The state-owned Instituto de Crédito Oficial has risen to prominence as Spain's most promising credit provider. However, the country's government must ensure careful lending practices are followed so as not to overstretch the resource. Writer Rodrigo Amaral

Spain's dramatic economic downturn over the past year has revealed the existence of an unsuspected new star in the country's financial system. As liquidity dried up, with banks tightening their lending criteria to impossible levels due to the global credit crunch and the rise of domestic default rates, state-owned Instituto de Crédito Oficial (ICO) has emerged as the country's most viable provider of credit. ICO, once widely ignored by the Spanish population, is now regarded as a source of hope in the midst of the financial crisis, and a television advertisement by BBVA has even listed 'ICO loans' as one of the most interesting products that the bank can offer to its clients.

New role

ICO's new prominence is a result of the central role played by the bank in many of the initiatives launched by the Socialist government of Spain to resuscitate one of Europe's sickest economies. While Spain was booming in the 1990s and early 2000s, ICO was considered a relatively insignificant financial agency dedicated mainly to the provision of second-floor loans to small and medium-sized enterprises (SMEs), and also as a participant in some syndicated loans provided to big Spanish companies.

Since the financial crisis has impacted upon Spain over the past two years, however, ICO has taken on a range of new responsibilities that include helping unemployed people to pay their mortgages, giving some respite to SMEs by strengthening their current assets, and guaranteeing the payment of debts incurred by local governments. It has also boosted its traditional task of making credit lines available to SMEs, for which more money is available.

Into the spotlight

"In 2008 and 2009, people suddenly found out that ICO existed," says Maria Antonia de Pablos, the head of ICO's research department. The discovery was highlighted by the contrast between the scarcity of credit lines provided by the private sector and the sharp increase of ICO's activity. The institute's balance sheet doubled between 2005 and 2008, reaching nearly €53bn. The total amount of loans to be made by ICO this year is set to reach €36.5bn, compared with €15.5bn in 2007. The media exposure is guaranteed by the insistence of the Spanish government in funneling all kinds of credit lines via ICO, which is the country's only state-owned bank. And it seems as if the institute is rarely out of the spotlight.

ICO's president, Aurelio Martínez, is perceived to be a very close ally to Pedro Solbes, the once-powerful economy minister who paid with his job for taking too long to acknowledge the extent to which Spain would suffer from the global financial crisis. In mid-April this year, when Mr Solbes left the government in a cabinet reshuffle instigated by prime minister José Luis Rodríguez Zapatero, Mr Martínez was called to a meeting with new economy minister Elena Salgado. The summons was interpreted by the Spanish media as a sign that Mr Martinez's job was on the line too. In normal times, rumours of a change at the top of ICO would barely generate a yawn in the Spanish media; this time, when Ms Salgado confirmed that Mr Martinez would keep the job, market players sighed with relief.

However, this spotlight has brought into play something that ICO was not used to facing in calmer times: frequent, and sometimes vociferous, criticism. The loudest complaints have been voiced by business organisations, who are unhappy with the slowness with which ICO's credit lines have been delivered. The numbers seem to give credence to the complaint: in the first quarter, ICO made a mere €3bn in loans, or less than 10% of the total expected for the year. But the institute's supporters claim that ICO cannot be blamed for the sluggish performance.

Although ICO provides the money for the loans, commercial and saving banks are responsible for the operational side of them, including the risk assessment of borrowers. As they retain the risks in case of default for most of ICO's credit lines, banks are applying to those loans the same criteria that are preventing them from lending their own money. Some have even been accused of trying to take too much advantage of their intermediation role, charging up to 7% a year for the loans, while the maximum rate that ICO considers acceptable is 1.9%.

In a change of procedures provoked by the crisis, ICO has started to share the risks of some liquidity lines created this year to help SMEs (although not in investment loans). Some business leaders have gone as far as to suggest that it should keep all the risks so the money would flow more smoothly into the economy. "Some criticism has been made by impatient people who want the credits to be granted immediately," says José Luis Escrivá, the chief economist of BBVA. "However, from a point of view of cautiousness, and given the need to organise methods and procedures, it seems to me that things are being done expediently," he adds.

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