* Bad debts driven by small businesses expected to rise
* About 1,000 companies a month going bust in Spain and in
* Economic outlook has deteriorated in both countries
* Spanish bad debts seen peaking at end of this year/early
By Silvia Aloisi and Sarah White
MILAN/MADRID, March 28 Small companies
struggling to repay loans in Italy and Spain signal bigger
problems on the horizon for the euro zone after the dust has
settled on Cyprus's last-ditch bailout this week.
Defaults by small and medium-sized enterprises (SMEs), easily
the biggest employers in Spain and Italy, are rising at a
worrying clip, spelling trouble for the banks and two countries
at the heart of Europe's debt crisis.
"You can be sure that if these companies' bad debts rise,
you're going to see more bad loans to families, and credit card
bills that won't be paid," said Javier Santoma, finance
professor at Spain's IESE business school.
The ability of Italy and Spain, which account for 28 percent
of the euro zone economy compared with Cyprus's 0.2 percent, to
pull themselves out of crisis and avoid full-blown bailouts
depends on the health of their banks; weak banks conserve
capital rather than lend to get the economy moving.
Profits at Spain's top three lenders Santander,
BBVA and Caixabank fell an average 60
percent in 2012 due to steep government-enforced provisions for
property losses. Writedowns of nearly 24 billion euros at
state-owned Bankia led to a record 19.2 billion euro
In Italy, the two biggest banks, Intesa Sanpaolo
and UniCredit, set aside a combined 14 billion euros
in 2012 to cover bad loans. Smaller lenders also had to increase
provisions after the central bank conducted simultaneous audits
of around 20 institutions.
Banco Popolare, Italy's fourth biggest, issued a
profit warning after the audit prompted 684 million euros of
loan loss provisions in the fourth quarter, more than the total
it set aside in the first nine months of the year.
The Italian banking association has said the pace of growth
in bad loans, which has been climbing at an annual rate of 16-17
percent in recent months, should ease later in the year, based
on economic recovery in the second half. That looks remote after
the government this month said GDP would shrink 1.3 percent this
year, adjusting a previous forecast for a 0.2 percent fall.
"Consumption levels, retail sales, industrial activity have
gone back to pre-euro levels, and the banks still have not fully
taken into account the fall in the property market. I doubt that
if they foreclose today ... they would get much of their money
back," said Ronny Rehn, analyst at Keefe, Bruyette & Woods.
"So I think we will see a lot more provisioning for many
years. Also, there is a lot of non-competitive companies that
will end up exiting the market and defaulting, entailing more
losses for the banks."
Spanish banks are better protected against SME losses after
Madrid used 41 billion euros of a total 100 billion euros of
European aid to prop up its weakest lenders.
The government has ruled out another round of special
provisions, and analysts said if more capital was required it
would be covered by the remaining European aid.
"It could be that one bank here or there needs more capital,
but it probably won't be a system-wide issue," said Erwin Van
Lumich, a banking analyst at Fitch ratings agency.
"Bad debts could peak in the course of this year, or
slightly into 2014, as there is always a delayed effect for
these types of statistics."
Spanish banks face 25 billion euros of losses from 2012-2014
on non-property-related SME exposure of 237 billion euros on a
base case scenario set by consultants Oliver Wyman last year.
On an adverse scenario, that hits 39 billion euros, compared
with losses of 65 billion and 97 billion euros in base and
adverse scenarios on real estate exposure of 227 billion.
NO SAFETY NET
Behind the figures are struggling people.
Raffaele Balzano faces eviction in days from his two-star
hotel in Pistoia, Tuscany, which was forced to close last year.
Power and water were cut off when he couldn't pay the bills.
"In 2011 it all came to a head. I had a debt of 26,000 euros
with the bank, and they would not give me any new credit lines
to try and stay afloat, plus I also owed some 50,000 euros to
suppliers which I could not pay," Balzano told Reuters.
"No one has helped me, not the government, the banks or any
trade unions. We, the small businessmen, have no safety net
whatsoever. I've lost everything."
One in 10 Spanish loans was in arrears for three months or
more in December, and research firm Axesor said February was the
worst month since 2008, with more than 1,000 companies filing
for creditor protection, up 82 percent on a year earlier, even
though banks roll over debt for many struggling borrowers.
Around 1,000 companies a month went bust last year in Italy,
and as of January, 7.4 percent of loans were non-performing, the
highest in nearly 13 years and much worse than France's 4.1
percent and Germany's 3 percent. At the other end of the scale,
the Greek bad loan ratio was 22.5 percent at end-September 2012.
With Italy and Spain expected to contract by 1.3 percent and
1.5 percent this year under the weight of government austerity
programmes, SME bad debts are set to climb, meaning defaults are
more likely in consumer credit and mortgages.
Unemployment, already a record 26 percent in Spain and 11.7
percent in Italy, the worst since the current statistical series
began in 1992, will also climb as small firms fire staff.
NO MARRIAGE, NO MORTGAGE
Fed up being ignored by banks and the Italian government,
Giuseppina Virgili set up an association called the "Invisible
Small Entrepreneurs" to advise businesses in trouble.
"The banks have turned off the credit tap for us small
entrepreneurs. They don't give us money, they don't trust us. We
are no longer welcome customers," Virgili told Reuters.
"They are scared that we can't pay them back, so they treat
us as if we were the cause of the economic crisis, even when we
should be part of the solution."
In Spain, a breakdown of the country's regional savings
banks, which overextended themselves in the property boom, has
left many of their small clients without financing.
"We want to lend, but those that really need the funding are
the SMEs that used to borrow from the savings banks. We don't
know their track record, and for now these companies are
isolated, which has created a shock in terms of lending," a
senior Spanish banker said, on condition of anonymity.
The government is trying to get various state-backed credit
schemes going, including 45 billion euros in SME financing, plus
tax breaks for these companies.
But bankers complain of a lack of "solvent demand".
"We have not seen a healthy demand for new credit," Victor
Massiah, CEO of Ubi Banca, said this month after
Italy's fifth biggest bank by branch numbers reported a nearly
40 percent rise in loan writedowns for 2012.
"Unemployment is rising, young people are living with their
parents, they are not getting married, and they are not buying a
house - the demand for private mortgages has halved."