The sad story of Maplin Electronics

Published by Anonymous (not verified) on Wed, 07/03/2018 - 2:20pm in



Last week saw two high-profile corporate failures in the UK. Toys R Us finally went into administration after a stay of execution over Christmas. And private equity firm Rutland Partners pulled the plug on geeky electronics retailer Maplin. Total job losses from both failures amount to something in the region of 5,000 across the whole of the UK.

No-one was particularly surprised by the failure of Toys R Us. The company had proved slow to respond to the rise of online shopping and the trend away from large out-of-town retail outlets in favour of small local shops. In the US, Toys R Us filed for Chapter 11 bankruptcy protection (the American equivalent of administration) in September 2017. Despite the American company's insistence that its European operations were not affected, it was almost inevitable that the UK subsidiary would eventually follow suit. British consumers are shifting to online shopping every bit as rapidly as consumers across the Pond, and the trend towards localism is evident in the UK with the growth of convenience stores. Toys R Us, with its big out-of-town stores, poor online offering and lack of high street presence, looked increasingly anachronistic.

But the second failure came as something of a shock. Only a few days before, Maplin had blithely announced the opening of a new store. What went wrong?

The company that has been placed into administration is MEL Topco, which is the top layer of a complex corporate structure created by Rutland Partners in 2014 when Rutland purchased Maplin Electronics Group (Holdings) Ltd. from its previous owner Montagu Private Capital. Maplin Electronics Group (Holdings) Ltd. still exists, however; its 2017 accounts say that it is a "non-trading intermediary holding company". Its sole owner is MEL Bidco. MEL Bidco is a wholly-owned subsidiary of MEL Midco, which in turn is a wholly-owned subsidiary of MEL Topco. The corporate structure below Maplin Electronics Group (Holdings) is similarly complex. Maplin Electronics Group (Holdings) Ltd. is the sole owner of Maplin Electronics (Holdings) Ltd., which in turn is the sole owner of Maplin Electronics Ltd., the actual retailer. So the retailer has no less than six holding companies above it. It also has a wholly-owned subsidiary of its own, Maplin Electronics HK Ltd.

MEL Midco's 2017 accounts were created on a "going concern" basis even though it has no income and a balance sheet consisting entirely of debt. Apparently this is ok because its shareholder, MEL Topco guarantees its solvency. Similarly, MEL Bidco's accounts were also done on a "going concern" basis despite having £83m of net current liabilities. Apparently MEL Topco guarantees those, too. So MEL Midco and Bidco are now insolvent, because MEL Topco cannot honour those guarantees.

Further down the corporate structure, Maplin Electronics Group (Holdings) Ltd. mainly seems to exist to drain Maplin Electronics Ltd. of profits. On the books of Maplin Electronics Group (Holdings) Ltd. is an intercompany loan to Maplin Electronics Ltd. at an interest rate of 10%. The interest charge on this loan was sufficient to ensure that Maplin Electronics Ltd. made a statutory loss in both 2016 and 2017. Meanwhile, the direct owner of Maplin Electronics Ltd, Maplin Electronics (Holdings) Ltd., appears to exist only as a vehicle to hold a £31m revolving credit facility from Lloyds Bank. All of these intermediate companies are effectively guaranteed by MEL TopCo. All of them are now therefore insolvent.

Interestingly, the lower half of the structure pre-dates Rutland's acquisition. It was created by Maplin's previous owner, Montagu Capital, when it acquired Maplin in 2004. So it seems Rutland simply added its own layers on top of the existing structure.

Quite why Rutland has created such a complex corporate structure for Maplin is not immediately apparent, but I suspect it may have something to do with tax, or rather avoiding it. The accounts of the holding companies reveal complex and opaque inter-company loans and transfers which are otherwise hard to explain. I'd like a tax accountant to have a good look at those intercompany transfers.*

However, the complexities of Maplin's structure post-Rutland are not my concern. I'm chasing a different hare.

When Rutland Partners acquired Maplin in 2014 it funded the purchase with debt. That debt was loaded in its entirety on to the books of MEL Topco, in the form of £15m of bank loans at Libor + 7.5% and £72m of shareholders' loan notes at 15%. The 2017 full-year accounts show that MEL Topco generated an operating profit. This turned into a statutory loss after goodwill amortisation and interest charges. Richard Murphy, in his brief analysis of MEL Topco's 2017 accounts, says that it was the high interest charges on the shareholders' loans and accrued interest that rendered MEL Topco insolvent.

It is fair to say that the shareholders' loans were significantly more expensive than the bank loans. But that does not necessarily mean that the interest rate was exorbitant. Shareholders' loans are deeply subordinated debt instruments with equity-like characteristics. Really, they are equity dressed up as debt to take advantage of the "tax shield" on debt. So that 15% interest rate can be regarded as equivalent to the after-tax return that Rutland Partners, as shareholder, expected to receive from its acquisition. Was that an unreasonable expectation?

For a long-term acquisition of a sound company with stable cash flow, 15% would be a fairly high return, though not exceptional - many shareholders would expect a return on equity of the order of 12-15%. On the face of it, therefore, an interest rate of 15% on shareholders' loans doesn't look exorbitant.

But a sound company can finance itself with senior debt, so would pay a lower interest rate. By using the interest rate on Maplin's bank loans as a benchmark, Richard Murphy effectively assumes that Maplin was a sound company. If he is right, then Rutland's high interest rates are extortionate

But I'm afraid he is wrong. The hard truth is that Maplin not only is insolvent now, but was when Rutland Partners bought it. In fact it has been insolvent for a very long time. It is a zombie company.

The story of how it became a zombie is interesting, and ultimately, very sad. It is a story of a family business that was too successful for its own good.

Maplin was originally created in 1972 by two geeks who were frustrated by the difficulty they had obtaining components for their home electronics. They started up a mail order business from their attic room, producing a catalogue of electronic components from which fellow geeks could order. The business quickly expanded beyond simple mail order, though: Companies House tells us that Maplin Electronics Ltd. was incorporated in 1976, when its owners opened their first retail electronics store. Originally, it was called Maplin Electronic Supplies Ltd, but in 1988, the name was changed to Maplin Electronics Ltd.

Maplin's first audited accounts, in 1982, reveal a fast-growing small company, still owned by its founders. Its turnover had risen from £2m to £3m in one year, it was generating substantial profits and had just made its first acquisition, a company called Mapsoft. It was a little slow paying its bills - trade creditors were high - which suggests it had cash flow problems. The normal response to this would be to obtain working capital finance. But Maplin went much further than simply easing its cash flow difficulties. In the 1985 audited accounts, trade creditors were lower, but Maplin's bank overdraft was well over £1m. It appears that Maplin had bought itself new freehold premises and paid for them entirely with short-term finance - hardly the most prudent financial management. In 1987, it mortgaged the property.

Nonetheless, Maplin continued to grow fast, riding the 1980s boom in home computing and electronics. By 1988, it was a solidly profitable company with a sensible mix of short and long-term financing. And it continued to expand. In 1989, it created a National Distribution Centre for its products. Four years later it opened its first overseas office, in Taiwan.

Maplin's final accounts as an independent company were issued in 1994. Later that year, it was acquired by the private equity company Cannon Street Investments plc, later renamed Saltire plc. However, this appears to have been a friendly merger, since Maplin's original owners remained as directors, and additionally became shareholders in Saltire. It certainly wasn't a leveraged buyout. Maplin continued to finance itself sensibly with bank loans and retained earnings, though in 1995 it took a hit to its revaluation reserve when it was forced to write down the value of its substantial property portfolio in the wake of the UK's property market crash.

Maplin's business continued to expand under Saltire's ownership. It made further acquisitions, opened more stores, and expanded overseas, establishing a Hong Kong subsidiary. But as operating profits rose, the company gave increasingly generous dividends to shareholders. In 1998, its dividend policy even turned a respectable operating profit into a loss. The need to keep Saltire happy was distracting attention from longer-term investment.

In 2000, the dividends stopped when Maplin declared a loss due to a major restructuring. Possibly to protect itself from takeover, Maplin took itself private in March 2001. But the sharks were already circling. In June 2001, the private equity firm Graphite Capital - of which Maplin's director Keith Pacey was a director and shareholder - led a leveraged management buyout of the company.

That's when Maplin acquired the first of its current holding companies. Maplin Electronics (Holdings) Ltd. was formed in 2001 as a vehicle for the debt financing of Maplin's acquisition by Graphite. At that time, it was loaded up with nearly £40m of debt, made up of a mixture of bank loans and subordinated loan notes. Balancing this was an enormous goodwill asset that dwarfed the retailer's substantial tangible assets. The 2002 accounts show that a reasonable operating profit was turned into a loss by the interest charges on the debt. Sounds familiar, yes?

No, this wasn't the start of Maplin's zombification. £40m wasn't a huge amount of debt for a fast-growing medium-size company, and the company was without question creditworthy. So by 2004, it was looking a whole lot healthier. It reported a respectable profit and had refinanced the subordinated loan notes with cheaper bank loans. Admittedly, Graphite was draining the company to some extent: the £5m dividend that year was paid by increased borrowing. But at this stage, Maplin was a healthy profitable company. In September 2004, Graphite sold it to Montagu Capital for £244m, six times what it paid for it. Graphite still lists Maplin as one of its most successful corporate acquisitions.

Montagu Capital took the same funding approach as Graphite. It created the second of Maplin's holding companies, Maplin Electronics Group (Holdings) Ltd., and loaded it up with acquisition debt. But because Montagu Capital had paid so much for the company, the amount of debt loaded on to the new holding company was far more. Right from the start, it proved an intolerable burden.

This is the long-term debt of Maplin Electronics Group (Holdings) Ltd. as at January 2005:

And these are the types of debt, with the interest rates charged:

Of course, some of the bank loans were existing Maplin borrowings brought through to the new holding company on consolidation. But by far the largest proportion of this debt is new. It seems that Montagu Capital financed the acquisition with a mix of bank loans and unsecured debt. But there's something distinctly odd about the Series A loan notes. The interest rate was significantly higher than it should have been for senior unsecured debt, even in 2004. It was higher than the interest rate charged by Rutland on its deeply subordinated shareholders' loans. And not only was the interest rate high, some of the interest was capitalised, thus compounding the interest. That suggests it was mezzanine debt. So, were the Series A loan notes subordinated? If so, why? Maplin was a healthy, fast-growing company which had delivered a stellar rate of return to its previous owner. There was absolutely no need for such an expensive form of financing. I'd call that extortion, personally.

Not only were the Series A notes extortionate, Maplin was never able to refinance them as it had Graphite's subordinated loan notes. The interest on all that debt, together with amortisation of the balancing goodwill asset, completely swamped Maplin. The January 2005 accounts show that an operating profit of £1.84m was wiped out by £11.74m of interest charges, resulting in a statutory loss of £9.6m. As the holding company didn't have any equity to start with, that loss rendered it insolvent by the same amount.

By December 2005, things were even worse. Operating profits were £16.43m, but goodwill amortisation of £12m and interest charges of £37.24m turned that into a loss of nearly £33m. The shareholders' deficit (the amount by which the company was technically insolvent) grew to £42.4m.

Every year thereafter, Maplin Electronics Group (Holdings) reported a loss. Because interest was being capitalised, the interest charges continually rose, so even though the company's operating profits improved every year until 2011, they were never enough to eliminate the losses. By 2012, the net debt had grown to nearly half a billion pounds, of which £68.9m was accrued interest, and the shareholders' deficit was £320m. Montagu Capital's extortionate charges had turned a healthy growing company into a zombie.

The aftermath of the financial crisis cost Maplin dearly. In 2011, its operating profits slumped as sales growth fell. When the downturn continued into 2012, Montagu realised the game was up. While operating profits were improving, it could pretend that the company would eventually deliver a profit. But now that operating profits were falling, reporting losses year after year while claiming that the company was still a going concern was no longer a sustainable strategy. Trading while insolvent is illegal in the UK. The directors of Maplin were risking disqualification, and Montagu Capital was risking legal action by its customers for failing to take action to recover their money.

In January 2014, Montagu cancelled the accrued interest and injected £542m of new equity into the company. It also impaired the goodwill asset by £85.4m. The goodwill impairment and debt for equity swap weren't enough to return Maplin to solvency, but that wasn't the intention. After all, when your gravy train hits the buffers, you get off it, don't you? So all Montagu aimed to do was make Maplin sufficiently attractive to interest a buyer. It was putting makeup on a corpse.

The buyer that Montagu managed to attract was Rutland Partners, a distressed debt specialist. Rutland paid £89m for Maplin, most of which went to clear Maplin's remaining debt. The first set of accounts for MEL Bidco, the holding company Rutland created as a vehicle for the funding of Maplin's acquisition, say that the real consideration was only £14.7m after debt settlement. But since Maplin was actually insolvent at the time of the acquisition, arguably even this amount was too high. The right price was probably a nominal £1 plus a further cash contribution from Montagu to help settle Maplin's debts. To my mind, Rutland did not drive a hard enough bargain. It must really have wanted Maplin in its portfolio. I wonder if some of its directors are closet geeks.

This brings us to the financing of Rutland's acquisition. In the circumstances, financing with bank loans and/or senior debt, as Richard Murphy suggested, was out of the question. Even financing with bank loans and commercial subordinated debt, as Graphite had done, was impossible. Rutland had to put its own money at risk - or rather, its customers' money. Interest rates are far lower now than they were in 2004, of course. But I find it hard to see that 15% was an exorbitant hurdle rate of return on what was by any standards an extremely risky acquisition.

However, this does not mean that Rutland bears no responsibility for Maplin's failure. Like Montagu, Rutland paid far too much for Maplin. And like Montagu, it funded the overpayment with debt, then loaded that debt onto Maplin's books. Once again, Maplin was loaded with debt it could not service. Had Rutland paid the right amount for Maplin, debt service would not have been so onerous, and Maplin might still be alive today.

Of course, if Rutland had tried to drive a hard bargain, Montagu might have opted to put the company into administration. Indeed, it could have done so anyway. The fact that Montagu sold Maplin to Rutland rather than putting it into administration kept it alive, and its staff in work, for four precious years. The job prospects for its staff now are better than they were four years ago. Perhaps that is something to be grateful for.

The sad story of Maplin Electronics might lead people to damn all private equity investment. Indeed, this is the conclusion that Richard Murphy reaches:

The time has come to question whether the venture capital business model adds value in the UK. The evidence is it may not because it places real business under too much financial stress to survive, let alone prosper.

But Maplin was owned by four private equity companies during its long lifespan. And under two of them, it flourished. Only when it was loaded down with debt and systematically drained of profits because its owners had paid far too much for it, did it get into trouble. Perhaps the problem is not so much the venture capital business model itself, but the greed and folly of some of those who make investment decisions.

And there is one final twist in this tale. We don't know exactly why Rutland pulled the plug, but we do know that Maplin's external financiers were getting cold feet. Maplin recently had its trade credit insurance revoked, which for retailers is usually a precursor to failure, whether or not they have a private equity owner. In an interesting article, Computer Weekly argues that Maplin has been unable to respond to the challenge of online sales and has become over-reliant on its stores. So the sad story of Maplin may simply be an old-fashioned tale of over-expansion, loss of core focus and inability to respond to a fast-changing market. Just like Toys R Us.**

Related reading:

All the accounts cited in this piece can be found on Companies House website. I have not linked directly to them here because the links expire after a short period.

FT Alphaville has written Maplin's epitaph

Corporate insolvencies - or potential insolvencies - are quite a thing at the moment. Here are a few more that have interested me recently. 
Clearing out Carillion's cupboards
The misery of Mitie
The Fallout from Carillion's Failure: Could Interserve Be the Next Domino To Fall? - Forbes
After Carillion, Capita's profits warning comes as no surprise - Forbes

* Various people have pointed out that layers of holding companies are often used in PE buyouts because they create structural subordination of various classes of debt. It's entirely possible that this is the reason for Maplin's complex structure.

** It seems there are more similarities between Toys R Us and Maplin than I realised. An article in the FT says that Toys R Us's decline and eventual failure stemmed from its buyout by Bain Capital, KKR and Vornado in 2005. Or rather, the headline does. The actual article indicates that Toys R Us was already declining at the time of the buyout - indeed that was the reason for it. I think we have to be very careful about correlation and causation. A company declining after a leveraged buyout does not necessarily imply that the buyout is the cause of the decline. Arguably, private equity buyouts kept both Toys R Us and Maplin alive and their employees in work for longer than would have been the case without them.

The original version of this article lacked the final paragraph. The Computer Weekly link was in Related Reading. I have now brought it into the post to tie up with the Toys R Us discussion at the head of the post. 

Whatever Happened to the Polytechnics? Part III

Published by Anonymous (not verified) on Fri, 02/03/2018 - 8:00pm in



I will now turn to what I consider to be the moral imperative for part-time provision, which leads me to conclude that we have grave problems with our current funding settlement.

Regardless of debates about what the proper cost of HE should be, what we have is a system that gives people in the main one shot at funded study and a culture that pushes them to make that decision at 17 or 18. As someone who changed undergraduate courses in the mid-90s, I am acutely conscious of the pressure put on young people to go to university too soon and the difficulty of redressing mistaken choices. The fee-loan regime introduced without adequate credit transfer arrangements is hopeless from this perspective.

It is very inflexible and at odds with lifelong learning and retraining. Crosland laid great stress on these points – the Polytechnics would have close ties to industry, business and the professions and in doing so would not only offer part-time provision (that was not beholden to e.g. the University of London external degree programmes)[ but offer training and retraining opportunities to citizens and workers throughout their lives.[1]

Given the subsidy built in to Student Loans Company loans and the repayment threshold of £21,000 (now £25,000) being common to graduates regardless of study mode, it may at first sight seem rational to choose the full-time degree.

However, there is an obvious problem in maintenance support for full-time study.

What is broken is maintenance support for full-time away from home students, where the chief villain is student rents. These have more than doubled since the early 2000s: purpose-built accommodation in London now averages over £220 per week (I say ‘now’ but that was in 2015/16).[2] Since students are asked to sign rental agreements for over 40 weeks, this is a very real problem: the maximum maintenance support (calculated in relation to household income) is based on a thirty-week model.

Let us briefly look at how Wales has set out its calculations for its proposed revisions to maintenance support (a mix of loans and grants there) – the maximum available amount is reached by taking the

  • minimum wage – £7.20 per hour
  • hours worked – 37.5 per week
  • weeks of study – 30 weeks

to give a total loan outside London equal to £8100 per year (£7.20 times 37.5 times 30 equals £8100).

These figures are very close to those established for new English-domiciled starters in 2016/17.

New Picture (3)

For London, the maximum available to English-domiciled students is £10,700. If you sign a 40-week contract for £200 pw rent (termly in advance) then you are left with £2700 for everything else (including travel another big cost in London even with the 30% discount).

I don’t think we can assume that students are able to locate sufficient paid work in the Summer holidays to generate a surplus that would cover costs for the other 40 weeks of the year.

Taking on excessive work in term-time clearly affects student performance and mental health – as does taking on other, more onerous, commercial debt (overdrafts, bank loans, credit card debt and payday loans – I know of one London HEI where 10% of students admit to having used payday loans). Despite their lower nominal balances, these debts are tougher for students and graduates to manage. It is an embarrassment that the government has commissioned no research on the effect of debt on young graduates and that it is sitting on the latest version of its regular study of Income and Expenditure for students (2014/15). [And still doing so nearly a year after I gave this paper!]

While this issue of rents and maintenance support goes unaddressed, we are effectively blind to a huge structural advantage to those coming from wealthier backgrounds and the source of what appears to be an expanding mental health crisis amongst students. It’s the stress of making ends meet and the burden of commercial debt which weighs most. Making an extra £2-3000 per year in SLC loans available is the sensible option.

The high-cost of SLC loans for borrowers and government and the hidden costs of full-time study – the gap between funding and costs – point to a concrete problem, but also an intangible one. The loss of goodwill universities have suffered.

Glib rent policies – ‘it’s the market rate’ –  and management enthusiasm for higher fees leave universities very close to having their Gerald Ratner moment: revealing their contempt for their customers.

At the moment, students don’t feel they have reasonable alternatives given the signalling function of the degree in the English jobs market. The degree makes sense insofar as the other options look worse or non-existent. This is a recipe for huge resentment! And that’s not a good basis for a sustainable higher education system. Particularly when the government seems keen to exploit this resentment to discipline universities through consumer pressure and new earnings data.

Academics are beginning to clock on to this. It is striking to me that in the early months  of 2017 in London I heard academics  -in universities – talk openly about repositioning their institution as a polytechnic. Here they meant teaching-focused, care-focused and cheaper. Were liberal arts colleges more prominent in the UK, it is possible that this is the analogy they would reach for.  But they perhaps have in mind offering a better deal to undergraduates in terms of contact time and less time of their own spent in the swamp that is the public procurement tender exercise known as the REF.

Before concluding with a sketch of a solution, I want to flag up a further consideration – what happened in 1993 did not create a unitary system – it created a stratified ladder. It’s a bit much to expect HE to be an engine of social mobility when it in fact does something else – it reproduces the middle classes by rationing positional goods: access to particular jobs. This unpleasant truth underneath the jibes about ‘former Polytechnics’.

Here is the annual income of each HEI in England in thousands.

New Picture (4)

Hesa 2014/15 data

This chart exemplifies the hierarchical ladder that Crosland feared would result from a unitary system with the established universities at the top.

In the face of funding, financial and health pressures, ‘academic drift’ and the loss of flexible study options, it’s in the interest of all to rethink part-time provision and to recognise that the current fee-loan regime cannot fix this problem. Part-time, lifelong learning cannot be funded as the subordinate to the full-time fee-loan regime.

The current funding incentives privilege full-time degree study – it is seemingly the best option for institutions and students. And so flexible modes of study have atrophied and withered.

As Wolf notes: “Under current conditions, students are offered one loan, tied to a degree, once. Publicly-supported institutions therefore have no incentive to offer anything other than degrees of maximum length at maximum permitted cost.” [2016, p. 8] (my emphasis)

In concrete terms, this means that staff cannot offer to students a change in mode of study, when their circumstances change. And loan restrictions mean that those wanting to retrain in later life – a core constituency for an alternative institution – are currently excluded in the main.

In the next part, I will draw these threads to a close, arguing for a different form of institution.



[1] This is a few years before the creation of the University of the Air – the Open University.

[2] £143pw in the rest of the UK. London is rent driven up by the plethora of studios averaging £270 pw.

Panel discussion at federal NDP policy convention

Yesterday I spoke on a panel discussion on economic inequality, along with Andrew Jackson and Armine Yalnizyan. We were guests at the federal NDP’s policy convention in Ottawa. The panel was moderated by Guy Caron.

Topics covered included the minimum wage, basic income, affordable housing, the future of jobs, gender budgeting, poverty among seniors, Canadian fiscal policy in historical perspective, and Canadian fiscal policy in comparison with other OECD countries.

The discussion was 30 minutes long. You can watch it here.

Panel discussion at federal NDP policy convention

Yesterday I spoke on a panel discussion on economic inequality, along with Andrew Jackson and Armine Yalnizyan. We were guests at the federal NDP’s policy convention in Ottawa. The panel was moderated by Guy Caron.

Topics covered included the minimum wage, basic income, affordable housing, the future of jobs, gender budgeting, poverty among seniors, Canadian fiscal policy in historical perspective, and Canadian fiscal policy in comparison with other OECD countries.

The discussion was 30 minutes long. You can watch it here.

To Grow the US Economy, Cancel Student Debt

Published by Anonymous (not verified) on Mon, 12/02/2018 - 8:00am in


Debt, student debt

A report from a group of economists at the Levy Economics Institute of Bard College finds that there would be huge benefits if the federal government were to forgive all existing student debt. This would ripple out from young people struggling to pay off massive college loans to the economy as a whole, according to the report. “The idea of canceling student debt is not just some crazy idea out of left field, but is actually something that could be done, and done in a way that has a moderately positive economic impact,” Marshall Steinbaum, a fellow and research director at the Roosevelt Institute and a coauthor of the report said in an interview. “The way this and similar polices are often discussed is in a mode of ‘well can we really afford this?’ and the answer is definitely yes,” he added.

Capitalism’s Crisis of Stagnation and Austerity

Published by Anonymous (not verified) on Wed, 31/01/2018 - 3:11am in


austerity, Debt

image/png iconsecular stagnation.png

As 2018 opens economic optimism is breaking out amongst the capitalist class. Leaving aside the vainglorious boasts of the current President of the United States that unemployment in the US has reached lows only last seen in the post-war boom, or that the New York stock market is now at all time record highs, more serious economic commentators are arguing that after a decade of misery (at least for 99% of the planet) the signs of recovery from the 2007-8 banking collapse are now behind us. If this sounds familiar it is because we have heard the same tale so many times.

read more

Public Debt. I can’t Believe we are Still There

Published by Anonymous (not verified) on Fri, 26/01/2018 - 5:19am in

The crisis is supposedly over, as the European economy started growing again. There will be time to assess whether we are really out of the wood, or whether there is still some slack. But this matters little to those who, as soon as things got slightly better, turned to their old obsession: DEBT! Bear in mind, not private debt, that seems to have disappeared from the radars. No, what seems to keep policy makers and pundits awake at night is ugly public debt, the source of all troubles (past, present and future).

Take my country, Italy. A few days ago this tweet showing the difference between the Italian and the German debt made a few headlines:


The ratio increased, so DEBT is the Italian most pressing problem. Not the slack in the labour market. Not the differentials in productivity. I can’t stop asking: why aren’t Italians desperately tweeting this figure?


This shows the relative performance of Italy and Germany along two very common measures of productivity, Multifactor productivity and GDP per capita. I took these variables (quick and dirt from the OECD site), but any other measure of real performance would have depicted a similar picture.

So what? The public debt crusaders will argue that precisely because of debt, Italy has poor real performance. The profligate public sector prevented virtuous market adjustments, and hampered real convergence.  The causality goes from high debt to poor real performance, they will argue. Reduce debt!

Well, think again. Research is much more nuanced on this. A paper by Pescatori and coauthors shows for example that countries with high public debt exhibit high GDP volatility, but not necessarily lower growth rates. High but stable levels of debt are less harmful than low but increasing ones. In a recent Fiscal Monitor the IMF has shifted the focus back to private debt (which, it is worth remembering is the root cause of the crisis), arguing that the deleveraging that will necessarily continue in the next few years will require accompanying measures from the public sector: on one side, renewed attention to the financial sector, to make sure that liquidity problems of firms, but also of financial institutions) do not degenerate into solvency problems. On the other side, the macroeconomic consequences of deleveraging, most notably the increase of savings and the reduction of private expenditure, may need to be compensated by Keynesian support to aggregate demand, thus implying that public debt may temporarily increase in order to sustain growth (self promotion: the preceding paragraph is taken from my book on the relevance of the history of thought to understand current controversies. French version available, Italian version coming out in March, English version coming out eventually).

In just a sentence, the causal link between high debt and low growth is far from being uncontroversial.

Last, but not least, it is worth remembering that Italy was not profligate during the crisis; unfortunately, I would add.  Let’s look at structural deficit (since 2010; ask the Commission why we don’t have the data for earlier years), which as we know washes away the impact of cyclical factors on public finances.


The Italian figures were slightly worse than the German ones, but not dramatically so. And if we take interest expenditure away, so that we have a measure of what the Italian government could actually control, then Italy was more rigorous (Debt obsessive pundits would use the term “virtuous”) than Germany.

The thing is that the Italian debt ratio is more or less stable, in spite of sluggish growth (current and potential) and low inflation. It is not an issue that should worry our policy makers, who should instead really try to boost productivity and growth. Said it differently, it is more urgent for Italy to work on increasing the denominator of the ratio between debt and GDP than to focus on the numerator. And I think this may actually require more public expenditure and a temporary increase in debt (some help from the rest of the EMU, starting from Germany, would not hurt). It is a pity that the “Italian debt problem” is all over the place.

No, Tweezer! It’s Not Labour that’s Attacking Investment, but Tory Privatisation

Published by Anonymous (not verified) on Sat, 20/01/2018 - 10:57pm in

More lies from Theresa May, the lying head of a mendacious, corrupt, odious party. Mike put up another piece earlier this week commenting on a foam-flecked rant by Tweezer against the Labour party. She began this tirade by claiming that Labour had turned its back on investment. This was presumably out of fear of Labour’s very popular policies about renationalising the Health Service, the electricity industry and the railways.

But Labour hasn’t turned its back on investment. Far from it. Labour has proposed an investment bank for Britain – something that is recognised by many economists as being badly needed. It was one of Neil Kinnock’s policies in 1987, before he lost the election and decided that becoming ‘Tory lite’ was the winning electoral strategy.

The Korean economist, Ha-Joon Chang, who teaches at Cambridge, has pointed out that privatisation doesn’t work. Most of the British privatised industries were snapped up by foreign companies. And these companies, as he points out, aren’t interested in investing. We are there competitors. They are interested in acquiring our industries purely to make a profit for their countries, not ours. Mike pointed this out in his blog piece on the matter, stating that 10 of the 25 railway companies were owned by foreign interests, many of them nationalised. So nationalised industry is all right, according to Tweezer, so long as we don’t have it.

The same point is made by Stewart Lansley and Joanna Mack in their book, Breadline Britain: the Rise of Mass Poverty (Oneworld 2015). They write

The privatisation, from the 1980s, of the former publicly owned utilities is another example of the extractive process at work, and one that hs brought a huge bonanza for corporate and financial executives at the expense of staff, taxpayers and consumers. Seventy-two state-own enterprises we4re sold between 1983 and 1991 alone, with the political promise that the public-to-private transfer would raise efficiency, productivity and investment in the to the benefit of all. Yet such gains have proved elusive. With most of those who landed shares on privatisation selling up swiftly, the promised shareholding democracy failed to materialise. In the most comprehensive study of the British privatisation process, the Italian academic Massimo Florio, in his book The Great Divistiture, has concluded that privatisation failed to boost efficiency and has led to a ‘substantial regressive effect on the distribution of incomes and wealth in the United Kingdom’. Despite delivering little in the way of unproved performance, privatisation has brought great hikes in managerial pay, profits and shareholder returns paid for by staff lay-offs, the erosion of pay and security, taxpayer losses and higher prices.
(P. 195).

They then go on to discuss how privatisation has led to rising prices, especially in the electricity and water industries.

In most instances, privatisation has led to steady rises in bills, such as for energy and water. Electricity prices are estimated to be between ten and twenty per cent higher than they would have been without privatisation, contributing to the rise in fuel poverty of several years. Between 2002 and 2011, energy and water bills rose forty-five and twenty-one percent respectively in real terms, while median incomes stagnated and those of the poorest tenth fell by eleven percent. The winners have been largely a mix of executives and wealth investors, whole most of the costs – in job security, pay among the least well-skilled, and rising utility bills – have been borne by the poorest half of the population. ‘In this sense, privatisation was an integral part of a series of policies that created a social rift unequalled anywhere else in Europe’, Florio concluded.
(pp. 156-7)

They then go on to discuss the particular instance of the water industry.

Ten of the twenty-three privatised local and region water companies are now foreign owned with a further eight bought by private equity groups. In 2007 Thames Water was taken over by a private consortium of investors, mostly from overseas. Since then, as revealed in a study by John Allen and Michael Pryke at the Open University, the consortium has engineered the company’s finances to ensure that dividends to investors have exceeded net profits paid for by borrowing, a practice now common across the industry. By offsetting interest charges on the loan, the company will pay no corporation tax for the next five to six years. As the academics concluded: ‘A mound of leveraged debt has been used to benefit investors at the expense of households and their rising water bills.’
(P. 157).

They also point out that Britain’s pro-privatisation policy is in market contrast to that of other nations in the EU and America.

It is a similar story across other privatised sectors from the railways to care homes. The fixation with private ownership tis also now increasingly out of step with other countries, which have been unwinding their own privatisation programmes in response to the way the utilities have been exploited for private gain. Eighty-six cities – throughout the US and across Europe – have taken water back into a form of public ownership.
(Pp. 157-8)

Even in America, where foreign investors are not allowed to take over utility companies, privatisation has not brought greater investment into these companies, and particularly the electricity industry, as the American author of Zombie Economics points out.

Lansley and Mack then go on to discuss the noxious case of the Private Equity Firms, which bought up care homes as a nice little investment. Their debt manipulation shenanigans caused many of these to collapse.

So when Tweezer went off on her rant against Labour the other day, this is what she was really defending: the exploitation of British consumers and taxpayers by foreign investors; management and shareholders boosting their pay and dividends by raising prices, and squeezing their workers as much as possible, while dodging tax.

Privatisation isn’t working. Let’s go back to Atlee and nationalise the utilities. And kick out Theresa, the Tories and their lies.

Selling Out Argentina’s Future—Again

Published by Anonymous (not verified) on Thu, 04/01/2018 - 8:00am in

Alan Cibils and Mariano Arana[1]

In Argentina’s 2015 presidential run-off election, the neoliberal right-wing coalition “Cambiemos” (literally, “lets change”), headed by Mauricio Macri, defeated the populist Kirchnerista candidate by just two percentage points. Macri’s triumph heralded a return to the neoliberal policies of the 1990s and ended twelve years of heterodox economic policies that prioritized income redistribution and the internal market. The ruling coalition also performed well in the October 2017 mid-term elections and has since begun implementing a draconian set of fiscal, labor, and social security reforms.

One of the hallmarks of the Cambiemos government so far has been a fast and furious return to international credit markets and a very substantial increase in new public debt. Indeed, since Macri came to power in 2015, Argentina has issued debt worth more than $100 billion. This marks a clear contrast to the Kirchner administrations, during which the emphasis was debt reduction.

The Kirchner Years: Debt Reduction?

Both Néstor and Cristina Kirchner pointed to desendeudamiento—debt reduction—as one of the great successes of their administrations. To what extent was debt reduced during the twelve years of Kirchnerismo?

Figure 1 shows the evolution of Argentina’s public debt stock and the debt/GDP ratio between 2004-2017. One can see that there was a substantial reduction in the debt to GDP ratio between 2004-2011—the first two Kirchner terms—due primarily to: a) the 2005 and 2010 debt restructuring offers, b) a deliberate policy of desendedudamiento (debt cancellation), and c) high growth rates. Indeed, debt/GDP dropped from 118.1% in 2004 to 38.9% in 2011. One can also see that the actual stock of public debt fell after the 2005 debt restructuring process, and then remained relatively stable until 2010. In 2011, it began a slow upward trend, due to the re-appearance of the foreign exchange constraint once the commodity bubble burst and capital flight increased.

Figure 1: Public Debt Stock (millions of dollars) and Debt/GDP ratio

Cibils-Arana-Fig1Source: Ministry of Finance, Argentina.

An additional, fundamental change occurred during the first two Kirchner administrations: the change in currency composition of Argentina’s public debt. Indeed, as Figure 2 shows, peso-denominated public debt reached 41% of total debt after the 2005 debt-restructuring process. Between 2005 and 2012 it remained relatively stable, and then, after 2012, dollar-denominated public debt began to grow again although never reaching pre-2005 debt-restructuring levels. The currency composition change is key, since it reduces considerably the pressure on the external accounts.

Figure 2: Currency Composition of Argentina’s Public Debt (as a % GDP)

Cibils-Arana-Fig2Source: Ministry of Finance, Argentina.

Fast and Furious

Since Macri became president in December 2015, there has been a dramatic change in official public debt strategy, radically reversing the process of debt reduction of the previous decade. As shown in Figure 1, there was a substantial jump in the stock of public debt in 2016, and it has continued to grow in 2017.The result to date has been a substantial increase in the stock of Argentina’s dollar-denominated public debt, as well as an increase of the debt service to GDP ratio. New debt has been used to cover the trade deficit, pay off the vulture funds, finance capital flight, and meet debt service payments. All of this has resulted in growing concerns about Argentina’s future economic sustainability, not to mention any possibility of promoting economic development objectives.

Upon taking office, the Macri Administration rapidly implemented a series of policies to liberalize financial flows and imports, and a 40% devaluation of the Argentine peso.[2] In this context, it also went on a debt rampage, increasing dollar denominated debt considerably. Between December 2015 and September 2017, Argentina’s new debt amounts to the equivalent of $103.59 billion.[3] This includes new debt issued by the Treasury (80%), provincial governments (11%), and the private sector (9%). While Argentina’s debt had been increasing slowly since 2011, the jump experienced in 2016 was unlike any other in Argentina’s history.

If the increase in debt is alarming, the destination of those funds is also cause of concern. Data from Argentina’s Central Bank (Banco Central de la República Argentina or BCRA) show that during the first eight months of 2017, net foreign asset accumulation of the private non-banking sector totaled $13.32 million, 33% more than all of 2016, which itself was 17% more than all of 2015. This means that since December 2015, Argentina has dollarized assets by approximately $25.29 billion.

According to the BCRA, during the same period there was a net outflow of capital due to debt interest payments, profits and dividends of $8.231 billion. Additionally, the net outflow due to tourism and travel is calculated at roughly $13.43 billion between December 2015 and August 2017.

In sum, the dramatic increase in dollar-denominated debt during the two first Macri years served to finance capital flight, tourism, profit remittances, and debt service, all to the tune of roughly $50 billion.

Where is this headed?

Argentina’s experience since the 1976 military coup until the crash of 2001 has shown how damaging is the combination of unfavorable external conditions and the destruction of the local productive structure. The post-crisis policies of the successive Kirchner administrations reversed the debt-dependent and deindustrializing policies of the preceding decades. However, since Macri took office in December 2015, Argentina has once again turned to debt-dependent framework of the 1990s. Not only has public debt grown in absolute terms, but the weight of dollar-denominated debt in total debt has also increased. Despite significant doubts regarding the sustainability of the current situation, the government has expressed intentions of continuing to issue new debt until 2020.

What are the main factors that call debt-sustainability into question? First, capital flight, which, as we have said above, is increasing, is compensated with new dollar-denominated public debt. Second, Argentina’s trade balance turned negative in 2015 and has remained so since, with a total accumulated trade deficit between 2015 and the second quarter of 2017 of $6.53 billion. Import dynamics proved impervious to the 2016 recession, therefore it is expected that the deficit will either persist as is or increase if there are no drastic changes. Furthermore, in the 2018 national budget bill sent to Congress, Treasury Secretary Nicolás Dujovne projects that the growth rate of imports will exceed that of exports until at least 2021, increasing the current trade deficit by 68%.

Finally, according to the IMF’s World Economic Outlook (October 2017), growth rate projections for industrialized countries increase prospects of a US Federal Reserve interest rate increase. This would make Argentina’s new debt issues more expensive, increasing the burden of future debt service and increasing capital flight from Argentina (in what is generally referred to as the “flight to safety”).

The factors outlined above generate credible and troublesome doubts about the sustainability of the economic policies implemented by the Macri administration. While there are no signs of a major crisis in the short term (that is, before the 2019 presidential elections), there are good reasons to doubt that the current level of debt accumulation can be sustained to the end of a potential second Macri term (2023). In other words, there are good reasons to believe that Argentines will once again have to exercise their well-developed ability to navigate through yet another profound debt crisis. This is not solely the authors’ opinion. In early November 2017 Standard & Poor’s placed Argentina in a list of the five most fragile economies.[4] It looks like, once again, storm clouds are on the horizon.

[1] Political Economy Department, Universidad Nacional de General Sarmiento, Buenos Aires, Argentina.

[2] For details, see “Macri’s First Year in Office: Welcome to 21st Century Neoliberalism.”

[3] Observatorio de la Deuda Externa, Universidad Metropolitana para la Educación y el Trabajo (UMET).


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Everything That’s Tied Down Is Coming Loose

Published by Anonymous (not verified) on Tue, 19/12/2017 - 1:45pm in

Our times at last have found their voice, and it belongs to a Pakistani American: Ayad Akhtar. Winner of the Pulitzer Prize for Drama, his plays revel in the combustions of an America on edge, bursting with excess — too much of everything, from wealth and impoverishment to religion, rage and radicalism, from sad hearts and hollow souls and shifting identities to the glorious celebration of money. In his new play Junk, perhaps that should be the inglorious celebration of money: E Pluribus Unum transformed into Every Man a Midas. Continue reading

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