Spanish aid to SMEs will not have mandatory discounts after banks fight back

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Any restructuring of government-guaranteed debt that Spanish small and medium-sized enterprises amassed during the COVID-19 crisis will not be mandatory for banks, according to government and financial sources, which means a softening of the original aid proposal.

Socialist Prime Minister Pedro Sanchez announced 11 billion euros in aid for SMEs on February 24, without giving any further details. A government source told Reuters that the aid package would include debt write-offs for viable businesses, with banks assuming some of the losses. But after two weeks of complex negotiations between the government, central bank and financial institutions, the decision was made that such loss sharing would only be voluntary for the banks, implemented by a “Code of Good Practice” that all banks will sign accordingly to a government source.

The original proposal had created uncertainty among banks, who warned against the possible reclassification of a much larger portion of their loan portfolios as NPL than just a portion of the government-backed loans that would be written off. Economy Minister Nadia Calvino was also reluctant to impose write-offs – an atrocity in Spain following the 2010 debt crisis – various government sources told Reuters.

“The banks are the ones who can see which (companies) are profitable and which are not and which tools should be used,” Calvino said in a recent radio interview. The measure can be approved on March 9, according to another government source, and is flanked by other lines of support for SMEs such as direct aid, capital injections and a line to help businesses meet their fixed costs such as rent or utility bills.

The government did not want to comment until the official announcement. This aid will be aimed in particular at the hospitality industry, which has been severely affected. It will also help micro-businesses that haven’t even applied for a government-sponsored loan.

Capital injections into medium-sized businesses can be made through a tool known as participatory credit, which Spain has already used to help large companies like Air Europa. A financial sector source familiar on the matter said auto haircuts were “out of the equation” but banks agreed they could renegotiate with companies on a voluntary basis.

“Everyone agrees that there is a debt problem, everyone will have to bear some of the cost of it … There is no bank that can fight it,” the source said, adding that there are still questions about it how the code of conduct is implemented. Codes of conduct have had mixed successes in the past, as in the case of mortgage agreements, where lenders have always been given some leeway to renegotiate terms directly with customers. Mortgage complaints from customers still make up the lion’s share of complaints filed with the Spanish central bank.

Spanish companies are among the most active in Europe in applying for government-secured credit and liquidity lines, but as in other European countries, the focus is on solvency issues. The state-supported credit agency ICO, which bears up to 80% of the potential loan defaults on loans for medium-sized companies, has approved 91.5 billion euros in funding lines and thus mobilized a total of 120.4 billion euros in financing. ($ 1 = 0.8380 euros)

(This story was not edited by Devdiscourse staff and is automatically generated from a syndicated feed.)

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