The Collison brothers have admitted they were “too optimistic” about Stripe’s near-term growth in 2022 and 2023 and underestimated the likelihood and impact of a broader slowdown.
They weren’t the only ones. So too did the investors who backed the internet company in its last funding round of $500m in March 2021, which valued the business at $95bn.
That valuation was slashed by 64pc by one investor during the summer. One investor to pile in at that lofty prices was the Irish State, through the Irish Strategic Investment Fund, which stuck in €42m ($50m).
Of course, if the Collisons say they got this one wrong and admit they hired too quickly on the back of assumptions about short-term growth, it is also their first big mistake.
For that reason it will be a painful lesson for them – and even the wording of their statement suggests they are grappling with the implications of having actually put a foot wrong.
But it is a big mistake. Shedding around 1,000 jobs (14pc of total workforce) at this stage in the company’s development is painful and a blow to credibility.
Perhaps more worrying is the fact that it comes as a response to a general slowdown.
Most people are of the view that the ‘general slowdown’ hasn’t really happened yet, whether you are in the US, Ireland or continental Europe.
It isn’t clear yet how many Stripe jobs in Ireland will be affected. They employ several hundred here, but had plans to expand that considerably.
Despite being an American company, the Stripe news raises questions about our own economic projections for the next 12 to 18 months.
The Department of Finance has predicted growth of 1.25pc for next year. Employers’ group Ibec last week downgraded its growth forecast for domestic demand in next year’s economy to 3pc. In previous projections published in July, it had been at 4pc.
We may soon see these forecasts whittled back into negative territory.
Inflation is driving central banks to increase interest rates. Even if they end up reaching an interest rate ceiling at a lower level than previously thought, the impact on disposal income will be very real.
If the rate of inflation falls back to a more modest 4pc next year, it doesn’t mean prices come down. People’s buying power will remain eroded as long as their wages fail to rise by an amount equal to the price increases.
The big issue for Ireland is whether the downturn turns into a jobs rout. We are so heavily dependent on the tax take from big tech – whether income tax from thousands of well-paid employees or corporation taxes – that a serious cull in tech jobs will hurt.
Even if Stripe’s direct Irish presence is small, it doesn’t augur well for what might be coming.
How many of the giant tech employers in Ireland have also underestimated the impact of a ‘general slowdown’ that has yet to fully take hold?
Central Bank worries about hidden leverage should be heeded
Worrying about an economic slowdown is one thing, but finding systemic multi-billion euro risks in the non-bank financial sector is another.
Central Bank governor Gabriel Makhlouf highlighted the need to keep an eye on potential risks in the financial system during the week.
I don’t know if it was good news or bad news. The fact he wants tighter rules on “hidden leverage” in the funds sector is good. The fact that he refers to “hidden leverage”, and suggests it is hidden even from him, is a little more worrying.
He is right to highlight these concerns – and the possibility of greater “interconnectedness” in borrowing reminds us of what happened before the last crash.
In recent weeks we have had the arrival of a new three-letter acronym – LDI (short for Liability Driven Investments).
Back in 2008 we got a crash course (excuse the pun) in three-letter acronyms such as CDOs, synthetic CDOs, CDSs and CFDs.
The Liz Truss debacle in the UK placed some pension funds on the brink of insolvency because of LDIs. Basically, a low-interest-rate environment after the last crash saw growth in Liability Driven Investments by defined-benefit pension funds.
They couldn’t get a return on bonds, so they borrowed billions using bonds they held as collateral. The borrowings enabled them to pursue something more interesting in the hunt for investment returns.
Once the value of those bonds began to fall rapidly after the Kwasi Kwarteng budget, they had to sell bonds rapidly in order to comply with their obligations.
The more they sold, the further in value the bonds fell. That is why the Bank of England had to step in and support bond prices with purchases.
No doubt Irish pension fund operators have been up to something similar, but the scale of exposure isn’t likely to be too high.
The problem for Ireland is that, together with Luxembourg, we have become a major international financial centre for handling these transactions on behalf of funds everywhere.
Our system might not crash – but serious contagion could lead to problems in other countries. It makes you wonder what other three-letter derivatives are embedded in the multi-trillion euro funds industry that most of us still haven’t heard of.
The Central Bank has already communicated to Dublin-domiciled pooled LDI funds that it requires Central Bank approval ahead of any leverage increases.
