Each day, thousands of small companies in Spain are hanging out signs that read: “Gone out of Business.” The administration of Prime Minister José Luis Rodríguez Zapatero has accused banks of not lending to these companies despite the assistance the banks have been receiving from the government.
The Spanish government isn’t the only entity expressing frustration with the banks, as Miguel Sebastián, the country’s minister of industry, said a few weeks ago: Various business groups also accuse them of being responsible for the credit tightening that is affecting the Spanish economy. Both large and small companies say that when they go to a bank in search of loans, they find the doors are closed.
For some of these firms, government intervention is the only alternative left, whether it means completely guaranteeing their loans or spelling out measures that enable loans to reach the real economy. But despite any optimism on that front, company owners complain that the government may be doing as much damage as the banks are in the current environment, since local government agencies and municipalities across the country are delinquent on bills totaling nearly 32 billion euros. “Working for the government is an incurable cancer,” says Hilario Alfaro, president of COCEM, a confederation of specialized companies. The situation is serious, since some local governments are more than a year behind in making their payments, despite the Law of Arrears, which establishes a maximum payment period of 60 days.
“In sectors such as construction and infrastructure, we are detecting payment delays of up to 210 days,” notes Antonio Barderas, president of AMEF, an association of family enterprises in Madrid. In addition, when it is time to add credit lines, banks don’t view government contracts the same way they did a year ago. Lorenzo Amor, president of ATA, the national federation of self-employed workers, says that while public payments were between 210 and 365 days behind schedule last year, it was not a problem because “banks were advancing the cash then.” Now, the rules of the game have changed and “the government, which is the first one to set an example,” is not paying interest on its huge debt. This includes payments for work and advance payments of Value Added Tax (VAT) made when bills are issued. “The self-employed have made us into a financial institution that loans to the tax agency,” says Amor.
The failure of local governments to pay their bills affects several sectors. No sector is hurt more than construction firms, which Spanish municipalities currently owe more than 8 billion euros. When it comes to providing municipal services such as garbage collection, payments are in arrears of about a year and the outstanding bills could reach 2 billion euros, according to the companies, which employ more than 80,000 workers across the country. If the situation does not improve, some companies might even wind up deciding not to provide services as the only alternative to bankruptcy.
Patricio Rodríguez-Carmona, president of CEAJE, the Spanish association of young entrepreneurs, believes that the government debt is “shameful, since it is a burden for many companies, destroying thousands of jobs,” not to mention “the lack of confidence that exists in the banking system.” The situation is made worse by the hardening of credit standards. “The differentials that they are applying are the Euribor rates plus two or three points,” notes Barderas. “The situation is not all that catastrophic for some solvent companies, which control their debt and have structural funding. Those continue to have credit.” However, eight out of every 10 independent firms have financing problems, so every day a thousand jobs disappear in Spain. This “trickle” of lost jobs seems to be invisible, but it provided 60% of the job losses that took place last month, notes Amor.
Financial organizations that provide loans feel that the government is discriminating against them. Speaking through its employers’ organization — known as ASNEF (the national association for financing institutions) — the industry is demanding that the executive branch permit it to have greater access to liquidity, just as the government has done with banking institutions. “The impossibility of achieving greater liquidity limits our potential for giving loans to families and small companies,” explains Honorio Ruiz, ASNEF’s secretary-general. The government undervalues the importance of financing institutions, which provide about 40% of the credit given to families, he notes.
ASNEF firms can benefit from assistance provided by ICO (the official credit institute within the Ministry of the Economy) including, for example, a mortgage moratorium for customers who are unemployed. An exception is the Plan Vive (an acronym in Spanish for “innovative vehicle, ecological vehicle”), which provides aid for financing new cars. ASNEF’s partners include Banco Cetelem, Cofidis, Santander Consumer Finance, Carrefour Servicios Financieros, and the financial arm of the department store El Corte Inglés, in addition to Fiat, BMW, Peugeot and Volkswagen. In Spain, 80% of all new cars are acquired through loans, half of which are provided by financial credit institutions. This sector represents 40% of all loans given to families.
How have things gotten to this point? According to Robert Tornabell, finance professor and former dean of ESADE business school, “ever since interest rates dropped to 2% plus a reasonable differential (0.50%) because of the arrival of the euro and the EMU (the Economic and Monetary Union), every company has resorted to using debt.” The slogan was, “Debt provides relief from taxes and it is cheaper than using your own capital.” This situation, which began in 2000, was prolonged until well into 2007, when the global crisis finally erupted. “Companies that support the construction industry, comprising thousands of small firms, had long lists of demands that seemed inexhaustible. The local governments were paying [more than six months late], and so were Spain’s [regional governments]. That didn’t matter. The banks discounted the promissory notes, and the cost was so low that they were working with debt without expanding their capital, which would have been the reasonable thing to do,” says Tornabell. “The time came when banks were no longer happy with earnings results of 2.5 times EBITDA; instead, they asked for 4 times or 5.5 times. Then, they cut their financing for the manufacturing sector. In addition, the canceled loan promises, and demanded margins and differentials that ranged from 0.75% to 2.5%.”
In search of credit
Olga Bueso has had more than 20 years of experience running her own company. Known as Boch, it is a multi-brand firm that specializes in footwear, handbags and leather garments. It has fifteen different locations in Spain. Nevertheless, after two decades of maintaining impeccable accounts, she now says that “in six months, I will have to shut down if I don’t get financing or a mortgage for my house.” Bueso maintains two lines of credit that expire in May and June, and which have to be maintained beyond then if her business is to keep functioning. “When I saw that things were getting more problematic, I wanted to be prudent,” she says. Bueso is also a member of the board of ACOTEX (a textile industry group), whose member companies have been experiencing first-hand how financial institutions have been closing their doors to them.
At first, Bueso’s company had some luck with a loan provided by the European Investment Bank at the end of 2008, in an agreement between the Community of Madrid (a local governmental organization) and three financial institutions — Caja Madrid, BBVA and La Caixa. “Everything looked good, but now where is the money? No one knows,” says Bueso. Her next step was to resort to a plan for small companies developed by the Chamber of Commerce and Caja Madrid. Just when everything appeared to be going well, the financial institutions responded by saying that the loan “was not viable.” Avalmadrid, the Madrid government’s public underwriting group, became her next source of hope but, ultimately, “that deal didn’t go through, either,” Bueso said. In that particular case, what went wrong was a mistake in the application process, which seems to have changed recently. “They continue to put me off [with delays],” she notes.
Her latest attempt has been for credit lines from ICO, which supports a percentage of loans requested. Santander Bank told her, “[We have] an internal requirement that we can only provide loans to those people who [already] have money in our bank.” At Banesto, they only provide loans for new investments, Bueso says, while she needed money to finance her working capital. The list of problems with financial institutions has continued, she adds.
Amor says it is “discouraging” that only 1,000 of the more than two million self-employed workers in Spain have been able to access this sort of financing. Most people, when they have tried to apply for this support, have found that the response is “no” because their branch offices “don’t have the necessary business software” they need to manage the application process.
This situation also applies to other sectors of the Spanish economy, such as construction materials. “[Financing institutions] tell some of our members that they have been ordered not to provide ICO credits. In any case, they only give loans to preferred customers and under tough conditions,” notes Luis Rodulfo, director-general of CEPCO, the Spanish confederation of associations of construction material manufacturers. “The only thing we ask of financial institutions is that they be more clear, more responsive and more efficient when it comes to authorizing ICO credits. Day by day, construction materials companies are dying. The problem is that they have done their job well, but they are overcome by their own customers’ inability to pay their bills. Now, these companies are planning not to provide materials because there is no certainty they will ever get paid.” Rodulfo offers a solution: “They should strengthen CERSA, the Spanish refinancing company (a state-owned trading company), so they can focus on guaranteeing that companies cover their risks.”
Another sector affected is tourism. Although “2008 was not a disastrous year” in that sector, “we have the same credit problems as in the rest of the Spanish economy. The government has to invest intelligently to strengthen tourism, which is the petroleum of our country,” notes Rafael Gallego, president of FEEAV, the Spanish association of travel agencies.
Tornabell notes that ICO “only has a line of 3 billion [euros] for small and medium-sized companies.” In order to get a loan “it has to be with the collaboration of a credit institution, but most institutions reject that idea because they have to provide the remaining 50%, and that means the deal is not profitable; it is too risky, given the preferential interest rates and the low margins [they must provide via ICO]. They prefer to maintain their own liquidity.” Pedro Solbes, Spain’s minister of the economy, has acknowledged that “[the government] should increase the resources of ICO, but not for small companies — for big projects and for big companies.”
“The small companies are perceived as being highly risky,” Tornabell says. “They have lost their big clients [such as automotive support industries, real estate and construction]. Meanwhile, city governments and autonomous regional governments don’t have the funding, and they pay badly and late. So, the banks don’t give them a discount on their promissory notes or they do so, but they demand guarantees as well as high interest rates and margins. What’s more, if you have a loan draft, they cancel it or demand additional guarantees.”
So, who is getting loans from the banks? “Naturally, they are loaning to all of the companies that have nothing to do with sectors that are involved in the crisis. They demand that potential borrowers have earnings with an EBITDA of at least 5.5 times the amount they are asking for in the loan,” says Tornabell. In his view, “[lenders] should give preference to companies who export, since the deficit in our current account balance is approaching 8.5% of our GDP [more than the percentage in the United States]. Companies need to find a way for their exports to improve without having to spend years in the planning process, and they have to be competitive in costs, quality and fringe benefits. The ultimate test for any company is very simple: Can it compete in international markets, which are getting more and more demanding?”
