Many of Europe’s small and medium-sized businesses, the motor of economic recovery, are crying out for credit as the banks they rely on for funding are battered by sovereign debt worries and the rising cost of servicing their own borrowings.
While many large firms are well financed, with good cash positions and access to the bond markets, smaller peers face an uphill battle to secure crucial financing from banks whose shares are being hit by investor fears of sovereign downgrades and the euro zone’s ability to stem a debt crisis.
Despite the 380 billion euro-plus ($539 billion) EU/IMF bailouts of Greece, Ireland and Portugal, little if any is trickling down to smaller companies. Banks in Greece, in particular, are more focused on collecting overdue loans than extending new ones, experts say.
Europe’s banks are finding short-term financing harder to come by — a problem that could intensify if euro zone policymakers dither over how to tackle a debt crisis that threatens to spread to Italy or Spain.
And with French banks under pressure from concerns over a French sovereign debt downgrade, an expanded bailout for Greece that would hurt French banks, and a government bank bailout, SMEs are being left way down the pecking order.
“They (SMEs) are dependent on bank funding and banks could be heading for funding problems of their own,” one credit analyst at a top European bank noted.
Greek banks have already effectively stopped financing small-and-medium sized enterprises (SMEs) — those employing less than around 200 staff — according to one banker involved in corporate funding in Greece.
Banks are either reserving their cash or prefer to lend it to bigger companies, he said. This is supported by the ESEE, a Greek federation of SME retailers, which says Greek banks are rejecting the vast majority of new applications for loans.
Coupled with austerity measures, in certain commercial streets of central Athens, up to one third of businesses have shut down.
Last week the chief executive of UniCredit , Italy’s largest bank, said the effects of the widening premium investors demand to hold the Italian government’s 10-year BTP bonds over German bunds would be felt this quarter.
“If the level stays at the level we are today, lending will be affected,” Federico Ghizzoni said. “If the customer accepts the price we will lend. If not, no.”
A credit crunch would add to the many headwinds to growth already faced by Europe’s so-called peripheral countries.
Spain’s small business association CEPYME, which said 48 percent of SMEs are still denied loans compared with 34 percent for the European average, has created a committee to monitor SMEs and their financing needs.
“The economic recovery will not happen until the SMEs and the (Spanish) autonomous regions have the necessary financing to continue their business,” it said.
In Ireland, banks have been largely locked out of the wholesale debt markets for over a year, triggering a prolonged slump in the supply of credit to consumers and companies that has curbed the domestic economy even as the country’s export-focused industries forge ahead.
“Since September 2008 the supply of credit has been a major issue for small businesses,” said Mark Fielding, chief executive of the Irish Small and Medium Enterprises Association.
“Banks in Ireland have to reduce the size of their balance sheets and the only way you reduce the size of your balance sheet is by reducing the amount of loans you are putting out.”
In Portugal, small companies are pinning their hopes on a government plan to negotiate a one-year moratorium on repaying their debt to banks and the state.
Joaquim Cunha, chairman of the Small and Medium-Sized Companies Association has said the measure could save many firms from going bust and help contain “the profuse bleeding of bankruptcies and job losses” in a field that accounts for 2 million of the total employed workforce of about 4.9 million.
“The only small companies that survive are the ones using self-financing. All those using financing from banks are having problems,” the association’s president Jose Alves da Silva said.
In the construction sector, one of the most hard-hit by the crisis, insolvencies rose 13 percent in the first half of 2011 from a year earlier, with three companies failing per day, while total insolvencies rose 10 percent to more than 3,000.
The Greek SME federation has also called on its government to set specific, quantitative lending targets for banks.
Ireland set its two large banks, Bank of Ireland and Allied Irish Banks , a target of lending 6 billion euros in new loans each for the two years from April 2010.
While the country’s Credit Review Office said in May the pair had exceeded their target for the first year, it admitted much of the lending was for restructuring existing debts for businesses unable to service their original loans.
In the UK, a deal struck between the Conservative-led coalition government and major UK banks such as Lloyds , Barclays and HSBC to boost lending to businesses has also come under criticism for not doing enough.
The banks missed their target for the first quarter and although they are now back on track, a survey in June found British firms were increasingly being forced to borrow from their own suppliers to make good a shortage of bank loans.
In peripheral Europe, tackling the big issue would be more effective than forcing banks to lend, said Investec economist Victoria Cadman.
“You would be better trying to resolve the underlying issue — worries about peripheral debt and unwillingness to lend, which is driving up core lending costs and impacts on small business lending at the bottom of the chain,” she said.
Some other European countries seem relatively sheltered. Germany’s Commerzbank said on Wednesday its Mittelstandsbank unit, which specialises in financing Germany’s medium-sized companies, was its main profit driver.
Smaller Dutch companies, who took the opportunity after the financial crisis of 2008 to refinance long-term, also have healthy balance sheets and benefit from Dutch treasury yields being among the lowest in Europe.
But concerns remain rife that trouble could spread.
“Our banks have shown a lot of support for SMEs,” said Laurence Parisot, President of French small business organisation, Medef. “But our great fear is that the growing euro zone crisis will further curb our banks’ ability to lend.”