Central Bank of Ireland experts estimate that Irish SMEs require €2.4 billion in external liquidity if they are to continue to operate.

Niall McGeever, John McQuinn and Samantha Myers note that SMEs are particularly important for job creation in Ireland, accounting for 68% of total employment in the Irish business economy.

Personnel costs make up a high proportion of total costs in many sectors, and the Central Bank trio report that the significant supports announced by the government in March will have eased the wage burden of affected SMEs.

They go on to state that a key factor that will determine the overall demand for liquidity is the ability of firms to reduce non-personnel expenses such as rent, rates, tax, insurance, trade credit, debt repayments and utilities.

Noting the domestic banking system is an important source of liquidity for Irish firms, the Central Bank analysis finds that in June 2019 SMEs had €2.7bn in undrawn credit available from Irish retail banks. “Access to this varies across sectors and is likely to prove challenging for SMEs without collateral or an existing relationship with a lender,” the Central Bank analysis states.

In Association with

In the absence of sufficient private sector liquidity, the report authors outline three options available to policymakers. These include credit guarantee schemes, lending schemes, and direct fiscal supports. At the moment, existing supports span the Credit Guarantee Scheme, and the SBCI, Enterprise Ireland and Microfinance Ireland schemes that are involved in direct lending to firms.

Direct Fiscal Supports

On the issue of direct fiscal supports, the Central Bank analysis states that grants or tax offsets have benefits in their support to the economy but raise issues regarding costs, targeting and moral hazard. They also blur the line between a liquidity support and a solvency support for firms.

The report authors state: “One of the issues in the current environment is that traditional demand-side stimulus is likely to have limited short-term impact. Since many businesses are not operational, and others are negatively affected by behavioural changes resulting from Covid-19, stimulus in the form of payments to households may not reach the firms who are most vulnerable, at least until demand resumes.

“Thus direct fiscal supports would need to be made on the supply side, rather than the demand side in order to provide a useful form of liquidity support to firms in the current environment."

On the temporary wage subsidy scheme, the Central Bank says there is a trade-off with respect to the amount of the wage covered.

“If the amount is too low, businesses are more likely to close, due to the remaining wage costs, and in some cases the relative attractiveness of unemployment benefits. On the other hand, higher coverage can result in transfers from taxpayers to some private households.

“A similar issue arises for rents. If direct fiscal support is provided to cover the entire rent payment, the incentive for SMEs to negotiate lower rates with their landlords is reduced. The support therefore could end up leading to a net transfer from taxpayers to owners of commercial property.

“On the other hand, if rents cannot be renegotiated, or if commercial property owners themselves become insolvent, SMEs could end up losing their premises and/or failing as the result of their inability to make rental payments, particularly in the absence of access to liquidity through other channels.”

Supplier Losses

The Central Bank believes an important effect of SME failure is that supplier firms will likely face substantial losses and liquidity pressure. It is estimated that firms in sectors that are highly affected by Covid-19 purchase around €40bn in goods and services annually from other firms, with around €15bn being purchases from firms in unaffected sectors.

“This represents a channel through which liquidity shocks can cascade through the economy even to businesses not thought to be directly impacted by the pandemic shock,” says the Central Bank report.

“Trade-offs also exist for other expenses. If at the extreme end governments were to provide a ‘blank cheque’ for expenses incurred during this period, SMEs would have less incentive to reduce their variable costs. On the other hand, if no fiscal support is provided and costs cannot be cut, SMEs are more likely to experience liquidity shortages. Thus there is a delicate balance to be struck between ensuring firm survival and limiting government costs.

"The costs and benefits of these additional interventions will likely form a core part of the public debate over the coming weeks and months," the report authors conclude..

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