David Chance
Grants need to be big part of business bailouts
It’s time to turn ‘too big to fail’ into ‘too small to let fail’ to save small and medium-sized businesses
There are no cheap options when it comes to saving our small and mediumsized enterprises (SMEs) who between them provided a million jobs before the pandemic hit this year.
All of the options under consideration – State loans and guarantees, taking equity stakes and grant aid – have major drawbacks.
They also have the potential to be very costly. The Central Bank of Ireland recently estimated that nearly a fifth of SMEs would have difficulty meeting operating losses or interest payments on debt this year alone.
But we need to be clear what is at stake here.
The number of people in the State working for SMEs is three times that of Ireland’s vaunted multinational sector and – to borrow a phrase from the financial crisis a decade ago – they are too small to fail or to be allowed to fail.
Just like with the blanket nature of the Pandemic Unemployment Payment, which drew criticism from some quarters for being overly generous, grants too will prove controversial, but the other choices are even less palatable.
This is especially as we teeter on the brink of another harsh lockdown. The direct damage to these companies from restrictions is just the first shoe to drop and the effects will be with us for a long time.
Modified domestic demand – the measure of what is really happening in the domestic economy – fell by 16.4pc in the second quarter from the first.
That impact did not suddenly cease to exist when we returned to the shops as you cannot simply quarantine a million jobs and expect everything to be fine.
Shuttered bars and hotels won’t be stocking up on drinks or food, landlords won’t be getting paid and the halt in investment spending in one industry will spiral out to others.
The damage to business investment spending could continue to damage the economy even when health concerns have ebbed.
Loans are attractive because costs to the State only begin to occur as companies start to default, so this would have much smaller up-front costs for the Exchequer.
However, you have to ask whether putting the Government in the position of creditor to small businesses across the land is really a desirable outcome.
Would the debts owed to the State be senior to those of all other creditors or would – as seems much more likely – political pressure and lobbying emerge that would force the State to write off its loans so as to keep companies going.
If you have risk-sharing arrangements in which the Government underwrites a proportion of those loans, with the private sector banks taking the remainder, you may still end up with a slew of bankruptcies. And because the banks have extended credit, you might find that it is unable to finance any recovery due to the existing high levels of debt on its balance sheet.
Taking equity stakes in return for loans has also been mooted. But while recapitalising and nationalising the banks at the height of the financial crisis was one thing, putting the Government in the position of becoming the partowner of every small company across the land is quite another.
You would also be asking the Government to take a view as to whether a particular business or industry would have been likely to survive – and it runs the risk of lobbying.
Grants are the most expensive option, though the most effective. The Central Bank says targeting them to firms based on viability “could cut financial distress rates in half relative to those modelled under current supports”.
The SME workforce is three times that of multinationals here