Central Bank's Ahearne: Irish firms need State-backed ultra-cheap bank loans to survive

The Government will almost certainly have to guarantee ultra-cheap loans for Irish banks to pump into businesses    if many small firms are to survive the Covid-19 economic storm, according to economics professor Alan Ahearne, who is an adviser to the Central Bank.

In an interview with the Irish Examiner, the director of the Whitaker Institute of Economics at the National University of Ireland Galway said that many small businesses will fail to reopen if they can’t tap near-zero bank loans that are guaranteed by the State.

Mr Ahearne was until recently a member of the Commision of the Central Bank and is still the chair of the bank’s risk committee.

He is also well known as the adviser during the last crisis to the late Finance Minister Brian Lenihan, joining the Department of Finance in 2009 as the State was hurtled towards the bailout from the troika after the Government was cut off from accessing the sovereign debt markets.

The Covid-19 economic fallout is similar to the banking and property crisis of over a decade ago in that there will be a fiscal price to pay, he said.

But a big difference this time is that it involves rebuilding employment back to the levels of last year, when the economy was showing few signs of overheating. “This virus required a different response because it is a very different health challenge and it is a very different economic crisis,” Mr Ahearne said, referring to the Government’’s business measures of the last month.

He said the banks will now have to go beyond measures such as their plans to extend their loan payment breaks to six months, as reported by the Irish Examiner. The lenders, Mr Aherne said, were in a much better place than they were over 10 years ago but Irish SMEs will require huge amounts of assistance in the form of getting access to new State-guaranteed and ultra-cheap loans if small business borrowers are to see the crisis out.

“Now small businesses are going to need a lot of help. I think the banks will be the conduits through which the help will be given by providing funds -- loans, overdrafts -- to businesses that are shuttered and still have obligations to meet to cover their fixed costs. It is important to give them cash. We should think of the banks as agents for the State,” Mr Ahearne said.

Asked if most SMEs do not want to take out loans at 4% and would require loans at rock-bottom rates, Mr Ahearne said the new measures “will be, and have to be, something much more extensive that is Covid-19 specific”. State-guaranteed loans through the banks cannot be priced at interest rates of 4% because such loans would be far too expensive.

He said the Irish State can afford the guarantees as other countries have done, including Britain, covering 80% of the banks loans, because the Government can borrow long term at close to zero rates. “The way they would do it is through the commercial banks because they have the links to small businesses. That is why the banks will be the intermediaries. Nobody should expect the banks to bear the losses,” he said.

Mr Ahearne said there would be question marks over the credit worthiness of some of small businesses caught in the Covid-19 storm as time went on and the restrictions were prolonged. "Will banks make loans in the next few months to the local fish & chip shop so it can pay its rent, for example?," he said.

"Issues about the viability of that business will arise as the crisis goes on, so if you want banks to lend to them to keep them afloat until reopening then there would have to be guarantees on the loans,” Mr Ahearne said.

He said the Central Bank scenarios on the cost in jobs and for the exchequer look credible. The scenarios were based on a three-month lockdown and, evidently, if the restrictions were extended the costs would grow. A €20bn budget deficit this year "is in the ballpark" of many commentators, he said, adding the estimate was based on relaxing restrictions.