The Spanish government’s announcement of a €200bn bailout plan to save the economy is reminiscent of an older model that was applied in a very different context. Readers might recall the Juncker plan, a European Commission project whereby Brussels guaranteed part of the business loans offered by banks to companies. In order to benefit from the scheme, companies had to submit a business plan and, once it was reviewed, the European Commission would decide whether to endorse the project or not.
The system chosen by the Spanish PM resembles the Juncker plan (in both cases banks and the administration worked together), but there is an important difference: the Juncker plan was intended to finance infrastructure and viable business projects. In contrast, Pedro Sánchez is asking banks to loan cash to companies that would likely go under otherwise.
Out of the total amount of the bailout announced by Sánchez (€200bn), the State has earmarked €17bn for a range of welfare measures (unemployment benefit, self-employed workers, helping out families with dependants in their care and so forth). In other words, so far we know that the State will be spending only €17bn. This expense will have an impact on the public deficit, but it will be a moderate one: about 1.5 per cent. Banks will fork out the remaining €183bn in the form of business and personal loans. About 55 per cent of that sum (€100bn) will be backed by the State through the ICO [Instituto de Crédito Oficial or Official Loans Institute, a state-owned bank]. This means that the remainder (€83bn) will be lent by banks without the State’s backing and, therefore, they will be exposed to defaults. Will banks agree to it?
A Finance Ministry spokesman has confirmed that “banks will contribute 100 per cent of the cash and the ICO will guarantee some of it”. This means that the ICO won’t necessarily be spending that amount because it will merely act as a guarantor and when a company manages to pay their loan back, the State won’t need to spend a penny. As a result, Spain’s public deficit will only rise to the extent that businesses default on loans guaranteed by the ICO.
Banks believe it is a given that they won’t be lending the full sum that was announced today (€183bn). Actually, the €100bn that the ICO is willing to guarantee is a very respectable figure, roughly equivalent to 10 per cent of Spain’s GDP. They also claim that today it was important to send the message that the Spanish authorities “are willing to spend as much as it takes in order to protect the economy”.
Nevertheless, the big question is what will banks do if loan applications exceed the total amount that the State is willing to guarantee (€100bn)? A source in the finance sector points out that “without the State’s guarantee, bad debt will surge for banks”.
Someone in the administration who is familiar with the management of EU funds points out that “banks will lend if they are forced to or if the State is willing to guarantee the whole operation. Banks might not have a choice because the government could find ways to force their hand, but one thing is for sure: they aren’t looking forward to it because they’ve been having trouble for years”.
As a matter of fact, Spain’s finance sector has been struggling for quite some time, which is why regulators have been pressuring banks to engage in further mergers that would allow them to streamline and become more profitable. The same source warns that “if they are forced to take greater risks, banks may also wobble and then we could be facing a banking crisis”.