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Country Commercial Guides for FY 2000: Spain Report prepared by U.S. Embassy Madrid, Released July, 1999   Note*

VIII. TRADE AND PROJECT FINANCING

Banking System

Spain has a diversified modern financial system, which is fully integrated with international financial markets. The system includes credit, stock, and money markets, and specific markets for derivatives (options and futures based on different assets).

The banking system is regulated by the Ministry of Economy and Finance, the Bank of Spain, the Directorate General of Foreign Transactions, and the Directorate General of the Treasury and Financial Policy.

The creation of the E.U. single market in banking and insurance services has generated changes in the Spanish legal framework. Spain has adopted E.U. Directives regulating the equity and solvency ratio of credit institutions, and the Second Council Directive on banking coordination. It has also adopted E.U. Directives on the securities market and insurance services.

The improvement of Spain's economic climate is benefiting the banking industry. Inflation and interest rates are at historic lows. Competition in the banking market is intense and brings down interest rates. Spanish banks are well capitalized.

The Spanish financial system can be classified as follows:

1. The central issuing bank: Bank of Spain

2. Other banks: * Spanish and foreign banks * Savings banks * Credit cooperatives - Rural savings banks

3. Financial institutions: * Credit Financial Establishments (introduced by Law 3/94, implementing the Second EC Directive on banking coordination). These are credit entities specialized in certain asset products which cannot take public deposits (leasing, lending, factoring, mortgage loans)

* ICO-Instituto de Credito Oficial (Institute for Official Credit). This institute acts as the State's finance agency and investment bank.

4. Investment institutions: * Collective investment entities: - Investment companies dealing in Marketable Securities, Property Assets - Investment funds: Marketable Securities, Money Market Assets, Property Assets, Mortgage Securities - Pension Plans and Funds * Venture capital funds and companies * Other investment entities

5. Brokers: * Stock market: Stockbroker companies and agencies * General: Banks and Security Management and deposit companies

6. Insurance and re-insurance companies and insurance brokers

The Bank of Spain

The Bank of Spain plays the most important role in the regulation and supervision of banks and deposit-taking institutions. The Law 13/1994 provided the Bank of Spain with a high degree of autonomy from the Spanish government, as required by the Maastricht Treaty (E.U.). This Law was modified by Law 12/1998, which ensures full integration of the Bank of Spain in the European System of Central Banks, recognizing the Central European Bank's authority to define monetary policy within the E.U. The Bank of Spain acts as a banker to the government and banking system, supervises operations of other banks and credit institutions, maintains centralized information system, and regulates exchange controls and foreign exchange markets.

The establishment of the European Monetary Union (EMU) and, consequently, the creation of the Central European Bank, affected some of the functions performed by the Bank of Spain. According to the EMU's schedule of implementation, the Central Bank has complete responsibility over monetary and exchange policy beginning in January 1999. The Bank of Spain cooperates with the Central Bank.

Banks

Private and savings banks are important because of their volume of business and because their activities cover all segments of the economy. Of the 158 registered private banks in Spain, there are 105 domestic, 33 branches of foreign banks headquartered in the E.U. and 20 with headquarters in non-E.U. countries, including four U.S. banks. Together they have over 17,500 branch offices. Many of them also maintain an international presence.

Most Spanish banks provide a full range of services to corporate and private customers, including international financing (collections and payments).

The Spanish Savings Bank Confederation comprises 51 confederated savings banks and 12 regional savings bank federations, with more than 15,000 branch offices. Savings banks are well-established institutions attracting a substantial portion of private savings in Spain. They lend primarily to private customers via mortgages and loans. These institutions are also active in financing major public and private projects by subscribing and purchasing fixed-income debt securities.

Many Spanish banks have merged to improve, in part, their position in view of the E.U. single market for banking services. As part of this process, a holding entity, Argentaria, has been created to group state-owned holdings in various banks into one single entity. Argentaria's privatization process was completed at the end of 1998. In January 1999, Banco de Santander and Banco Central Hispano reached an agreement to merge and form the largest Spanish bank, the Banco de Santander Central Hispano (BSCH).

Spanish legislation governing the incorporation of banks is regulated by Royal Decree 1245 dated July 14, 1995. Authorization to carry out banking activities is the responsibility of the Ministry of Economy and Finance at the recommendation of the Bank of Spain. Foreign banks already authorized in another E.U. member country do not need authorization from the Bank of Spain to set up a branch or representative office in Spain. The conditions of access to the Spanish financial system are the same for both Spanish and foreign companies.

Investment and Brokerage Entities

Spain is taking steps to improve its investment and brokerage entities. For example, it has implemented new regulations to strengthen financial reporting by collective investment operators. Furthermore, the government has begun to recognize new types of investment organizations such as venture capital funds and companies. Additionally, Spain has created tax relief measures to eliminate the extra costs involved in using this medium for investments.

These measures have led to a notable increase in the number of these institutions and in the volume of their investment. Property investment funds also exist in Spain, thus completing the process of adaptation to and standardization with collective investment instruments in the E.U.

Credit Market

The Spanish credit market is structured around private banks, which attract most private and corporate savings and use their funds to provide financing for the private sector. These banks also operate as investors and underwriters in the stock market. They adjust their liquidity by interbank and money market transactions.

The process of liberalization of capital movements in the E.U. is making it easier for Spanish companies to obtain financing from abroad.

Distribution of loans

According to Spanish Central Bank statistics, the Spanish banking systems distributed a total of USD 663.4 billion in loans in 1998, with the public administration receiving only 6.0 percent of these loans (USD 39.5 billion). Stock Market

The Spanish Stock Market comprises four stock exchanges. After dealing only in stock and bond issues, Spain's stock exchanges have undergone a process of renovation, which has brought new ways of operating and new types of financial assets.

Leading Spanish private companies and banks are listed on the stock market. Also listed are guaranteed bills, promissory notes issued by the Spanish branches of foreign banks, and some foreign companies' shares. Certain non-resident entities may also issue bonds denominated in pesetas (matador bonds) in the Spanish market.

The Spanish system of market regulation is based on a British/U.S. model. Its primary objectives are to protect small investors and the market itself. Spain has a single computerized and centralized continuous stock market, in which insider trading is penalized. A National Stock Exchange Commission supervises the system and cooperates in developing its regulations.

The competitive securities market has a three-day settlement system. Trading on credit is permitted and new hedging instruments, index and warrant options, are available. Furthermore, the government has enacted stricter and more comprehensive regulations regarding takeover bids. Other positive developments for the stock market in Spain include the establishment of markets for options and futures and an unofficial second market for trading in fixed-income assets. These advances have made the Spanish securities market more transparent and safer.

In the last two years the Spanish government has carried out a privatization process. Several state-owned companies such as Telefonica (telecommunications), Repsol (oil and chemicals), Tabacalera (tobacco), Argentaria (bank) and Endesa (energy) have been partially or totally privatized. In some cases, individual investors have acquired a significant percentage of shares.

Money Market

The Bank of Spain bases Spain's money market fundamentally on the issuance of short-term securities, which are taken up by banks, finance companies and money market operators.

Because of the increased liberalization and greater flexibility of the Spanish financial system, the money market has become increasingly more important. Interest rates are ordinarily higher than the rate of inflation and there is a substantial volume of trading in money market securities. The government debt market is also important in Spain and both resident and foreign investors use it. For non-residents, favorable tax arrangements for investments in these securities make Spain an attractive market.

Pension Plans and Insurance Companies

The development of security investment companies and funds in Spain has increased during recent years. The Pension Plans and Funds Law of 1987 introduced a new form of saving in Spain. This law deals with the existence of pension plans promoted by employers, associations, and financial entities. These plans include favorable tax treatment as well as restrictions on the use of the funds before retirement, death or disability takes place. However, as of January 1998, the accumulated savings in pension plans can be used in the events of long-duration unemployment or serious illness. Furthermore, the new private insurance legislation, Law 30/1995, requires companies to formalize their pension plans with an external fund or an insurance contract.

The life insurance market has also grown substantially in Spain, due primarily to the similarities between survival insurance contracts and traditional saving formulae and the more favorable tax treatment of the former. However, the government prohibits the sale of short-term survival insurance with low actuarial content.

In recent years, international insurance companies have set up operations in Spain, either by forming subsidiaries and branch offices or by purchasing existing companies. In most cases, they have achieved profitable results and excellent positioning in the market.

The European Monetary Union, the Euro and the Effects on the Spanish Financial System

Spain is one of the eleven E.U.-member countries that entered into the EMU as on January 1, 1999. The main advantages of the EMU include:

* A decrease of exchange transaction costs and related expenses for companies with international operations;

* An increase in opportunities for foreign investors and exporters to expand business across European national markets;

* Required price stability and economic convergence amongst member states which will ease long-term industrial investment decisions;

* An ease in trans-border trade in Europe;

* Higher degree of standardization of accounting practices, which will make it easier for an exporter or investor to bill in one European currency rather than in 11 local currencies;

* A broader European capital market, offering easier funding in bonds, cheaper bank products and access to a broader investor basis;

* Easier treasury management for international corporations established in Europe; and

* An increased pressure on governments to standardize tax levels and eliminate obstacles to competitiveness, due to the Euro.

In the medium to long-term, non-E.U. companies can adopt the Euro in international business. Forecasts predict that eastern and central European countries that now align their currencies to the Deutch Mark (DM) and African countries that align theirs to the French Franc (FF) will adopt the Euro for international business.

The creation of the European Central Bank and the beginning of the manufacturing process of Euro notes and coins started in 1998. On January 1, 1999, irrevocable conversion rates for E.U. currencies to the Euro were established. The exchange rate for the Spanish Peseta was established at one Euro equals 166.386 Pesetas. As of January 1, 1999 the Euro replaced the ECU and started to be introduced into contracts. Since then, prices have been established both in Euros and in local currencies. In the same year, the European Central Bank will have complete responsibility for monetary and exchange rate policy. In the year 2002, the first Euro notes and coins will begin to circulate and local currencies will be gradually withdrawn. Both types of currencies will be valid until July 1, 2002 when all invoices will be expressed in Euros.

Foreign Exchange Controls Affecting Trade

The adoption in recent years of required E.U. regulations completed the liberalization of the Spanish financial sector. For example, exchange controls and capital movements are now fully liberalized. Between 1991 and 1993, Spain implemented several key Royal Decrees. They were:

* Foreign transactions (RD 1816, December 1991), modified in 1993 (by RD 42/1993)and in 1996 (by RD 1638/1996). * Spanish investment abroad (RD 671 and 672, July 1992).

Some main features of Royal Decree 1816/1991 include:

Safeguard clauses: Under exceptional circumstances, the law authorizes the Spanish government to prohibit or limit certain financial transactions with non-residents. This is applicable if the transactions affect Spanish interests, or if they affect the application of measures adopted by international bodies of which Spain is a member.

Documenting transactions: For statistical purposes, banks must document money transactions.

Declaration to the Bank of Spain: Notification must be given to the bank when certain transactions occur between residents and non-residents such as: financing and deferral of payments and receipts for over a year, offsets of credits and debits on commercial and financial transactions, and financial loans received from non-residents.

Prior notification: This regulation requires prior notification for the export of coins, bank notes and bearer checks, in either local or foreign currency, for amounts over one million pesetas per person, per trip. Prior notification is also required for quantities coming into Spain of more than one million pesetas.

Prior authorization: Prior administrative authorization is required for the export of coins, bank notes, and bearer checks, in either local or foreign currency, for amounts over five million pesetas per person, per trip.

Bank accounts: Non-resident individuals and companies can maintain bank accounts under the same conditions as residents. The only requirement is documentation of non-resident status.

For exchange control purposes, residents are:

* Individuals who live in Spain * Companies with registered offices in Spain * Branches or subsidiaries of foreign companies or of individuals living abroad

General Availability on Financing

Banks are the primary source for short and long-term capital. While short-term financing is relatively easy to obtain, banks are very cautious about lending medium and long-term funds. Only the largest companies have easy access to these types of loans.

The most important types of short-term financing are made through loan agreements (polizas de credito), discounting of commercial bills, and loans made against bills drawn on the borrowing company to the order of the bank (efectos financieros). Under a "poliza de credito" (the usual term is six months) the borrower has access to credit up to the maximum amount negotiated in the loan agreement. Spanish borrowers prefer "polizas" to loans made against bills (efectos financieros or letras financieras) because the latter are subject to stamp tax. Commercial bills and other trade instruments are generally discounted under an overall credit line agreed upon by the bank and its client.

Banks usually offer these lines for one year and prefer that short-term paper (30, 45 or 90 days) be passed through the line. Local companies that wish to raise their discount ceilings can normally do so by opening term or savings accounts equal to 5-20 percent of their drawings. Equity financing is also available.

Savings banks offer mainly, but not exclusively, credit for projects within their local areas. Loans offered are directed towards the financing of long-term housing and agriculture as well as to projects that create new jobs and improve the infrastructure of the area.

The Official Credit Institute (ICO), a state supported agency, offers special terms on loans for industrial restructuring and for smaller firms.

Credits from the European Investment Bank are increasingly significant in Spain and are available for investment projects directed to the development of selected sectors and regions.

How to Finance Exports/Methods of Payment

Methods of payment are the instruments used in international trade to guarantee collection of funds and reduce the commercial risk. The methods of payment most commonly used in Spain for international trade are:

Checks (cheque): While bank checks offer security in transactions, (since the bank issuing the check needs the guarantee of the transfer to issue it), personal checks do not offer enough guarantees against commercial risk as the bank does not guarantee the funds in the account of the person issuing the check.

Payment Order (orden de pago): In this case, the importer gives an order to the bank and, by using a correspondent bank in the same country, pays the exporter's bank the amount due. The initiative for the payment in this case is the importer's responsibility. These transfers, via SWIFT, are a common practice in the Spanish banking system.

Documents against payment (remesa documentaria): Exporters use this instrument to ensure the possession of the merchandise until the collection of funds, or at least until the importer accepts a bill of exchange.

Documentary Credit (credito documentario): This method of payment offers safer conditions in the transaction, due to the involvement of banks in both countries. In this case, the importer's bank ensures against the entrance of a third party (an exporter, the bank or a correspondent bank).

In general, foreign products are imported by using irrevocable letters of credit against documents, particularly during the first year of business. Opening irrevocable letters of credit is a straightforward process in Spain through which importers can insure against exchange risk with their banks. When a long-term relationship has been established between a supplier and a customer, credit may be negotiated. Payment practices are 30, 60 and 90 day terms. However, for large orders, payment conditions are established on a case by case basis.

Types of Available Export Financing and Insurance

Numerous financial organizations exist to assist American exporters. They include commercial banks and private financial sources such as factoring, forfeiting and confirming services. U.S. Government programs are also available to assist the U.S. exporter. Several federal, state, and local government agencies offer many types of programs. Some are guarantee programs that require the participation of an approved lender. Other programs provide loans or grants to the exporter or a foreign government.

Commercial banks use government guarantee and insurance programs to reduce the risk associated with loans to exporters. Lenders who are concerned with an exporter's ability to pay often use government programs to reduce the risk that would otherwise prevent them from providing finance.

For assistance in determining which financing options may be available, companies should consult the following sources:

* The exporter's international or domestic banker.
* The exporter's state exports promotion or export finance office.
* A Department of Commerce District office.
* The Export-Import Bank of the United States (ExImbank).

Availability of Project Financing

The Export-Import Bank of the United States (ExImbank) is the federal government's trade finance agency, offering many programs to address financial needs of American firms. Other agencies fill various market niches. The Department of Agriculture offers a variety of programs to foster agricultural exports. The Small Business Administration (SBA) offers programs to address the needs of smaller exporters. The Overseas Private Investment Corporation (OPIC) provides specialized assistance to U.S. firms. The Agency for International Development (USAID) provides grants to developing nations that can be used to purchase U.S. goods and services.

Types of Projects Receiving Financing Support

As mentioned in previous sections, U.S. exporters may receive financing in support of their exporting efforts from different institutions in the U.S. and for different types of projects. For Spain, there are several types of grants and incentives offered from the different levels of government (European, Spanish National Government and regional and local authorities). These incentives can be classified as:

* State and regional incentives for training and employment, especially focused on improving qualifications of active workers and under skilled workers, and to foster indefinite employment,

* State and regional incentives for specific industries, providing financial aid and tax benefits for activities in certain industries in priority sectors (e.g., agrofood industry, energy, mining, technological improvement, R&D). Incentives for technological developments are managed through the ATYCA Initiative of the Ministry of Industry, under two main programs: Industrial Technological Development Program and Industrial Quality and Safety Program,

* Incentives for investment in certain regions, to promote economic growth in less developed areas (Economic Promotion Areas and Special Areas) with a ceiling of up to 50 percent of the investment,

* State incentives for small and medium firms, known as "Iniciativa PYME". The Directorate General for Small and Medium Firms has launched several programs addressed specifically to SMEs: the Business Cooperation Program, the Program to Promote Information Services, Design Programs and Financing Programs,

*Incentives for Internationalization primarily addressed to Spanish firms willing to invest abroad or foster their business activities abroad,

* E.U. incentives and grants, focusing especially on depressed European regions or those with the lowest levels of income and high unemployment. These E.U. incentives are routed through Spanish institutions. Some of these E.U. instruments are:
a) European Investment Bank: Loans from this entity may cover up to 50 percent of the projects and are especially aimed to promote projects of interest for several states in the areas of energy, environment and industrial development for SMEs.
b) European Investment Fund (EIF): Has the objective of increasing investments in the Paneuropean transportation network, telecommunications and energy industries.
c) Structural Funds: These are one of the largest chapters for E.U. expenditure and are used to fund structural improvements in the less developed E.U. member States. Some of these structural funds are the European Social Fund (ESF, especially aimed to fund official agencies and non-profit organizations), the European Agricultural Guidance and Guarantee Fund (EAGGF, to improve processing and marketing conditions of farm and fishery products), the European Regional Development Fund (ERDF, for industrial, educational and health care infrastructure), and the Cohesion Funds (to promote economic and social progress, removing differences in living standards). In the past, Spain has been a beneficiary of these Cohesion Funds, which primarily co-finance Trans-European transportation and environmental projects.

List of Banks with Correspondent U.S. Banking Arrangements

All major Spanish banks have agreements with one or several U.S. banks. (See list of banks in Appendix E.)