COVID19: Delays in government-backed business loans halts economy

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A government financial package worth around €1.5 bln for coronavirus-hit businesses has been stuck in parliament for two months now, due to disagreements over how the state guarantee for loans scheme would work.

Α bill providing state guarantees to cover loans with low interest to be given to coronavirus struck businesses by banks are up in the air as MPs cannot find consensus on the specifics of the scheme.

The bill was tabled just days after lockdown measures where imposed in mid-March.

Angelos Votsis, chairman of the House Finance Committee and DIKO MP, said parties are in disagreement with the government over the involvement of the state’s Auditor General Odysseas Michaelides, who will be given a monitoring role over the amount of the loans that are to be guaranteed.

As he said, there is disagreement regarding the total amount of loans to be guaranteed by the state.

Initially, Finance Minister Constantinos Petrides tabled a scheme which would guarantee loans to cash-strap businesses hit by the coronavirus crisis, of €2 bln.

However, MPs did not agree with this, expressing concerns over who will monitor procedures while banks may prefer to direct the cash flow towards larger businesses, leaving smaller companies on the outside.

The bill was revised by the Finance Ministry, lowering the sum to be guaranteed and regulating the percentage of money to go to companies according to their size.

Self-employed and small businesses will be eligible to borrow an amount of €300 mln.

Small, medium and large enterprises are eligible to apply for the €1.2 bln allocated for borrowing (€1 bln for SMEs and €200 mln for larger enterprises).

The state will guarantee 85% of loans to be given to very small companies and self-employed while guaranteeing the 70% of the amount borrowed for SMEs and large enterprises.

The remaining 15% or 30% according to each case, will be guaranteed by the bank.

Votsis told the Financial Mirror, that the majority of the parties also want to see one-off state grants to self-employed people and small businesses, included in the government’s proposals to increase.

As things stand today around €100 mln are earmarked for such grants.

The DIKO MP is optimistic that the bill will pass with amendments, noting that there is a majority consensus to reduce the level amount of guaranteed loans while a bigger lump sum to be given as grants to small companies seems to be gaining support.

However, even if the House does pass the bill with amendments, there is a serious possibility it will be vetoed by President Nicos Anastasiades, who will then send it to the Constitutional Court to be reviewed.

This would mean several more weeks of delay, as the scheme will then go back to the parliament for further amendments.

Finance Minister Constantinos Petrides clarified to the parties that the ministry is not going to make any other changes to the bill, calling on MPs to assume their responsibilities.

Petrides said, “we have included as many political party proposals as we could.”

The Finance Minister argued that issues were raised which are not in line with the government’s philosophy nor the European Commission’s framework.

“The guarantees scheme constitutes an incentive for banks to allocate part of their liquidity to businesses under favourable conditions, as defined by the European framework. It reduces the risk for banks which enables them to make the most of their liquidity reserves.”

Scarce capital

Sounding the alarm over the situation created Ioannis Tirkides, Economic Research Manager at Bank of Cyprus told the Financial Mirror that the guarantee scheme is of vital importance as many businesses do not have enough liquidity to stay afloat, while there are no other ways for them to raise capital in the current financial climate.

“We need to understand that what is at stake, is not just a financial upheaval. What is really at stake is the physical destruction of the economy. We usually think in financial terms because we take the physical economy for granted”.

He argued that income support, monetary accommodation and fiscal expansion including loan guarantees to the banking sector, are all necessary in good measure.

He argued that finance is about the efficient allocation of scarce capital resources.

“The physical economy is about everything else: production, consumption, movement and transport,” said Tirkides.

He explained the lack of operating capital destroys otherwise viable companies, other productive units and the physical economy creating a depression.

“This is when industrial plants are misaligned and when trading systems are ruptured.”

Tirkides believes the current crisis is larger and more unpredictable in terms of its fallout and lasting effects, than the financial crisis of 2008-09.

He said that the latter involved primarily liquidity and solvency-related measures.

“In contrast, the current crisis relates to the amount of operating capital in the economy.”

Tirkides urged stakeholders to push on with approving the state guarantee bill to inject liquidity into the market and “help businesses, which are the core of the economy to stand on their own feet once more”.