SMEs in Ireland: Contributions, Credit and Economic
Crisis
Fergal McCann
Irish Economy Conference, Dublin 1st February
Disclaimer: The views expressed here do not represent the official opinions of the Central
Bank or Ireland or the ESCB
Domestic demand and particularly investment have fallen
severely and are just showing signs of stabilising.
(Source: CSO Quarterly National Accounts)
Domestic Demand and Gross Fixed Capital Formation,
1997q1-2012q3. €m
45000
40000
35000
30000
25000
20000
15000
10000
5000
0
12000
10000
8000
6000
4000
2000
0
Final Domestic
Demand
Gross Domestic Fixed
Capital Formation
(Right Axis)
• 2: SMEs in the real economy
and the distribution of
economic activity
The distribution of private sector employment
(Source: CSO - CIP and ASI; Excludes Agriculture and Construction)
•
SMEs are very important in private sector employment (72%)
•
Domestic demand is crucial for employment (64%)
Different picture for Gross Value Added – the international
sector is much more important. (Source: CSO - CIP and ASI; Excludes
Agriculture and Construction)
•
SMEs account for 52% of GVA
•
Domestic demand accounts for 33%
Exports and employment are not strongly related – “exportled recovery” as employment recovery???
• 3: SMES and the banking crisis
Direction of SME new lending – to which sectors is new
lending going? 4-quarter average figures to Q3 2012.
Key message – SME lending is realigning away from Real Estate lending (although share of
stock of credit remains large at ~50%
0.900
0.800
0.700
0.600
0.500
Share of Stock
0.400
Share of New Lending
0.300
0.200
0.100
0.000
11. Real Estate Activities
Non-Real Estate
Non-financial, non-Real Estate Lending.
Key “winners” – Primary; Bus-Admin Services, Other Community, Social.
Key “Losers” – Wholesale/Retail; Hotels & Restaurants
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
Share of Stock
Share of New Lending
• NB: “losing” sectors employ
large amounts of people:
• Construction 98k
• Wholesale & Retail (including
Motors) 330k
• Hotels & Restaurants 145k
SME Gross New Lending is not growing since 2010 (Source:
Central Bank; Money, Credit and Banking Statistics)
Given economic contraction, some correction to credit conditions was necessary and
inevitable. Has the pendulum swung too far? Credit decisions, 2007 and 2010, Eurostat
Access to Finance
Finland
Ireland
France
Malta
Cyprus
Belgium
Poland
Denmark
Slovakia
Lithuania
Latvia
United Kingdom
Greece
Spain
Bulgaria
Italy
Germany
Netherlands
Sweden
Luxembourg
Accept Partial Reject
98.1
1.9
0
96.9
2.1
1
94.5
3.6
2
94.3
5.7
0
93.2
6.8
0
92.4
5.4
2.2
91.9
4.3
3.7
91.8
4.5
3.7
89.3
7
3.7
89.2
9
1.8
89
6.7
4.3
88.4
6.1
5.6
87.6
11.7
0.7
87.3
9.7
3
87
9.9
3.1
86.6
12.2
1.2
85.3
8
6.7
84.3
8.9
6.8
84.2
7
8.7
78.8
15.2
6
Finland
Malta
Poland
France
Belgium
Sweden
Italy
Cyprus
Slovakia
Germany
Luxembourg
United Kingdom
Latvia
Netherlands
Denmark
Greece
Spain
Lithuania
Ireland
Bulgaria
Accept Partial Reject
95.9
3.9
0.2
91.3
6.5
2.2
85.4
10.3
4.3
83.3
9.7
7
83.1
11.2
5.7
79.7
14.1
6.1
78.4
16.7
4.9
76.7
19.1
4.2
76.1
14.7
9.2
75.9
15.9
8.2
68.4
20.9
10.7
64.6
14.7
20.8
63.5
10.1
26.4
61.3
16.2
22.5
59.8
21.7
18.5
59.6
29.6
10.8
59.1
27.8
13.2
58.4
20.4
21.2
53.2
20.2
26.6
42.5
22
35.5
The price of credit for SMEs – impact of deposit competition (in reaction to sharp fall in
external funding) on lending spreads for SMEs?
Covered banks offer higher deposits from
Increased spreads for small firm loans are
2010 onwards 
driven by covered banks over same period.
2002m1
2004m1
2006m1
2008m1
2010m1
5
4
2012m1
date
Non-FMP banks deposit rate
Euribor (3m)
3
1
2
3
Interest rate, per cent
6
4
7
5
(c) Interest rates on new lending, loans <1million Euro
2002m1
2004m1
2006m1
2008m1
2010m1
date
FMP-Banks deposit rate
Foreign banks
Domestic banks
2012m1
• 4: Sources of the fall-off in
credit provision
Supply and demand side factors are both at play in Ireland
• Supply
– Banks’ balance sheet problems
• High losses on non-performing loans and a need for more sustainable assets to liabilities ratio
can lead to credit rationing.
• Changes in risk aversion post-crisis.
– Borrowers’ balance sheet problems
• High arrears, excessive debt levels and decreased creditworthiness can lead to loan rejection.
• Demand
– Excessive existing leverage – incentive is to lower borrowings, not accumulate
more debt.
– Lack of aggregate demand for their output.
– Decreased investment and growth opportunities.
Balance Sheet Recession? (Source: Macro Financial Review, Central Bank)
•
NB: MNCs account for large share
of these numbers.
•
Disaggregate data unavailable for
SMEs or indigenous firms.
•
Cussen and O’Leary (2012)
highlight that 47% of GVA of Irish
NFCs is from foreign firms.
•
as a % of financial assets, Irish
NFC debt is one of the lowest in
Europe (under 50%).
•
Almost 50% of NFC debt in
Ireland is with non-resident
lenders. MNC debt.
While Euro area NFCs appear in balance
Demand: Net % increase in need for external finance is
falling; but remains around euro area average
Data: SAFE Survey
up to wave 7 (Sept 2012)
Change, Bank Loans
Change, Overdraft
Country Net % Net % Country Net % Net %
Sep-12 Mar-12
Sep-12 Mar-12
DE
-8.3
1.6 AT
-2
2
AT
-5.5
-5.7 DE
-0.3
6.4
NL
-4.6
-7.9 NL
4.6
0.9
BE
-1.3
6.6 BE
8.3
7.1
FI
0.4
1.2 FI
11.9
1.1
ES
4.8
9.7 Total
15.9
18.7
IE
7.2
10.7 IE
17.2
24.8
Total
7.3
10.2 ES
20.4
21.4
FR
10.5
8.5 PT
21.6
36.4
IT
18.6
24.6 FR
23.4
17.7
PT
22.7
17.9 IT
24.8
36.1
GR
57.6
26.5 GR
61.2
27.2
Sources of weak demand: investment demand is low, but is offset by above-average demand for
working capital. Unknown: how much smaller are lending volumes for Working Capital?
Decrease
.2
.3
.4
Panel (b): Ireland’s share of firms increasing
their need for external finance due to working
capital needs is above average
Decrease
Increase
IT
N
L
PT
AT
BE
D
E
ES
FI
FR
G
R
IE
IT
N
L
PT
AT
BE
D
E
ES
FI
FR
G
R
IE
0
.1
Increase
IT
N
L
PT
AT
BE
D
E
ES
FI
FR
G
R
IE
IT
N
L
PT
AT
BE
D
E
ES
Share of firms changing needs due to working capital
FI
FR
G
R
IE
0
.1
.2
.3
.4
Panel (a): Ireland has the lowest share of
firms whose need for external finance
increased due to investment needs.
Pattern reflected in Red C survey Mar-Sept 2012.
“Reasons for making financial request”
A balance-sheet explanation for decreased lending: Negative
relationship between new lending and 90-day arrears rate in a
sector (Source Central Bank of Ireland lending data).
Expected bank rejections – Across euro area, the risk-adjusted
coefficient on bank rejection responds to the macro economy…
Stronger Domestic Demand
Lower Pr(Rejection)
More indebted private sector 
Higher Pr(Rejection)
Bank Rejection
.5
0
-.5
-.5
0
.5
1
Coefficient on Probability of Bank Rejection
1
1.5
Bank Rejection
-4
-2
0
Change in domestic demand
2
4
1
1.5
2
Private Debt to GDP
2.5
3
Competition among banks is decreasing since 2010 –
potentially negative implications for price and access to
credit for SME
Credit Rejection (% of applicants) – Mazars/Red C reports
improving rejection rates. Still unfavourable in terms of European
ranking.
Data: SAFE survey, up to
Wave 7 (Sept 2012)
Changes in Other Terms and Conditions – Ireland and other peripheral countries
still have most unfavourable patterns.
Summary
•
•
•
The Irish economy is experiencing the aftermath of a credit-induced property boom.
–
Banks suffering losses and need to shrink balance sheets. Bank competition decreasing.
–
Firms over-leveraged; aggregate demand weak; zero fiscal space.
The credit market is exhibiting the symptoms of this stress:
–
Sectors with higher loan arrears are receiving less new lending.
–
Countries in Europe with weaker demand or higher leverage have higher probability that SMEs are
rejected for credit.
–
The demand for financing does not appear below-average in Ireland. Demand for investment
financing is certainly weak in Ireland. Still not enough information on volumes.
–
There is evidence that Irish SMEs are experiencing credit constraints, beyond that predicted by the
weak economy here, in 2011-12
Positives:
–
Credit constraints appear to have reached their most severe in 2011.
–
Property prices, GDP and GNP stabilising
–
Govt. measures; NPRF €850M investment – fill funding gaps for firms, free up bank capital.
References to sources for this talk.
•
Central Bank of Ireland. Economic Letter - Vol 2012, No. 8
Irish SME credit supply and demand: comparisons across surveys and
countries - Sarah Holton and Fergal McCann
•
Central Bank of Ireland. Economic Letter - Vol 2012, No. 4
Bank competition through the credit cycle: implications for SME financing Fergal McCann and Tara McIndoe-Calder
•
Central Bank of Ireland. Research Technical Paper 04RT12
Firm Credit in Europe: A Tale of Three Crises by Sarah Holton, Martina Lawless
and Fergal McCann.
•
Bank balance sheet repair and credit provision: Insights from the Irish bank
deleveraging experience. Jane Kelly, Reamonn Lydon, Martin O'Brien, Fergal
McCann. Mimeo, Central Bank of Ireland.
•
Credit Access for Small and Medium Firms: Survey Evidence for Ireland by
Martina Lawless and Fergal McCann. Forthcoming Journal of SSISI
Thank you