HARSH, HONEST AND CUTTING TO THE BONE

Eddie Hobbs

Property; education; women in business; the Taoiseach; pensions, there is nothing that financial guru and current media darling Eddie Hobbs doesn’t have a forthright opinion on. Exclusive interview with Maree Morrissey.

This time last year Monday night TV became addictive viewing for audiences. Tuesday mornings began with talk of, ‘Rip of Republic,’ and issues such as car tax, property rates and SSIAs replaced chat about Brad and Angelina and Big Brother. With ratings in the region of 667,000 RTE had unexpectedly discovered what is known as, ‘watercooler TV,’ in the form of Cork man Eddie Hobbs and his forthright views on how we are all being hard done by the government and corporate Ireland. The media loved it, the government didn’t, but everyone was watching. A year later and with a best selling book also now under his belt Hobbs has become something of an oracle when it comes to all things economical and monetary and the backlash he received about some of his views certainly hasn’t made him any shyer and he still doesn’t pull any punches.

The First Swing

Laying down the first swing Hobbs believes the Irish economy and the government should be looking East at what is happening in countries such as China and how it will affect us in the long term. “That whole China story is going to dominate the world business for the next 30-40 years because they can produce electrical engineers, factory workers at a tiny fraction of the developed world. And we are already seeing a large part of the US manufacturing base go over to China.” While the West should start taking note Hobbs believes that the Irish are a little bit more cushioned from the Chinese situation because we skipped the old industry manufacturing stage. “We went straight from being a farming country to a high-tech country without the old industrialisation in the middle.”

While we may be high tech our overdependence on foreign companies is of concern to Hobbs. “About 90% of Irish manufacturing export comes from our foreign firms. There are 1273 foreign firms in Ireland. And that means only 10% of export comes from indignations Irish firms. Now this is a huge concern if you are planning a long-term economy. What it means that those foreign firms themselves could become subject to substitution threats or encouragement to go east.”

Property

Property is the new buzz word for the new generation but Hobbs believes it may he harming our business sector. “We’ve been taking the money from our businesses and putting it into property and not investing it back into our business. We have gone on a huge property splurge. I am detecting that people are overexposed to property.

Hobbs believes that billions that could have been invested in businesses and managed for a good return has been redirected into property. “For individuals and personal balance sheet, it has been a good thing so far. From an Irish economy perspective it is a bad thing. There is a lot of money going into international property while building personal balance sheets.”

The spending boom is Ireland is being held up by what Hobbs terms, “a lake of credit,” and in 2002 the total amount of private sector credit including mortgages, term loans and credit cards was €140 billion. “At the end of last year, it was €260 billion going at a rate of 30% a year. So, at the end of this year, it will be €340 billion and potentially in 2007 it will be over €400 billion.”

“There is an OECD report that’s out that says everything is fine. But nobody has explained it to me how a property market can rise in value when the level of borrowing, private sector credit, is growing at a gargantuan rate. And European interest rates are rising and even the most optimistic economists, are suggesting that the base rate has gone from 2 to 3 and a half. That is a huge increase. How people are going to repay that debt when interest rates go up by a percent and a half, as the debt mountain grows itself, without affecting property value, is something I don’t understand.”

Most Exposed

Hobbs believes that those most at risk are those whose borrowings are more than 50% of the entire value of property. “They are in industries that potentially are at the front-line threat. These industries are more exposed to redundancy threats than featherbedded industries, like public service, pharmaceuticals and some of the high-tech companies.”

While Irish property may be causing headaches it is nothing to what the foreign markets could do Hobbs predicts. “Right now there is a massive amount of miss-selling of foreign property to Irish investors. The Central Bank issued a warning that Spanish property is overvalued by 20%. Yet sellers are selling the same successfully to Irish investors. This is serious. In the book I’m writing now, in my view, we are in the classic age-old cycle of rational exuberance, which always leads to tragedy.”

Women In Business

“Women have a completely different pattern of thinking than men. They are much more intuitive, much better at delegation, building teams around them and less political.”

When it comes to the issue of child care, which is a major factor for women in the work place, Hobbs says, “if the actual supply of crèches can’t meet demand, it doesn’t matter what the government do, because costs will continue to spiral out of control, a bit like the property market.”

Pensions

“This is an underestimated problem. There are a million people without pensions. These people are already borrowing heavily on credit cards and overdraft.” In Hobbs opinion the PRSAs have also been a failure. “If you are married with kids, you cannot survive in Ireland on the average industrial wage without borrowing money. That is why you can’t get voluntary investment in the long-term pensions until you solve the cost of living problem. This problem again will take about 10 years to solve by taking out restrictive markets and liberalising things. Eventually, I think they will extend the retirement age from 65 to 75.

Education And Entrepreneurship

Students today are not in the same situation as they were a few decades ago, Hobbs believes, and face new obstacles and challenges. “Lots of students coming out of colleges today will be getting massive transfers of money from their parents, something that we have never seen before in Ireland. They will be inheriting huge sums from property.” But Hobbs wonders whether they will invest in indigenous Irish businesses or not?

Recent statistics report that 50% of postgraduates are thinking about starting their own businesses and an estimated 20% out of those probably will, but it is a harsh reality that awaits them predicts Hobbs. “God help them. Behind the Irish entrepreneurial story is the ingenious marketplace that is foul for the small entrepreneurs starting up. How can you expect a young MBA type to come out and start a business? He wont get inheritance because his mum and dad will still live for a while. Nobody is interested in financing small start-ups. There is a cultural attitude that says if you fail you are a wipeout. So, they will either go and express their talent abroad or they will be sucked in by companies in Ireland who take them on as directors and join the slower circle of development.”

Taoiseach

“The existing leadership has probably taken it as far as they could have. I think a lot of people vote for the existing administration only because there isn’t a good alternative. If there is one, then it will be a compromise between a business and socialist oriented party.”

Hobbs is of the opinion that Fianna Fail is feeling rather smug about their proposition of the next election. He took on the government with, ‘Rip Off Republic,’ and he believes it created a lot of venom but he reports that 90% of people thought the facts were accurate, they were tested independently and were found to be accurate. Hobbs scoffs however at the fact that, “they couldn’t find any government minister nor the Taoiseach who had seen the show.”

Audience’s Vote

While the government may claim not to be watching Hobbs, most people are and while he remains a mouth piece for direct and honest opinion on Irish business, Irish economics and the Irish government a lot of people will continue to listen to him too.

HOBBS ON…

Start Up Businesses I think there is a massive problem. I’m saying this not just from desk analysis, I’ve been involved in start-ups and organising banking finance and the fact is retail banks in Ireland aren’t capable of financing start-ups. Businesses and Property It is unsurprising that the first phase of the wealth we have created would have gone into property. People were saying I have a million Euro in the company; I can take it out, pay my tax, buy property and spread my risk. Construction Industry When you outstrip all the good things, you will see that it had been the construction industry that has been driving the Irish economy. Construction is around 20% of GDP and 13% of the workforce. Eddie Hobbs with Maree Morrissey Property Prices I think that the end result of a number of drivers will be a price drop. I think the consumers are going to wake up once the SSIA boom is out of the way. Once the consumer sentiment changes, then property prices could take a wallop. Private Bankers I got a letter from one of them expressing his grave concern about the lending that’s going on and talking about the growth in volume in lending and not equivalent growth in quality. This is an auditor in a bank writing to me privately which is concerning. Banks and Finance Banks have no problem in lending money for secured property but there is a zero appetite to finance the equity in businesses. It is a culture. Failure In Ireland you are not allowed to fail. If you fail then you have a stamp on your forehead saying that you have failed and then you are out of the game. Enterprise Ireland EI has money available for business start-ups, but EI is run by civil servants. The decision-making process in there almost cripples the company. Before you get their money, they put you through so many hoops. Capital Pool You need to have a private capital pool where you have experts assessing business risk making quick decisions. Rip Off Republic 2? It’s more a question of…it comes down to whether; it would be feasible to do something this close to general elections. I’d love to do it.