"Doubtful" loans to the most vulnerable companies soar to highs of the COVID crisis

"Doubtful" loans to (non-financial) companies "most affected" by the COVID pandemic soared in the first quarter of this year to crisis highs, since March 2020, according to a report published by the Bank of Spain this Tuesday.

The interest of companies in European funds falls due to the slow pace of calls and uncertainty

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The measures adopted by the Government and favored by the European Commission (including the financing of ERTEs, ICO guarantees or direct aid) have, until now, achieved "a relatively moderate deterioration" in business solvency, "compared to with previous crises”, according to the institution. However, the latest data show the existence latent risks [...] in the medium term, in a context in which a high percentage of the loans guaranteed by the State end their grace periods during this year”, he warns.

“Doubtful” loans to the most vulnerable companies—whose sales would have fallen by more than 15% in 2020—exceeded the peak of the second quarter of 2021 with the start of the Russian invasion of Ukraine in late February. Meanwhile, loans considered “in special surveillance” also remained close to the highest levels of this period for these companies; and they set a record for those “moderately affected”—those whose sales would have fallen between 8% and 15%—by COVID.

The risks that these figures give off “could materialize, especially, if the economic recovery were less vigorous than expected as a consequence, for example, of of a possible escalation of tensions linked to the war in Ukraine”, according to the Bank of Spain.

Another worrying fact is the one that has to do with bankruptcy proceedings, which reached a maximum since the euro crisis (2010-2012), in sectors such as hotels and other services. These processes are the final consequence of the inability of companies to meet their commitments and, "despite the insolvency moratorium in force until mid-2022, the number of company bankruptcy proceedings has increased since the third quarter of 2020, especially in the case of individual entrepreneurs”, observes the institution.

Already in April, the Bank of Spain analyzed that "the exhaustion of the deployment of the ICO guarantee programs [Instituto de crédito oficial] has substantially reduced new guaranteed operations, although the program launched at the end of March 2022, [dentro del primer Plan de choque] associated with the war in Ukraine, could reverse this trend.

time is running out

Last week, the Government announced the approval of “the possibility of extending the guarantees of the ICO guarantee lines for business financing after June 30, once the term of the temporary state aid framework approved by the European Commission has expired. ”, according to the press release distributed by the Ministry of Economic Affairs.

“The extension of the term of the guarantees will allow companies and the self-employed, prior approval by the financial institution, to extend the repayment term of their loans to 8 or 10 years. In this way, the maintenance of viable companies that have difficulties once the temporary framework has ended is facilitated, by lengthening the term of their guaranteed loan, granting them a greater margin to meet their obligations,” the statement indicated.

"Until last May, the ICO has deployed guarantees that have made it possible to mobilize more than 140,000 million euros in financing for SMEs and the self-employed," he added.

ICO endorsements

One of the most pressing needs after the start of the pandemic was to mitigate the impact of the restrictions on activity on the liquidity of companies, for which the ICO credit guarantee programs were introduced. In 2020, the Government approved two public guarantee programs for loans to companies and the self-employed with the aim of facilitating access to financing for the companies most affected by the COVID crisis.

“These programmes, for a combined amount of 140,000 million euros, allowed financial institutions to cover a high part of the possible losses associated with the loans received (up to 80% in the case of financing granted to SMEs and self-employed, and up to 70% for that provided to large companies) ”, explains the Bank of Spain.

These guarantees, of course, cannot be extended indefinitely and the cost to the state it will be higher or lower depending on the final percentage of defaults. Another worrying fact about the business world recently published by the Bank of Spain is that the interest of companies in European funds has fallen due to the slowness of the calls and the uncertainty.

The last survey of business activity of the institution (the Ebae of the second quarter) reveals a panorama of certain detachment: only 13% of companies plan to attend a call for the Recovery Plan in the next six months. This percentage has decreased in recent quarters. In the third of 2021 it reached 25%, in the fourth of last year it was 23% and in the first quarter of this 2022 had already fallen to 17%.

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