13 May, 2014

For Some in Europe, High Lending Rates Hamper Recovery

PARIS — Lúcio Machado’s small business in northern Portugal is finally starting to bustle again after his country’s recession. He hoped to expand his 12-employee business, which repairs autos and creates custom mechanical equipment for trucks and tractors, with a loan.

But a banker dashed his plans. For a loan of more than 100,000 euros (or about $138,000), his banker told him the annual interest rate would be around 10 percent. A smaller loan, even if secured with collateral, would cost around 7 percent — nearly double what a comparable company in Germany might pay.

Other small-business owners that Mr. Machado knows in Portugal have been rejected for loans so often, he said, that they have stopped approaching banks.

The same thing is happening in other euro zone countries most damaged by the long financial crisis, where small and medium-size businesses are struggling to get the loans that would help them rebuild. Such businesses typically represent two-thirds of all jobs in those countries, so a full-fledged economic recovery is unlikely to take hold as long as such lending remains tight.

“It’s demotivating and almost impossible for an entrepreneur to work with these conditions,” Mr. Machado said. “Without investment there is no employment growth, and unemployment is the biggest scourge in our country and in Europe.”

For businesses in the 18 countries of the euro zone, sharing a currency is not the same thing as having a common cost of money. In the countries where businesses need loans the most, they are the least likely to get them — or at least not at affordable rates. The problem is particularly acute in the euro zone’s underperforming southern-tier economies, Portugal, Spain, Italy and Greece.

The situation threatens one of the fundamental aims of the currency union: to create a single market with an integrated economy. The crisis, has forced banks to take a closer look at risks of individual economies, creating a lending disparity that punishes otherwise healthy companies just for being situated in the wrong country.

Interest Graph by European Central Bank
Interest Graph by European Central Bank

Before the crisis, small and midsize businesses in most of the southern tier did not pay significantly higher interest rates than their northern peers. But in the last two years, as the worst of the euro crisis has passed, a lending gap has developed, at least as measured by interest rates. The scarcity of business lending in the southern tier continues even as the interest rates on sovereign debt in those same countries has come down to nearly precrisis levels and the European Central Bank has held its benchmark lending rate at a record low.

The credit squeeze has eased a bit in recent months, according to a recent report from the European Central Bank. But the lending environment remains tough. More than five years after the euro zone’s debt crisis started, new bank loans to businesses are still at only half their former level, the report said.

The central bank report found that 66 percent of businesses in Greece, 52 percent in Italy and 43 percent in Portugal still faced a “very pressing problem” in gaining access to bank credit at affordable rates. When businesses in those countries can obtain loans, they are paying interest rates two to three times as high as German businesses are paying.

That environment could perpetuate the euro zone’s two-speed recovery, which is already evident in higher growth and much lower joblessness in countries like Germany and Austria compared with the southern tier.

“It’s something that guarantees economic divergence,” said Simon Tilford, deputy director of the Center for European Reform in London, “and it will make it hard to generate growth in the south, without which those countries’ debts will be unsustainable.”

In some cases, government investment arms are partly filling the breach. In Germany, which pushed austerity on southern countries and is now trying to extend them a helping hand, the state-run development bank KfW recently announced credit facilities of at least €100 million each, earmarked for lending at affordable rates.

For larger companies, the pullback has created an opening for private equity firms and hedge funds. European and Wall Street firms, including Kohlberg Kravis Roberts, the Blackstone Group and Ares Capital, are increasingly involved in direct financing or in restructurings that extend financing in return for equity stakes.

In one deal, Kohlberg Kravis lent €320 million to Uralita, a Spanish building materials firm whose sales had been dragged down by the collapse of the domestic housing market. Uralita had revenue of €621 million last year, compared with more than €1 billion in 2008. The seven-year deal, struck last year, has enabled Uralita to pay off its existing bank debt and bonds, expand into more robust markets in Eastern Europe and put new emphasis on the company’s profitable insulation business.

“We are seeing a lot of companies that want to participate in the rebound, but they don’t have the capital and banks aren’t supportive,” said Nathaniel M. Zilkha, co-head of credit and special situations for Kohlberg Kravis in New York. “After wandering in the desert, they are saying ‘We see opportunities to grow again if only we could get financing.’ ”

For many companies with sufficient size, raising money through bond offerings is also becoming more common — a relative novelty in a region where more than 70 percent of corporate financing has traditionally come from banks. Numericable, a French telecommunications company, recently issued €7.9 billion in junk bonds — a European record amount — to help finance its acquisition of the French telecom operator SFR, which it is buying from Vivendi in a €17 billion deal.

When credit is available and affordable, businesses can innovate.

François Libner, whose company in St.-Maixent-l’École, France, manufactures delivery truck bodies, said the bank loans he received in 2012 enabled him to develop new technologies, including an electric mini-truck that makes deliveries easier in narrow French streets. The more than €1 million in loans at around 4 percent interest rates, from France’s state-run industrial bank and commercial banks, also helped him to expand his 200-employee work force to nearly 300.

But for smaller companies, in weak economies, financing remains all too scarce.

Tens of thousands of businesses collapsed in southern-tier countries during the crisis. The higher loan-default rates there is one reason banks are demanding higher rates now.

The European Central Bank has been struggling to address the problem. There has been talk of a program, similar to one used by the Bank of England, to provide incentives to banks to lend money to small and midsize businesses. But the European Central Bank still faces legal and technical obstacles.

One complication, economists say, is that the central bank adopted policies that ended up making it more attractive for European banks to spend their money buying high-yielding government bonds rather than take risks with business lending. Now, as the central bank is conducting a review of their balance sheets, banks may have all the more reason to avoid the risks of commercial loans.

“Banks are cleaning their balance sheets all over Europe,” especially in the south, said Barbara Richter, an economist at KfW, the German development bank. “That is easier to do if you buy government bonds, which is less risky than giving loans to small and medium-sized businesses.”

Mr. Machado wound up reinvesting a portion of the profits of his company, situated in Mondim de Basto, Portugal, to diversify its automotive and engineering operations. But that crimped cash flow, and he has still not been able to hire more workers.

Eventually Mr. Machado was able to obtain a €75,000 bank loan, using his business as collateral. But the 6.9 percent interest rate left him resentful.

“When I look at the rates in Germany or even Ireland, which are a fraction of what we pay, it is a reflection of the huge problem that the Portuguese have been struggling with, and of the injustice to which we are condemned,” he said. “We will always be a poor peripheral country if nothing changes in Europe to make opportunities more equal.”

Source: The New York Times

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