Trade and Project Financing in Spain

A Hot Tip about Banking and Finance in Spain

Posted on: 1 Mar 2010

How Do I Get Paid (Methods of Payment)

In general, foreign products are imported by irrevocable letter of credit. When there is a continued relationship between exporter and importer/distributor, other forms of payment can be negotiated. Payments are usually based on 30-, 60- or 90-day terms. Large corporations (including large retailers) negotiate or impose longer payment terms of up to six months. The government defers all payments. Depending on the department, payments can be deferred up to one year.


The methods of payment most commonly used in Spain for international trade are:

• Check (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 provide adequate 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): The importer gives an order to the bank in Spain 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 (Society for Worldwide Interbank Financial Telecommunications), are common 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 transactions, due to the involvement of banks in both countries. In this case, the importer’s bank insures against the entrance of a third party (an exporter, the bank or a correspondent bank).


How Does the Banking  System Operate

Spain has a diversified modern financial system 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 Directorate General of Treasury and Financial Policy in the Ministry of Economy and Finance; the Directorate General of Trade and Investments in the Ministry of Industry, Tourism and Trade; and the Bank of Spain. The EU single market in banking and insurance services has changed the Spanish legal framework. Spain has adopted EU Directives regulating the equity and solvency ratio of credit institutions, and Council Directives on banking coordination. It has also adopted EU Directives on the securities market and insurance services.


Spain’s 15 years of rapid economic growth greatly benefited the banking industry. Competition in the banking market is intense. Monetary System interest rates have been low by traditional Spanish standards, and they now fluctuate according to European Central Bank actions. Spanish banks are well capitalized, and as of late 2008 no Spanish banks had needed government capital injections of the sort seen in several other European countries.


Operators in the Spanish financial system can be classified as:

1. The Bank of Spain The Bank of Spain is the central issuing bank and acts as a banker to the government and banking system, supervises operations of other banks and credit institutions, maintains a centralized information system, and regulates exchange controls and foreign exchange markets. The Bank of Spain is fully integrated in the European Central Bank System. The European Central Bank has had complete responsibility over monetary and exchange policy since January 1999.


2. Other banks

• Spanish and foreign banks

• Savings banks

• Credit cooperatives - rural savings banks


Private and savings banks are important because of their volume of business and because their activities cover all segments of the economy. The Bank of Spain’s register, as of December 31, 2008, shows 351 credit entities; private banks (66), savings banks (45), credit unions (83), finance houses (75), and branches of foreign banks (81) headquartered in EU and non-EU countries, including two U.S. banks. These banks have a total of 15,135 branch offices. Over the last several years, a number of Spanish banks have merged to improve their position in the EU single market for banking services. Many also maintain an international presence, especially in Latin America.


The Spanish Savings Bank Confederation (Confederación Española de Cajas de Ahorro - CECA), is the national association of 45 savings banks (cajas) and 12 regional savings bank federations, with more than 23,456 branch offices. Savings banks are wellestablished institutions attracting a substantial portion of private savings in Spain.


Besides its activity as an association, the CECA is a private credit institution that lends primarily to private customers and other entities in the market through mortgages and loans. The savings banks are also active in financing major public and private projects by subscribing and purchasing fixed-income debt securities.


Spanish legislation on 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 at the recommendation of the Bank of Spain. Foreign banks already authorized in another EU member country do not need authorization from the Bank of Spain to set up a branch or representative office in Spain. Conditions of access to the Spanish financial system are the same for both Spanish and foreign companies.


3. Other credit entities

• Credit financial establishments specialize in asset products such as leasing, lending, factoring, and mortgage loans. They cannot take public deposits.

• ICO-Instituto de Crédito Oficial (Institute for Official Credit) 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 dealing in 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 Spain has improved its investment and brokerage entities. Regulations governing investment entities require financial reporting to the public and recognize new types of investment organizations such as venture capital funds and companies. Spain has created tax relief measures to eliminate the extra costs involved in using this medium for investments.


Money Market

The Bank of Spain bases Spain's money market fundamentally on the issuance of shortterm securities, taken up by banks, finance companies and money market operators. With increased liberalization and greater flexibility of the Spanish financial system, the money market has increased in importance. 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.


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 inter-bank and money market transactions. Liberalization of capital movements in the EU has made it easier for Spanish companies to obtain financing from abroad.


Stock Market

The Spanish stock market is comprised of 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. The Spanish system of market regulation is based on a British/U.S. model. Spain has a single computerized and centralized continuous stock market in which insider trading is penalized. The 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. The government has enacted stricter and more comprehensive regulations regarding takeover bids. Other positive developments for the stock market in Spain include 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 safe and transparent.


Pension Plans and Insurance Companies

The development of security investment companies and funds in Spain has increased during recent years. Employers, associations, and financial entities can promote pension plans. These plans include favourable tax treatment and restrictions on use of funds before retirement, death or disability. Accumulated savings in pension plans can also be used in the event of long-duration unemployment or serious illness. Private insurance legislation, Law 30/1995, requires companies to formalize their pension plans with an external fund or 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 favourable tax treatment of the former. The government prohibits the sale of shortterm 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 market positions.


Foreign-Exchange Controls

The adoption in the 1990s of required EU regulations completed the liberalization of the Spanish financial sector, including exchange controls and capital movements. Between 1991 and 1999, Spain implemented key legislation on foreign transactions (RD 1816, December 1991), and on Spanish investment abroad (RD 664/1999). Some main features of Royal Decree 1816/1991 include:

• Safeguard clauses Under exceptional circumstances, this law authorizes the Spanish government to prohibit or limit certain financial transactions with non-residents if the transactions affect Spanish interests, or if they affect the application of measures adopted by international bodies of which Spain is a member. The Ministry of Economy or the Council of Ministers invokes these safeguards if necessary.

• 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, to non-E.U. countries for amounts of more than 6,000 Euros (USD 8,772 at average 2008 exchange rate per person, per trip. Prior notification is also required for quantities of more than 6,000 Euros (USD 8,772) coming into Spain.

• Prior authorization Prior administrative authorization is required for export of coins, bank notes, and bearer checks, in either local or foreign currency, for amounts over 30,000 Euros (USD 43,860 at average 2008 exchange rate) 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 nonresident status.


For exchange control purposes, residents are individuals who live in Spain, companies with registered offices in Spain or branches/subsidiaries of foreign companies or of individuals living abroad.


Project Financing

General Availability of Financing

Banks are primary sources 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 through loan agreements (pólizas de crédito), discounting of commercial bills, and loans against bills drawn on a borrowing company to the order of the bank (efectos financieros). Under a "póliza de crédito" (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 "pólizas" 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 can raise their discount ceilings 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 financing long-term housing and agriculture as well as to projects that create new jobs and improve local infrastructure.


The Official Credit Institute (ICO), a Government of Spain-supported agency, offers special loan terms for industrial restructuring and for smaller firms.


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


Types of Available Export Financing and Insurance

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


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


To determine financing options available, consult:

• Your international or domestic banker.

• Your state exports promotion or export finance office.

• Department of Commerce Export Assistance Center

• The Export-Import Bank of the United States


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) also offers programs to address the needs of smaller exporters .


Types of Projects Receiving Financing Support

As indicated above, financing may be available to U.S. exporters from public and private U.S. institutions. In Spain, grants and incentives offered by different levels of the EU and Spanish Government, as well as by regional and local authorities include:

• State and regional incentives for training and employment, especially focused on improving qualifications of active workers and under-skilled workers, and fostering indefinite employment.

• State and regional incentives for specific industries, providing financial aid and tax benefits for activities in certain industries in priority sectors (agriculture and food, research and development, energy, mining, technological improvement).


The “National Plan for Scientific Research and Technological Innovation,” partly funded by EU Structural Funds, tries to raise the level of Spanish science and technology, increase competitiveness and the efficient use of research and development results.

• Investment incentives 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-sized firms (SMEs), known as "Iniciativa PYME." The Directorate General for Small and Medium Firms has several programs for SMEs, mainly for business cooperation and promotion of key areas (Information Services, Design Programs and Financing Programs).

• Incentives for internationalization, primarily for Spanish firms willing to invest overseas or foster their business activities abroad.

• EU incentives and grants focusing on depressed European regions and those with lowest levels of income and high unemployment. EU incentives are routed through Spanish institutions.


EU financial assistance programs provide a wide array of grants, loans, loan guarantees and co-financing for feasibility studies and infrastructure projects in a number of key sectors (e.g., environmental, transportation, energy, telecommunications, tourism, public health). These initiatives create significant market opportunities for U.S. businesses, U.S.-based suppliers, and subcontractors.


The EU provides project financing grants from the European Commission and loans from the European Investment Bank (EIB). Grants from the Structural Funds are distributed through the Member States’ national and regional authorities, and are only available for projects in the 27 EU Member States. All grants for projects in non-EU countries are managed through the EuropeAid Cooperation agency in conjunction with various European Commission departments, called "Directorates-General."


• Tendering for European public procurement contracts. The US Mission to the European Union in Brussels has developed a database to help US-based companies bid on EIB public procurement contracts in non-EU countries. EIBfinanced contracts open to US-based companies are featured in this database. All tenders in this database are extracted from the EU’s Official Journal. The EIB database contains on average 50 to 100 tenders and is updated twice per week.

• Some EU instruments are: European Investment Bank loans, which may cover up to 50 percent of projects and especially promote projects of interest for several states in energy, environment and industrial development for SMEs. For more details, please visit: Chapter 7 of the U.S. Mission to the European Union Guide on Doing Business in the European Union


European Investment Fund (EIF), with the objective of increasing investments in the Pan-European transportation network, telecommunications and energy.


EU Structural Funds, including the European Regional Development Fund, were created in 1975 to assist economically depressed regions of the European Union that required industrial restructuring. The EU earmarked EUR 308 billion (USD 425 billion) for projects under the Structural Funds and the Cohesion Fund programs for the 2007-2013 period for the EU-27. In addition to funding economic development projects proposed by Member States or local authorities, EU Structural Funds also support specialized projects promoting EU socioeconomic objectives. Member States negotiate regional and “sectoral” programs with officials from the regional policy Directorate-General at the European Commission.


For projects financed through Structural Funds, Member State officials are the key decision-makers. They assess the needs of their country; investigate projects; evaluate bids; and award contracts. To become familiar with available financial support programs in the Member States, it is advisable for would-be contractors to meet with local officials to discuss local needs.


Tenders issued by Member States’ public contracting authorities for projects supported by EU grants are subject to EU public procurement legislation if they meet the EU minimum contract value requirement for the eligible sector. Below this threshold, tender procedures are subject to national procurement legislation. There are no overt prohibitions against the participation of U.S. companies, either as developers or concessionaires of projects supported partially by the Structural Funds, or as bidders on subsequent public tenders related to such projects, but it is advisable to team up with a local partner. All Structural Fund projects are cofinanced by national authorities and most may also qualify for a loan from the European Investment Bank. The private sector is also involved in project financing.


The Cohesion Fund. The Cohesion Fund is another instrument of EU structural policy. Its EUR 70 billion - USD 102 billion (2007-2013) budget seeks to improve cohesion within the EU by funding transport infrastructure and environmental projects in Portugal, Greece and the 12 new (since 2004) EU Member States in Central and Eastern Europe. Spain is eligible to a phase-out fund only as its GNI per inhabitant is less than the average of the EU-15. These projects are generally co-financed by national authorities, the European Investment Bank, and the private sector.


Trans-European Networks (TENs). The European Union also provides financial support to Trans-European Networks (TENs) to develop infrastructure, strengthen cohesion and increase employment across greater Europe. The TENs are a series of transport, telecommunications and energy projects continually being expanded and upgraded and largely financed by private sector and non- EU sources. The EU does, however, provide grants from the Cohesion Fund, loans from the European Investment Bank, loan guarantees from the European Investment Fund, and partial feasibility study grants for the TENs. There are no EU restrictions on participation of U.S. firms in the TENs.


Other EU Grants for Member States. Sector-specific grants offer assistance to EU Member States in science, technology, communications, energy, environmental protection, education, training and research. Tenders for these grants are posted on the various websites of the Directorates-Generals of the European Commission. Conditions for participation are strict and participation is usually restricted to EU firms or tied to EU content.


External Assistance Grants, the EuropeAid Cooperation Office is the European Commission agency in charge of managing EU external aid programs. The EuropeAid website offers extensive information on the range of grant programs, the kinds of projects eligible, as well as manuals to help interested parties understand relevant contract law. Participation in calls for tender for contracts financed by EuropeAid is reserved for enterprises located in EU Member States and requires that products used to respond to these projects be manufactured in the EU or in the aid-recipient country. European subsidiaries of U.S. firms are eligible to participate in these calls for tender.



Read the full market research report

Posted: 01 March 2010

See more from Banking and Finance in Spain

Expert Views    
Financial Sector in Spain   By U.S. Commercial Service Poland
Short-term monitoring of the Spanish government balance   By Javier J. Perez, Banco De España
How2Go Internacionalization Consulting   By How2Go Consultoría de Internacionalización
How2Go Consultoría de Internacionalización   By How2Go Consultoría de Internacionalización
Hot Tips    
Trade and Project Financing in Spain   By U.S. Commercial Service Poland