Bank crisis 'could sink small firms', warns top economist
Published 10/03/2014 | 02:30
THE economist who predicted the property crash has issued a fresh warning to homeowners and entrepreneurs.
The country faces an "existential threat" from the cost of helping the banks deal with bad loans to small businesses and mortgages, according to UCD Professor Morgan Kelly.
Prof Kelly, who highlighted the overheating property market in 2007, said Ireland would finally face a "real crisis" if the banks were forced to write off millions of euro worth of loans to SMEs and homeowners.
While billions have been pumped into the banks already, that money was only to cover losses in loans made to big developers.
As well as the big mortgages doled out during the boom, many small businesses invested in property in an attempt to boost their profits.
Central Bank statistics show about 14pc of mortgages are in arrears, while a huge number of SMEs are behind on their repayments as well. According to Prof Kelly, the banks are yet to confront those debts.
European regulators are due to test the strength of Irish banks at the end of the year, along with a wider test of banks across the continent.
That could force the banks to call in those loans, putting thousands of SMEs out of business.
"There will be a big clean-up (of the banks) and that means foreclosures on mortgages and dealing with SME loans," he said. That could mean hundreds of SMEs being shut down at the same time, putting thousands of people out of work.
About 70pc of the workforce – 1.2 million people – is currently employed by a small business.
The only way to deal with the SMEs and mortgages is to write off part of the principal of the loan.
But Prof Kelly said this process would have to be carried out openly so as to prevent accusations of political interference or favouritism.
Prof Kelly was dubbed a doom-monger when he made predictions in 2007 that property prices were going to collapse.
In his latest remarks, he also strongly criticised the education system, and accused his employer UCD of being overburdened with administrators at the expense of quality education.
"State universities should be able to provide decent education cheaply. Our universities used to be able to do that, but that is no longer the case as we spend money on things like administration.
"When I started in UCD 15 years ago, there was no administration to speak of. Now there are two administrators for every lecturer," he said.