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News : Irish Economy Last Updated: Apr 15, 2013 - 10:13 AM


Irish Economy 2013: Central Bank action on SME loans crisis overdue; Unknowns abound
By Michael Hennigan, Finfacts founder and editor
Apr 12, 2013 - 8:22 AM

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Irish Economy 2013: Half of all lending to SME (small and medium enterprises) business is in arrears, according to the Central Bank. Fiona Muldoon, the director of credit institution supervision at the bank told a conference in Tralee yesterday that of the €50bn lent to the sector by the domestic banks, some €25bn was impaired. This is a serious issue for the economy and five years after the crash, Central Bank action is overdue. It’s extraordinary that this situation still remains full of unknowns. With so many loans non-performing, what economic scenario in the next 5 years will change the fundamentals?

Muldoon said on Thursday that "in effect, in Ireland, literally and figuratively, all roads lead to property." Given that 70% of people in private sector employment are employed by SMEs there is a...direct knock-on for these employees (& past employees) into the whole area of household debt and mortgage arrears in particular.

She added: "When it comes to SME arrears within the banks, there are complex issues and high levels of inter-connectedness. In many cases family businesses borrowed to expand the business, invest in their premises and maybe a buy-to-let property for their pension. Some cases include personal guarantees or drawdowns on the family home. That same SME is now the only source of cash flow in servicing both direct and indirect debt. Where that SME is consumer facing, they are facing restricted demand brought about by unemployment, reduced consumer confidence and the resultant increased savings levels we have seen over the last several years. In effect households are de-leveraging alongside the banks."

Benoît Cœuré, member of the executive board of the ECB, said at a seminar in Dublin Thursday, that the SMEs are more likely to be affected by excessive bank risk aversion and thus by outright rationing of credit provision than are large firms. Difficulties in borrowing, which influence not only their day-to-day activities, but also their ability to grow, may then easily transform liquidity constraints into solvency risk.

Cœuré, said: "To illustrate this point, two facts are worth mentioning. First, SMEs tend to face higher costs for bank finance. A simple comparison between small loans (typically to SMEs) and very large loans (typically to large corporations) shows that euro area SMEs were paying on average around 160 basis points (1.6%) more than large euro area companies in the six months up to January 2013. There is also a substantial divergence across euro area countries which has worsened since the beginning of the financial crisis (Chart 3). For instance, in the same period, the spread was around 50 basis points for SMEs in Austria and Belgium, but 261 in Spain and 174 in Ireland. Just to put this in a “historical” perspective: between 2003 and 2008 the same spread was 84 basis points in the euro area, 79 basis points in Spain and 44 basis points in Ireland.

Slides

Speech

Fiona Muldoon indicated that the Central Bank hasn't got detailed facts on the situation and has only begun to address the issue in recent times. She doesn’t inspire much confidence with this accountancyspeak:

“We believe that the banks now have credible credit assessment tools.  We have overseen that operational skills and resources are improved and that appropriate external help is engaged where necessary.

Policies and Key Performance Indicators (KPIs) are in use in the banks to measure their success.  The banks’ management teams must now be accountable for the implementation of the strategy and measured in terms of their success in that implementation. We receive regular updates from the banks management on their progress against plan.  In this way, restructuring and re-underwriting will continue to take place throughout the year.”

Progress against plan?

The fact that half the loans value is impaired makes this a crisis issue.

So while the NTMA, the debt agency, is lauding every sale of bills or bonds as a huge achievement towards returning to market, the Central Bank is saying that the banks remain in a mess. Apart from individual mortgage arrears, many SME owners have investments in bust hotels etc.

It’s a clash of fairytale spinners at government level, while agencies such as the Central Bank and the Irish Fiscal Advisory Council (IFAC) are reluctant to tell little emperors that they have no clothes - - the renowned American baseball player Yogi Berra (b. 1925) once quipped "It's déjà vu all over again" and this seems like a replay of policymaking in Irish bubble times.

Michael Noonan, finance minister, is also trying to ride two horses at the same time — so on his second objective, after ending the bailout, is to get debt relief from Europe, but when should the story on SME debt be revealed?

The domestic economy has been in a depression since 2008, SMEs, its main economic engine, are deep in debt and with little prospect of significant growth, the banks will have to write off a lot of it.

Where will the money for recapitalisation come from?

At least, it would be a first step if the Central Bank had detailed information on the loan situation that it clearly hasn't at present.

European Commission Factsheet on Irish SMEs [pdf]

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