Irish SMEs Now Under Huge Threat from Stress Tests
Yet again Professor Morgan Kelly has created a stir among the Irish Media, predicting doom and gloom if the debt overhang associated with property in SMEs is not dealt with.
He is quite right in identifying that a lot of SMEs during the boom times did acquire quite a large property portfolio in the belief that this would generate substantial returns over a period of years. We all know that this turned out not to be the case and has now put their trading business in jeopardy. In fact, only 6 months ago the Central bank issued a statement telling us that there was €50bn of borrowings out to SME’s in Ireland and possibly over half of that impaired. This is a very sobering thought.
We are glad to report that some of the banks that we are working with are rebasing, writing off or parking the debt for quite a period of time therefore not affecting the trade or businesses. However, it would appear that, unfortunately, RBS under their GRG department are not engaging this form of discussion. Given the fact that they had such a large presence sectorally in the banking sector in Ireland, this is having an ongoing adverse affect on quite a variety and number of businesses.
AIB and Bank of Ireland have already provisioned for a lot of these property loans and have written them down as we know by 65% to 70% as reflected in their accounts; therefore, they are in a much better position to engage more fruitfully with the borrowers.
We at GDP are glad to report that on a number of cases the banks have been very receptive to our proposals regarding a rebase and write off. An important point to note here is that without the assistance of the bank, insolvency was the only option by way of Company liquidation and/or bankruptcy.
Let us hope that Professor Morgan Kelly's contribution to this debate would be taken seriously by the banks and the Government and inform SMEs of the options available to them. If it were not for the low interest rate currently that SMEs are paying to service their property loans, there is no doubt they would have potentially been put out of business. How long will these low rates last? Some say a further 2 years. Therefore, now is the time to deal with the property debt associated with being over geared and engage in facing the overall restructuring discussions with the Bank.
As Morgan Kelly has pointed out, later this year Europe is running an experiment in terms of the Stress tests for Irish banks. If they follow through with this and aggressively make the banks fall into line and clean up their own balance sheets, they will subsequently have to deal very aggressively with the Irish SME’s. If this happens, a lot of trouble is pending down the line as the SME market is the lifeline of the Irish economy. We watch this thread with interest.