“MILAN/MADRID (Reuters) – Small companies struggling to repay loans in Italy and Spain signal bigger problems on the horizon for the euro zone after the dust has settled on Cyprus’s last-ditch bailout this week.
Defaults by small and medium-sized enterprises (SMEs), easily the biggest employers in Spain and Italy, are rising at a worrying clip, spelling trouble for the banks and two countries at the heart of Europe’s debt crisis.
“You can be sure that if these companies’ bad debts rise, you’re going to see more bad loans to families, and credit card bills that won’t be paid,” said Javier Santoma, finance professor at Spain’s IESE business school.
The ability of Italy and Spain, which account for 28 percent of the euro zone economy compared with Cyprus’s 0.2 percent, to pull themselves out of crisis and avoid full-blown bailouts depends on the health of their banks; weak banks conserve capital rather than lend to get the economy moving.
Profits at Spain’s top three lenders Santander , BBVA and Caixabank fell an average 60 percent in 2012 due to steep government-enforced provisions for property losses. Writedowns of nearly 24 billion euros at state-owned Bankia led to a record 19.2 billion euro loss.
In Italy, the two biggest banks, Intesa Sanpaolo and UniCredit , set aside a combined 14 billion euros in 2012 to cover bad loans. Smaller lenders also had to increase provisions after the central bank conducted simultaneous audits of around 20 institutions.
Banco Popolare , Italy’s fourth biggest, issued a profit warning after the audit prompted 684 million euros of loan loss provisions in the fourth quarter, more than the total it set aside in the first nine months of the year.
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