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Proposals for credit guarantee scheme for businesses impacted by Covid-19

The Government has given the go-ahead for the publication of proposed legislation that will, if enacted, establish the new credit guarantee scheme to help businesses impacted by the Covid-19 crisis.

The scheme, first announced two-and-a-half months ago, will see up to €2bn in low cost loans made available to struggling firms, with 80% of the amount underwritten by the State.

The aim of these loans will be to provide much needed liquidity to companies with fewer than 500 employees who have seen their actual or projected turnover or profit fall at least 15% due to the coronavirus crisis.

The scheme will be operated through the Strategic Banking Corporation of Ireland, with loans of between €10,000 and €1m being made available from AIB, Bank of Ireland and Ulster Bank through a range of products, including overdrafts, term loans and working capital. 

It is expected the legislation underpinning the plans will pass through the Oireachtas next week and will be enacted soon after.

Once in place the programme will be the largest credit guarantee scheme in the history of the State, with the State facing a maximum potential liability of €1.6bn and lenders carrying the remainder of the risk.

Tánaiste and Minister for Enterprise Trade & Employment Leo Varadkar said changes being made to the scheme would bring the offering into line with similar schemes across Europe.

However, business lobby groups are continuing to seek grants rather than loans for businesses worst hit by the pandemic in the July stimulus plan, arguing most companies cannot afford to take on more debt.

Speaking on RTÉ’s Morning Ireland, Mr Varadkar said the Government believe it would be a “mistake” to assume 100% liabilty for loans provided under the new credit guarantee scheme because he said if they did “the banks would take no risk whatsoever”.

Mr Varadkar said he and his Government colleagues considered it but decided to assume 80% liability because “if somebody has no skin in the game, takes no risk whatsoever, the tax payer is 100% liable for any business that doesn’t pay back its loans.

“Then there’s no disincentive to avoid reckless lending or lending to companies that sadly may not be able to pay the money back”.

He said “it remains to be seen” whether or not the UK made the right decision in assuming 100% liability.

He said “you could find in a few years’ time, the British taxpayer being on the hit for that and that would mean higher taxes for workers, for ordinary people, for businesses too”.

He said there are credit guarantee schemes in place already and “hundreds of millions have already been drawn down from those schemes, so we do know they work.”

He said about €100m was drawn down from the one that was set up back in 2012 and about €150m from the Covid one set up more recently, but he said “we want lending of about €2bn to be out there in the economy and we believe that this approach will provide much more attractive loans to businesses.”

He said it is not just new loans but also in some businesses refinancing debt that they are rolling over, which he said they will be able to do at lower rates.

He said it is open to any business with up to 500 employees and any business that has lost 15% of its profit or turnover.

He said he expects it to start in September or October.

Regarding the Pandemic Unemployment Payment, Mr Varadkar said it will be extended but the plan is to regularise the situation over time and bring it back in line with regular job seekers’ allowance.

He said there are people, with dependents, who would be better off on the regular social welfare payments as they are getting no extra money for these dependents on the PUP.

He said the most important thing is to get people back to work and currently 42% of those on the PUP are already back to work and he would like to get that much higher, ideally 100%.

Responding to media reports of a phased reduction in the PUP until it is at the same level of the regular unemployment payment at Christmas, the Tánaiste said no decision had been made on this.

He said a cut in VAT for the hospitality sector in the stimulus packages is “one of the things under examination”, but there are different options with VAT such as raising the threshold, which he would be helpful for small businesses, you can give rebates or reduce the rate.

He said “all of those measures are in the mix”, but a decision will be made next Monday.

He said it would be a mix of extending the wage subsidy scheme, an enhanced restart grant, which he said hotels and restaurants need to get up and running again, and they are also looking at business taxes, such as commercial rates and VAT.

He said it will be a package that will be possible to deploy and implement quickly.

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