IMF study: Irish SMEs still face ‘vulnerabilities’

An expert in a research paper commissioned by the IMF has warned about the “vulnerabilities” still facing debt-laden Irish firms eight years after the onset of the financial crash.

The research by Nir Klein, published on the IMF website this week, finds many corporates have weathered the crash but warns “some indicators suggest the corporate sector vulnerabilities remain elevated”. 

That’s because non- financial companies here carry among the highest debt loads in Europe, at 185% of GDP, while the level of non-performing loans though declining “remain high”, according to the research.

“These two features limit firms’ ability to undertake new investments,” writes Mr Klein. Moreover, Irish SMEs, despite some falls in the cost of loans, still pay some of the highest interest rates in Europe.

Mr Klein cites evidence showing the level of corporate debt has “somewhat eased” but the number of company bankruptcies remains above 2008 levels.

 This means Irish SMEs are “particularly” vulnerable to any economic shocks such as a rise in interest rates or an event that led to sharp falls in profits.

“A combined shock of tighter conditions and lower profitability would have a sizeable impact on firms’ balance sheets and thus likely to push many firms into a vulnerable situation,” Mr Klein writes.

Turning to Irish banks, the research shows that any such shocks would lead to a “significant” increase in company defaults, but the losses may be absorbed nonetheless by banks from their capital reserves, based on reserve levels in the third quarter of 2015.

“The vulnerabilities of the Irish non-financial corporate sector have moderated,” the research finds. 

“The levels of corporate debt and corporate non-performing loans remain high, limiting firms’ ability, particularly SMEs to access finance and undertake new investment,” it says, adding that a large number of indigenous companies faced distress in recent years.

The research published in its working papers series does not necessarily reflect the views of the fund, the IMF said.

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