Small business credit drought slows Ireland's recovery

At Weirs of Baggot Street, a hardware store just south of the Grand Canal near Dublin city center, the next generation is keen to build this 67-year-old family business.

Having weathered Ireland's brutal housing collapse and painful recession, Maeve and Johnny Plower recently expanded the tidy shop's offerings to include housewares and children's toys. They've taken on two more workers this year and are considering opening a second location.

But the credit needed to fund that growth, say the Plowers, is hard to come by.

John W. Schoen | CNBC

Maeve and Johnny Plower, managers of a family-owned hardware store in Dublin, would like to expand their business. But they say credit is hard to come by.

"The banks have been appalling," said Maeve Plower. "We've had to give personal guarantees (for credit lines) and we've funded our expansion through income from the business."

Small business owners from Dublin to County Mayo echo the same complaint. Ireland is not going to get its economy back on track, they say, by letting bankers hoard cash while they nurse their battered books back to health.

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For their part, bankers say they're eager to lend—but first they have to finish restructuring the bad debts that are clogging up the credit pipeline.

"Credit conditions have tightened here—there's no doubt about that," said Oliver Mangan, chief economist at Allied Irish Bank, one of the few lenders left standing after the bottom fell out in 2008. "The banks, having lost so much money, are far more cautious. And so are the regulators standing over them."

More than five years after the global financial collapse laid ruin to the country's banking system, Ireland's bankers are still working through an epic pile of bad loans.

Ireland is not alone. Across much of Europe, a severe small business lending drought has cut off the capital small businesses need to fund expansion and create new jobs. In Ireland, small businesses employ some 7 in 10 workers.

But many of those businesses are already struggling to pay down existing debts—let alone borrow more money to expand.

Ireland's government is also saddled with a public debt load of roughly 120 percent of gross domestic product—up from 25 percent in 2008. That includes $90 billion for bank bailouts. Huge public and private debt are also weighing on Portugal, Spain, Greece and Italy, where debt surged to an average 106 percentage points of GDP between early 2006 and a peak in 2013, according to a report earlier this month by Standard & Poor's.

The process of paring down debt "has barely begun," according to S&P, and is likely to hold back economic recovery for years.

Ireland's heavy reliance on small business for growth and employment means its recovery will take longer, according to a new paper from the International Monetary Fund

To try to jump-start growth, Europe's central bankers recently began charging banks to hoard cash by imposing "negative" interest rates. The ECB is also pondering a scheme to help small businesses bypass banks by creating loans backed by bonds sold to private investors.

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So far, the ECB's efforts to thaw the credit freeze have been slowed by political infighting and a much weaker charter than the U.S. Federal Reserve, which moved much more quickly and forcefully to heal the wounds to its credit system.

"(The ECB) is a central bank for 18 different countries," said Mangan. "And Germany, for its part, is very wary of the fact that it might become the paymaster for the rest of Europe. If they put the money in to recapitalize the banks and it's gone down the tubes, they won't get it back again."

Mangan said the Irish banks have worked through about two-third of the bad debts on their books and expect to have restructured about 90 percent by the end of the year. In many cases, if the business is viable, lenders are writing off a portion of the loan to try to limit the wider fallout, he said.

"If a hotel or large shop owner down in the country employs 50 to 100 people, at least 50 or 60 of those people have mortgages with the bank," he said. "So all you're doing is worsening your mortgage arrears problems" by calling in the loan.

Despite the credit crunch, there are signs that the Irish economy is pulling out of the economic downturn that sent much of much of Europe's economy into reverse last year.

Growth has perked up, and the Irish Central Bank expects gross domestic product to grow by 2 percent in 2014, helped by job gains, stronger economic growth overseas and outside investment from multinational companies expanding operations here.

Read More S&P upgrades Ireland's rating, growth forecast

"You've got Google down the road and LinkedIn across the way," said Johnny Plower. "It's great to see those workers come because potentially they're more footfall for us. But they could easily be just pack up and leave."

As both the housing market and overall economy have bottomed out and unemployment peaked, the Irish government's tax receipts are rising. That likely means the worst of the painful spending cuts are over.

But the crisis has left many small business owners—and Irish voters generally—deeply resentful about the painful austerity measures imposed as a cure for a massive public and private debt hangover.

Noel Morgan, a Dublin cabbie waiting for a fare next to St. Stephens Green, said Ireland's bank bailout came with a very high price tag: the loss of Irish political independence.

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"Ireland is being run from Europe, it's not being run from over there," he said, nodding toward the Department of the Taoiseach, the central government complex a few blocks away. "And it's mainly run from Germany. I think we should have stayed with our own currency. "

Ireland is not alone in rising is antipathy toward Brussels. Earlier this month, voters across the continent elected a wide range of opposition parties that share a common belief that the benefits of the euro experiment have not been worth the harsh measure brought by the banking collapse.

"Without a swifter economic recovery and growth in employment, we think popular dissatisfaction could swell," Standard & Poor's chief sovereign rating officer Moritz Kraemer wrote in a recent report.

—By CNBC's John Schoen