Analysis: It’s a difficult journey for Spanish companies in the liquidity trap

MADRID (Reuters) – Brother and sister Juan and Dolores Balsa asked for state emergency loans in April to keep their fun fair business afloat in the city of Coruna, in northern Spain, despite the closure due to the pandemic.

Juan Balsa poses in front of their trucks at a warehouse, amid the coronavirus disease (COVID-19) outbreak, in Carnoedo, Spain, in this undated image obtained by Reuters on October 8, 2020. JB / Handout via REUTERS

But with a second wave of coronavirus infections keeping bumper cars and toddler joyride firmly shut, they lost the late summer income they hoped would help pay off loans. Today, the family business is fighting for its survival.

Their situation is mirrored by other small businesses across Spain, whose economy has been hit the hardest in Europe but cannot offer the same level of support to its businesses as its richer neighbors to the north.

“We have to pay a lot but there is no money coming in,” said Dolores, who runs the toddler rail route, listing the mountain of fixed costs ranging from insurance premiums to expenses related to their truck that keep piling up.

Spanish businesses already suffered one of Europe’s toughest lockdowns earlier this year, with the country becoming one of the region’s epicenters for the virus. A new wave of infections is worsening the blow to the economy, which is expected to contract by more than 11% over the year as a whole.

However, tax aid to support the economy amounted to only 3.7% of GDP against 8.3% in Germany, estimates the Brussels think tank Bruegel. This left small Spanish businesses rushing to take out short-term loans as their only lifeline.

“The greater reliance on secured loans in Spain can be partly attributed to the lower availability of alternative tax relief measures for businesses,” the European Central Bank said in its September bulletin.

Spanish companies have taken out 102 billion euros in emergency loans against 70 billion from their German counterparts, which the ECB noted had access to “other policy measures”. One of these supports is the generous “Kurzarbeit” wage subsidy program.

Policymakers across Europe face the dilemma of deciding which companies have been rendered unsustainable by the pandemic and therefore should be allowed to go bankrupt, and which face short-term difficulties and should be kept afloat.

Alicia Coronil Jonsson, chief economist at Singular Bank, says it is clearly clear that once the pandemic subsides, Spain’s tourism sector can once again become the economic mainstay it has been for decades.

“Tourism is not a zombie industry. Life will be its own thing again, ”said Jonsson, who is calling for extended waivers on loan repayments and additional help for small businesses.

In Spain, such support is all the more urgent given that small businesses represent 95% of the economy and generally have less access to long-term finance than large businesses – a fact the IMF has identified as a vulnerability for the economy. ‘economy.

This has led some government critics to argue that state guaranteed loans are precisely the wrong policy tool.

“Cash aid is an absolute trap,” said Eduardo Abad, president of one of the self-employed associations UPTA. “This leads us to over-indebtedness.

The Balsas, who currently rely on modest unemployment benefits for daily household bills, are one example.

Currently, they are using Juan’s $ 20,000 loan to cover the $ 900 in monthly payments on an existing $ 60,000 debt. But from next April, they will also have to start repaying the emergency loan, as well as the separate credit of 8,100 euros from Dolores.

“By the time I applied for these credits, I was able to pay the installments,” said Juan Balsa, arguing that he needed an extension of the moratorium to hold them at least until the start of their main season in June. next.

Official data for August showed the toll already taken on the small business sector: at least 85,000 businesses have collapsed since February and 83% of them had fewer than five workers.

Asked for comment, a spokesperson for the Economy Ministry said that while the overall duration of state-guaranteed loans was set at five years under EU rules, the length of grace periods belonged to individual banks.

Like the funfair siblings, thousands of independent Spaniards have applied for state-guaranteed loans with grace periods ranging from six months to one year, meaning the first payments are due from this month.

Santiago Carbó, professor of economics at the University of Granada, said this meant things were about to get worse: “If the crisis continues, crime will increase dramatically.

Additional reporting by Michael Nienaber in Berlin; Editing by Mark John

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