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It’s too soon to let Covid-hit firms fail, says Central Bank

Scale of the potential closures would likely cause an unwarranted degree of damage’

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Minister for Finance Paschal Donohoe Photo credit: Julien Behal Photography/PA Wire

Minister for Finance Paschal Donohoe Photo credit: Julien Behal Photography/PA Wire

Minister for Finance Paschal Donohoe Photo credit: Julien Behal Photography/PA Wire

The Central Bank has warned of a wave of insolvencies as the pandemic wanes, but said not all firms should be allowed to fail.

A quarter of smaller firms could fail if they were struggling before Covid hit, the Bank said in research published yesterday.

“It would be a mistake to continue with protection and forbearance in perpetuity, just as it would be wrong to allow all companies making losses currently to fail,” said Central Bank governor Gabriel Makhlouf.
Deputy governor Sharon Donnery said smaller firms should not be judged against normal standards given the ongoing lockdown and economic uncertainty.
“Now is not the time to begin assessing companies’ survival prospects based on what we understood as pre-pandemic norms. The scale of the potential closures would likely cause an unwarranted degree of damage to the labour market and to our economy.”

Over 70pc of small and medium-sized firms (SMEs) – those with 250 employees or fewer – experienced some fall in turnover in 2020, the survey said.

Hotels and restaurants bore the brunt of the downturn, while wholesale trade and business services were least affected, according to the research, done jointly with the Economic and Social Research Institute.

An average of 40pc of firms cut spending to deal with the pandemic last year.

Over 30pc of businesses made losses, while a further 30pc broke even.

“While policy choices have led to an avoidance of widespread insolvency up to now, it is an unfortunate reality that the effects of the pandemic on SME balance sheets, combined with structural changes that have either been created or exacerbated by it, mean that some SMEs will be unviable,” said Mr Makhlouf.

Once economic supports are withdrawn, the most likely firms to fail are those that were loss-making, struggling or breaking even in 2019 and 2020, the Bank said.

According to the survey, 5.4pc of SMEs that were loss-making in 2019 were still “struggling” in 2020. And 19pc that were struggling in 2020 were only breaking even in 2019.

“These two groups appear at first glance to be more vulnerable to liquidation as the pandemic evolves and insolvency criteria begin to normalise,” the survey said.

A further 42pc of SMEs that were profitable in 2019 and struggling in 2020 should have “better prospects of trading back to viability” once the economy reopens.

Finance Minister Paschal Donohoe said there would be no “cliff edge” for economic supports, but that Ireland should not become a “fiscal outlier” in the EU.

“Once the public health situation allows, supports will be unwound in an appropriate and incremental way. There will be no cliff-edge in the removal of support. Supports will continue for as long as is necessary to ensure a strong recovery.”

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The survey found that around 61pc of SMEs received wage subsidies during the pandemic, 20pc used tax warehousing while fewer than 6pc of firms used lending initiatives.

Around half of SMEs had bank debt, with 12pc reporting they had deferred loan repayments in 2020.


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