to pose multiple questions at one time. Unclear responses to questions were verified while maintaining the overall time limit of the interview. Though open end questions were asked, leading questions were avoided. Background research on the two sectors and the operations of the two companies was done via secondary sources of information. However, any leading questions were avoided. The observations were recorded as notes and an audio recording was done to ensure that a playback of the interview was possible while doing the analysis.
The data from the survey and depth interview was stored in datasheets. The audio tapes were replayed to capture any information that was not captured in the notes. The qualitative part of the discussion was given a structure to ensure that the data analysis would be supported by structured data.
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