Spanish SMEs fight to survive

The global financial crisis of 2007-2009 saw Spanish gross domestic product (GDP) contract by 7.7% from peak to trough, and though it is some years since, the recovery is barely now underway.

While the snap-back in activity across most of Europe has been considerably more pronounced, it comes accompanied by some doubts already in the air in regards to the strength of the global economic recovery. 

Acting as a backdrop, the Greek crisis is now in ‘full swing’, as the Eurozone tries to come up with the best possible response to the crisis, although there is apparently quite a bit of reticence when it comes to taking new steps towards a fully-fledged fiscal union. In theory such steps could either take the form of direct fiscal transfers or, alternatively, through the issuance of Eurozone debt.   

In the best of both worlds, the crisis risks further pressure on the debt of periphery countries, which, in turn, translates simultaneously into less aggregate demand and bank credit, with both of those trends then feeding off of each other.

The effect which this has had on Spanish small- and medium-sized enterprises (SMEs) has been ghastly. Perhaps the main reason for this is that the previous decade’s long credit and housing boom led many of these SMEs to treat short term revolving debt as long term debt, or permanent capital: a classic error in finance. Perhaps contributing to that, some experts call attention to the lack of professionalisation and predominance of family ownership structures in Spanish SMEs (with informal management styles).

Not to be forgotten, the Spanish business lobby CEPYME estimates that 99% of Spanish companies are SMEs (businesses with less than 500 employees). Furthermore, of these firms around 85% are family-owned and together account for close to 70% of private sector employment, according to figures from the Instituto de la Empresa Familiar (IEF). 

On top of that, some observers cite institutional and cultural factors,  but above all the lack of a quicker response to the crisis, which have contributed to sending average billing periods for SMEs in Spain to approximately 180 days outstanding (if not more), versus say the 30 days typical of the United Kingdom. For a small company with no or limited access to financing that can translate into nothing short of a ‘cash crunch’ as the needed investment in working capital shoots up. If the aforementioned comes on top of high and volatile short-term debt levels, that makes for a very toxic, if not lethal, combination. This is precisely the predicament that many Spanish SMEs have faced in the past few years.      

Since the beginning of the crisis, 450,000 companies have gone bankrupt in Spain - 250,000 SMEs and 185,000 self-employed professionals - according to the President of the CEPYME, Jesús Terciado Valls. Also worth highlighting is a recent survey by SAGE which shows that for 80% of Spanish SMEs the main goal for this year is: survival.

Serving to underline the gravity of the current situation, Mr. Valls cites late payments by the public sector (central government and local corporations) as one of the main problems facing SMEs. The others, for him, are a lack of financing and the high tax burden.

Therefore, with the renewed tensions in periphery debt markets the risk exists that things could yet worsen again before they improve. This is because, by different estimates, which reflect differing assumptions, scenarios and probabilities, the Spanish financial system will eventually face approximately between €80bn and €140bn in potential write-downs, with the more widely-accepted estimates coming in at around €100bn. While such an amount, standing at approximately 10% of GDP, seems more than feasible to take on, there is a fairly generalised consensus that more measures need yet to be taken, on the macroeconomic reform front, in particular, as the International Monetary Fund just recently pointed out.