Bank stress tests 'could lead to demise of SMEs'
A HUGE number of small firms are set to go out of business as a result of this year's bank stress tests, one of the country's top economists has warned.
UCD's Morgan Kelly was among the first to warn of the overheating property market in 2007, but in a lecture at his university he said the crisis had now shifted to the small and medium enterprises (SME) and mortgages sector.
Prof Kelly made his name in the last decade when he was one of the few experts to question the Government's claim that the economy was being gently slowed down.
He repeatedly warned that there was a property crash coming.
Now, however, he has switched his attention from the wider property market to the state of the small business and mortgage sector.
Numerous SMEs are stuck with huge property debts that dwarf their business. Many of those debts will never be repaid, Prof Kelly said, and the banks have yet to recognise those losses.
Ireland has an unusually high number of people employed in small firms – about 70pc of all workers earn their crust with an SME.
The European Central Bank has essentially kept the Irish banks going up to now, Prof Kelly said, but ECB president Mario Draghi has made it clear that the lenders here needed to be "sorted out", with European regulators set to carry out stress tests of banks' balance sheets across the continent by the end of this year.
"The banks have already been recapitalised, but that was only to deal with loans to big developers, not for mortgages and SMEs," he said.
"That means there will be a big clean up – foreclosures on mortgages and dealing with SME loans.
"A lot of SMEs are surviving through bank forbearance. If you have a large company with huge debts, you can sell it on, but in an SME the main asset is the owner, so call in his loan and the company is gone.
"If the ECB has a quick clean-up of the Irish banks we will see a lot of SMEs go under.
"If you work in the public service, your view is these small companies aren't part of the new Irish economy; if you work in the private sector, the chances are you work for an SME.
"If you have a lot of SMEs wiped out in any clean-up of the banks, you will have a big chunk of the Irish economy wiped out in one go. This is a potentially enormous problem that nobody seems to care about," Prof Kelly claimed.
The only solution to this is to effectively pick winners and to give debt write-offs under certain circumstances. That will mean some companies being put out of business and others surviving – a process the professor said would have to be done publicly.
"There is no transparency (in how the banks are reducing principals on some mortgages) – the obvious danger is you turn this process into a bottomless trough for political patronage," he added.