The Irish Economy

Trinity Research in Social Science (TRiSS), in partnership with its member schools and disciplines, is organising a weekly series of online events, over the summer, on how covid19 will change society. Each week, experts from Trinity and other leading institutions around the world will be bringing their insights on how covid19 is likely to change our lives – from corporate power and climate change to civil liberties and the future of tourism & travel.

The first event – “COVID-19 and the Future of Cities” – takes place on May 18th at 3pm Irish Standard Time and is co-hosted with the Department of Economics at Trinity College Dublin. Attendance is free but requires registration via Eventbrite. The webinar will last 75 minutes, with three 15-minute presentations and a moderated discussion afterwards. Participants include:

• Prof. Edward Glaeser, Harvard University
• Prof. Jessie Handbury, University of Pennsylvania
• Prof. Diego Puga, CEMFI
• Prof. Martina Kirchberger, Trinity College Dublin, as chair

Edward Glaeser is the Fred and Eleanor Glimp Professor of Economics in the Faculty of Arts and Sciences at Harvard University, where he has taught since 1992. He has published dozens of papers on cities economic growth, law, and economics. In particular, his work has focused on the determinants of city growth and the role of cities as centers of idea transmission. He received his PhD from the University of Chicago in 1992. Some of his recent work examines how COVID-19 has affected small businesses.

Jessie Handbury is an Assistant Professor of Real Estate at the Wharton School in the University of Pennsylvania. She completed her BA and PhD at Columbia University and was selected as a NBER Faculty Research Fellow, International Trade and Investment. Her research interests lie at the intersection of urban economics, trade, and industrial organization. She has developed an exposure index based on smartphone app location data to help analysis during the current pandemic.

Martina Kirchberger is an Assistant Professor at Trinity College Dublin. She is a development economist with a particular interest in urbanization, infrastructure, the construction sector, labor markets, and spatial mobility. Previously, she was an Earth Institute Post-Doctoral Research Fellow at Columbia University. She received her DPhil in Economics from the University of Oxford in 2014. Some of her ongoing research examines the labor market effects of COVID-19 on low-skilled urban workers.

Diego Puga is Professor of Economics at CEMFI, in Madrid, Spain. His research interests include urban economics, economic geography and international trade. Born in Spain, where he completed his undergraduate degree in Economics, he obtained his Ph.D. in Economics from the London School of Economics in 1997. He is member of the Multidisciplinary Workgroup advising the Spanish government on scientific issues related to COVID-19 and its future consequences.

The Statistical & Social Inquiry Society of Ireland invites you to attend a special Symposium on the covid19 pandemic, at the seventh and final Ordinary Meeting of its 173rd session. The meeting takes place online, at 4.30pm on Thursday May 21st.

The theme for the special symposium is “Understanding the Covid19 pandemic and its consequences” and its aim is to provide views from a number of different perspectives on the covid19 pandemic and what it means for policymakers and wider society. The symposium will be chaired by Society President Danny McCoy and will comprise six short contributions of no more than ten minutes, followed by a general discussion:

1. Catherine Comiskey (Trinity College Dublin), “The epidemiology of Covid-19: Learning from the past and modelling for the future”
2. Jean Acheson (Revenue Commissioners), “The impact of covid19 on income and employment: early evidence from administrative data”
3. Reamonn Lydon (Central Bank of Ireland), “Measuring the economic impact of covid19 in real time”
   
4. Conor Lambe (Danske Bank), “Covid19 and the Northern Irish economy: initial insights”
   
5. Shana Cohen (TASC), “What has Covid-19 told us about inequality in Ireland?”
   
6. Gerard Brady (Ibec), “Business in a compressed economy”

We are hosting the Syposium on the Zoom platform, which allows logging in through the Zoom app, through a web browser or by phone. To attend the event, please register here on Eventbrite, and the specific details for attending will be sent to you by email on Tuesday May 19th and again on the day of the event.

As always, non-members are welcome to attend and participate in the discussion. Given the format, you are encouraged to circulate this link to others who may be interested so that they may also register their interest and attend on the day.

The government has announced a loan guarantee scheme for bank lending to Irish SME’s to help them emerge from the economic shutdown associated with the pandemic. The proposed program provides a lending bank with a guarantee giving 80% pari passu (proportional sharing) loan loss protection for eligible loans to Irish SMEs impacted by the pandemic shutdown. There is also a portfolio cap on the guarantee so that each bank can only claim 80% loss coverage on 50% of its covered loan portfolio.  This effectively shrinks the “tail risk” coverage (if the bank’s SME loan portfolio performs disastrously) to 40%. The guarantee is offset by a 50 basis point fee payable to the government. The budgeted €2 billion loan guarantee program equates to 0.58% of 2019 GDP. Policymakers still have a few weeks to best calibrate the program for maximum effectiveness before a prospective Dáil majority coalition passes the enabling legislation. Given the calamitous economic impact of the pandemic shutdown there is no guaranteed best strategy.

It is useful to compare the proposed Irish program with some of the existing programs. Spain has already opened a €100 billion 70-80% pari passu guarantee program; the budgeted magnitude equates to 8.02% of 2019 Spanish GDP. The French €300 billion loan guarantee program equates to 12.4% of French 2019 GDP. It has 90% pari passu loan coverage for lending to firms with 2019 revenues of €1.5 billion or less; 70-80% pari passu for larger firms. Most generous in the EU is the program of Germany, which has announced a loan guarantee program of €500 billion + which corresponds to 14.6% of 2019 GDP. The “plus sign” here denotes that the German government has explicitly committed to increasing the loan guarantee budget to however much above €500 billion is needed. It is not clear whether such an increase is pre-approved by the EU Commission or alternatively whether an increase will require subsequent vetting. The EU amended state aid rules require “the aid is granted on the basis of a scheme with an estimated budget” so it is ambiguous whether the German government can formally make this unlimited commitment within these newly amended rules. The German program pari passu loss coverage ranges from 100% for the smallest firms down to 80% for the largest eligible (the program covers both SMEs and larger firms, but the very largest German corporations are dealt with separately). The German program also offers fast-track approval and dispersal of funds for smaller loan amounts.

The UK is no longer bound by EU strictures regarding state aid rules and monetary financing rules and this flexibility is reflected in its SME lending aid programs. For small loans the UK government offers 100% loss coverage; 80% for larger loans, with no fee for the guarantee. For small firms (less than £41 million 2019 revenues) the government will pay the first six months of loan interest in addition to providing the guarantee, so the implicit “insurance fee” for the guarantee is negative. The small-loan Bounce Back Loan program has had a fast and successful start, whereas the Coronavirus Business Interruption Loan Scheme (larger loan amounts) which requires more vetting and paperwork has had less quick take-up. The UK budgeted amount for its loan guarantee programs is not fixed beforehand. The UK plan originally had a portfolio cap (as in the proposed Irish plan) but they have dropped it.  The very successful joint programs of the US Fed / US Treasury involve 95% outright loan purchases (equivalent to 95% pari passu loss coverage) with no fee payable. One of the two US schemes (the Paycheck Protection Loan Plan, see my earlier blog entry) has a large subsidy component since the loan amount due is partly or entirely forgiven if the loan proceeds are spent on retaining staff that otherwise would have been made redundant. Unlike the US or UK, Ireland has the prospect of a eurozone sovereign debt crisis looming in the background, shrinking the available fiscal space for bold giveaway programs to save jobs. Ireland also must navigate through the state-aid restrictions of the EU Commission.

The economic rationale for these loan guarantees is fundamental and needs to be understood clearly. To encourage a quick macroeconomic recovery, countries need their banking sectors to engage in this lending which, in the absence of a loan guarantee, is not in their financial interest. Sector risks are substantial in this new SME lending since no one knows for sure which currently impacted sectors will remain closed or deeply troubled. For example, there will be likely be considerable SME lending demand from Irish hotels. Should banks be willing to lend to hotels in Ireland, to allow them to reopen? In the absence of a government-funded loan guarantee, the correct answer is no. Commercial banks earn their value by “being boring,” that is lending to low-risk activities, with unsystematic risks which diversify across individual businesses and sectors, resulting in a modest and predictable realised default rate. In exchange the banks earn a relatively small but dependable interest margin over funding costs. The very uncertain prospects for SME lending outcomes in the post-pandemic period, with large systematic sector risks, are too exciting to be a sensible activity for commercial banks in the absence of a government loan guarantee.

The SME loan guarantee programs of EU countries include a 20-100 basis point loan guarantee fee paid to the national government so that each program can be ruled to not violate the EU rules against individual member state aid to industry. It does not make sense if the guarantee fees payable for these programs are market-value based fees which fully compensate for the value of the risk capital. Charging a market-value-based fee for the guarantee defeats the purpose of the program: to give powerful incentives for otherwise-too-risky lending to SMEs in vulnerable sectors.

Patrick Honohan (2020) overviews these loan-guarantee programs internationally and expresses his concern that these loans may impose too much debt on troubled firms and generate prolonged financial distress. Such a concern is particularly pertinent for Ireland, with its extremely slow and cumbersome non-performing loan (NPL) resolution framework. Honohan also worries that many of these government-guaranteed loans may effectively transform into subsidies via non-payment; this is particularly relevant in the case of Ireland given its political-business culture regarding NPLs. Honohan suggests adding an equity-conversion feature to the loan guarantees, but this might be a bit too complicated in the Irish case.

In terms of the Irish proposal, the 80% guarantee coverage is on the low side relative to comparable nations. 90% coverage would be better; imposing a 20% risk exposure on the banks might slow take-up substantially. Getting a fast and high take-up rate requires that the program is administratively easy to access and well-incentivised for both the SMEs and banks in terms of risk-reward acceptability. The €2 billion budgeted amount seems very low. The guarantee fee (which is counterproductive) should be pushed as low as the EU commission will allow. It would be good if the smaller loans at least could have some sweetener attached, linked to payroll or job retention.

---

Clifford Chance (2020). Coronavirus – Guarantee Scheme in Spain. [online] cliffordchance.com. Available at: https://www.cliffordchance.com/briefings/2020/03/covid-19-_-spanish-guarantee-scheme.html [Accessed 7 May 2020]

Department of Business, Enterprise and Innovation (2020). Credit Guarantee Scheme for COVID-19 FAQs. [online] dbei.gov.ie. Available at: https://dbei.gov.ie/en/What-We-Do/Supports-for-SMEs/COVID-19-supports/Credit-Guarantee-Scheme-COVID-19-FAQ.html [Accessed 7 May 2020]

European Central Bank (2020). ECB announces new pandemic emergency longer-term refinancing operations. [online] ecb.europa.eu. Available at: https://www.ecb.europa.eu/press/pr/date/2020/html/ecb.pr200430_1~477f400e39.en.html [Accessed 7 May 2020]

European Commission (2020). Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak. [online] ec.europa.eu. Available at: https://ec.europa.eu/competition/state_aid/what_is_new/sa_covid19_temporary-framework.pdf [Accessed 7 May 2020]

European Commission (2020). State aid: Commission approves German measures to support economy in Coronavirus outbreak. [online] ec.europa.eu. Available at: https://ec.europa.eu/commission/presscorner/detail/en/IP_20_653 [Accessed 7 May 2020]

Financial Times (2020). State-backed SME lending picks up pace too late for many. [online] ft.com. Available at: https://www.ft.com/content/9b5c3d0a-4960-4654-b8d5-c4b6697c43c5 [Accessed 7 May 2020]

Financial Times (2020). UK set to launch loans scheme for small businesses. [online] ft.com. Available at: https://www.ft.com/content/52dcf686-6b88-11ea-89df-41bea055720b [Accessed 7 May 2020]

Financial Times (2020). How will the UK’s ‘bounce back’ loans work? [online] ft.com. Available at: https://www.ft.com/content/1ca15db2-93e4-4e34-877d-110309cd9716 [Accessed 7 May 2020]

Financial Times (2020). Loan guarantees: what funding will be available to UK businesses? [online] ft.com. Available at: https://www.ft.com/content/626de1f8-69b4-11ea-800d-da70cff6e4d3 [Accessed 7 May 2020]

Financial Times (2020). More than 100,000 apply for ‘bounce back’ loans. [online] ft.com. Available at: https://www.ft.com/content/ad74d6ff-f9cf-4218-9563-c511681f5acb [Accessed 7 May 2020]

Patrick Honohan (2020). Pandemic loans to firms: Postponing the evil day? [online] Peterson Institute for International Economics. Available at: https://www.piie.com/blogs/realtime-economic-issues-watch/pandemic-loans-firms-postponing-evil-day [Accessed 7 May 2020]

Ireland Strategic Investment Fund (2020). Pandemic stabilization and recovery fund. [online] Available at: https://isif.ie/pandemic-stabilisation-and-recovery-fund [Accessed 9 May 2020]

Bruno Robino (2020). Capped Portfolio Guarantee. European Investment Bank. [online] Available at: https://www.fi-compass.eu/sites/default/files/publications/Bruno_Robino_How_does_a_Guarantee_scheme_work_0.pdf [Accessed 11 May 2020] 

Shearman and Sterling (2020). Updated – Covid-19 France: State Guarantee Scheme for New Money Loans. [online] shearman.com. Available at: https://www.shearman.com/perspectives/2020/04/covid-19-france-state-guarantee-scheme-for-new-money-loans [Accessed 7 May 2020]

The Telegraph (2020). Germany’s 100pc guarantees highlights shortcomings of UK loan scheme. [online] telegraph.co.uk. Available at: https://www.telegraph.co.uk/business/2020/04/08/germanys-100pc-guarantees-throw-spotlight-ailing-uk-loan-scheme/ [Accessed 7 May 2020]

The effective closure of the Irish economy due to the pandemic generates very difficult problems in economic analysis; Irish policymakers are struggling to respond quickly. The situation is unprecedented, and it is hazardous to speculate about best policy responses. Nonetheless, with that caveat clearly stated, I want to make some informal remarks about the best ways to get adequate lending to Irish SMEs to help them resume normal business, and the role of the Irish banking sector.

The main point that I want to make is that the best approach to SME support might be through bank-mediated lending in tandem with capital replenishment via loan purchases by the government or central bank. The US Fed has already demonstrated that this works, with a very large loan purchase program already showing positive impact [1]. If loan purchases are not feasible, perhaps some other method of providing contingent capital to the banking sector (to encourage lending) could be used.

It is useful to strip the problem back to some basics: there are three possible sources of funding in this context: government expenditure, private bank capital, and monetary financing through the central bank, and two funding types: cash subsidies or loans. There are of course numerous potential mixtures and combinations of these three capital sources and two funding types.

In the USA, the $349 billion Paycheck Protection Loan Plan (PPLP) is being run by the Small Business Administration in collaboration with the commercial banking system (the $349 billion authorization was quickly exhausted; the amount will likely be topped up this week with an additional $250 billion). Ireland quickly implemented a somewhat parallel scheme, the Covid-19 Pandemic Temporary Wage Subsidy Scheme (TWSS). The PPLP and TWSS have similar objectives, but the TWSS is a direct wage payment/subsidy whereas the American PPLP is packaged as bank-mediated lending with a subsidy attached if the SMEs workers are successfully retained.

The direct-subsidy approach of the TWSS provides a fast start but is limited by its expensiveness per euro of impact. TWSS unlike PPLP also fails to take advantage of the well-developed lending and credit monitoring capabilities of the private banking sector. The Strategic Banking Corporation of Ireland Covid-19 Working Capital Loan Scheme uses the private banking sector but is limited in scope [2].

In the case of SME support based on private bank lending rather than subsidies, it is fair to ask why not rely entirely on private bank capital? Again, it is important to strip back to some fundamental issues. One, the capital at risk from emergency SME lending is potentially large in magnitude and very risky. Two, there is a big public interest in this emergency lending taking place quickly and aggressively to get the economy back up and running normally. The risks are large and the potential (public interest) rewards are also large. The restructuring of the Irish economy post-pandemic could be modest, or it could be massive, and the downturn could be brief or prolonged. Generous SME lending is macroeconomically vital, but risky.

In the USA, the central bank (Fed) quickly implemented a $2.3 trillion debt asset purchase plan backed by its monetary resources. The $2.3 trillion authorized amount equates to 10.7% of 2019 GNP. The Fed is putting a huge amount of risk capital into unusually risky debt assets relative to the classes of assets it has previously had in its portfolio. If this program is successful in helping to restart the US economy, the Fed will get its money back and will have served the national interest. If this risky lending goes sour, which could happen, the risk capital is backstopped by $454 billion (19.7% of the capital amount) that the US Treasury has handed over to the Fed as credit insurance for the program. It is a type of contingent monetary financing which makes good sense under the circumstances.

The Fed purchase program will be split between purchases of private sector debt (78% of the total) and state and municipal debt (22%). As one component of the program, the Fed has stepped in to help facilitate the PPLP; it has launched a $350 billion program to buy up PPLP loans from banks, leaving a residual 5% ownership position in the banks. In tandem with the $350 billion purchase authorization for PPLP-linked loans, the Fed has initiated a $600 billion loan purchasing facility called Main Street Lending Program to purchase non-PPLP bank loans of small and medium-sized US firms. Additionally, the Fed has begun corporate bond purchases of up to $850 billion; note that the US corporate bond market rather than bank lending often serves as a lending vehicle for larger US firms (less true in Europe).

In a rough parallel to the Fed program, the ECB has launched the Pandemic Emergency Purchase Program (PEPP) with authorized funding of €750 billion, which equates to 6.3% of 2019 euro-area GDP. The credit criteria differ from previous ECB asset purchases in that Greek non-investment-grade sovereign debt is included, but there are no major changes to the credit criteria for eligible private debt assets.

One difference between the Fed’s debt asset purchase plan and the ECB’s is that the Fed’s approach is mostly about purchasing private debt assets whereas the ECB’s is mostly about purchasing government debt assets. The ECB’s focus (very understandably) is on preventing a sovereign debt crisis in Italy, Greece and/or Spain; purchasing credit-risky private bank assets is not on the agenda.

Unlike US banks, Irish banks cannot rely on any direct capital support for emergency SME lending from their central bank. Could private bank capital in Ireland prove adequate to fund all pandemic emergency SME lending? Just prior to the pandemic Irish banks had healthy capital ratios and very ample liquidity ratios. Nonetheless, it might be better if these unusual debt assets could be moved off the banking sector balance sheet, as is being done in the US by the Fed’s purchase program. This segregates this unusual lending stream from the other lending activities of the Irish banks and allows them to continue normal lending channels for mortgages, automotive finance, new business finance, and SME expansion. Commingling the normal lending portfolios with this unusual emergency lending is potentially damaging to normal bank lending. Also, if private bank risk capital is used for this SME lending, it does not capture all the public interest rewards from this lending in helping to stabilize the economy. There is a “tragedy of the commons” market failure since the economic gains from a successful lending effort by the banks is shared widely across the economy, but the potential losses associated with the program are paid from private bank capital. This could incentivize banks to under-lend relative to what is needed. Something like the US approach seems appropriate in the circumstances.

---

[1] See “Federal Reserve takes additional actions to provide up to $2.3 trillion in loans to support the economy” Press Release, Board of Governors of the Federal Reserve System, April 9th, 2020, https://www.federalreserve.gov/newsevents/pressreleases/monetary20200409a.htm; “With $2.3 Trillion Injection, Fedʼs Plan Far Exceeds Its 2008 Rescue” New York Times, April 9, 2020, https://nyti.ms/3caFiH1 (behind paywall) and “Fed Rolls Out $2.3 Trillion to Backstop Main Street, Local Governments,” New York Times, April 9, 2020, By Reuters, https://nyti.ms/3c5qPwk (behind paywall).

[2] See “SBCI Covid -19 Scheme,” Strategic Banking Corporation of Ireland, April 20th, 2020. https://sbci.gov.ie/schemes/covid-19-loan-application

The Statistical & Social Inquiry Society of Ireland invites you to attend the sixth Ordinary Meeting of the 173rd session. The meeting takes place online, at 5pm on Thursday April 23rd, and is the Society’s annual Symposium.

This year’s Symposium is entitled “Science-Policy Interfaces and the Environment” and assesses the power of science to understand and navigate the relationships among the social, environmental and economic objectives of sustainable development, with the view to strengthening the Science-Policy Interfaces on the UN Sustainable Development Goals (SDG) Environment targets, with a special focus on Ireland.

The Symposium will be chaired by Danny McCoy (the Society’s President and CEO of IBEC) and contain three papers:

1. The Future is Now: The Science-Policy Interface for achieving Sustainable Development, by Astra Bonini, UN Department of Economic & Social Affairs
2. Developing solutions and informing Irish policymakers acros the pillars of Climate, Water & Sustainability, by Dorothy Stewart, Environmental Protection Agency
3. Benchmarking Ireland’s performance on Environmental SDG targets for policy-making, by Patrick Paul Walsh, UCD Geary Institute for Public Policy (and an Honorary Secretary of the Society)

Following feedback from our last Ordinary Meeting, we are hosting the Syposium on the Zoom platform, which allows logging in through the Zoom app, through a web browser or by phone. To attend the event, please register here, on Eventbrite, and the specific details for attending will be sent to you by email on Tuesday April 21st and again on the day of the event.

As always, non-members are welcome to attend and participate in the discussion and, given the new format, feel free to circulate this to others who may be interested so that they may also register their interest and attend on the day.