Spain Weighs New Lifeline to Save Companies From Collapse

(Bloomberg) --

Spain is considering pledging additional funds to help companies pay their suppliers on time, a move that aims to stave off the collapse of businesses struggling to survive the coronavirus crisis.

The government of Prime Minister Pedro Sanchez has already vowed to guarantee as much as 100 billion euros ($109 billion) in bank loans to companies to help them tackle cash flow problems. But the program may not be enough to address delays in short-term credit claims between businesses, which are equivalent to almost one-third of Spain’s total economic output.

Economy Minister Nadia Calvino said on Tuesday that the government would allow a state agency to begin to re-insure the companies that already insure those short-term credit claims. “Payments to suppliers and short-term credit claims are critical channels to ensure that financing flows throughout the economy,” Calvino said in a televised press conference.

The government still has to provide details on the size of the guarantee it will provide to the reinsurance company. Madrid is also considering other measures, according to people familiar with the matter.

One additional response could be a new line of state-backed credits that could be tapped by banks to specifically lend to companies that in turn pay their suppliers, the people said on condition of anonymity.

With restrictions on many citizens and businesses in Spain set to remain in place until at least the first half of May, the additional steps may help allay concerns that the government hasn’t done enough to limit job losses and keep companies afloat.

The collapse of suppliers -- typically small and medium-sized companies in Spain -- would reverberate throughout the European Union’s fourth-largest economy as it faces the biggest recession in decades. The Bank of Spain said on Monday gross domestic product could shrink by as much as 12% this year. The central bank’s economists say the pace of economic recovery after the pandemic will largely depend on how many businesses survive the downturn.

The concerns have forced officials to consider additional fiscal measures, the people said.

The loan guarantee program already in place allows banks to help companies pay suppliers. But policy makers say that in practice banks aren’t issuing enough state-backed loans to address an increased delay in payments.

Some economists and policy makers say banks appear to be prioritizing lending to companies for other operations, such as paying employees’ salaries. And the sheer magnitude of outstanding short-term credit claims between businesses means that even if banks start to focus on that market, the current loan guarantee program is likely to fall short.

Calvino said on Tuesday that the Economy Ministry will analyze the loans that have been granted so far by banks to see if the government should consider changing any of the guarantee requirements moving forward.

Another potential response under consideration would be to provide financial incentives to suppliers, for instance, to ask banks to liquidate the claims they have against a buyer, the people said. The government would then potentially provide some guarantees for the banks taking on that risk.

©2020 Bloomberg L.P.