SMEs in turmoil as Bank of Scotland flees Ireland


Small businesses in Ireland fear a decision by a major UK bank to close its Irish operations will plunge them into an acute credit crisis by the end of the year.

The decision by Bank of Scotland could force the closure of hundreds of companies as the bank will no longer offer working capital to business customers. The move threatens to devastate the hotel sector where Bank of Scotland is responsible for an estimated 20% of all loans.

Around 5% of its total loan book is made up of small businesses, many of which now face closure given the reluctance of other banks to lend to SMEs.

"The fact remains that contrary to the lies and propaganda of the banks, SMEs are still finding it almost impossible to access credit," said Mark Fielding, chief executive of ISME, a business lobby group.

Hotels facing closure

At least 150 hotels are thought to be in immediate danger if they cannot secure credit lines from another bank. Fielding wants the government to put pressure on Irish banks to step up their lending to SMEs in return for ongoing state support.

Ireland's hotel sector has been dogged by oversupply resulting from tax breaks to encourage the construction of hotels. The domestic tourism market has been hit hard by falling consumer confidence, while attracting international tourists has also been challenging.

Paul Gallagher of an Irish hotel industry group said the withdrawal of working capital facilities in December will be "catastrophic", adding that other banks are unlikely to lend to struggling hotels as Bank of Scotland will continue to have a claim on their assets until outstanding loans are repaid.

Hundreds of jobs in jeopardy

Employees and unions expressed dismay at the announced closure, as the bank had offered guarantees that jobs would be safe for at least two years. It has now emerged that 36 jobs will be lost immediately, with hundreds more facing an uncertain future.

Bank of Scotland closed retail arm Halifax earlier this year, having embarked on a major expansion across Ireland at the peak of the property bubble. Around 750 jobs were lost as a result.

Opposition politicians said the move was an indictment of government policy, but the Irish Chambers of Commerce said it merely follows a trend by international banks to dispose of foreign assets in the wake of the financial crisis.

"It is in this context that the Bank of Scotland decision should be viewed, rather than seeing this as a commentary on the future of the Irish economy," a spokesperson said.

Earlier this year the bank's UK operation wrote to tens of thousands of SMEs informing them that it will no longer pay interest on their current account balances, despite its owner – Lloyds Banking Group – turning in profits of £1.6 billion (€1.95 bn) for the first six months of the year.

Ireland's financial crisis has been deeper than that faced by most Western countries due to the collapse of its property market, which began in 2007. The international downturn that followed has exacerbated the problem, hurting exports and increasing unemployment.

House prices and land values continue to plummet, decimating the balance sheets of Ireland's banks, most of which are heavily exposed to the property market. The Irish government has been forced to bail out the banks by nationalising some financial institutions, offering billions in capital to others and introducing a bank guarantee scheme.

The controversial guarantee scheme expires in September, but banks are already lobbying for its extension. The Irish government's commitment of billions of euro to Anglo Irish Bank spooked bond markets this month, making it more expensive for Ireland to borrow money on international markets. It was heavily rumoured that the European Central Bank had to step in to buy Irish bonds in recent weeks, but the Bank has not commented on speculation.

Ireland has also introduced a bad bank to buy up "non-performing loans" from financial institutions in an effort to clean up the banks' balance sheets. However, this has added to the burden facing Irish taxpayers.

Profesor Patrick Honohan, the recently-appointed governor of the Irish Central Bank and a respected former academic, said the cost of borrowing is higher than he would like to see but that the burden of bailing out the banks is "manageable".

  • Dec. 2010: Bank of Scotland (Ireland) to close its Irish operations, transferring all outstanding loans to its UK base and cutting off working capital to business customers in Ireland.

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