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Spain's credit squeeze thwarts small companies' export plans
June 18, 2013 / 12:37 PM / 4 years ago

Spain's credit squeeze thwarts small companies' export plans

MADRID, June 18 (Reuters) - For three generations the Posada family has exported candied chestnuts around the globe, but plans for further expansion are being hampered by the worst bank lending crunch in the business’s history.

The scarcity and high cost of credit for small businesses is holding back an economic recovery in Spain, which has swung in and out of recession for five years following the bursting of a massive property bubble in 2008.

With record unemployment stifling consumer spending, exports are seen as the key to growth and job creation.

Jose Posada, owner of Galicia-based Posada Marron Glace, which last year sold 1 million euros ($1.3 million) of delicacies, mostly abroad to countries like Japan, Russia and Angola, wants to push into China and Central America.

But banks that were once happy to lend are now throwing up obstacles despite lenders being awash with cash from last year’s 41 billion euro international bailout.

“They’re asking for more and more guarantees, they even asked for my mother’s house as collateral,” says Posada, whose grandfather began exporting chestnuts to Brazil in the 1950s, in boats carrying Galician immigrants to Latin America.

“Our company is profitable, but there’s this uncertainty now. Banks don’t trust anyone.”

Posada’s dilemma is at the heart of Spain’s economic woes.

Prime Minister Mariano Rajoy has turned to Europe for help and the European Central Bank and Luxembourg-based European Investment Bank have said they will look into ways of stimulating the flow of capital to small businesses.

Germany, sensing an opportunity to improve its image as euro zone partners tire of Berlin-driven austerity, has even stepped in with a promise to grant Spanish small business some 1 billion euros in aid, with a similar scheme planned for Portugal.

WARY OF RISK

But economists say European institutions are reluctant to expose themselves to Spanish, Italian or Portuguese small business debt, while the German offer - though symbolic as a sign of Germany’s commitment to the euro zone - is a drop in the ocean compared to tens of billions of euros in lost bank loans.

“It’s a public relations move, but the rhetoric from Germany has definitely shifted,” said Alberto Gallo, economist at RBS. “I think they’ve done it as a kind of reward to countries that have done some reforms.”

A majority of small businesses in Spain, Italy and Portugal reported rising bank lending rates in the latest ECB survey, in direct contrast to their equivalents in Germany and France. A recent report from thinktank FUNCAS showed Spanish small companies pay 77 percent more for bank loans than German peers.

And aside from the cost of lending, risk-wary Spanish banks are reluctant to hand out loans, stung by the devastating effects of a decade of reckless investment in real estate and facing a rising tide of souring debt from businesses and families and pressure to provision for these loans.

Smaller Spanish business loans - defined as loans under 1 million euros - have fallen steeply. Last year banks made 139 billion euros of such loans, half of what they lent in 2008, and the trend has continued in the year to date.

Banks say demand has fallen for loans during a brutal recession which has pushed bankruptcies up to record levels. But the fall in demand is coupled with a reluctance among banks to expose themselves to more loan defaults.

“The power in the bank now lies with the head of risk,” said one senior Spanish banker, who spoke on condition of anonymity. “Banks are being very selective in who they lend to. They are scared of risk as a result of all the rules imposed on them.”

EXPORTS AND JOBS

Exports are one of the few bright spots hinting at an end to Spain’s crisis. But companies that want to escape the shrinking domestic market and tap into foreign demand cannot get the capital to fund expansion plans.

“Banks don’t give you a penny - on the contrary,” said Enrique Ferrer, manager of ACR, a Valencia-based manufacturer of transport air conditioning units who would like to increase exports from current levels of around 5 percent of sales. “They cut credit lines and charge more for what’s left.”

Spain posted its first trade surplus since records began in March. Falling wages have increased competitiveness, and exports now represent around a third of economic output, a higher proportion than France or Italy.

But the rise has not translated into more jobs, a major source of social unrest in a country with record unemployment of 27 percent, second only to Greece in the euro zone.

Small and medium-sized companies are crucial to getting more Spaniards back to work as firms of less than 250 employees account for the vast majority of businesses.

Micro companies with less than 10 workers employ around 40 percent of the workforce in Spain and Portugal, significantly above the European average. In Italy, there are twice as many small businesses as in Germany - most employing less than 10.

HIGH-TECH STRUGGLE

Europe recognises the importance of small businesses as a driver for employment and the ECB has said it will look at ways of increasing the flow of credit to them. This could include revitalising the market for asset-backed securities, which would free up banks’ balance sheets by bundling loans into new instruments and selling them on to other investors.

But ECB President Mario Draghi has shied away from taking the lead on any initiative and said in June such measures were not for the short-term.

“I don’t think we’ll see any powerful instrument coming out of this discussion any time soon,” said Gilles Moec, economist at Deutsche Bank.

Back in Galicia, candied chestnut maker Posada resorted to a capital hike and more collaboration with other companies in his region to get around more stringent bank lending conditions.

Food products are the second biggest segment of Spanish exports. Yet less traditional industries like technology, touted by the government as key drivers for future growth, find it even harder to get bank backing.

“We’ve gone to banks and asked for loans and in most cases the answer has been negative,” said the chief executive officer of one small Spanish biotechnology company, who spoke on condition of anonymity. “They are very, very unwilling to loan money to a company that is in research and development.”

He is considering moving his cancer drug development firm, whose customers are international pharmaceutical companies, to another country because of difficulty in accessing financing. The company is looking for around 10 million euros to take its drug pipeline through clinical trials, but to no avail.

“We’re not getting the money we need to help the economy move forward and we’re not alone in that,” the CEO said.

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