The economic, personal, and business challenges from the Covid 19 pandemic across Ireland and across the European Union are enormous. One fact highlights this. In the EU in the past eight weeks some 50 million people – about 10 per cent of the entire population – now rely on government-provided employment subsidies. Not only can this not continue from a Government financing perspective, but it is a crushing blow for people who cannot find work or face long-term unemployment.
We face many of the same problems that marked the great financial crisis 10 years ago. A decade ago, it was the doom loop of bad banking and sovereign indebtedness that collided to bring down our economies. Since then, the banking industry has gone through a total reset in terms of regulatory standards, EU-wide supervision, increased capital requirements and the de-risking of balance sheets through non-performing loans reduction.
Some 75 per cent of the Irish mortgage loan book is now based on macroprudential rules that make mortgage lending and borrowing much safer, and also greatly reduce the prospects of another housing bubble.
Investment
The Covid-19 crisis has precipitated an unprecedented shutdown affecting every sector of our economy. The challenge now, as we take the first tentative steps towards unlocking that shutdown, is to restart the economy and get investment going again. Banks in Ireland and across the EU still represent about 80 per cent of all lending to businesses, big and small. Banks are the crucial intermediaries in terms of providing capital to the real economy.
The banking industry in Ireland, like other parts of the economy, is coming under significant pressures, as evidenced in the first-quarter trading statements to the market by the leading retail banks in Ireland. Banking is not immune from the crisis – it’s a commercial industry like any other that must be run on a commercial basis.
SMEs play a major role in most economies. According to data from the Central Statistics Office, SMEs accounted for 99.8 per cent of the total number of enterprises in Ireland in 2017 and more than 68 per cent of employment in the business economy while generating nearly half of total turnover in the business economy.
Even under normal trading conditions, SMEs can find access to credit challenging due to various factors.
In times of significant economic downturns credit-guarantee schemes are widely used as a policy tool to support lending to SMEs. However, their use has been significantly enhanced during the current economic crisis, because traditional policy tools do not effectively address business support needs in a fast and efficient way.
In addition, the normal criteria used by financial institutions to evaluate loan proposals is unlikely to work in the current economic climate, due to the risks attached to such lending. For example, the UK and German guarantee schemes which have been in existence for a number of years were updated to 100 per cent state guarantees in order to move money quickly into the hands of businesses.
The impact of the Covid-19 pandemic on Irish SMEs has been severe in the extreme and is evident in the number of business closures, reduced turnover, falling profits and, most of all, in terms of the numbers of unemployed arising from the rapid decline in economic activity. While there are different forecasts as to the economy-wide effects of Covid-19 in Ireland in 2020, all predict a serious reduction in GDP.
At the heart of Irish SMEs survival and their capacity to withstand the current challenges is the central issue of liquidity. It is the most fundamental element in the survival plans for Irish businesses and without liquidity support, businesses will quite simply struggle, if not find it impossible, to survive.
Given the social and economic consequences that have arisen because of the Covid-19 pandemic, governments across the EU, including Ireland, have moved quickly to introduce a range of support measures.
In addition to unemployment-related support measures, the Government recently announced a loan guarantee scheme, among several new initiatives, with €2 billion budgeted for bank lending to SMEs. The commitment of all bank chief executives, who recently met the Taoiseach, is to work closely with businesses and the Government to make sure that we get the loan guarantee scheme right. Delivering funding quickly to those businesses when the scheme is enacted through legislation and ensuring that the structure underlying the guarantee allows new lending decisions to happen at pace are vital given the urgency of what we face.
But as CBI researchers noted recently, a balance must be struck “between limiting the cost of finance to SMEs and ensuring that banks and the government providing the guarantee do not make substantial losses”.
We also need to look at what other European countries are doing and deliver instruments that maximise the time we have before the EU state-aid rules are reintroduced .
In that regard, we cannot be an outlier in the range of supports we offer our businesses. We cannot have our SMEs at a competitive disadvantage to others in terms of emergency credit measures. But the banking industry fully accepts its responsibility in making viable schemes work for business and new lending opportunities.
Deleveraging
Many smaller businesses will not want to take on new debt. In fact, about 50 per cent of all SMEs have no debt at all and went through a period of deleveraging their debts following the last financial crisis.
Some of the most exposed sectors have seen a dramatic reduction in overall SME indebtedness in recent years. And irrespective of new credit demands, banks, the State and its agencies cannot lend recklessly and must have regard for the viability of business proposals – a point that was recently highlighted by the governor of the Central Bank of Ireland.
In all the challenges ahead, lenders have a unique relationship with businesses across the country. They have significant sectoral knowledge that can be deployed for the benefit of business. Banks are also very conscious of their day-to-day relationship with Ireland’s SMEs and their responsibility to support the national effort in getting Ireland back to work.
In the past two months banks have delivered more than 120,000 SME, mortgage and personal loan breaks to their customers. This has helped cash flow with businesses and families and given much-needed breathing space during this crisis.
What is needed now is a business guarantee that works quickly for those businesses that need liquidity.
Brian Hayes is chief executive of the Banking & Payments Federation Ireland
