Draghi’s Trillion-Euro Pump Finds Blockage in Spain: Euro Credit

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Mario Draghi’s plan to channel as much as 1 trillion euros ($1.3 trillion) into the euro region’s economy is running into a blockage: some companies in the countries hardest hit by the debt crisis don’t want the money.

“We’re getting calls from lenders every day,” said Miquel Fabre, 34, whose family-run beauty products firm Fama Fabre employs 43 people in Barcelona. “They can see that they’ll benefit from a loan because we’re doing good business and will return the money. Whether it’s in our interest as well is a different question.”

Many small and medium-sized businesses are wary of the offers from banks as European Central Bank President Draghi prepares to pump more cash into the financial system to boost prices and spur growth. The reticence in Spain suggests demand for credit may be as much of a problem as the supply.

The ECB’s Options to Aid the Economy

The monthly flow of new loans of as much as 1 million euros for as much as a year — a type of credit typically used by small and medium-sized companies — is still down by two-thirds in Spain from a 2007 peak, according to Bank of Spain data. The total stock of loans is almost 470 billion euros below the 2008 record of 1.87 trillion euros, the figures show.

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Spanish bonds rose for a third day yesterday, with 10-year yields dropping to 2.11 percent, after further evidence that Draghi may have to resort to buying government debt to get cash into the economy. The ECB’s latest attempt to funnel money through the financial system with a targeted-loans offer, known as TLTRO, was shunned by banks on Sept. 18.

That’s not to say banks aren’t making an effort to attract borrowers. Banco Popular Espanol SA, a Spanish lender that borrowed 2.85 billion euros from the TLTRO, started an advertising campaign this month using Spanish NBA basketball star Pau Gasol to target smaller companies.

In the first six months, Popular boosted lending to that group by 6 percent and is aiming for a 10 percent increase for all of 2014. Across the economy, small business loans at 12.9 billion euros in July were the highest in more than two years, while still just a third of the peak volume.

Software maker Vincle Internacional de Tecnologia y Sistemas SA is also shunning bank funding for its expansion in Latin America next year. The firm will dig into its own funds to provide the 250,000 euros needed to open an office in Colombia and hold off extra investments until the new business generates can pay for them, said deputy general manager Hector Recio.

Funding Costs

“Funding ourselves enables us to be independent,” said Recio, whose Barcelona-based company counts Danone and Novartis AG as clients. “Spending money they didn’t have led many companies to close down in Spain. We prefer a more sustainable approach.”

Spanish and Italian banks looking to trim their funding costs were among the largest takers of TLTROs in the euro area, taking more than 45 percent of the 83 billion euros handed out by the ECB to trim their funding costs.

Lenders paid 0.15 percent to the central bank to borrow for as long as four years in an operation that caps more than five years of record-low borrowing costs.

Still, Spanish companies have seen little of the central bank’s largesse. The average interest rate on a new loan to companies of as much as 1 million euros was 4.58 percent in July compared with 2.24 percent in France, according to the ECB. Italian companies pay 3.93 percent.

Wary Banks

“Demand for funding has dropped because the costs remain high for small companies and the conditions hard to meet,” said Carlos Ruiz, economics director at Cepyme, a federation of Spanish SME groups.

And even at those prices, some of the supply proves illusory. Juan Ramon Gomez, 41, says he knocked on four doors to find a bank willing to lend him 3,000 euros to buy an air-conditioning unit for an office rental business in Madrid that has been profitable since January.

“Many banks are calling to offer loans,” Gomez said. “That doesn’t mean they’re actually going to grant them. Banks are still extremely wary of not being paid back. They’re not trusting anyone.”

Back in Barcelona, Fabre says his company has about 2 million euros of bank credit lines to cover needs in between orders and sales only. It’s ruled out funding investments with other money than re-invested profits.

“We’re not interested in borrowing money to expand,” said Fabre, whose company was founded by his grandfather in 1946. “Demand is too limited to make it worth the risk of using someone else’s money.”

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