Covid-19: new credit guarantee scheme for SMEs needed, says Davy

The Government should introduce a new credit guarantee scheme to support businesses during the Covid-19 crisis, according to Davy Stockbrokers.

While welcoming measures introduced by the State to bolster businesses during the crisis, it said that there have been no attempts to seek to match guarantees worth up to 15 per cent of GDP as seen in France, Germany and the UK.

In a new analysis, the broker described the introduction of such a scheme as a “prerequisite for confidence to return towards the sector”.

“Guarantees in an Irish context are approached with a large degree of scepticism - not necessarily an unreasonable position to take given our past history with such tools. However, the nature and impact of the pandemic mean that real consideration should be given to the introduction of a credit guarantee scheme,” it said.

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The broker stressed that while an existing guarantee scheme is available through the Strategic Banking Corporation of Ireland, it is both restrictive and time consuming.

It said that to deal with liabilities, a credit guarantee scheme should be considered which could provide medium-term loans to small and medium-sized businesses at low cost allowing the discharge of liabilities and enabling the State to collect the outstanding tax and rates due.

Davy analysts said the Covid-19 crisis presents significant challenges, but says the Irish economy is better placed to cope than in the last downturn relative to the rest of Europe.

In its analysis, it added that given its open, export-oriented structure, the economy should be “relatively insulated” from the initial hit from business restrictions.

The broker stressed that while in the past there has been a reliance on foreign direct investment (FDI) to aid recovery, after a long period of deleveraging, the economy is in a better position to bounce back.

“Ireland’s export-oriented economy will continue to provide flexibility as in the last recession, but fiscal and macroprudential policy will support the recovery this time around,” it said.

“Also, after a decade of deleveraging, many indigenous sectors were still at an early stage in the housing, credit and investment cycle - pointing to a latent recovery going forward,” Davy analysts added.

The broker said fiscal and macroprudential policy will also bolster recovery, with measures already rolled out helping to support incomes and limiting the damage from business shutdowns.

“With appropriate support to vulnerable households and companies, Ireland’s economy is probably better placed to bounce back than most European countries. However, equities exposed to the Irish economy are discounting a very negative outcome,” it said.

Looking at housing, Davy analysts said the sector is unlikely to experience the sharp decline witnessed during the recession as the market had changed significantly since then.

“Due to the changed capital structure and supply pipeline, we expect each sector of the Irish real estate market to perform far better relative to Europe in this downcycle,” it said.

Nonetheless, the broker said housing prices may become more volatile with transactions slowing to a trickle and more cash buyers in the market.

It added however that house price valuation metrics don’t currently point to over-valuation.

“We calculate that the average house price-to-income ratio in Ireland was 6.8x in 2019, a little below the 6.9x recorded in the UK but substantially below the 11x peak in 2007. Similarly, gross rental yields, circa 5-6 per cent”, are well above levels close to 3 per cent during the Celtic Tiger era,” it said.