The European Commission and the ECB warned yesterday that credit is drying up in Spain. Money is not flowing to the real economy because the public sector is hogging cash in order to cover its deficit, which doesn't leave many loans for private companies and citizens.
The situation is serious, and small companies are suffering the most. The EU estimates that the credit shortage will reach its peak in 2014 at which point loans will start to become available little by little through the end of 2015.
Still, small companies will keep struggling to get loans during this mid-term stretch. Banks are accumulating a lot of government debt, which is keeping this money out of company hands. But this is not the only reason credit is scarce.
The troika's report also warned the banks that they are still in a "vulnerable" situation and need to watch for volatility inside and outside of their walls. Solvency levels are generally above the required levels, but compared to banks across Europe, Spanish lenders "do not have the best capital ratios" and for that reason the troika wants them to reinforce cash provisions even more.
This factor also hurts loan availability. After yesterday's meeting between Mario Draghi and Spanish bankers, the ECB's President revealed doubts about whether it would look at how much government debt the banks have on their balance sheets during 2014 stress tests. If this factor is considered, then the banks will look less creditworthy.
Of course, the banks are in better shape than they were a year ago. But they are still not as healthy as they should be. The proof is the fact that they are not granting enough loans and unemployment is still high across a nation that is still mired in economic crisis. When government budget imbalances impede the entire country's ability to recover, that is a big problem.