Germany to help Spain with credit for growth, jobs

AP News
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Posted: Jun 03, 2013 8:51 AM
Germany to help Spain with credit for growth, jobs

BERLIN (AP) — Germany is setting up a loan program for struggling small and medium-sized firms in Spain to boost growth and jobs in the crisis-hit southern European economy, according to a document obtained Monday.

Germany's state-owned KfW bank will provide about 1 billion euros ($1.3 billion) at low interest rates to its Spanish counterpart. The move is aimed at easing a credit crunch that is afflicting much of southern Europe, where small and medium-sized firms are struggling to access affordable loans that would allow them to expand their business.

Top ECB officials and several EU leaders have described the lack of access to credit in heavily indebted countries as one of the most pressing issues to deal with as the continent tries to emerge from recession.

Germany, on the other hand, enjoys a top-notch AAA rating that investors see as a safe haven. It can therefore borrow money at rock-bottom interest rates.

The initiative could also be extended to other countries, such as Portugal, that have been hit hard by the 17-nation eurozone's debt crisis, German Deputy Finance Minister Steffen Kampeter said in the document obtained by The Associated Press.

Spain, the eurozone's fourth-largest economy, is mired in recession, with an unemployment rate of about 27 percent and almost every other person aged under 25 out of work.

The German initiative's design as "bilateral aid with rapid impact" reflects growing impatience in Berlin about the slow progress by the EU in freeing up existing funds to assist hard-hit countries.

The European Central Bank's benchmark interest rate is currently at a record low 0.5 percent, but banks are not passing on that low rate to companies because their own finances are strained. Firms in economies like Spain, Portugal, Greece and to a lesser extent Italy still struggle to get affordable financing. Even when banks are willing to lend, the interest rates demanded are significantly higher than in, say, economically robust Germany.

The loan facility for Spain foresees Germany's KfW bank granting its Spanish state-backed counterpart, ICO, a ten-year 800 million euros loan. The total liability including interest rates is estimated at 1 billion euros, according to the finance ministry document. In addition, KfW is in talks to support two existing ICO company lending programs with another 100 million euros each.

"It must be achieved to rapidly solve companies' acute financing problems, because then many small and medium-sized firms, who have a solid business model and good growth outlook, will be able to secure their existence and start expanding employment again," the document read.

The ministry stressed overcoming those firms' credit shortages is important "because those companies are crucial for safeguarding the existing jobs and the creation of new trainee positions and jobs."

Analysts said the program is a step in the right direction, but cautioned it might not be big enough to make a significant difference.

"Of course this is more a drop in the ocean," said Commerzbank analyst Christoph Weil. "But it's better than nothing."

"Spain is still in a protracted recession: For companies it's important that their sales and profit outlook improve, only then will they consider new credit-financed investments," he added.

Germany's Finance Minister Wolfgang Schaeuble will brief Parliament's budget committee on the initiative Wednesday. It was expected to have wide cross-party support, and lawmakers won't hold a vote since the foreseen amount remains within the framework of already agreed credit guarantee lines.

"It is good news that the government finally actively supports the program countries to overcome the credit crunch," said Priska Hinz, the opposition Greens' ranking member on the committee. "One can only hope that this change of heart doesn't come much too late," she added.

Germany is currently also assisting Portugal, which is in the middle of a recession coupled with high unemployment, to set up a state-owned bank modeled on KfW to prop up lending to the private sector as a first step before possibly also granting it a bilateral loan facility.

"The measures are part of an overall strategy that shall foster growth and employment especially of young people in selected (...) eurozone countries," Schaeuble's deputy Kampeter said in his letter to lawmakers dated Friday.

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