Interest rates paid by Spanish SMEs on bank loans at lowest level since July 2010

A small-to-medium-sized company in the Ruhr basin, one of the most industrialized areas in Europe, pays interest rates on a loan that on average are 40 percent below those paid for in the blue-collar ring around Barcelona. This is an example of what European Central Bank (ECB) President Mario Draghi calls the “fragmentation” of the euro-zone financial market that heightened during the euro crisis, but which has started to soften of late.

According to the latest figures for November released by the ECB, a German company paid on average interest of 3.69 percent on a five-year loan of up to one million euros, the benchmark for SMEs, while a Spanish company paid 5.16 percent. The gap of 1.47 percentage points fell to its lowest level since September 2011. The 5.16 percent figure was also the lowest for Spanish SMEs since July 2010 but remains above that of French (3.59 percent and Italian (4.99 percent) rivals and still well above the average in the euro zone of 4.02 percent.

The average interest on the benchmark five-year loan fell in the case of Spain from 5.50 percent in October to 5.16 percent, and in the case of Germany rose to 3.69 percent from 3.61 percent.

The improvement in the financial markets that kicked in over a year ago has already facilitated buying interest in Spanish sovereign debt and allowed big Spanish companies to tap the bond markets without problems. But something of an improvement in credit facilities for Spanish SMEs has only been evident in the ECB’s November figures. The main source of financing for Spanish SMEs is the banking system.

During the real estate-fueled boom prior to the crisis, Spaniards paid less interest on loans than Germans did, while during the height of Spain’s sovereign debt crisis they paid almost double the amount Germans as did.

Despite the narrowing of the differential in borrowing costs in November, the lack of credit for exporting SMEs remains an obstacle to the economic recovery.

The yield on the benchmark 10-year government bond is now at around 3.7 percent, its lowest level since 2009, with the spread with the German equivalent, that is, the risk premium, falling below 200 basis points, its lowest level since 2011. The secretary general of the Treasury, Íñigo Fernández de Mesa, said last week that he expects this trend to continue and for this to eventually have an impact on funding for the private sector.

But one of the problems of the dearth of credit is that a large part of the cheap funding Spanish banks receive from the ECB is being used to buy government bonds rather than provide loans to companies to help the recovery.

The banks also complain about a lack of “solvent” demand for credit, with the non-performing loan ratio hitting a record 13 percent in October. In its latest report on Spain released last month, Barclays predicted loan defaults would peak in the second half of this year. However, it also said it expects lending to the private sector to remain weak in a situation in which public debt moves above 100 percent of GDP, unemployment remains high at over 25 percent and household income continues to fall.