Saturday, June 30, 2012

The Unbearable Tightness of Lending

Last week the Government announced a scheme to provide €90 million worth of extra lending to small businesses. Over the next ten years. Fantastic.

Yesterday the Central Bank released its statistics for May 2012, which showed that lending to businesses (non-financial corporates or NFCs) fell by €338 million in the past month. That's on top of a €326 million decline in April. Not so fantastic.

The bottom line is that a) Irish banks have their own 'issues' and are in survival mode only so they won't entertain new borrowers; and b) because of the same issues, the banks are effectively locked out off international markets and are only able to provide short term finance to any business willing and able to borrow. Hence the continuing increase in NFC loans maturing in less than one year (including overdrafts), and the continuing declines in loans with maturities great than one year. The banks can't access long-term funds at sane interest rates, and therefore nor can their customers.

Ireland's banking system is broken. It won't be fixed any time soon (and arguably we shouldn't fix it: I agree with Steve Keen - the global banking and financial sector needs to shrink to about a third the size to ensure its gambling proclivities don't inflict such spectacular damage ever again). But businesses need access to finance to invest, hire and grow so new arrangements are necessary. One option is crowd-funding - there have been a number of attempts at this in Ireland. Beyond crowd-funding there's the yet more interesting idea of creating your own money. Even the political Left are beginning to look beyond state-controlled money to find new ways of resolving the crisis and helping entrepreneurs. Some are going so far as to turn 'the 99%' into their own central bankers through initiatives such as Freicoin. That's certainly one way to shrink the financial sector.

Still, the Government has its €90 million loan fund to distribute. It will only be available to firms employing fewer than 10 people. Luckily, thanks in large part to the banks, a lot of companies currently employing more than 10 people will soon be able to qualify for the scheme. That's if they haven't gone and found their own funding solutions in the meantime.

1 comment:

  1. Your blog is always a great source for alternative thinking, Gerard. Please keep up the good work.


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