Morgan Kelly, the first economist to predict the scale of the Irish financial crash, warned that moves by the European Central Bank to “clean up” around €32bn in bad debts owed by small and medium sized firms (SMEs) could plunge the country back into disaster.
Stating that “real crisis” may not yet have hit the Irish economy, Prof Kelly said: “We could be facing something really, really terrible, quite soon.
“The Irish economy is equivalent to the SMEs. You’re going to have a lot of your SMEs wiped out in any clean-up of the banking system.
“That means you are going to have a big chunk of the Irish economy wiped out in one go. So this is a potentially enormous problem.”
Prof Kelly estimated the scale of the debt hang-over for SMEs from the burst property boom was between €25bn and €32bn as he raised fears that the ECB was poised to bring the matter to a head.
The expert said a proper stress test of Irish banks by the ECB later this year could result in a large part of the economy being “wiped out”.
Social Protection Minister Joan Burton accused the UCD professor of taking a pessimistic view, but said his report should be studied.
However, opposition parties insisted that the Government was not doing enough to address the situation.
Mark Fielding, chief executive of ISME, said the debts were large, but manageable.
“The total SME debt would be about €57bn; €32bn of that would be non-core property debt, so the other €25bn would be of normal overdrafts and loans,” said Mr Fielding.
“We just hope that during the stress tests the other €32bn will be managed over a period of time, which will leave the SME sector OK in the long term.”
Fianna Fáil’s finance spokesman Michael McGrath urged the Government to treat the matter with more urgency.
“We know from last year, the statement from the director of the Central Bank, that about half of the €50bn of SME debts in the banks are in some level of distress, so the alarm bells really should have started to ring at that point,” said Mr McGrath.
“It’s only getting a fraction of the attention that mortgage debt is getting, but about three quarters of the people working in the private sector are working for SMEs, so 700,000- 800,000 people work everyday in SMEs, so we need to deal with this.”
A Government spokesperson said: “Everyone is entitled to their views.
“That does not mean we are being dismissive of Prof Kelly, but Finance Minister Michael Noonan has expressed confidence in the banking system.”
Finance department sources said that they expect the Irish banking system to come through the ECB stress tests later in the year.
ISME also expressed concern at the attitude of banks to the sector as a new report showed that 54% of loan applications had been rejected in the three months to the end of February.