Morgan Kelly, the first economist to predict the likely scale of the Irish banking collapse, has said the "real crisis" for the Irish economy may not yet have happened.
If the Irish banks were forced to deal with bad loans to small- and medium-sized enterprises, “we could be facing something really, really terrible, quite soon”.
He said the SME sector provided most of the employment in the economy and many companies within the sector were still struggling with debts from the property boom which they could not repay. Because of their debts, these businesses were “an existential risk to the economy”, he told a recent meeting of the Economics Society at University College Dublin, where he works.
Prof Kelly said that if the European Central Bank decided to conduct an "experiment" in Ireland and implement a true, rather than a soft, stress test for its banks, this could create problems for SMEs with unmanageable debt.
However, head of economics at NUI Galway and Central Bank commission member Alan Ahearne said the EU-wide bank stress tests could result in banks being told to increase their capital, but would not lead to banks being told to call in loans.
Prof Ahearne said there was no sense of the ECB stress tests being "tough for Ireland and soft for everyone else".
He said the banks were working towards targets for resolving loans for the SME sector and were “much further along” in resolving the issue than they were with the mortgage problem.
"The banks can't close down the SME sector; it's their customer base," he told The Irish Times . Debt forgiveness for SMEs, he said, was an inevitable part of the process.
Asked about Prof Kelly's comments, Minister for Social Protection Joan Burton said she could not see ECB president Mario Draghi plunging Europe into another systemic crisis. Speaking on RTÉ's The Week in Politics programme, she said a lot of the recent employment growth in Ireland was through the SME sector.
Prof Kelly, in his address, said the turnaround in the Irish economy had come more quickly, and the scale of the downturn had been less severe, than he had thought it would be. “This is very, very surprising. It is a big puzzle.”
The answer to the puzzle, he said, was not Enda Kenny. It was Mario Draghi.