Profiling the indebtedness of Irish SMES

This is exactly the kind of responsive research the Irish Central Bank should be doing. The Central Bank’s Fergal McCann takes a look at Irish SME indebtedness in the wake, presumably, of Morgan’s latest Irish Times op-ed on the subject. Fergal solves the data problem the ICB has for SME indebtedness levels using Red-C data.

There’s no doubt, I think, that there is a serious debt problem within Irish SMEs. But 34% lot of them have no debt at all, with others with very little debt relative to turnover.

McCann’s work is not of the ‘it’s grand lads, nothing to look at here’ variety, either, and it does put a shape on the problem for us.

The seriously indebted medium-sized enterprises are in trouble, though, and we now have a good measure of the likely extent of how many of these firms there are.

By Stephen Kinsella

Senior Lecturer in Economics at the University of Limerick.

8 replies on “Profiling the indebtedness of Irish SMES”

‘… exactly the kind of responsive research the Irish Central Bank should be doing.’

YES. And it doesn’t have to be simply ‘resposive’ – a smidgin of ‘proactive’ on the ‘real economy’ would also be welcome; as would some idea of level of ‘expertise’, or lack therof, within Irish banking on lending to ‘real economy’ – which methinks may be somewhat ‘dire’.

Report a few daya ago, Mazars methinks, on EU SMEs on ‘fast, medium & slow’ since 2007/8. Ireland is in the ‘slow’ lane. Don’t have the link to hand – maybe someone will help us out.

I’m always unsure what to think when economists analyse the extent of debt issues.

Money originates through bank loans and so every euro is born with an even higher debt. Every euro is destroyed again as the loan is repaid. Hence every euro has to have a matching debt.

The fact that banks only issue the amount of the loan but record a debt of all plus interest explains why there is more debt than money in the economy.

Furthermore, going into the future, how can we expect levels of personal and business debt to lower when every euro has to have a matching debt?

The indebtness profile of Irish Sme’s looks the profile of adult drinkers in ireland in the 1950 s. One third of the population were pioneers and did not indulge whilst the other two thirds more than made up for their sobriety.

A few points:

The Debt/Turnover (D/T) ratio:
While historically debt /equity has been used as one of the main indicators of financial health, the D/T ratio is both novel and has a lot of merits. Turnover should at least, in most industries, be an indicator of the potential profit from which loans will be paid.

However the band spreads chosen for summary (1/3, 1/3-1, >1) are, imho, too wide and too high.
Consider the case of an SME with sales of €10 million and debt of €3.5 (35%). That, in the opinion of most people would be a highly indebted company (unless turnover to assets was very low), and unless there was a very good profit margin in that business, such a company would be in the highly endangered category. It would be interesting to see the data for bands of say, <10%,<10-%-20%, 20-30%, 30-40%, 50%-100%, the rest.

In relation to D/T not being a indicator of solvency with the most indebted firms, there is a real-life logic to that. The lender at that stage has given up on the loan; it is not coming back and he knows it.

The lenders attitude to collection through receivership/ liquidation would also have changed dramatically following the Finlay-Geoghegan judgement in the Belgarth Motors case. This judgement effectively means that statutory redundancy costs, will rank higher than bank ‘floating charges’ in the event of liquidation, which pretty much means in practice that the banks security is confined to the property charge and personal guarantees.

One further point that does impact the decision to fold companies in trouble, is the fact statutory redundancy is now no longer subsidised by the State. Statutory redundancy can be a sizeable contingent liability for a business facing closure. This means that neither business owner or bank is being subsidised to get rid of employment. This was at least one good change made by Minister Joan Burton, and its effect should not be underestimated, in terms of job retention or business retention.
[In the past many large and very profitable companies (incl banks and other plcs were big beneficiaries of the State subsidy for job destruction]

Nice data, but I don’t see enough data to give real insight into the overall situation. Morgan Kelly’s fear was that there’d be very widespread company failures. This seems to contradict that idea, but only on an inferred basis.

Plus, I don’t see a curve of the value of debt against percentile along the indebtedness ratio. Looks likely the vast majority of the debt is concentrated in comparatively few companies, but not sure. Also, is there a curve of total debt against firm size? Are these most indebted firms many? Large? Holding huge debts in comparison to their size? Lots of questions still worth asking…but certainly interesting reading.

Looks like nice data, but is it accurate! Has anybody considered if this data includes the personal debt of the SME owner that directly relates to ownership of the related SME business premises. Many SME owners have purchased business premises as part of pension planning, and do they reduce the rent to stabilise business costs and create a personal debt problem, or do they pay the rent and create an SME business cost structure problem? Banks will tend to enforce the latter. If this related personal debt is not included in this data stream, the inferences drawn by Fergal McCann are inaccurate, and related public policy may also be equally mis-guided! So, can Fergal tell us if this related personal debt is included in the data stream or not? I sincerely hope it is!

Always surprises me the sheer volume of commentary on (i) labour market issues, and (ii) ‘real’ industrial economy issues ….

… on this blog.

Am I missing something?

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