In 2010 the Spanish government, led by former Prime Minister José Luis Zapatero, installed the ICO Directo initiative, which allowed companies to apply for credit without financial intermediaries. This was against the grain of current lending practices. It was completely ignored that credit was not flowing because of problems with the financial industry and the fact that many companies were already struggling to repay their debts. The goal of the ICO Directo was to stimulate loan granting for small- and medium-sized businesses, because the government would agree to assume all default risk.
A Bank of Spain warned the ICO that in such a case the state should apply the same risk control measures that the banking sector uses to grant loans. This warning fell on deaf ears, and the program ended up a failure. In two years only 500 million euros in loans were granted and the default rate for the ICO is 40%, which means that it will have to get cash provisions for these suspect loans.
The ICO failure de-incentivizes bank loans, which funnel high-risk loan request to the ICO. And small businesses still are not getting the loans they need, which was and is the main problem, as the Bank of Spain has said time and time again. The banks do not want to assume all the risk associated with ICO loans, and the Bank of Spain advises sharing the risk with the ICO so long as the Institute assumes a smaller share than the banks.
The effort will be worth it, because small businesses have no other smart way to get loans. As the Bank of Spain has said before, credit will not start flowing again until the risk premium stabilizes and an economic recovery begins. Getting small businesses up and running can help achieve both those goals.