Sunday 11 December 2016

Banks must be part of survival strategy

While government may play a major part in any recovery, banks will make or break it, writes James Fitzsimons

Published 27/02/2011 | 05:00

Most people see the change of government as a first step on the road to recovery. Only time will tell whether this is a sustainable beacon of hope or just another candle in the wind. If we sit back and wait we might miss the rising tide that could lift all boats. It is time for the business community to take advantage of the opportunity for change.

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But without some help many will not recover. Our domestic debt crisis is of paramount importance. The banking system needs to change if it is to serve the public. Businesses and families have been forced to bear the full burden of the economic crisis, while many financial institutions stepped back from their responsibilities. If there is no help for those carrying the burden of debt that was part and parcel of the boom, there will be no restoring public confidence and this contagion will affect everybody.

It may be premature to resort to debt forgiveness, but that is one viable solution provided the banks and bondholders carry their share. In most cases we only need flexibility. Without that there is little hope of a solution.

If it is unreasonable to ask for debts to be written down the same must apply for the bondholders' losses even if it affects the European banking system. We are committed to honouring our sovereign debt and dealing with our banking crisis, but there is no reason why the banks and the bondholders cannot be held accountable too. In the same way an act of God can prevent an insurance claim, the global economic crisis creates exceptional circumstances and the consumer should be treated fairly.

The banks are like a bottomless pit. It doesn't matter how much money is thrown into them they will always need more. The SME sector employs over a million people in this country, which accounts for over half the workforce. Some of these are self-employed and cannot get access to funds to run their businesses and support employment. Politicians have talked about the importance of the SME sector, but they do nothing about it.

There is about €35bn owed to the banks by SMEs. At least that is what we are led to believe. It would have been better for the country if the Government paid off the €35bn of loans to the SME sector. That may constitute misuse of taxpayers' money, but it makes better sense than what Fianna Fail and the Greens did when they gave it to the banks.

At least we would have a well-capitalised indigenous business sector capable of sustaining jobs and paying taxes. It would be value for money if viable businesses could be recapitalised for so little. Likewise why couldn't the same be done for families with impaired homeloans? Instead the last government helped itself and its cronies. At least that is how it looks.

The only valve for businesses with money problems is to go into liquidation. Of course, this only works for companies. Sole traders and partnerships would have to be declared bankrupt and many would never recover from this within their working career. In 2011 alone the government needs €20bn to cover the shortfall in public spending. It can borrow this from the ECB, but it won't help businesses that need the same.

The starting point for resolving the debt crisis for SMEs lies with the owners themselves. In some cases there may be the possibility of packaging up what is left of the business and selling it on. This is something most owners don't even think about. Maybe their customer base is too small to support a standalone business, but it might still be worth something to another viable business. Any payment could help pay off outstanding debts or start again. New companies are tax-free for the first three years subject to certain conditions.

It's a pity the government didn't help existing businesses with tax relief over the last two years. Start-up businesses fail more easily than well-established ones and that could place a financial burden on the taxpayer. Existing businesses would have a better chance of survival. If more were supported we could have avoided the high cost of redundancies, which are largely paid for by the taxpayer.

Impaired businesses could be revitalised with a little flexibility from the banks. Debts created by the global downturn cannot be rescheduled until the economic recovery is well under way. Meanwhile, it requires the banks to rearrange facilities for business customers to facilitate recovery over a reasonable time. Interest might still accrue, but it should be at a rate subsidised by the ECB. In 2008 the ECB announced this would happen. Nothing substantial arose and it needs to be revisited.

There is a compelling argument to support tax relief for those who are trying to climb out from under an unbearable debt burden. Many businesses with cashflow problems are viable and are even paying taxes on their profits. Tax relief on the capital repayments for their loans would make their recovery more rapid and that would carry over to help the economic recovery of Ireland. The options are endless, but we are so tied up with the crisis in Europe we are not dealing with problems at home.

James Fitzsimons is a financial consultant specialising in tax & financial planning

Sunday Independent

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