Spanish non-financial firms have spent the last four years deleveraging. Their gross debt has fallen by more than 25 pps of GDP since the peak reached in 2010, down to 108% in 2014 Q2. In spite of this considerable effort, many firms are still too heavily in debt. According to EC estimates, corporate debt needs to fall by a further 10 pps to reach a sustainable level. These aggregate data hide the great disparity between different companies. It is clear that the firms that got too much into debt during the boom years must continue their deleveraging while others with healthier balance sheets already have the creditworthiness to begin investing again.

Based on company information from the BACH database, we have compared the trend in the leverage ratio (debt to equity ratio) between 2008 and 2012. While SMEs had considerably reduced their leverage over this period, specifically by 49 pps for firms in the second quartile,1 the adjustment made by large firms was much less (15 pps) and such differences are even greater when we look at the third quartile of the debt to equity ratio. In other words, those SMEs that were most indebted in 2008 are the ones that have deleveraged the most (specifically by 130 pps), while this ratio has barely fallen for the companies least in debt (first quartile). In contrast, large firms, including the most leveraged companies of the third quartile, deleveraged very little between 2008 and 2012. This pattern shows that, for the time being, SMEs, whose economic activity and external sources of financing tend not to be highly diversified, have carried out most of the adjustment.

To place the deleveraging of Spanish SMEs in context, it is useful to compare them with those in other European countries. In 2008 Spanish SMEs had very similar or even lower leveraging rates than their European peers and, between 2008 and 2012, SME deleveraging became widespread. The largest drop in the ratio can be seen among German SMEs with a median reduction of 57 pps, rising to 140 pps when, once again, we look at the third quartile.

Returning to Spain, it is evident that not all industries have deleveraged at the same rate. Focusing on the third quartile (the segment most heavily in debt), it comes as no surprise that sectors such as construction, which had reached very high levels of debt (a median of 241% in 2008), have reduced their debt the most whereas SMEs in other sectors, such as hotels and restaurants, have a similar leverage ratio to that of 2008. This shows that few companies in these sectors were excessively in debt and, consequently, they did not need to deleverage so much.

Lastly we can also see early signs of a recovery in credit to SMEs: new loans of less than 1 million euros granted to non-financial firms have grown by a cumulative 7.4% for the year to date. It therefore appears that most of the laborious process of SME deleveraging has been completed and might actually be coming to an end.

1. The first (second or third) quartile is the value where 25% (50% or 75%) of the companies have a ratio below this value and the remaining 75% (50% or 25%) have a higher debt to equity ratio.