Spain Weighs Major Boost to $113 Billion Loan Guarantee Plan
Spain is weighing plans to significantly increase the size of its 100 billion-euro loan guarantee fund due to the huge demand.
(Bloomberg) -- Spain is weighing plans to significantly increase the size of its 100 billion-euro ($113 billion) loan-guarantee fund after the program attracted huge demand from businesses struggling to weather the coronavirus pandemic, according to people familiar with the matter.
Officials are considering pledging as much as 50 billion euros in additional guarantees, one person said. Others said the ultimate size depends on how the negotiations unfold. They all spoke on condition of anonymity because the details aren’t public.
A spokesman for the Economy Ministry, which oversees the program, declined to comment. Shares of Spanish banks rose Tuesday morning on the report.
State-backed loan guarantees are a key feature in the global response to the economic fallout from the pandemic, with governments pledging trillions to help keep businesses afloat. Since Spain launched its program on March 17, banks have financed around 70 billion euros worth of loans –- about 54 billion of which are state-backed. That’s a much greater deployment of loan guarantees than in other European countries.
Europe’s fourth-largest economy had one of the continent’s strictest lockdowns in response to the deadly outbreak of the virus. The economy is also greatly dependent on the floundering tourism industry, and its long-troubled labor market could see the jobless rate spike as high as 24% this year, according to central bank forecasts. In a worst-case-scenario, the Bank of Spain expects the economy to contract by as much as 15% in 2020.
Across Europe, less than 15% of funds made available by governments through banks as loan guarantees for companies have been used, according to figures from seven of the region’s largest economies compiled by Bloomberg News. That means more than 2 trillion euros could still be deployed as of June 18.
In Spain, the loans are funneled through the Instituto de Credito Oficial, known as ICO, a state finance agency. Most of the guarantees have been used to help support small and medium-sized companies. Some large businesses have also tapped the program. British Airways owner IAG SA borrowed around 1 billion euros through ICO to help its Spanish units Iberia and Vueling weather the collapse in travel demand.
In the event of a default, the Spanish government has pledged to back 80% of a loan to an SME and 70% for a large company.
When Socialist Prime Minister Pedro Sanchez first rolled out the program, some companies complained that banks were requiring them to purchase other products in order to secure financing, something known as cross-selling.
Other business people said banks asked them to personally guarantee the loans, pledging their own homes, for instance. And some executives said the interest rates that banks were charging on the loans was unnecessarily high and not in line with the government’s guidelines.
Those complaints from borrowers have, for the most part, quieted down. One reason, according to officials, is that the government has introduced the program in increments of around 20 billion euros each. That has allowed them to make tweaks along the way, detecting initial problems and then admonishing some banks to avoid cross-selling, for instance, in the following tranche.
Spain rolled out the final increment of the 100 billion euro program last week, accelerating the conversations to bolster the size of one of the country’s most significant responses to the coronavirus crisis.
European Central Bank policy maker Pablo Hernandez de Cos called on Spanish lawmakers on Tuesday to consider extending the loan-guarantee scheme to ensure financing for companies that are likely to remain viable once the acute part of the crisis is over.
While larger businesses and those with a lower risk profile have been able to borrow at favorable interest rates without tapping the 100-billion-euro state-backed debt program, some smaller ones could have more trouble accessing funding without public support, he said.
“It’s advisable to assess the possibility of having public guarantee mechanisms in addition to those that have already been approved,” Hernandez de Cos, who is also the governor of the Bank of Spain, said during a parliamentary hearing on the post-coronavirus recovery.
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