Spain’s government is getting a nudge from the country’s central bank to deliver more economic aid and avoid the risk of permanent damage from the coronavirus crisis.
Bank of Spain Governor Pablo Hernandez de Cos on Tuesday urged lawmakers to increase the country’s 100 billion euro ($113 billion) state-backed loan guarantee fund, and the extension of furloughs that ensured millions of Spaniards received at least a portion of their salaries during one of Europe’s strictest lockdowns.
The central bank chief’ intervention brings the weight of his institution’s expertise behind the efforts of officials considering the need for more aid in an economy facing one of Europe’s worst downturns. According to a person familiar with the plans, the government is pondering whether to pledge as much as 50 billion euros in extra guarantees.
“The economic-policy response has to combine the goal of supporting the recovery — which means not prematurely withdrawing support measures, as this would increase the risk that economic growth would suffer more lasting damage — with that of facilitating structural adjustment of the economy,” he told Spanish lawmakers during a parliamentary hearing on Tuesday.
The Spanish government is weighing the most effective way to support the economy now that the country’s lockdown has ended and two pillars of its multi-billion euro response are reaching their expiration date.
Last week, Spain approved the final tranche of its loan guarantee program. While companies have only tapped around half of the available funds so far, the approval of the last 15.5 billion euros signals the program is winding down.
That’s accelerated talks about next steps and Spanish officials are considering a significant increase in the fund, according to people familiar with the matter.
Hernandez de Cos didn’t comment on the magnitude of a potential increase, but he said an extension would ensure financing continues to reach viable companies.
While larger businesses and those with a lower risk profile have been able to borrow at favorable interest rates without tapping the state-backed debt program, some smaller ones could have more trouble accessing funding without public support, he said.
Around 95% of Spain’s companies have nine or fewer employees, slightly higher than the European Union average, making their survival critical to the strength of the recovery.
“It’s advisable to assess the possibility of having public guarantee mechanisms in addition to those that have already been approved,” Hernandez de Cos said.
Spain has deployed significantly more funds through its loan guarantee fund than other major European economies, according to an analysis by Bloomberg News.
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Officials say that’s a testament to the efficient design of the program. By introducing loan guarantees in increments of around 20 billion euros each, the government has been able to identify problems and make tweaks along the way.
Loan guarantees have helped to counter what would have been an unwillingness by banks to lend. The program has helped drive a 90% annual increase in new loans in April, Hernandez de Cos said.
However, high demand could also reflect fewer alternative options for struggling companies, says Maria Jesus Fernandez Sanchez, an economist at Spanish think tank Funcas. Spain, which began the crisis with more debt, hasn’t aided major enterprises like Germany for example, which is taking a direct stake in airline Deutsche Lufthansa AG.
Fernandez Sanchez also says the government needs to focus urgently on an extension of the furlough program, which expires next week. While most economists and business leaders expect Madrid to prolong the program at least through September, it’s unclear what portion of employee costs the government will cover and whether the extension will still apply generally or only to worst-hit areas such as tourism.
“Companies need to know now if these programs are going to be maintained,” Fernandez Sanchez said. “If not, they need to rethink the size of their companies and their staff.”