Governments all around Europe have prioritised three areas of extra spending in their response to the COVID-19 pandemic.
Health budgets are unconstrained, those out of work have been provided with household income support and business firms have been offered wage subsidies and holidays from tax payments.
The SME sector is vulnerable for a variety of reasons. Since the emergency will end, perhaps with the availability of a vaccine sometime next year, and since partial release from lockdown will become feasible sooner, as many firms as possible need to be positioned to resume normal working. But small firms, retailers, pubs or professional service suppliers, are often short of assets which can be pledged as collateral for loans and are not an attractive credit risk for banks. The banks themselves are unlikely to exhibit a high appetite for credit risk given the disaster visited on the country a decade ago. In any event it is not desirable that small firms, which employ as much as half the total workforce, should emerge from the downturn burdened with heavy debts to the taxman, the banks, suppliers, landlords or anyone else.
THERE ARE HUGE COSTS IN RE-ASSEMBLING OTHERWISE VIABLE SMALL FIRMS
Proprietors might go bust or simply shrug and walk away. There are huge costs in re-assembling small firms, otherwise viable, which break up on insolvency. It is not as if someone else can buy the factory from the receiver – there is no factory. Employees may have irreplaceable skills which are employer-specific, hence the wage subsidy designed to prevent redundancy. It is not easy to inject actual equity capital into small firms, although some of the venture capital companies are willing to invest modest amounts into start-ups. But capital is dwindling rapidly for small firms which are closed, as it has been for those still open but experiencing much reduced turnover.
Business lobby groups have been campaigning for straight grants instead of loans, which would avoid the build-up of unsustainable debt which will follow from bank forbearance or tax deferrals. But taxpayers will fear an outbreak of corporate welfare at huge cost to them, and it would surely be better to explore whether the state can take an ownership stake in return for straight cash. This is what was done with the banks, do not forget, and there is some potential upside for the taxpayers.
There have been some bad ideas put forward, including that insurance companies should pay out business interruption claims even when the policies did not cover pandemic risk. There were no premiums collected to cover such risks and hence there are no corresponding claims reserves. If insurers pay out beyond what they have contracted and charged premiums for, they go bust, in breach of their regulatory obligation to stay solvent. The public then pays, through the Insurance Compensation Fund – people were paying for the collapse of PMPA in the 1980s twenty years later and will be paying for Quinn Insurance twenty years hence.
RELIEVING FIRMS OF OUTGOINGS THEY ARE UNABLE TO PAY WOULD HELP
A better idea is to relieve business firms of outgoings which they are unable to pay. The insurers have indicated that motorists will be getting some money back since road traffic, hence accidents and claims, will fall. Business firms may feel that the same should apply to public and employer liability policies while they are closed. But the insurers are nervous about an avalanche of claims against firms that are open – Walmart in the USA is facing class-action negligence claims from customers who have become infected. The insurers will face fewer claims from some policyholders but bigger claims from others – they pool risk, they do not eliminate it, and Lloyds of London have estimated that the worldwide insurance industry will be out many billions when the dust settles.
The other outgoings, aside from wages, that struggling SMEs can mitigate, are rent and rates. Rent for many, especially in urban areas, is by far the bigger of the two. Rates for a shop unit can be around €10,000 where the rent might be €60,000 in the more central areas. Since rent is highest for the busiest locations, there ought in fairness be a recognition from landlords that the world has changed, and that commercial reality means lower rents. But these are private contracts in which the state cannot interfere, and some landlords will be more reasonable than others.
The government has decided that rates will now be waived rather than deferred, and local authorities reimbursed from central government. This makes sense: even though commercial rates are a tax, there is an implicit understanding that they pay for services provided, and no services are provided when you have been closed by the government. Two issues remain to be addressed – how long will the rates waiver remain in force, and will firms which have stayed open but on reduced hours be entitled to some form of partial discount?.