The Government has approved this week the line of guarantees’ first tranche, amounting to 20 billion euros, to ensure liquidity for companies affected by the coronavirus pandemic. Of the total, half will be earmarked for SMEs and the self-employed, guaranteeing 80% of new loans and financing renewals. The remainder will go to medium and large companies. In the latter’s case, up to 70% of new loans will be guaranteed, while loans’ renewals will be guaranteed up to 60%. The duration of the guarantees issued will be equal to that of the loan granted, up to a maximum of 5 years.
The banks will channel the funds so that companies can survive and as few jobs as possible are destroyed. It has also ensured that the mechanism of the guarantees will be adjusted according to the results. Once the resources are used up, the government will automatically activate new tranches of credit lines up to the maximum target of 100 billion euros.
For the experts at Santander Credit Research, the guarantee programme endorses the quality of Spanish banks’ assets within the context of the general economic package proposed by the government:
“Specifically it aims to ensure that the corporate sector’s liquidity does not dry up due to the likely economic slowdown resulting from the quarantine measures imposed in Spain.”
That said, they also highlight the condition that the banks assume the cost of the guarantee and the committment to maintain the cost of loans to borrowers using the guarantee line ( i.e. not to transfer the cost of the guarantee to companies).
” As a result of this condition, the provision of loans under the guarantee programme is likely to affect the profitability of financial institutions.”
Some details were also missing from the government’s announcement in order to assess the total impact of this first tranche of guarantees on the Spanish banking entities.
“Amongst other important considerations, the government did not clarify yesterday whether the guarantee on the part of the loan it covers will be pari passu with the unsecured part of the loan for which the banks still assume the risk. Or whether this will have some other order of priority (e.g. “first loss”).
The guarantees will only be available for new financing or renewals. They will not under any circumstances be available for businesses with insolvency problems prior to the pandemic. The government wants to prevent already struggling firms from benefitting from the plan. It has been launched exclusively to mitigate the impact of the virus on the economy.
In this way, Spain will implement the models approved in other countries, such as Germany or Belgium. That said, in the former the guarantee line includes guarantees of up to 90% in some cases. The Spanish government has not wanted to reach this threshold. This coverage has also been included in the French project.