This Selected Issues paper analyzes Spain’s sustainable growth rate. It sheds some light on Spain’s medium-term growth prospects by looking into the key factors driving potential growth, both in the past and likely in the future, and international experience of countries in the aftermath of financial crisis. The paper suggests Spain is likely to face a long period of moderate growth (about 1½–2 percent) and high unemployment, but policy action—especially that directed toward reducing structural unemployment and raising productivity—could lead to much better outcomes.


This Selected Issues paper analyzes Spain’s sustainable growth rate. It sheds some light on Spain’s medium-term growth prospects by looking into the key factors driving potential growth, both in the past and likely in the future, and international experience of countries in the aftermath of financial crisis. The paper suggests Spain is likely to face a long period of moderate growth (about 1½–2 percent) and high unemployment, but policy action—especially that directed toward reducing structural unemployment and raising productivity—could lead to much better outcomes.

Tackling the Corporate Debt Overhang in Spain1

Non financial corporations (NFCs) in Spain accumulated large amounts of debt during the boom years. This process started to be reversed in the last couple of years. But a significant fraction of NFCs is showing symptoms of debt overhang such as little hiring, low investment, and financial distress. This note reviews lessons from country experiences in addressing corporate debt overhang and examines policy instruments that could play a role in this process. It concludes by recommending a comprehensive strategy, catalyzed by the official sector and aligning the incentives of all stakeholders, to lubricate the restructuring process and enhance growth prospects.

A. Background

1. Non financial corporations’ (NFCs) debt increased quickly since 2000 (67 percent of GDP during 2002–10) but has been declining since 2010. Their debt was 129 percent of GDP by end 2013 (15 percent of GDP lower compared to the peak). However, debt levels are still high compared to other European countries and historical averages.

2. NFCs’ debt reductions have been driven by a remarkable improvement in net lending flows that started in 2008. Debt restructurings/write-offs have not been significant. The adjustment in net lending flows was explained by a decline in investment and a sharp increase in savings supported by a very large reduction in employment.

3. The deleveraging process of NFCs has been uneven within the economy.2 Debt reductions have been more intense in the construction/real estate sector than in other sectors, and by SMEs rather than by large firms. More generally, the decline in debt, investment, and employment has been (appropriately) more acute in those sectors that were more leveraged before the crisis.

4. The fraction of firms struggling to generate enough profits to meet interest payments has been increasing steadily since the beginning of the crisis.3 It was 18 percent in 2007 and reached 30 percent in 2012. Similarly, the fraction of debt at risk owed by these firms has also been increasing, especially for SMEs.4

5. Many firms under financial stress maybe unviable and should go bankrupt (i.e., be liquidated) to allow resources to shift to more productive uses. However, many other firms may be viable but are unable to invest, hire, and grow because they have too much debt. In those cases, some kind of debt restructuring could be in the interest of all stakeholders. Debt restructuring could include: extension of maturities, lower interest rates, debt-for-equity swaps, debt reductions, and others.

6. Corporate debt restructuring should entail operational restructuring. The latter is important to revamp profitability and remove obsolete or excessive capacity. It could include: replacing management, reductions in staff, sales of assets, revised business model, and others.

7. A period of corporate restructuring in Spain is unavoidable to realign the corporate sector to the post-crisis environment. However, experience has shown that a protracted corporate restructuring process would result in worse growth prospects. Indeed, this has been identified as one of the main drivers of sluggish economic performance in Japan since 1990.5 A strategy to accelerate corporate restructuring could, therefore, assist economic recovery.

B. Lessons from Country Experiences

8. The experience from past crises, such as Latin America and Asia, provides lessons for designing strategies for corporate restructuring in the NFCs sector.6

9. The main lesson is that some degree of government intervention has occurred to jump start and sustain corporate restructuring. The level and modalities of government intervention depend on the dimensions of the debt problem, the capacity of debtors and creditors to burden-share losses, and the legal and financial resources available to the government. The insolvency law is one important tool to support corporate restructuring but other tools are usually needed.7

10. Governments may have both institutional limits (e.g., EU limits on State Aid) and fiscal space constraints on intervening to resolve private sector debt problems and large scale intervention by governments has the potential to lead to unsustainable public debt burdens.

Figure 1.
Figure 1.

Non Financial Corporations Are Deleveraging

Citation: IMF Staff Country Reports 2014, 193; 10.5089/9781498330862.002.A002

Sources: Bank of Spain; ECB; INE; Bornhorst and Ruiz Arranz (2013); Menendez and Mendez (2013); and IMF staff calculations.1/ Current episodes start in 2002.2/ Historic episodes: Japan 1989–97; UK 1990–96; Austria 1988–96; Finland 1993–96; Norway 1999–05; Sweden 2001–04.3/ Saving is a residual equal to net lending plus gross fixed capital formation (investment).

11. The close links between the corporate and the financial sectors requires restructuring efforts on both fronts to resolve a financial crisis. Restructuring banks without addressing corporate weaknesses is a bad strategy.

12. The involvement of all stakeholders (e.g., firms, banks, government) in the formulation of a comprehensive strategy for restructuring enhances its credibility and effectiveness. Korea benefited from the early formulation of comprehensive restructuring strategies.

13. Corporate debt restructuring could entail various degrees of government involvement.14 The experiences of Korea, Malaysia, and Thailand in the late 1990s were relatively decentralized. The experiences of Chile in 1982 and Mexico in 1983 were relatively centralized. The experiences of Mexico in 1995 and Indonesia in 1998 had elements of both approaches.

14. Corporate restructuring is challenging.15 Distinguishing viable from non viable firms is far from trivial in the aftermath of a crisis. Many viable firms may be struggling during a cyclical downturn and could return to a more solid position once the economy recovers.

C. Instruments

In court bankruptcy regime

15. A sound bankruptcy regime distinguishes between viable and non-viable firms, fosters the restructuring/rehabilitation of the former and the liquidation of the latter, and provides an efficient process in both cases. It also facilitates out-of-court workouts by providing a credible threat against which the bargaining occurs.16

16. The bankruptcy regime in Spain is underutilized compared to other countries, mainly because:17

  • the regime for individuals/SMEs18 is too severe with the debtor

  • the regime for corporations is slow, costly, and restructuring options are limited

17. The regime for individuals/SMEs does not allow for debt discharge, which entails unlimited liability. This is extreme and inefficient.19 Even countries with very different legal traditions allow for some debt discharge. For example, debt discharge is immediate in France and is allowed after one year in UK.

18. In September 2013 the Law of Entrepreneurs introduced a special bankruptcy regime for self-employed individuals and entrepreneurs (including owners of SMEs).20 One major novelty of this new regime is that it allows the possibility of debt discharge. However, it excludes privileged creditors, which is likely to leave the majority of debtors out of the benefit.21

19. The current bankruptcy regime should be upgraded by the establishment of a separate personal insolvency framework for individuals that includes some debt discharge for financially responsible individuals.22 Other countries have introduced some debt discharge without undermining payment culture (e.g., Germany).

Out of court process

20. Greater reliance on out of court debt workouts could result in a speedy, cost effective, and market friendly alternative to court supervised insolvency regimes.

21. The court system many times does not have the resources to support a large number of cases. However, out-of-court workouts are often hampered by coordination and asymmetric information problems. Attrition wars can plague negotiations, with delays that could be in the interest of the individual stakeholders but not for the economy as a whole. These problems could be paramount for larger firms since they borrow from multiple banks and also from smaller firms that typically have debts with one bank and public creditors. Moreover, the reliance on secured loans23 often discourages banks’ incentives to participate in debt restructuring given that it is less costly for them to foreclose collateral.

22. The Law of Entrepreneurs approved in September 2013 introduced an expedited out-of-court procedure-the “out-of-court agreement on payments” (OCAP) designed to address financial stress of small businesses, facilitated by a professional mediator. This was a step in the right direction. However, the procedure has three important limitations: i) secured creditors and public creditors are excluded; ii) the moratorium set forth in the plan may not exceed three years; and iii) any haircuts cannot exceed 25 percent.

23. The exclusion of secured creditors and public creditors limits the effectiveness of the procedure given that SMEs rely heavily on secured loans, and tax authorities are usually a significant creditor. The restrictions on moratoriums and haircuts are too rigid for a heterogeneous field of SMEs and should be relaxed to improve the effectiveness of the procedure.

24. The Decree of Refinancing Agreements and Debt Restructuring enacted on March 2014 aimed to promote out of court refinancing agreements by facilitating debt to equity swaps, among others. Specifically, firm owners may be personally liable if they reject a debt-to-equity swap that is considered “reasonable” by an independent expert. The Decree also allows banks in certain cases to benefit from lower provisions for the new loan after they exchange debt for equity.

25. This is a good initiative, especially for large firms under financial distress. In the case of smaller firms the benefits are likely to be more limited since banks will probably be reluctant to receive equity stakes that may require them to manage those firms and/or to increase capital to compensate for a more risky portfolio of assets. Other important measures in the Decree that supports restructurings include: i) reducing the risk of “claw back” of arrangements24; ii) increasing the space to “cram down” (i.e., bind) dissenting creditors to an agreement; and iii) eliminating several tax disincentives to restructuring.


26. An independent entity could facilitate time-bound negotiations by fostering creditor coordination for cases that justify case-by-case negotiations (i.e., large firms). Although the collective interest of the creditors may be to restructure debts of the firm, the individual interests of all creditors may not be aligned, and this could block restructuring deals. International experience suggests that governments can play an important role in facilitating out of court workouts relying on mediation.

27. The best known form of official mediation is the “London approach” started by the Bank of England during the U.K. recession in the mid 1970s, encouraging creditors and debtors to adopt a coordinated approach to arrive at voluntary restructuring agreements.25 The involvement of the Bank of England was possible because its statutes did not limit its activity to a narrowly defined role and because it was not involved in banking regulation. The approach was informal to maintain flexibility and adaptability. It was implemented in more than 160 cases during 1989–97.

28. Several countries relied on mediation by government agencies to facilitate voluntary workouts.26 Korea created the Corporate Restructuring Coordination Committee (CRCC) to act as a mediator; in Mexico, the Unidad Coordinadora del Acuerdo Bancario Empresarial (UCABE); in Malaysia, the Corporate Debt Restructuring Committee (CDRC); in Thailand, the Corporate Debt Restructuring Advisory Committee (CDRAC); in Indonesia, the Jakarta Initiative Task Force (JITF). Annex 1 summarizes several features of out of court workout frameworks adopted in a number of corporate restructuring experiences.

29. To promote corporate out of court workouts it could be helpful to have a public body that is perceived as independent acting as a catalyst to facilitate debt restructuring workouts. Moreover, it would be useful to issue centralized guidelines for restructuring arrangements (e.g., Portugal).27 Those guidelines should be based on the principles put together by the international federation of insolvency practitioners (INSOL)28, built on the London approach.


30. A standardized menu of voluntary restructuring agreements could play an important role to facilitate debt workouts for SMEs. The large number of SMEs implies that centralized case-by-case mediations are unfeasible. Similarly, the in court bankruptcy system cannot handle so many restructuring processes. However, failure to reorganize SMEs could have very adverse social implications given that they account for 75 percent of jobs and tend to employ those on lower incomes.

31. A standardized SME restructuring program could include: i) a simple method to assess viability (e.g., interest cover ratio (ICR) thresholds); ii) harmonized restructuring terms for viable firms (e.g., extension of loan maturities, improved interest payments terms, debt reductions/equity swaps); and iii) fresh funding for working capital for viable firms.

32. Standardized programs could obviously make mistakes. For example, simple methods to assess viability may result in mistakes at the time of dividing viable from non viable firms. However, those mistakes are unavoidable to avoid gridlock in the restructuring process.

33. The Bank of Spain compiles comprehensive data on SME balance sheets, which could be an important input into the triage process assessing SME viability. The translation of this data into such assessments/ratings, could be even out-sourced to a specialized private agency.

34. In Malaysia, SMEs received financing support from the central bank if companies were in the middle of a restructuring process. In Thailand, the central bank set targets for financial institutions to restructure a specific number of SMEs loans each month.29


35. There are several ways in which tax reforms might help to tackle corporate debt overhang.

36. First, the tax authorities should be allowed to participate in out-of-court debt restructuring based on clear criteria. Many times a large fraction of a firm’s liabilities are tax liabilities. Hence, tax authorities should be part of debt restructuring for viable firms under financial stress. In Spain tax authorities are not required to participate in out of court debt restructuring negotiations. Portugal made legal changes in 2011 requiring tax authorities to participate in out of court debt restructuring.30

37. Second, the tax system could eliminate the tax advantage for corporations that rely on debt financing (instead of equity financing).

  • One way to do this is to introduce a deduction for equity financing similar to the one obtained for debt financing (i.e., interest payments are deductible).31 The main problem with this measure is the potential fiscal cost, estimated at around 0.5 percent of GDP for an average developed country. However, the near-term cost could be reduced by granting the allowance only to new investment.

  • The other way to do this is to eliminate interest deductibility. However, this would be very onerous for indebted firms.

  • Spain implemented some measures in March and July 2012 limiting interest deductibility.32 The Law of Entrepreneurs approved in September 2013 introduced a tax deduction for equity increases to promote capitalization. These measures have not fully eliminated the debt bias.

38. Third, written off debt could be deductible for the creditor, and should not be taxable income for the debtor. For example, under the current Spanish CIT, written off debt is taxable income to the debtor. The Decree of Refinancing Agreements and Debt Restructuring enacted on March 2014 established that written off debt is still taxable income for the debtor but this income could be carried forward to split the burden of taxation across time. In the case of debt-for-equity swaps, the debtor is not taxed. Public deeds documenting debt write-offs and other refinancing agreements are now exempt from transfer tax and stamp duty.

Bank regulation

39. Stronger banks facilitate corporate restructuring, especially when they are the main source of financing for the non-financial corporate sector. Banks need to be viable and establish loss absorption capacity to play a positive role in corporate restructuring. Stronger banks are more likely to be willing to crystallize loses associated with debt restructuring. Similarly, non financial corporations are more likely to seek and accept debt restructuring deals when they face stronger banks.33

40. Spain implemented an ambitious program to put the banking system on a stronger footing during July 2012-January 2014. The program basically did the following: i) strengthened the system’s capital after identifying undercapitalized banks and requiring them to address these shortfalls; ii) segregated the most illiquid assets into a single asset management company; and iii) revamped the frameworks for bank regulation and supervision.34

41. Policies that boost bank capital and ensure adequate provisioning support corporate debt restructuring. Recent actions by the Bank of Spain, such as tightening provision coverage for restructured loans35 and limiting the distribution of dividends have been very important in this regard.36

42. Provisioning rules and bank supervision need to induce banks to undertake debt restructuring rather than continue rolling loans forward. Provisioning rules tend to be backward looking.37 One way in which provisioning rules could further facilitate debt restructuring is to require banks to provision performing loans of viable firms whose metrics suggest they may be under financial stress. This could be combined, as per the recent Bank of Spain guidelines, with reduced provisions on exposure to viable firms that have lower financial stress after restructuring.

43. The tax treatment for provisioning loans by banks seems to be relatively restrictive in Spain.38 Banks could be given more leeway in obtaining tax relief for provisioning to induce them to do that.


44. Credit guarantees could be used to foster corporate debt restructuring by linking the eligibility for the guarantee to debt restructuring.39 Banks may be highly risk averse in the aftermath of a bank restructuring process or may have doubts about the solvency of potential borrowers. By protecting a part of a loan with a guarantee, these schemes could induce banks to provide better financing terms in a more cost effective way (compared to direct subsidies) as banks have more expertise to scrutinize credit risk than government agencies.

45. The design of the scheme is crucial for its effectiveness and sustainability. The provision of guarantees should be limited in amount, conditional on the overall fiscal position of the country, and reported in a transparent manner. A significant part of the credit risk should be taken by the banks (i.e., the government should not be taking over all the credit risk of any lending arrangement).

46. The Spanish Guarantee System consists of a state owned company (CERSA) and 23 private mutual guarantee companies (SGRs). Its focus has been on improving SMEs access to credit by relying on guarantees.40 The system has been in place for more than 30 years and is subject to supervision and regulation by the Bank of Spain. The main weakness of the Guarantee System in Spain is its relatively small size and its relatively low penetration. An expansion of this system could contribute in the corporate restructuring process. Some recent measures (e.g., Law 14/2013) aimed to address the problem of the small size of the Guarantee System by increasing capital requirements.

Asset management companies

47. To minimize the costs of financial crisis it is sometimes argued that good assets of financial institutions should be separated from their bad assets and a centralized asset management companies (AMCs) should take over these bad assets.

48. The pros for AMCs that are usually mentioned are: i) efficient division of labor; ii) facilitation of valuation; iii) strengthening credit discipline by breaking unhealthy links between banks and troubled firms; iv) economies of scale; and v) enhanced bargaining power. The cons are: i) loss of information41; ii) weakening credit discipline (borrowers are less likely to repay AMCs that cannot provide fresh funding); iii) difficulty in pricing assets; iv) political interference; and v) fiscal cost and the associated subsidy (which could raise State Aid considerations in the EU).42

49. AMCs have been used by governments to more directly support the corporate sector restructuring process in several countries. The experience with publicly owned AMCs in corporate restructuring, however, is not generally encouraging.43 Successful experiences (e.g., Sweden) suggest that AMCs can be effective only when they have narrow mandates (e.g., for resolving insolvent financial institutions and selling their assets). And even this may require very special conditions: a type of asset that is relatively easy to price (e.g., real estate), remain clear from politicization, and be sufficiently funded. Hence, publicly owned AMCs do not seem promising instrument to facilitate corporate restructuring in Spain.

50. Private AMCs may also emerge from the desire of banks to transfer impaired assets to a specialized private entity for more efficient management and resolution. The establishment of those AMCs should be facilitated by removing legal obstacles, minimizing rigidities regarding incorporation, and securing tax neutrality for assets transfers.44 Spanish banks are currently studying a private AMC to manage equity stakes from firms benefitting from debt-for-equity swaps.

D. Conclusion

51. A comprehensive strategy, catalyzed by the official sector and aligning the incentives of all stakeholders, could “fast-forward” the restructuring of corporate debt and enhance growth and employment prospects for the economy as a whole. A public body could usefully oversee and drive the overall process, compile qualitative and quantitative debt restructuring statistics, and report them.

52. All the “tools of the trade” should be considered to address this challenge. These include: (1) further increasing the effectiveness of in court and out of court workouts by including public creditors fully in the process and introducing a personal insolvency regime to help individual entrepreneurs; (2) for larger firms, issuing centralized guidelines for voluntary out of court workouts, coupled with independent mediation by a centralized agency; (3) for SMEs, developing a menu of standardized voluntary workouts, relying on simple methods to identify viable firms, harmonized restructuring terms, and indicative targets for financial institutions to offer/agree to restructurings; (4) temporary and limited fiscal incentives to accelerate the restructuring process; and (5) ensuring adequate provisioning.

53. The government recently announced plans to: (1) strengthen the in-court debt restructuring process along the lines of the recent enhancements in out-of-court mechanisms; (2) foster liquidation as a going concern (i.e., transferring the business as a whole) instead of piecemeal liquidation; (3) introduce a code of good practice to facilitate debt restructuring for SMEs and the self-employed; (4) expanding the options available for SMEs to timely restructure in and out of court, (5) reviewing the current legal framework of the insolvency administration to reduce the costs and time involved in insolvency procedures, and (6) take measures for institutional cooperation to evaluate the effectiveness of the reforms undertaken and the need for further reforms. These plans continue improving the corporate debt restructuring process and are thus highly welcome.

Annex 1. Features of Out-of-Court Restructuring Processes

article image
Source: Claessens (2005).


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Prepared by Pablo Lopez Murphy (EUR).


Mendez and Menendez (2013a) conduct a thorough analysis of this issue.


Mendez and Menendez (2013b) document this relying on a large sample of NFCs for which they compute interest cover ratios (ICR) below 1. They measure the ICR as the ratio between gross profits plus financial revenues, and financial costs.


Martinez Carrascal and Mulino Rios (2014) estimate that SMEs account for about 75 percent of domestic bank credit to NFCs, or about 50 percent of total NFCs debt.


Caballero and others (2008) review the experience of Japan.


Claessens (2005), Claessens and others (2001), Hoelscher and Quintyn (2003), and Stone (2000) review corporate restructuring country experiences.


Laryea (2010) emphasizes these points.


Claessens (2005) distinguishes government centralized and decentralized approaches to corporate restructuring.


Stone (2000) highlights this.


Laryea (2010) elaborates on these points.


When a business is non-corporate, its debts are debts of the business’ owner; and when a business is a small corporation, lenders typically ask for personal guarantees that remove the owner’s limited liability.


Stiglitz (2001) argues that excessive deference to creditors reduces their incentives to engage in (ex-ante) due diligence, encourages predatory behavior by creditors, worsens the risk sharing between creditors and debtors, and weakens creditors’ incentives to engage in (ex-post) monitoring.


Garcia-Posada and Mora-Sanguinetti (2013) describe the main changes introduced by the Law of Entrepreneurs.


Garcia-Posada and Mora-Sanguinetti (2013) document that SMEs rely more heavily on secured loans than large firms.


IMF (2013a) and DeLong and others (2014) make this recommendation.


Garcia-Posada and Mora-Sanguinetti (2013) document the importance of secured loans across firms of different size.


Claw back means set aside by a judge that declares invalid the agreement.


Lieberman and others (2005) describe the origin and key features of the “London approach”.


Claessens (2005) reviews eight country experiences.


Portugal issued centralized guidelines in September 2011 in line with international best practices (IMF (2013b)).


Claessens (2005) reviews special programs for SMEs in Asia.


IMF (2013b) describes the reforms to the Legal Toolkit for Corporate Debt Restructuring in Portugal.


De Mooij (2011) discusses options to eliminate the debt bias.


Royal Decree Law 12/2012 and Royal Decree Law 20/2012.


Otherwise they will expect to be better off negotiating with failed banks and choose a “strategic default”.


IMF (2014) reviews the achievements of the program.


IMF (2012) documents this.


IMF (2014) explains the case for limiting dividend distribution.


European Commission (2012) reviews this issue.


Laryea (2010) discusses this issue.


Garcia-Vaquero (2013) describes the Spanish Guarantee System.


This is especially important in the case of loans to SMEs where banks collect valuable information on their borrowers.


Woo (2000) discusses these issues.


Klingebiel (2001) arrives to this conclusion after examining several country experiences with AMCs.