The Government has calculated the cost of the guarantees that it deployed during the pandemic through the Official Credit Institute (ICO). The amount amounts to about 4,300 million euros and has been charged to the public deficit figure for 2021, as detailed in a report by the Tax Authority and confirmed by government sources. These numbers represent a significant reduction compared to the 10,000 million losses that the Executive initially estimated in its Stability Program sent to Brussels in 2021. Until now, a good part of these credits have enjoyed grace periods in which they were not paid the principal and, therefore, the bulk of the calculated losses has not materialised. As non-payments occur, the executed guarantees will be added to the public debt. The Tax Authority warns, in any case, that these numbers could end up being higher. Especially since the calculations have been made before the energy crisis aggravated by the invasion of Ukraine.
Even so, it is a success given the scale of the losses that could have been assumed if no action had been taken. The pandemic forced the States to launch initiatives of an unprecedented dimension. As in all of Europe, Spain opted above all for the ERTE and the cessation of activity for the self-employed, whose costs have exceeded 40,000 million in two years and protected up to five million workers at the maximum peak despite the forced interruption of the activity. As it was a problem that was initially temporary, thanks to financing from the ECB, the State was able to avoid greater evils by bearing a large part of the labor costs of the companies.
The other leg of this plan to rescue the economy was the measures to avoid a credit crunch similar to the one that occurred in the last financial crisis. So many businesses, especially small ones, ceased to be viable due to lack of liquidity, increasing the destruction of employment. However, in the pandemic, the support of the ECB was clear. The Bank of Spain calculated the financing needs of companies in a context of paralysis. And the Ministry of Economy launched the State guarantees through the ICO very quickly. Lines totaling 140 billion were deployed. Of these, 104,000 million euros have been used in guarantees that have served to mobilize financing worth 137,000 million. On average, the guarantee covers 75% of the credit granted and the loss is divided from the first euro between the bank and the State. There have been almost 1.2 million operations, of which 98% have been signed by SMEs and the self-employed.
Since the ICO did not have the means to manage such an amount of loans, the banks did so and were forced to bear part of the loss so that they would have an interest in managing them well. In 2020, at the height of the pandemic, ICO financing represented around a quarter of all credit granted to companies and the self-employed. And net corporate debt increased by about 50,000 million euros. This increase is a source of concern as it is highly concentrated in sectors affected by covid.
The ICO delinquency rate was slightly above 2% last year. It is a fairly low percentage, partly due to the shortcomings that allow the debtor to pay the interest but not the principal. Currently, 32% of the financing granted is still in a grace period. And there is another part that is only returned in a single payment. It is probably in these credits with deficiency where more problems can arise. The Bank of Spain has already warned that a third of ICO loan holders have granted other loans that have shown signs of deterioration. In the calculation of the 4,300 million, in addition to the expected default, the commissions that the ICO has charged and the amounts that it expects to recover are introduced.
More financing and less direct aid
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While in Europe 4% of GDP has been granted in guarantees, in Spain close to 8% has been given. And 75% of the guarantees provided have been used compared to 30% in the EU. According to the Ministry of Economy, these figures underline the good design of the plan, although in Spain less direct aid has been given and that could also have influenced so that more credit was withdrawn. According to Economy estimates, the percentage of companies with severe liquidity deficits would have dropped thanks to ICO credits and direct aid from 33% to 9%, leaving the risk of closing companies at pre-pandemic levels. These measures “prevented the deterioration of business balance sheets from triggering a financial stability problem,” the Government pointed out in the Stability Program sent to the Commission in 2022.
With the invasion of Ukraine, a new line of guarantees for 10,000 million has been opened. They will be available until the end of the year and will have a one-year grace period for the payment of the principal. In addition, the ICOs that were already given are made more flexible. Until now, only companies with a 30% drop in their turnover compared to 2019 could obtain an extension of the repayment terms up to eight or ten years. Now this lengthening of maturities extends to all of them. And the sectors most affected by the rise in fuel —that is, transportation, livestock, fishing and agriculture— will have an additional six-month grace period.
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