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Irish businesses need ultra-cheap state-backed bank loans to survive

The government will almost certainly have to guarantee ultra-cheap loans for Irish banks to inject into businesses if many small businesses are to survive the Covid-19 economic storm, according to economics professor Alan Ahearne, who is an adviser to the Central Bank.

In an interview with the Irish Examiner, the director of the Whitaker Institute of Economics at the National University of Ireland in Galway said many small businesses would not reopen if they could not benefit from near zero government guaranteed bank loans.

Mr. Ahearne was until recently a member of the Central Bank Commission and still chairs the bank’s risk committee.

He is also well known as an advisor during the last crisis of the late Finance Minister Brian Lenihan, joining the Finance Ministry in 2009 as the state rushed to bail out the troika after the government was barred. to access sovereign debt markets. .

The economic fallout from Covid-19 is similar to the banking and real estate crisis of more than a decade ago in that there will be a tax price to pay, he said.

But one big difference this time around is that it’s about restoring employment to last year’s levels, when the economy showed little sign of overheating. “This virus required a different response because it is a very different health challenge and it is a very different economic crisis,” Ahearne said, referring to the government’s trade measures last month. .

He said banks will now have to move beyond measures such as their plans to extend their loan payment breaks to six months, as the Irish Examiner reported. Lenders, Mr Aherne said, were in a much better position than they were over 10 years ago, but Irish SMEs will need considerable help in the form of access to new state-guaranteed loans and ultra-cheap if small business borrowers are to see the crisis come out.

“Now small businesses are going to need a lot of help. I think the banks will be the channels through which help is delivered by providing funds – loans, overdrafts – to businesses that are closed and still have obligations to meet to cover their fixed costs. It is important to give them money. We have to see the banks as agents of the state, ”said Mr. Ahearne.

When asked if most SMEs do not want to take loans at 4% and need loans at extremely low rates, Mr Ahearne said the new measures “will be, and should be, something much more extensive which is specific to Covid-19 “. Government guaranteed loans through banks cannot be priced at 4% interest rates as such loans would be far too expensive.

He said the Irish state can afford the guarantees as have other countries, including Britain, covering 80% of bank loans because the government can borrow long term at rates close to zero. “They would do it through the commercial banks, because they have ties to small businesses. This is why the banks will be the intermediaries. No one should expect banks to bear the losses, ”he said.

Mr Ahearne said there would be question marks over the creditworthiness of some of the small businesses caught in the Covid-19 storm over time and prolonged restrictions. “Are the banks going to lend in the next few months to the local fish & chips so that they can pay their rent, for example?” He said.

“Problems with the viability of this business will arise as the crisis continues, so if you want banks to lend to them to keep them afloat until reopening, you would need loan guarantees,” he said. Mr Ahearne said.

He said the Central Bank’s cost of employment and Treasury scenarios appear credible. The scenarios were based on a three-month lockdown and obviously if the restrictions were extended the costs would increase. A budget deficit of 20 billion euros this year “is in order” for many commentators, he said, adding that the estimate was based on an easing of restrictions.

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