Eurozone SMEs struggle to access finance Teldat, a small Spanish designer and maker of internet routers for corporate use, is exactly the kind of company the eurozone needs to foster in order to generate growth and recover from the sovereign debt crisis. With an annual turnover of €80m and 240 employees, the Madrid-based group sits squarely in the small and medium enterprise sector that policy makers say is critical to creating much needed new jobs. But Teldat and other small companies face disproportionately higher charges than their bigger rivals when they borrow money from banks. "Our access to financial resources is tighter than in the past," said Agustin Muñoz Grandes, Teldat's chief executive. It's more difficult to access the traditional financing routes that a company of our size can use. The conditions are tougher and the market is more conservative. Exactly how tough it is depends on which part of the eurozone you do business in. This credit crunch has affected some countries more than others, an aspect of the eurozone's financial fragmentation that has continued to deteriorate even as fears of a eurozone break-up have receded. Data collected by the European Central Bank shows that small Italian and Spanish companies pay significantly higher borrowing rates than their German and French peers and that this divergence is widening. Research by Deutsche Bank puts the spread, or difference, at as great a level as 3-4 percentage points for similar loans by small companies. The problem is even more alarming given that Italian and Spanish SMEs account for about half the employment in their respective economies, compared to just under 40 per cent in Germany, according to European Commission data. Fortunately for Teldat, Mr Muñoz has a card up his sleeve. In January, the company completed the acquisition of Funkwerk Enterprise Communications, a German peer. Mr Muñoz says he plans to move invoicing, procurement and other internal processes to the new German subsidiary in order to benefit from easier financing conditions. "It's definitely one of the advantages that we now have," he said, speaking at the annual Cebit trade fair in Hanover last month, where the company was trying to pitch its products and services to Germany's famous Mittelstand sector of small and medium sized companies. Ironically, perhaps, there is little sign that those German Mittelstand companies are making use of what could be a cheap borrowing bonanza. This is partly because of Germany's conservative business models and their own uncertainty about export markets. The conditions are tougher and the market is more conservative Agustin Muñoz Grandes, Teldat Rittal is one such mainstay of the German Mittelstand. Founded in 1961, the maker of equipment ranging from metal enclosures for computer server equipment to small, turnkey data centres dominates a corner of the sprawling trade fair and, despite not being a household name, is a point of call on Chancellor Angela Merkel's regular visits. Karl Christoph Caselitz, chief of customer operations, says the group, which manufactures in plants across the world, was hit with a 30 per cent drop in sales in 2009 but has recovered and does not rely on bank funding. We are a self-financed company, financially completely sound and strong. We're not of course completely independent of interest rates, but it doesn't play a role for us," he said, adding that he believed the availability of cheap funding played a "minor" role for other Mittelstand companies too. "I think Germany has become cautious because of the performance of the export markets," he said. Gilles Moec, an economist at Deutsche Bank, says European Commission data indicates that Spanish and Italian SMEs on average display lower productivity than their domestic economies as a whole, and that this is falling further. This gives banks "good reasons to impose an additional risk premium" on lending to them. Nonetheless, the starkness of the fragmentation has prompted a debate about whether the European Central Bank should act. The ECB could extend its collateral rules to allow banks to use SME loans to access more ECB funding. If that failed to increase lending, the ECB could theoretically buy up bundles of SME loans, Mr Moec said, adding that the ECB appeared unwilling to go down this route. Any such radical step might be difficult to justify, especially as the bank's mandate is to focus on price stability and not unemployment. Mario Draghi, ECB president, has made clear the bank is "not in the business of cleaning up banks" balance sheets." The strongest resistance would almost certainly come from the Bundesbank . Its president, Jens Weidmann, believes fixing this fragmentation is not a job for the central bank. "A country in a deep recession certainly has different financing costs to a country that has nearly full unemployment," he said. Not every difference in the financing costs indicates the need for political action . . . I am rather sceptical that we could or should use monetary policy instruments to absorb the different financing conditions for SMEs in certain countries. As a stroll round the Hanover trade fair makes clear, though, Europe's SMEs are not just battling against their bank managers, but ever greater competition from China. Mr Muñoz said Teldat holds its own against multinational giants like Cisco and Huawei in the Spanish market, where it has a 50 per cent market share thanks to contracts with Telefónica and Banco Santander. But the improving quality of routers made by Chinese competitors has forced it to offer cloud-based software and services alongside the routers so it can charge a premium price. "To justify having hundreds of engineers in Germany and Spain with salaries that are five or six times that of the same person in Asia, you have to really strive for added value," he said.