The Central Bank says that Irish SMEs will suffer a loss of revenue of up to €11.7 billion this year as a result of the impact of Covid-19.
“The impact of Covid on Irish enterprises has been sudden, large and uneven,” said the CBI, which noted that even after accounting for reductions in costs revenue shortfalls for 2020 will likely come in between €10.3 and €11.7 billion across SME enterprises.
A report by the monetary authority’s Derek Lambert, Fergal McCann, John McQuinn, Samantha Myers and Fang Yao says that supports will be needed to meet these shortfalls, and notes that a combination of using existing cash reserves, drawdown of existing credit commitments, new borrowing, additional cost reductions or loss sharing, or governmental non-wage grants, reliefs and guaranteed loans may be needed.
Their Financial Stability Note says that the uneven nature of the shock across sectors has become apparent, with firms in sectors such as the accommodation and food sector continuing to report the largest falls in activity relative to pre-Covid norms.
They set out a a model of the financial distress of SMEs, based on their capacity to meet losses through cash holdings, or to service interest expenses during the shock.
In Association with
This suggests that existing policy supports are likely to have mitigated SME financial distress in some cases, but challenges will remain. The report states: “From a policy perspective, many of the firms modelled as being in financial distress may be viable over the medium term. Additional firm-specific forbearance or restructuring may be required to allow such viable SMEs the opportunity to trade through the current disruption.
“Given the difficulties in distinguishing viable from unviable firms, policy measures may need to prioritise the protection and survival of firms in the short run to a greater degree than in normal times.
“Further, the aggregate importance of firms through their creditor, employee, supplier and customer relationships means that widespread liquidation at a time when typical market signals are functioning poorly is undesirable. Nonetheless, policymakers also need to prepare for the likelihood that some SMEs are unlikely to survive this shock.”
Fiscal Supports
The authors say that the wage-based supports of the TWSS and EWSS will have provided c.€5 billion of direct fiscal support to SMEs by March 2021, but that apart from these the supports to SMEs are weighted more towards loans than grants or equity, which may scare off firms wary of taking on more debt.
Should there be a move more towards grants, the authors suggest that one option would be to provide equity-like or ‘conditional grant’ injections to SMEs which involve an element of clawback or potential return, lowering the cost of intervention compared to a direct grant.
The report concludes that the Central Bank itself is focused on ensuring that there is appropriate support for borrowers in distress and that lenders treat them fairly, through consistent processes and in line with relevant codes and regulations.
“This will involve lenders engaging effectively with distressed borrowers to deliver appropriate and sustainable solutions, and facilitate as many borrowers as practical to return to repaying their debt in a sustainable way, while also recognising and prudently accounting for the level of distress in their books.”
