SME debts ‘will not trigger crisis’

The overall indebtedness among Irish SMEs is not at a level that will trigger a wave of company foreclosures and presage another economic crisis, according to research conducted by the Central Bank.

A study undertaken by Central Bank economist Fergal McCann, found that one-third of all Irish SMEs have no debt at all and only 16% of SMEs have debts greater than one-third of their turnover.

Debt repayments that exceed one third of turnover are seen as unsustainable, noted Mr McCann. Only 7% of all SMEs have debts greater than turnover.

UCD economics professor, Morgan Kelly, caused a media storm in March when he claimed that there was a debt time bomb sitting in the SME sector.

He quoted Central Bank figures which showed that there was €56bn in SME debt and roughly €27bn of this related to distressed property deals. Mr Kelly argued that the level of SME failures would ramp up later this year when the ECB completed its stress tests of the Irish banking system.

He said following these stress tests, the banks would call in business loans in a bid to preserve as much capital as possible.

However, the data available to the Central Bank only related to SME loans held with domestic banks. There was no data for economy-wide SME indebtedness.

Mr McCann compiled his research using data collected by four six-monthly Department of Finance surveys over 2012 and 2013 using a sample of 1,500 SMEs.

The highest levels of debt were in the hotels and restaurant sectors.

The study found that firms with debt less than one-third of turnover had loan defaults rates of less than 10%. SMEs with debt to turnover ratios of between one-third and 100% had loan default rates of between 5% and 20%.