Protesters in Madrid carry placards asking why their money is being used to bail out banks. ISAAC F. CALVO / EL PAÍS

S peaking on national television recently, Juan Rosell, the president of the Spanish Confederation of Business Organizations (CEOE), described Spain's credit crunch as "terrible, appalling." Which is all well and good, but he then went on to say that he understood why banks aren't lending money: "I probably wouldn't lend money to those who the banks are turning down because the rate of non-repayment in Spain is very high: at the moment, it's around 11 percent." His comments were not well received by the business sector, who pointed out that Rosell sits on the board of Caixabank.

Between mid-2009 and the end of 2012, bank loans to Spain's private sector fell by 9.2 percent, a reduction of some 172 billion euros - equivalent to 17 percent of GDP - according to a report entitled The financial restrictions on Spanish SMEs: the importance of bank loans, written by Joaquín Maudos, an economic analyst at the University of Valencia. SMES - companies with between 10 and 249 employees - have been worst hit by the credit freeze. Between them, they employ 74.5 percent of the Spanish workforce, according to the report. Aside from being scarce, credit is expensive, with 80 percent of SMEs saying that the cost of financing has risen.

The problem of the lack of credit in Spain has reached levels unknown since 1963. The situation, which reared its head in 2007, is similar to a game of tennis between businesses and the banks, although the most likely outcome is that neither side will win. In the short term, businesses (particularly if they are SMEs) are more likely to lose, but even in the medium term the banks are still unlikely to win, and the consequences will be negative for the entire economy. When a business dies it creates more unemployment, with the subsequent recession due to the fall in consumption and more unpaid loans to the banks. In this situation, the financial sector faces a greater need for provision, and at the same time its income falls because commercial activity decreases. It is a vicious circle.

Part of the problem is that a large number of the banks, above all those formed out of the merger of savings banks, are victims of their own mismanagement and overdependence on the property sector, which has required a rescue by the taxpayer (the same people they are now refusing to lend to). These zombie banks have worsened the credit problem. The clients of the old savings banks, particularly if they are SMEs, suddenly find that nobody is prepared to lend them money. Where can small businesses (many of them exporters with viable business plans) in Valencia go, for example, now that Banco de Valencia, Bancaja, and CAM have disappeared? The banks that have survived do not know them, and they have no credit history with them, a key factor at a time when there are so many doubts about recovering a loan. Furthermore, healthy banks cannot renew 100 percent of a loan to a company if previously they had lent it 50 percent of a loan with other banks that have since folded.

Part of the problem is that banks are victims of their own mismanagement

And it is precisely for that reason, says Economy Minister Luis de Guindos, that restructuring the banking sector is a priority. "The banks that have been nationalized or that have received help from the state were in no position to offer credit until they had recovered their solvency and their capital. They now have that and will lend money when the time comes," he says. Does that mean that Bankia, CatalunyaBanc and Novagalicia will lend money after having had 40 billion euros pumped into them?

In theory, yes. "We have three fine banks that are now healthy and with liquidity. We need to use them in the best way; we have to use that leverage to encourage loans," said De Guindos a few days ago in Congress. According to the minister, Spain has begun an "unparalleled" financial restructuring process, and that thanks to this, "today we have a strong, healthy, and solvent system."

That said, Antonio Carrascosa, the head of the FROB bank restructuring fund, admits that it is unlikely that 2013 will see much lending. "Economic history shows that just as lending continues during a recession, it is also true that it doesn't reappear until GDP recovers and the recession ends. That is to say that lending does not take place before the economy recovers, but instead comes afterwards. The Spanish economy should take off with the government's reforms," he says. In a bid to lubricate the machinery of lending, on February 23 the government announced an extraordinary credit line of 22 billion through the Official Credit Institute "under more advantageous conditions than those being offered by the banks," and to which will be added 10 billion euros via the banks. But the experts say that these amounts are too small to solve a problem as large as that facing businesses today.

The situation is further complicated by the fact that what must grow on the one hand is obliged to shrink on the other: That is to say that it is beyond question that Spain entered the crisis with one of the largest credit excesses in the world. As José Ignacio Goirigolzarri, the president of Bankia, pointed out a few weeks ago, in 2000, loans amounted to 194 percent of Spanish GDP.

Experts agree: Spain is seriously ill and must learn to live with less lending

"Eight years later, that ratio was 327 percent. Spain is a world record holder in this regard. Spending was greater than saving, and there was a huge foreign debt. It was a similar trajectory to that of Latin America in the 1990s, when it became massively dollar indebted," he said.

The worst aspect of it all is that when the bubble burst, between 2007 and 2008, the public administrations asked for all the loans that were being denied to business. In this way, the ratio of debt to GDP continued to grow: at the end of 2011 it was 346 percent, falling slightly for the first time in decades by the middle of 2012.

The experts agree on the diagnosis: Spain is seriously ill, and must learn to live with less lending. Now, the total has reached 2.87 trillion euros. The matter is serious because in the case of Spain there is another element that weighs heavily: the banking system is still contaminated by the enormous weight of the property sector, the assets of which continue to depreciate and are slowing down recovery. We should not forget that half of the growth of lending was related to the property sector: construction companies, developers, and homebuyers. The fall in property prices is even affecting the biggest and healthiest banks, which is preventing them from taking risks, even in other sectors of the economy.

This is why many experts believe that the process of recapitalizing the banking system is not complete and that the machinery of lending will not get going until all doubts about whether or not the hole created by the collapse of the property sector has been properly plugged are resolved.

After doling out money to everybody, the banks are now very strict"

The outlook is not encouraging. "The financial system will have problems this year and lending will fall further than in 2012. Europe has demanded measures to restrict lending by nationalized banks that will discourage them from doing so," says José Carlos Díez, chief economist at financial advisers Intermoney. Nevertheless, Bankia says that it will put aside 44 billion euros for lending to SMEs and the self-employed over the next three years. It says it will lend eight billion in private loans up until 2015.

Since the crisis began, banks have denied that they have stopped lending, saying when accused that "there is no solvent demand." Some even say that in percentage terms they are approving more loans, but argue that businesses "do not want to invest; neither do SMES, and households are not buying cars or apartments."

So where does the problem lie, with supply or demand? Ángel Laborda of FUNCAS, the Foundation of Savings Banks think-tank, says it is a mixture of both. "Supply of loans by the banks is lower than before because they are shut out of the international markets, and therefore have little and more expensive financing. The money they get from their clients, from deposits, they mainly use to pay debts. If the risk premium is above 200 basis points, it is costing them a lot of money to finance themselves. It will take a long time before things normalize," he says.

Laborda says that banks are asking more and more from their clients in return for lending money. "After a period in which they were doling out money to everybody, they are now very strict," he says, adding that banks prefer to put their money into government debt bonds, which are less risky and more profitable. Another factor that is holding the banks back is that the relationship between lending and deposits is very high. For every 100 euros they possess they have loans worth 140 euros. And the remaining 40 euros have been financed with loans received from the international money markets, who now want paying back.

I doubt a bank will automatically refuse a loan: banks make money from lending"

The EU has told Spain's banks that they must bring their loans and deposits closer to 100 percent, which is another incentive not to lend. Finally, analysts predict an increase in mortgage default and non-repayment of loans from SMEs. It is a self-fulfilling prophecy: if you cut credit lines, non-repayment will automatically increase.

Joaquín Maudos, professor of Economics at the University of Valencia, explains the situation in terms of numbers: "I doubt that a bank will automatically refuse a loan if the company asking for it has an attractive project - after all, banks make their money from lending. That said, I do believe small businesses when they say that there is a credit crunch, as they have told the European Central Bank (ECB) in a recent report on access to financing. The ECB's latest report says that 57 percent of Spanish SMEs say that banks are less inclined to lend money, compared to an average 37 percent in the rest of Europe, and above those in Greece, where the figure is 49 percent."

The Spanish Banking Association (AEB) denies a blanket refusal to lend money by its members: "The banks are not being indiscriminate in cutting lending. They continue to look at each request, regardless of the sector it comes from, applying solvency and profitability criteria based on risk," says a statement from the AEB, which insists "taxpayers' money has not been used to help the financial sector, but only to a few, specific banks in difficulty."

The Spanish Confederation of Savings Banks, CECA, points to the opening of new credit lines, saying: "Public mechanisms could be set up to identify which businesses are solvent and provide signposting that would reduce the cost of borrowing for these companies through guarantees or by providing them with access to credit ratings." The savings banks also identify another factor in reducing lending: "The ever-higher capital provisions being demanded of banks are limiting their capacity for lending."

Banco Popular says that it has not cut back on lending and that in 2012 loans increased by 18.6 percent, while in 2013 it is putting aside 500 million euros to lend to SMEs, along with a financing line of three billion euros. The bank says that Spanish banks are being "discriminated against compared to their European competitors" by the international money markets.

Banco Sabadell does not believe that reducing capital provisions would endanger lending. This bank, which claims it is responsible for "one in four loans," says that it expects an improvement in financing for "the more profitable business projects."

Jesús Terciado, president of CEPYME, which represents the country's small businesses, says Spain's SMEs are being let down by the banks. "Banks need to bear in mind the viability of business projects and not simply companies' ability to meet the guarantees demanded of them. The important thing is that banks evaluate the viability of a business plan independently of the sector it is associated with or the size of the company."

The Association of Self-Employed Workers, ATA, whose members on average have borrowing needs of around 8,000 euros, is calling for "a system of micro-financing of small amounts to deal with the lack of liquidity." ATA says part of the problem is the slow process of restructuring the Spanish banking system.

Juan Sitges, the director of Cofidis, a Europe-wide loan company, says that in 2012 it lent 4.7 percent more money than the previous year and that the key to the problem "is finding a balance between debt and savings. Any initiative by the government to boost lending would help companies." Mario Draghi, president of the ECB, says Spain's banks are "well capitalized and in a position to lend."

That said, some experts blame Germany - where the ECB is headquartered - for the credit crunch. A report by Spanish bank La Caixa in January points out that Germany is lowering its debt-to-GDP ratio more than Portugal. "It would be highly beneficial if countries with underused credit capability did not sit back and do nothing," says the report. Miguel Ángel Bernal, a lecturer at the Institute of Stock Exchange Studies (IEB), explains: "You can't fight a tiger with a fly swat. We cannot address a problem of this size by worrying about the risk of inflation. Germany needs to encourage internal demand, even if that means creating a little inflation, as the United States has done. Perhaps if the German train were to start moving, as Rosell said, the banks would be less fearful and the Spanish recession would begin to recede."