Property debt overhang still hampering many Irish SMEs

Central Bank research suggests small and medium-sized firms are shouldering €26bn in debt

Small and medium-sized firms are shouldering just over €26 billion in debt, according to research by the Central Bank.

The bank, however, was unable to put a precise figure on how much of this debt related to property loans taken out during the boom.

Nonetheless, it said the property debt overhang left in the wake of the financial crash was “substantial” and that many SMEs are being restrained in their core business activities by the burden of outstanding property loans.

The research, derived from the Central Bank's own loan-level data which excludes Ulster Bank loans and non-bank debt, also indicated that firms carrying property debt were significantly more likely to default.


The report entitled - Property Debt Overhang: the case of Irish SMEs - was presented at a conference on SME finance in Dublin today, hosted jointly by the Economic and Social Research Institute and the Department of Finance.

It indicated that more than 10 per cent of firms in the Irish SME sector were carrying some form of property debt.

However, when measuring in terms of a share of the balance, 32 per cent of SMEs have property debt outstanding against them, suggesting larger firms are shouldering relatively bigger property debts.

The businesses worst affected were hotels and restaurants as well as those in the retail, wholesale and construction sectors.

One of the report’s authors Tara McIndoe-Calder said: “The figures tell us if you have property debt you are more likely to be in default.”

“Equally, the more property debt you have the more likely you are to be in default and the bigger share that property debt makes up of your overall debt the more likely you are to be in default.”

“So the numbers we have show there is a residual property debt overhang and it appears to be affecting businesses conduct their core activity,” she said.

Economist Morgan Kelly has warned that upcoming stress-testing of Irish banks will further tighten lending conditions here, potentially wiping out many SMEs who are burdened with debts from the property boom era.

A separate paper presented to the conference on discouraged borrowers - firms who do not apply for a bank loan because they feel they will be rejected - was presented by Annalisa Ferrando of the European Central Bank.

Her research found that out of a sample of 8,000 firms across the euro zone about 15 per cent were discouraged borrowers.

From an examination of their financial accounts, the research showed discouraged borrowers were on average riskier loan candidates than firms which successfully borrowed.

However, Ms Ferrando said there was a significant, albeit unspecified, percentage of firms in this category that could have applied to banks and received funding but failed to do so.

“So essentially there are good and bad borrowers within the discouraged category,” she said.

Eoin Burke-Kennedy

Eoin Burke-Kennedy

Eoin Burke-Kennedy is Economics Correspondent of The Irish Times