Miguel Ríos had a bustling business that ran four karaoke bars in Barcelona until coronavirus forced him to close them. He took out bank loans worth € 80,000, equivalent to $ 96,000, enrolled his 10 employees in a government wage support program and hoped for the best.
Almost a year later, with the doors still closed, Ríos fears his business could go bankrupt, leaving him with a pile of debt and exposing his banks to losses. “We are resisting thanks to savings and bank credit, but we cannot last long like this,” said the 59-year-old entrepreneur.
Its story resonates across Europe as small businesses fight to stay afloat during the pandemic. Their survival is essential for the region’s banks, which together lend them over € 2 billion, or 40% of the lenders’ entire business loan portfolio.
Overall, lenders have significantly cleaned up bad loans from the previous crisis, but many are still struggling with downgraded portfolios. They also find it difficult to make money in a negative interest rate environment.
Regulators fear that a new, potentially larger wave of defaults may cause banks to scramble to cover their losses. The weakest may need state aid to survive. Andrea Enria, head of banking supervision at the European Central Bank, warned that bad debts in the euro area could reach 1.4 billion euros, more than in the aftermath of the financial crisis, if the economy goes down. contracts more than expected.
The oversized exposure of banks to small businesses is part of the European economic fabric. Companies with fewer than 250 employees represent 99.8% of all businesses and two-thirds of all private sector jobs in the European Union, according to the European Commission. Small businesses in the United States also have economic clout, but they tend to be bigger. About half of Europe’s workforce is employed by companies with fewer than 50 people, compared to about a quarter in the United States, according to the US Census Bureau.
Given their size and the small economies they serve, many European companies struggle to attract investors, relying heavily on bank loans for financing. In Europe, about 80% of financing for small businesses comes from banks, compared to 50% in the United States, where small businesses find financing from private equity firms, angel investors, initial public offerings as well as leasing and factoring, according to Euler Hermes. , a credit insurance provider.
He estimated that about a quarter of companies in the euro area could face cash flow problems and potentially insolvency this year without government support measures.
So far, the financial difficulties of companies have not been transferred to the banks thanks to a series of programs deployed in Europe to support the economy. These include moratoriums on loan repayments, government guarantees on loans and wage subsidies to keep people in employment. But regulators and analysts say these are just postponement issues.
“That’s what worries me, the future,” said Cristina Paradisi, who, along with her two sisters, owns two clothing stores in the province of Pesaro e Urbino, in northern Italy. As consumers remain at home under forced lockdowns, sales have plummeted. The sisters have postponed some € 3,000 in monthly loan repayments under a moratorium program, but normal levels of activity seem like a pipe dream.
“By simply opening the doors of our stores, we are losing money,” Paradisi said.
Southern European banking systems, whose economies depend more on small businesses, are generally more exposed. Moody’s Investors Service estimates that more than a quarter of private sector loans in Italy, Greece and Portugal go to these small businesses, compared to 11% in Germany.
At one of Mr. Ríos’ banks, Bankia SA, small business loans made up 46% of his total business loan portfolio in September. Under pressure from the pandemic, Bankia recently agreed to merge with its larger counterpart CaixaBank.
Some large banks are also highly exposed. At the two largest Italian lenders, UniCredit SpA and Intesa Sanpaolo SpA, loans to small businesses represent approximately 30% and 50% of their business loan portfolios, respectively.
Many banks have actually increased their exposure to small businesses in recent years as negative interest rates have caused them to seek higher returns in riskier segments. Officials from Intesa and UniCredit said banks’ loan portfolios remained strong and performing.
Small business loan portfolios tend to have a higher percentage of non-performing loans because businesses are more fragile and can fall behind on payments faster.
“We have set up an SOS line and we are getting calls from people who are desperate and do not know how to continue,” said Giuseppe Palmisano, president of an association of small businesses and entrepreneurs in Italy. “People cry on the phone, I’m even afraid some people are thinking about suicide.”
In Portugal, where bank loans to small and medium-sized businesses account for nearly 70% of their business loans, a group of restaurant and nightclub owners camped outside Parliament late last year on hunger strike. to urge the government to do more.
Among the protesters was Ljubomir Stanisic, a celebrity chef who hosts Gordon Ramsay’s national version of “Hell’s Kitchen”. Stanisic’s two Lisbon restaurants were booming at the start of last year, aided by increased tourism and economic growth after Portugal neared bankruptcy in 2011.
Now Stanisic says he’s on the verge of bankruptcy himself. Restaurant revenues have fallen more than 70% since March. He had to reduce his workforce by half to 40. The only thing that increased is Stanisic’s debt: a loan of 2 million euros that he already had at the start of the year, closer to 1 million euros, partly guaranteed by the state, which he contracted with two banks in April. The lines, he said, are draining quickly to cover wages and other monthly bills.
“If I don’t find a solution quickly, I’m going to have to close my two restaurants and fire everyone,” he said. “Multiply my situation by the number of small businesses and you can imagine what the impact will be.”
—Pat Minczeski contributed to this article.