Government in talks with banking sector to jumpstart credit flow to companies

The administration of Prime Minister Mariano Rajoy is in talks with the banking sector to get credit flowing again to companies in order to create jobs and help pull the nation out of recession, sources said.

In a visit to Madrid two weeks ago, the European Union commissioner for economic affairs, Olli Rehn, identified as a bottleneck in the Spanish economy the fact that credit is excessively restricted and too costly. Outstanding credit in Spain has fallen 10 percent since 2009.

Rajoy wants to announce new measures to increase lending to small and midsized enterprises, which account for about 85 percent of the jobs in Spain, during next week's State of the Nation debate.

The plan would involve a form of collaboration between the banks and the state-owned lender Instituto de Crédito Oficial (ICO). The banks have argued that because of the poor economic prospects there is little "solvent demand" for loans, which raises the risk of defaults on loans granted for new products. As a result, they want the ICO to assume part of the burden of possible loan defaults under a risk-sharing arrangement. They also want the ICO to lend at low rates in order to increase their margins and to better assume the costs of potential non-performing loans.