THE REPUBLIC has a 15 per cent chance of falling into bankruptcy, according to a London-based economist who addressed a gathering of small businessmen and women in Dublin yesterday.

Dan O’Brien, senior editor at research group the Economist Intelligence Unit, says the Government should urgently cut spending on infrastructure and welfare if it wants to avoid financial failure.

“This is a potential State bankruptcy situation,” Mr O’Brien said, after an address to small business group Isme.

International experience shows that higher taxes do not stabilise public finances, in part because governments have no control over how much can be raised, according to Mr O’Brien. Reducing spending is, he said, much more effective.

Welfare, he argued, is “the elephant in the room” in the Irish public finances, while the State’s infrastructure deficit is already closing itself as a slowing economy leads to less transit activity.

“We’ve got to bring expenditure closer to revenue,” said Mr O’Brien .

He also said a reduction in the minimum wage from €8.65 was “an open and shut case” because the current rate “hinders” job creation rather than protecting employees.

In relation to full bank nationalisation, he said this could “spook” international lenders, but added that this is “probably where it’ll end up”.

Isme members heard that economic conditions could become worse before improving.

“At the very best it’ll be a very long climb out of the dark and dangerous place we’re in at the moment,” he said.

He sounded a particular warning over “reset mortgages” in the US, or homeloans which were offered at very low “teaser” rates and are nearing the point where higher rates will kick in, thus putting pressure on a new set of US homeowners and, by extension, the financial system.

Isme members also heard their new chairman, Eilis Quinlan, from Naas, Co Kildare, call on the banks to begin lending again.

Ms Quinlan, who started her own accountancy practice, told the gathering that a lack of bank funding was “literally killing business”. Isme said earlier this week that 58 per cent of small businesses had been refused credit within the past three months.

Case study: Cloverhill Food

DAN BUCKLEY, owner of Cloverhill Food Ingredients in Mill Street, Cork, says his ingredient distribution business is holding up and even “growing slightly”.

The biggest problem faced by the company, he says, is in receiving payment from customers.

“I imagine it’s just banks keeping them on a tight leash,” says Mr Buckley, adding that banks have gone from “throwing money at us” to almost needing a customer to prove they don’t need the money.

Having set up the company six years ago, Mr Buckley has had a few good years and now employs 18 people.

The firm supplies small and medium food manufacturers in the bakery, dairy and meat sectors.

Like many other small companies, where the relationship between staff and owners is by necessity a close one, Cloverhill is not cutting its wages to deal with recessionary pressures but is instead implementing a pay freeze.

Case study: JS Dobbs & Co Ltd

JS DOBBS Co Ltd, a distributor of healthcare products based in Baldoyle, in north Dublin, has been in business for 34 years.

Barbara Geoghegan is the second generation of her family to run the business, which she says is solid because of the “careful” way in which it has been run.

Times have been tough, however, with trade down about 20 per cent last year and 2009 expected to bring the firm back to 2006 levels of business.

JS Dobbs’s main customer is the HSE, thus the firm is directly affected by cost-saving strategies at hospitals. In some cases, the company is suffering because hospitals are sourcing equipment, such as beds and acute care items, directly from the UK to take advantage of lower VAT rates.

Employing 12 people, JS Dobbs was recently forced to let one person go. A pay freeze is also in place.

Ms Geoghegan says she is “naturally optimistic” so is confident of surviving.

Case study: Bookaroom.ie

THE NEXT year or two will be "challenging", says Regina Mangan, who owns and runs Bookaroom.ie, a property rental business in Waterford.

Ms Mangan set up the business 12 years ago with the help of a €7,000 loan from the local Enterprise Board and took eight years to turn a profit.

The company has "done well" in the past four years, she says.

"The climate is tougher but we're still doing business."

Bookaroom.ie services landlords and tenants and offers estate management for some tenants.

Ms Mangan says that while the firm is not cutting commissions, it has laid off one staff member and has tried to add more value to its offering. A major landlord customer has, for example, been helped to find his own maintenance person rather than leaving maintenance to Bookaroom.

Some clients are, says Ms Mangan, under "extreme pressure" from banks.