Spotlight turns to SME debt
By Business Editor David Murphy
Whether he is right or wrong, UCD economist Morgan Kelly always has the ability to put the fear of God into the Irish authorities.
When he predicts a financial maelstrom, it is always worth taking notice.
He is worried about impaired loans to small and medium enterprises (SMEs).
He argues if banks get tough with small businesses it could result in enormous difficulties for the Irish economy, as thousands of these companies could go to the wall.
Last week’s results from AIB gave a clear indication of the scale of the problem.
It lent €13.8bn to SMEs. It said 35% of those loans were impaired and 47% were satisfactory – the rest are vulnerable or are being watched closely.
AIB and Bank of Ireland say the problem is improving.
Talking to bankers it is clear they are writing off debt and agreeing solutions with small firms.
Clearly Professor Kelly is right about the scale of the problem across the whole banking system.
But it is not one which has gone unnoticed.
Last year the Central Bank’s outgoing head of credit supervision Fiona Muldoon bluntly said half of the loans to SMEs were not performing.
The IMF said late last year that progress in dealing with SME loans “has been very slow” but it added that resolving the problem was progressing.
A lot of attention has been given to residential mortgages in arrears – that is because of the highly sensitive nature of the prospect of a family losing their home.
This has overshadowed the debate on arrears in the small business sector.
However, if a firm goes bust and workers lose jobs it can have equally devastating consequences for a household.
The Central Bank has set public targets for banks to offer permanent solutions to mortgage holders in arrears.
It has also set targets for SME loans, but these have not been published.
While the banks say they are making good progress it is difficult to tell what that means while the targets remain undisclosed.
Morgan Kelly has also pointed out that Ireland is being helped by a steady stream of cheap credit from the European Central Bank.
The ECB has kept interest rates at 0.25% – before the financial crisis they were 4.25%.
Imagine what would happen if they returned to what they were.
The other part of Morgan Kelly’s assertions, which he gave in this address, is that the European Central Bank could force the Irish banks to foreclose on SME loans.
He says this could result in the requirement for further recapitalisation of Irish banks.
If this was to happen it would be a significant setback for Ireland which has been slowly recovering.
Professor Kelly has pointed out that European Central Bank president Mario Draghi has called for the Irish banks to be sorted out.
But there is little evidence so far that the ECB is going to force Irish banks to perform a fast clean-up to the detriment of SMEs.
Central Bank Governor Patrick Honohan has dismissed the suggestion.
Either way, by drawing attention to the issue of SME debt, Professor Kelly had done the State some service.
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