One of the factors that triggered the financial and economic crisis in Spain was the excessive accumulation of debt in the private sector (both households and corporates). Between 2000 and 2007, the debt to GDP ratio moved from around 0.88 to 1.67, an astonishing increase taking into account that, in the same period, nominal GDP was growing at a compound annual growth rate of 6.6 percent (i.e., the rate of growth of private debt was substantially higher than that of nominal GDP).
A large fraction of that debt was held in the balance sheet of non-financial firms, especially in the form of bank loans. In graph 1, we see the dramatic increase in private debt by sector: agriculture (green line), industry (blue line), real estate (red line) and services (purple line). As expected, real estate was the most heavily indebted sector, experiencing a sevenfold increase in leverage over the period 2000-2007.
Graph 1: Evolution of Spain’s Corporate Debt by Sector (year 2000=100)
Since then, firms have gone through a deleveraging process that has altered the traditional capital structure of Spanish non-financial firms. This is precisely the subject of a recent report by the Bank of Spain, which provides an interesting perspective on the evolution of the sources of funding of the corporate sector since 2007.
How intense has the deleveraging process been? Let’s look at the numbers. Spanish non-financial firms have increased their equity capital by 10 percentage points, moving from 48 percent of total liabilities in 2007 to around 58 percent in 2017. This means that corporates have reduced their debt exposure considerably during the crisis.
In addition, bank loans, the traditional source of funding for Spanish firms, have lost weight in favor of other forms of debt. In 2007, loans represented 32 percent of total liabilities; in 2017, 25 percent. This reduction in loan financing has partly been compensated by an increase in debt-security issuances, which has been encouraged by the ECB’s Corporate Sector Purchase Program (CSPP) aimed at pushing down bond yields via outright purchases of corporate bonds. Fixed-income securities have moved from representing only 7 percent of total corporate debt in 2007 to 14 percent in 2017.
The report also points to other less traditional sources of funding for businesses. Although still marginal, alternative markets, private equity and crowdfunding platforms have experienced a considerable growth in Spain, proving to be valid alternatives to bank financing for some companies.
How does Spain compare with the Eurozone regarding the evolution of the capital structure of its business sector? As shown in graph 2, non-financial firms in the Eurozone have hardly modified the composition of the liability side of their balance sheets between 2007 and 2017. The most significant change can be found in the issuance of debt securities. Like its Spanish counterpart, the Eurozone corporate sector has taken advantage of the CSPP program and increased its bond issuances, especially since 2016.
Graph 2: Capital Structure of Spain’s and EMU’s non-financial firms (2007 vs. 2017)
Source: Bank of Spain. Blue: equity; red: fixed income; yellow: bank loans; green: trade credit; light blue: other liabilities.
In sum, Spain’s corporate sector is less dependent on bank loans than it was before the crisis. The deleveraging process has resulted in a more diversified capital structure, which has made non-financial firms more resilient to potential economic and financial shocks that may arise in the future.
Luis Pablo de la Horra
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