New research from the Central Bank on debt levels among SMEs shows that companies with property related debts have higher loan default rates than firms with debts only related to their core businesses.
The Central Bank looked at 185,000 small and medium sized businesses, 296,000 loans and €32 billion in outstanding balances for its research.
The technical paper said that SME's expansion into the property market has a "detrimental" impact beyond that of the firm's total debt level.
It added that the SME sector has seen a bigger increase in loan defaults than the mortgage market.
Saying that Ireland represents "a uniquely suitable laboratory for the study of the interaction between the credit market, the property market and the real economy", the Central Bank said that high levels of indebtedness can impede firms' ability to invest for productive means.
Its research found that the default rate is highest in the construction, and the hotels and restaurants sector and the default rates increase with the intensity of property exposure.
The Central Bank stated that the policy implications of its analysis is "stark". "Pre-crisis property-related borrowings have an economically and statistically large impact on the likelihood that firms will default on their 'core' enterprise debts," it stated.
It also said that the unlinking of non-core property related debt from the debts of otherwise potentially viable SMEs represents an area of "crucial policy importance".
