ETV - Company Insolvency and Innovation


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Post published in the Innovation Models Blog following the interview of Hugo Mendes Domingos in ETV's (Portuguese Economic TV) Closing Bell in October 2 2012 about the current increase in company insolvencies in Portugal.

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ETV - Company Insolvency and Innovation

  1. 1. Portuguese companies have suffered a downturn in their financial stability ever since start of thecrisis in 2008. Company insolvencies have now reached a number of around 15.000 since thebeginning of 2012, which accounts for 50 new insolvencies per day, as reported innewspaper Público. Looking at the historic company insolvencies in Portugal below, 2008 wasthe most dramatic period with 41.245 insolvencies. This statistic (total insolvencies) is notdirectly comparable with the 50 insolvencies per day figure for a number of reasons. It is likelythat the total number of insolvencies in 2012 will show an increase on the previous year.Source: PorDataConsultants Euler-Hermes expect a 50% increase in insolvencies in Portugal this year, as shownbelow. This is well above other European countries, including Spain and Greece.
  2. 2. Source: Euler-HermesAccording to the report by Euler-Hermes, in Portugal "there is a time gap between the economicpolicy decision and its impact on the real economy. The industrial fabric is in danger andrebuilding it will take some time".This recent wave of company insolvencies is but a symptom of the adverse financial conditionsthat most Portuguese companies are facing. Between the Governments austerity measures andthe slowdown in Spain, one of the countrys major trading partners, companies are facing majorheadwinds.In our view, the answer is to invest in innovative projects. Companies facing financial difficultiesare less likely to take on new projects however we believe that this is exactly what the economyneeds. Below is a chart of the percentage of GDP invested in R&D for Portugal and otherEuropean countries. Germany is an example of economic development. In Germany, R&D spendrepresents almost 3% of GDP. While Portugal has increased its share from 0.7% in 2005 to 1.6%in 2010 and is well above countries such as Greece or Spain, that trend is reversing. R&D spendis just a proxy for innovation however, a reduction of R&D spend does not bode well for a futureeconomic recovery.Reactions to withdrawal of the proposed changes in social security contributionsWe think it is relevant to do a quick analysis on the aftermath of the initial announcement ofproposed changes to social security contributions and the corresponding investors reactions.The Portuguese government bond yields (10 year maturity) reacted negatively to theannouncement and subsequent withdrawal of proposed changes to social security contributions.Yields have been increasing almost continuously since 7 September, the date of the initialannouncement of the proposed changes by the Prime Minister.The yields in 10-year Government bonds react to a number of factors, aside from internal policydevelopments. Investors may be reacting to events taking place in Spain. However, investors
  3. 3. have almost certainly detected that the current Government has lost momentum as itannounced proposed changes to the social security contributions and then had to pull back inhaste following a widespread negative reaction to the proposal. Portuguese Government Bond Yield (10 Y)Source: Bloomberg as at 1 October 2012These themes were discussed in ETV’s “Closing Bell” programme on 2 October (in Portuguese):Youtube link - articles • Portugal Tolerance for Higher Taxes Reaching Limit: Euro Credit - Bloomberg ( • An Own Goal in Portugal ( • Portugal unveils new austerity measures (