Bloomberg News

Spain Cash-Starved Firms Seeking Growth Run Out of Time: Economy

September 09, 2013

Closed-Down Store in Madrid

Pedestrians pass empty cafe seating outside a closed-down store in Madrid. Photographer: Angel Navarrete/Bloomberg

Patricia Carral Cunningham says the economic recovery may come too late for her business even after she kept up sales to weather Spain’s six-year slump.

“I’ve put up all my personal assets as guarantees and now there’s no way I can get another credit line,” according to Carral, 50, who says her Madrid-based construction company Soldray S.L.’s 20 years of experience helped it survive the end of a real-estate boom in 2007.

While Spanish manufacturing and services expanded in August for the first time in more than two years, falling bank lending threatens small companies in a country where only 2 percent of businesses employ more than 20 people. That is overshadowing the recovery Prime Minister Mariano Rajoy forecasts after a two-year recession.

“Spanish companies are most often small family-run operations,” said Nathalie Gianese, director of studies at Informa D&B, the research arm of Spanish risk insurer CESCE S.A. “Between the slump in revenue and their limited means, these small firms are disadvantaged at a time when banks are seeking to reduce risk as much as possible.”

The number of companies seeking protection from creditors increased by 26 percent through August compared with the same period a year earlier, according to a report published last week by Informa D&B. In the second quarter, 73 percent of businesses in such a predicament employed fewer than 20 people, Spain’s national statistics institute said last month.

Higher Rates

Lending by banks to non-financial corporations fell 1.3 percent in July from June in Spain, more than in Portugal, Ireland and Greece, while it rose in Italy, according to data compiled by the European Central Bank. Since January, it has declined almost 10 percent in Spain.

“Loans used to come at 2 or 3 percent and now they cost more than three times as much, it is crazy,” said Modesto Duran Lopez, 62, whose real-estate business Inmobiliaria Duran is based in Plasencia, western Spain. In order to balance its books, his company has cut staff and wages and ended a credit line with an 11 percent rate.

“This is a disaster,” he said. “Here we are begging banks when we are paying twice as much to borrow than the government.”

Bank of Spain Chief Economist Jose Luis Malo de Molina said in July that deleveraging in the economy makes funding restrictions far worse for smaller enterprises, which are paying interest rates at least 2 or 3 percentage points higher than similar businesses elsewhere.

Economic Slump

Spain’s economy has contracted for two years and declined 0.1 percent in the three months through June, the least since 2011. Rajoy says he expects the country to exit its recession by the end of the year and predicts at least 0.5 percent growth next year.

That compares with the ECB’s forecast for economic expansion of 1 percent in the whole euro area in 2014. While the ECB acknowledges that the cheap funds it provides to banks aren’t filtering down to the private sector in several countries, President Mario Draghi says officials can’t do anything when banks perceive small and medium-sized enterprises as too risky.

“We tried everything,” he said during a European Parliament hearing in July. “The ECB doesn’t have a direct instrument to force banks to lend to SMEs, and neither would it be right.”

Reluctant Lenders

Asked about the option of developing so-called mezzanine credit for such businesses, which would give lenders the rights to convert debt into equity, Draghi last week said that the ECB is working on measures with the European Commission and the European Investment Bank. He didn’t specify a time frame.

The reluctance of Spanish banks to lend is forcing businesses to resort to other methods of finding cash. Financial services company Gedesco Services Spain SAU last week said small businesses account for 23 percent of the 1.3 million euros ($1.7 million) it has loaned through car lease-backs since January 2011. In the first half, the amount was 51 percent higher than a year earlier.

In August, state-owned development bank ICO lent 746 million euros to smaller businesses, the most in seven years for that month.

Spanish Deficit

The ECB has told governments that reducing credit-market fragmentation ultimately depends on boosting growth, shoring up banks and balancing budgets. Spain’s deficit was the largest in the European Union last year and bad loans reached a record 11.6 percent of bank lending in June amid a 26 percent jobless rate.

Spain’s recovery may be helped by an improving outlook for the euro region, which exited its longest recession on record in the second quarter. Its second-largest economy, France, is likely to expand 0.2 percent in the third quarter, the Bank of France said today, raising its previous estimate of 0.1 percent.

The French central bank also said that business sentiment in August rose to 97 from 95 in July, matching the median estimate from six economists surveyed by Bloomberg.

Spain’s credit rating remains under pressure and it’s too early to tell whether the economic crisis has bottomed out, rating company DBRS Head of Sovereign Ratings Fergus McCormick said in an interview with Expansion published today.

The yield on Spain’s 10-year bond benchmark bond were unchanged at 4.53 percent at 2 p.m. in Madrid, while the spread with similar German maturities narrowed to 256 basis points. That compares with a euro-era high of 650 basis points in July 2012, after Spain secured European aid to bail out its banks.

Balance-Sheet Cleanup

Spanish “banks are still cleaning up their balance sheets and they’ve got quite a way to go before starting to open the tap again,” said Angel Laborda, chief economist at Funcas, the research arm of the Spanish saving banks foundation. “The lack of funding at affordable prices for small businesses is one of the main obstacles for a potential recovery.”

Carral said that while she has “done the impossible” to preserve revenue at Soldray, the problem she now faces is a simple lack of cash. She says she’s not alone.

“This is a serious issue for all small and medium enterprises,” she said.

To contact the reporter on this story: Angeline Benoit in Madrid at abenoit4@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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