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Slow credit, slow job market?

Credit flow is crucial for startups

Employment rates plummetted during the first five years of the financial crisis, while so did financing availability. Now that credit flow is improving, will there be a spike in the job market? How are credit and employment connected?

10 december 2015

Three out of four Spaniards express deep concern over unemployment. Polls carried out by the CIS (Centro de Investigaciones Sociológicas) show it every month, and unemployment rates are still sky-high, despite Spain’s slow recovery: 21.6% rate on a national level, with jobless youth figures reaching 47.7%. There isn’t a simple answer as to what caused this situation (nor a simply solution), but one of the many factors that contributed was the drop in the flow of credit to businesses, in particular SME’s (small and medium-sized enterprises).

The term credit crunch, made popular in the last decade, refers to this situation: banks now offer credit at a much higher cost or require stricter guarantees than before the financial crisis. For SMEs, this policy is absolutely critical, since other financial instruments such as bonds are not at their disposal, as opposed to larger businesses. Available loans are central in their aspirations, more so with poor market demand: without them, job creation is an impossible task, while keeping existing positions isn’t much easier.

Spain has suffered an added component compared to their European neighbours: the need to intervene in several financial institutions, some of them the main credit providers for Spanish SMEs. Financing restrictions were even stricter in these banks, and the effects on employment have been crushing: up to 35% percent of jobs destroyed between 2006 and 2010 were the caused directly because of this intervention.

If that wasn’t enough, further measures taken to force an increase in market liquidity have had conflicting effects: carry trade, for instance. Banks took loans from the European Central Bank at ridiculously low rates (then 0.75%; that rate has now dropped to 0.25%) and reinvested that same money in government bonds, which at the time, in Spain’s case, sold at over 5%.

That procedure is now impossible (or at least undesirable) thanks to negative yield on the market for Spanish bonds. With these financial “tricks” rendered less profitable, and with bank deposits penalised, the numbers do show that the access to credit has improved in the last few semesters as far as SMEs go. Concern over financing has plummeted to 11% among these businesses (down from 30% in 2012), and credit availability has improved regularly since 2013, according to the Survey on the Access to Finance of Enterprises in the Euro Area carried out every six months by the ECB (full text here). But there is also unrest at the current lack of customers. If low demand is now making SMEs hesitate more than financial availability, and with unemployment still abnormally high, what should be done now to breathe new life into the job market?


Friday, December 11th, D. Gabriel Jiménez Zambrano, head of the Department for Financial Stability of the Bank of Spain, will run down the effects of credit restrictions on the job market, in a seminar for the “Cátedra de Finanzas Internacionales-Banco Santander”, Universitat de València. You can read his paper “When Credit Dries Up: Job Losses in the Great Recession” here, written alongside Samuel Bentolilla, Marcel Jansen and Sonia Ruano.

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