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Small businesses struggle as crisis deepens in Spain

Some store owners expect their vital lines of credit to be cut or cancelled as banks call in loans.

Israel Barragan and his wife, Isabel Navarro, are hoping for a good Christmas at their home and kitchenware store Piu e Piu in Madrid, but say even buoyant sales are unlikely to save the three-year-old business. They rely on a ?60,000 (Dh291,927) credit line, renewable at the start of every year, which they expect to be cut or cancelled as banks call in loans.

"We can't afford to stock this floor any more," says 30-year-old Ms Navarro, gesturing to a bed on the downstairs level once used to show off bed linen. "We've cut costs to a minimum, but can't cut any more. We don't put as many lights on, do the cleaning ourselves and we had to let our other worker go." Piu e Piu is among many small Spanish businesses squeezed between more cautious banks and cash-strapped customers who are increasingly turning to large chains during Spain's sharp downturn.

"There's help for banks and property firms, but nothing for us," says Mr Barragan, who has fixed monthly costs of ?12,000 on the shop. These include rent, ?244.45 a month in social security payments and ?289.50 in paying an administration firm to help him navigate the paperwork of the tax system. So far, Spain has taken no special initiatives to help small businesses, although in line with other EU countries it has launched plans to increase bank liquidity, which the government hopes will trickle down into the wider economy.

Unions and the conservative Popular Party have voiced scepticism over whether that will happen. "The uncertainty is whether the banks will hoard liquidity for what may come in the future or go back to lending to small- and medium-sized businesses and individuals," said Manuel Romera, the director of finance at Madrid's Empresa Business School. The Spanish economy grew faster than the EU average for more than a decade, fuelled by a housing boom and cheap credit, but is now sliding towards recession, with unemployment at 11.3 per cent in August - the highest rate in the Euro zone, according to Eurostat.

"The freeze in the property market has caused a chain reaction," says Camilo Abietar, the chairman of the Spanish self-employed association OPA. "All those self-employed people involved with construction are being hit, from estate agents to people selling furniture, home decorating shops, bathroom and kitchen fittings." According to the latest statistics available from Eurostat, Spain in 2005 had 59.1 small or medium companies per 1,000 inhabitants, compared with 39.9 in the 27-member EU and 25.6 in the UK.

That picture may be rapidly reworked. Small businesses do not have the clout of their large rivals to negotiate credit terms with banks and suppliers, so they cannot cut prices profitably to attract bargain hunters. For example, Spain's largest retailer, El Corte Ingles, the only national department store chain, has just introduced a low-cost label for food and toiletries called Aliada. "If we buy 10 bags and sell two, we're left with eight, which we've already paid for," says Piu e Piu's Ms Navarro. "El Corte Ingles tells its suppliers to deliver the goods and then take back what it doesn't sell."

Although Spanish retail sales are falling - down 5.9 per cent in August - data from the National Statistics Institute shows large stores are managing continued growth, grabbing market share from the smallest players. The clothing retailer Inditex, which dominates the country's High Streets with a dozen chains including Zara, Bershka, Massimo Dutti and Oysho, bucked the falling market in September to post a rise in net profit for its first half.

It even launched a new accessories chain in Spain in July, and said in its September earnings report that it saw "no significant risks or uncertainties" for the second half. The failure of small businesses, which tend to source locally, is also having a knock-on effect on small suppliers. Spain's textile sector, once known worldwide for leather goods like shoes, handbags and belts, is fighting for survival.

It employs about 170,000 and is concentrated in southern regions like Valencia and Alicante. "More than 70,000 jobs in the textile sector have been lost since 2005," said Jose Mesa, who represents the sector for the UGT union. "Almost on a daily basis a business closes." This month, Saenz Merino, the maker of Lois Jeans, a Spanish household name since the 1980s, filed for liquidation, and the UGT expects about 350 workers to lose their jobs.

At the height of its success, the family-run, Valencia-based company employed some 1,700 people and the Swedish pop group Abba and tennis player Bjorn Borg appeared in advertisements for its jeans. "The main factors are the entry of China into the World Trade Association and globalisation," Mr Mesa said. "Many businesses had undergone restructuring to emerge from their own crisis in the textile sector, and now this financial crisis is sinking them." * Reuters