EU Small-Business Loan Plan Said to Be Scaled Back After Doubts

The European Union is scaling back its ambitions to counter the credit crunch squeezing small and mid-sized businesses, according to EU officials.

Countries have all but rejected an option to spur as much as 100 billion euros ($135 billion) in extra lending, said five officials familiar with the discussions. Instead, policy makers will probably move ahead with a plan that would lead to 58 billion euros at most, they said.

The options were prepared by the European Commission and the European Investment Bank in June to boost credit as banks pare lending. Loans to companies and households in the euro area fell the most on record in August as the currency bloc struggles to recover from its longest-ever recession.

EU finance ministers will discuss the options next week in Luxembourg so that leaders can make a decision later this month and the EU can move ahead next year.

The plan to boost credit would involve a combination of a guarantee on new loans along with the possibility of bundling them over time, helping to revitalize the small-business loan market in three years.

The intent is to encourage banks to lend to small businesses by helping them find funding and by providing guarantees on loan portfolios to attract investors. Lenders could tap the government guarantees on loans and bundled securities in exchange for meeting small-business lending requirements, according to the proposals.

Nations including the U.K. and Belgium have argued that diverting EU structural funds to such a lending program would penalize countries that have already dedicated their share of the funds to other projects, three of the officials said. As a result, the SME lending effort is likely to offer reduced gains because some countries wouldn’t take part, they said.

EIB Readiness

The EIB is neutral on the options and stands ready to implement its shareholders’ decisions, an EIB official said yesterday. EIB’s existing small business lending programs will reach 20 billion euros in 2013, and EU nations now will need to decide how to move ahead, the official said.

Banks in Spain, Italy and Portugal face about 250 billion euros in potential losses on their business loans over the next two years, the International Monetary Fund said. About one-fifth of combined corporate loans is at risk of default in the three economies, which are forecast to contract this year, according to the fund’s Global Financial Stability Report released today.

Companies in southern European countries like Spain may be most likely to benefit from any lending program that moves ahead, Danish Economy Minister Margrethe Vestager said Oct. 8. She told lawmakers in Denmark she expects a majority of nations to back the proposal to bundle old loans, with some support for another option that includes new loans as well. That option which has estimated potential to unlock 65 billion euros in leverage, also remains under discussion, the EU officials said.

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