As the pandemic winds down, government support measures will soon begin to be retracted. Thinking ahead, the Central Bank has issued a warning for the possibility of exit shock as government support is removed. It is especially concerned that an abrupt removal of support could potentially lead to many bankruptcies and mortgage arrears.
The extent of the damage wreaked by the pandemic is yet to be fully seen as government aid and lender forbearance have covered most of the disturbances. As the assistance wanes, there may be a heightened demand for loans at a time of uncertainty with weak bank profitability. Lenders may be less willing to administer new forms of credit to consumers and companies at a time these customers need it the most.
According to Central Bank governor, Gabriel Makhlouf, the economic conditions have actually improved in Ireland over the past six months, however, government support was a major element of these improvements. He continues by acknowledging that there is still an uphill battle in the recovery of the economy, and many businesses will be tested by how they adapt once government aid is tapered off.
The Central Bank warned that there are three factors that can threaten the capability of Ireland’s banking system to back fresh growth in the economy. These three factors include the constriction of global financial circumstances, an uncertainty in domestic revival, and a rise in harmful loans.
As the review reports, there has been a decreased occurrence of company insolvencies during the pandemic, though, SMEs have lost a lot of money over the past year. It will be inevitable that the most afflicted will have no other option but to restructure or shut down entirely. Additionally, many borrowers who were already troubled before the pandemic received help through loan moratoriums. As forbearance comes to an end, these borrowers will once again become vulnerable.
Mr. Makhlouf has stated that bank credit choices should not make hardships worse by withholding ready funds. He continued to say that unviable firms should take measures towards “orderly liquidation” rather than continue to be dependent on extraordinary measures to stay afloat because it is in the best interest of the economy.
It is impossible to tell the full damage the pandemic has caused until government support is completely withdrawn. As Mr. Makhlouf stated, the economy had been able to improve in many ways over the last six months due to government aid. Once it is completely taken away, some businesses may struggle to survive. A careful eye must be kept on these government support policies as they may determine the stability of businesses and bank lending in the coming year.
Ihle, Jon. “Central Bank Warns of Exit Shock as Government Tapers Financial Supports.” Independent.ie, 16 June 2021, https://www.independent.ie/business/irish/central-bank-warns-of-exit-shock-as-government-tapers-financial-supports-40546327.html.