The Spanish Government approved publics endorsement for companies and freelancers of up to €100 Billion, it was authorised last 24 March by the Council of Ministers. But, how does it work? Who will benefit from it?
The endorsement’s main purpose is to ensure a guarantee so that the guarantor must acquire the obligation, in case that if the principal debtor don’t pay, the guarantor will have to be pay instead. In this situation, the guarantor is the Spanish Government. In that regard, the money is provided by the bank but the ultimate risk is taken by the Official Credit Institute (ICO, Instituto de Crédito Oficial). That is to say, the Spanish State.
The state of alarm means a shutdown in the economic activity. SMEs, freelancers and other companies have ceased to receive income, but they still have to pay the expenses which provoke a liquidity problem. A long-term liquidity problem can lead to bankruptcies. Therefore, a destruction of the business fabric.
To keep jobs and to minimize the economic impacts due to the COVID-19, the Ministry of Economic Affairs and Digital Transformation (Ministerio de Asuntos Económicos y Transformación Digital), will grant guarantees to the financing granted by credit institutions, financial credit institutions, electronic money institutions and payment institutions to companies and freelancers to meet their needs arising from invoice management, current requirement, tax and financial obligations or other liquidity needs, for instance.
The Ministry of Economic Affairs and Digital Transformation will grant guarantees of up to €100 billion. This massive injection of liquidity aims to provide companies with sufficient liquidity to cope with this situation. It is a guarantee offered by the Spanish State to the country’s private banks through the ICO to provide credit to companies that require it, on favourable terms. As the stateis the responsible, financial institutions are protected against possible future non-payments of such loans by the companies, SMEs and freelancers receiving them.
The applicable conditions and requirements to be met, including the maximum period for the application for the guarantee, shall be established by Council of Ministers Agreement, without further regulatory development is required for its implementation. Although the Ministry of economy is aware of the crucial work that banks will have in this crisis, a number of limitations and conditions have been set in order to not jeopardize public accounts.
The guarantees covered by this rule and the conditions developed in the Council of Ministers agreement shall comply with the rules of the European Union on State aid matters.
The public endorsement have been approved with coverage of between 60 and 80%. The maximum guarantee will be to financing those SMEs and freelancers affected by the COVID-19. These guarantees will cover both the renewal of loans and new financing by credit institutions, credit institutions, electronic money institutions and payment institutions, to meet their derived needs. Therefore, facilitatingjob security and attempting to ease the economic effects by the COVID-19. However, the guarantees won’t be allocated to companies with prior insolvency problems. That aims to prevent companies with previous problems to benefit from this plan. Since it has been launched to exclusively mitigate the economy consequences amid the virus.
The Spanish Prime Minister has detailed that the €100 billion will allow banks to make available to companies an additional €50 billion or an additional €100 billion. That would raise the liquidity to a maximum of 200 billion.
The Council of Ministers gave the approval to the first amounts, for €20 billion. The Government spokeswoman, María Jesús Montero has pointed out that half of this amount will go to SMEs and freelancers, i.e. €10 billion.
Large companies may apply for financing with state coverage of 70% for new operations and 60% for the renewal of existing contracts.
The Spanish Government also approved an additional €2 billion guarantee for exporting enterprises, especially SMEs, and facilitate the restructuring of credits to drought-affected agricultural enterprises. This plan is specifically intended for SMEs. In parallel, the Spanish Government has authorised to the adoption of “measures to facilitate the restructuring of credits to drought-affected farms”.
We want to send companies and markets a strong message: the Spanish Government is going to provide to the business fabric all the liquidity it needs to prevent liquidity problems from becoming solvency problems,” said Pedro Sánchez. This is one of the measures companies were demanding: facilities to have liquidity.