Professor John McHale:

Unfortunately, I do not have a silver bullet but it has been a significant achievement to begin this stabilisation process. We were in a situation where the vicious feedback loops between the banking system, the real economy and the public finances were driving the economy downwards and a key first step had to be restoring the creditworthiness of the State. Matters might have become significantly worse if that stabilisation had not occurred. Having said that, however, there is no doubt that SMEs are facing a difficult situation at present. The credit system is broken to a significant extent, in respect of the balance sheets problems of both the banks and business. Although the banks have been substantially recapitalised, they remain highly risk averse in the context of the uncertainties on the asset side of their balance sheets to which Deputy Mathews adverted. The Central Bank has also reported that 50% of SME loans are impaired, which is a legacy of the past. Many of these loans were associated with property-related borrowing. However these debts were incurred, they affect the creditworthiness of SMEs when they try to fund projects. As Deputy O'Donnell noted, a decent number of these projects potentially offer high returns but a legacy of past debt makes a company uncreditworthy even in respect of financing new and attractive projects. There certainly is a problem in the credit system and significant efforts are required to address it.

At the risk of saying something with which certain people will disagree, the win-win opportunities for restructuring debt are probably much larger in the SME sector than with mortgage debt. There is a general idea that the solutions exist for mortgage debt and if we only proceed with them, everybody will gain. The banks would gain by writing down debt and the mortgage holder also gains. It is much harder in the case of mortgage debt to achieve those win-win solutions, however, because in effect the bank is giving up an option in the hope that by reducing debt it will change incentives, possibly to earn more income, so that it ends up getting paid more. Those opportunities exist but they are scarce. SMEs are in a different position, however, because of the legacy of these debts from the past. SMEs have opportunities for profitable investments but they are not creditworthy because of this overhang of debt from the past. The possibility is higher for restructuring those debts in a way that will ultimately be good for the bank and the small business.

In terms of pressing things forward in a way that supports investment in the domestic economy and, ultimately, in jobs, it is important that we deal with the lack of credit flow to SMEs as a priority. This is not only a domestic issue because initiatives could also be taken at European level, such as supports from the European Investment Bank and, ultimately, the European Central Bank, for SMEs. This is a problem that needs urgent attention if we are to get the domestic economy going.