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The European Central Bank is facing a high-stakes dilemma. Its own figures suggest there are serious problems with the supply of credit to small companies in the euro zone's most troubled economies, Spain and Italy. The ECB has the means to help – provided it is ready to slay some sacred cows.
Small and medium-sized Spanish and Italian enterprises are paying 300-to-400 basis points more than their German peers for loans, ECB data shows. Since mid-2010, the interest rate charged to German SMEs is about 50 bps higher than for large companies. That spread has remained stable. In Italy, it has doubled to 200 bps, while in Spain it has jumped from 200 bps to 300 bps.
This matters, because small firms employ half of Spanish and Italian workers, against 40 per cent and 33 per cent in Germany and France respectively. Compounding the problem, the situation of smaller firms is deteriorating faster than the economy as a whole. Companies that could get credit don't want it. And companies that would need it can't find it.
One solution would be a new version of the ECB's longer-term refinancing operations tailored for SMEs. Banks reluctant to lend to riskier small firms would be able to swap these loans with the ECB for cash. But because the banks ultimately retain the risk, this might not boost lending much.
The ECB could instead take the risk itself. It could buy bundled-up SME loans from the banks so that lenders could extend cheaper loans. Italian and Spanish companies might then start borrowing again. Of course, securitising SME debt isn't easy, and the ECB could face losses if the loans backing the bonds defaulted. Yet some of the €1-trillion that president Mario Draghi has lent European banks is secured on SME loans, so it is already on the hook anyway.
Politically, an SME bond-buying programme would be a difficult sell. The richer nations in the euro zone would see it as akin to a recapitalisation of Italian banks by the back door. But Draghi has proved he is prepared to act to prevent a euro zone break-up, and Italy's economic crisis has been aggravated by an inconclusive election. Bazooka options like SME bond buying are not as impossible as they look.