By Conor McCabe.
This article is the third in a four-part series adapted from the Unite union’s policy document, Hope or Austerity: A Road Map for a Better, Fairer Ireland After the Pandemic, written by Conor McCabe.
In its response to the Covid-19 economic challenges faced by businesses – particularly micro and small to medium-sized businesses (SMES) – the Irish government has been particularly weak. This will have significant implications for employment levels when the current restrictions are lifted. On the face of it this weak response is surprising given Fine Gael’s pro-business credentials.
A deeper dive into the announced schemes, however, reveals a government that is more concerned with protecting banks and corporate landlords than those that operate in the real economy. This is worrying given the enormous challenges that lie ahead as the country emerges from the shutdown.
To date the government has announced three schemes for businesses. The Credit Guarantee Scheme supports loans to SMES up to €1 million for periods of up to 7 years. Applications can be made to AIB, Bank of Ireland and Ulster Bank. The interest rates are normal business loan rates from the respective banks, with an additional 0.5% charge because of the government guarantee.
The scheme “does not substitute for conventional lending that would otherwise have taken place”. Also, the Department of Business, Enterprise and Innovation, which funds the scheme through the guarantee, “plays no role in the application or decision-making process, which, is fully delegated to the participating lenders”. The loans that are issued are at the respective bank’s market interest rate.
Bank loans should be interest-free
In other words, the banks that administer the scheme also make the decisions as to whether to issue loans or not based on their own (for-profit) criteria for loan issuance, not those of a government department trying to keep companies afloat during a global pandemic.
There is nothing in this scheme that speaks to the pressures that thousands of businesses across the state are under as a result of Covid-19.
At the very least, loans issued under the scheme should be at least interest-free (possibly with a negative-interest rate to encourage uptake) with a six-month moratorium on repayments.
It is doubtful that very many businesses are going to take out an interest-bearing loan to cover expenses incurred during a global pandemic – at least, not enough to make a difference on a national scale. It is clear that it has been designed with the interests of banks in mind, and not the wider economy and its employment levels.
The second scheme announced by the government is the Microfinance Ireland COVID-19 Business Loan. These are loans of up to €50,000 for enterprise with fewer than 10 full-time employees, less than €2 million annual turnover and a balance sheet with net worth/capital account/equity that does not exceed €2m.
Originally the interest rate was 6.8 per cent if submitted through Local Enterprise Office or referred by your Bank, or 7.8 per cent if you apply to the Department of Business and Enterprise directly.
However, due to pressure these interest rates were reduced to 4.5 per cent and 5.5 per cent respectively. As with the Guarantee Scheme, the Microfinance Ireland loan suffers from a disconnect with reality. Micro-enterprises can only apply if they are having difficulty in accessing finance from Banks and/or other commercial lending providers.
Once again, these loans should be interest-free and, given the types of businesses and the nature of funding, there is a case to be made that they should be issued at a negative interest rate.
The government has also produced additional funding for the Future Growth Loan Scheme which was established to help businesses plan for up to 8-10 years with regards to Brexit.
The final scheme is the Sustaining Enterprise Fund which has a total budget of €180m. It allows for advances of up to €800,000 for businesses for specific projects. The advances carry a three-year repayment grace, but are subject to a 4 percent administration fee. It is hard to see how this scheme will speak at a structural level to the actually-existing recession that has been caused by Covid-19.
Debt write-down needed to avoid depression
The problems facing most businesses as a result of Covid-19 are not that dissimilar to those of the workforce. Businesses also face a range of involuntary costs that have legal consequences if they are not met. These include commercial rent, loans, insurance, utility bills, and commercial rates.
Ireland is heading into a recession that will turn into a depression unless measures are taken now to avert it. If the government wants businesses to bounce back afterwards, it needs to address their involuntary outgoings, preferably through a structured debt write-down.
This is critical to ensure that businesses can indeed open up once the crisis measures are lifted, and that state finances are not put under more pressure than is absolutely necessary.
To make an analogy, significant sections of the economy have been put into a state-induced coma so that our medical services can fight this infection. States across the EU, including our own, are purposely shutting down economic activity in order to save lives.
In Ireland it means that there are thousands of businesses that cannot generate income, but under current arrangements they are being treated – for the purposes of rent, debt and utilities – as if they can, and as if nothing has happened.
The government response so far has been to defer payments, not to get rid of them. This merely saddles businesses with debt for the months during which they were told to shut down and not do anything.
When the economy wakes up, we cannot pretend it generated the same income as before while it was under sedation. And when hundreds, possibly thousands, of businesses go bankrupt or are unable to reopen due to lack of funds or weak credit rating, we will have a depression.
We also have to remember that when the crisis measures end, we will still have to tackle housing, health, and climate change. It would be counterproductive in the extreme to use up critical public funds today — funds we will need to address our significant social infrastructure failings and climate action responsibilities — so that landlords and banks can have a guaranteed 100 per cent income during a global pandemic.
Real economy must come before debt and rent
We must avoid businesses shutting down permanently because of debt incurred. A structured debt write-down for workers and businesses is essential to help the economy reboot itself. It is the role of the ECB — not hairdressers, restaurants, and gyms — to ensure that otherwise healthy banks and companies remain solvent. The ECB, for its part, has made it clear it is willing to honour its responsibilities.
Debt is a creature of accountancy and the law. It has no physical presence but has a coercive power due to state enforcement of its mechanisms. Rent, for its part, is essentially parasitic. Both are tolerated in normal economic times, but in times of crisis it is folly for the state to privilege their profit over the survival of the real economy. We have been here before. We cannot do the same again.
We need to introduce a rent and debt freeze and subsequent write-down for the coronavirus months, coordinated by government and the state, and tied into the liquidity response that the ECB has already undertaken.
These measures are needed to ensure that people and businesses get through this crisis somewhat in one piece, and that the state has the resources going forward to tackle the housing and health issues that dominated the recent election, as well as to ensure we can implement a green new deal that is vital to our future.
And it is to that future that we now look, and to a vision of a more progressive and equal Ireland.
Dr Conor McCabe is a research associate with UCD Equality Studies Centre, and the author of Money (Cork University Press, 2018). Follow him on Twitter @CMacCaba.
Read the full report, Hope or Austerity: A Road Map for a Better Fairer Ireland After the Pandemic, published by Unite the Union here. Follow Unite on Twitter @UniteunionROI.