Public guarantees: a countercyclical instrument for SME growth. Evidence from the Spanish Region of Madrid

This paper analyses the effects that public credit guarantees have on SME business activity and investment. We focus the study on the main regional mutual guarantee institution in the Spanish Region of Madrid, covering two distinct stages of the economic cycle and credit environments: first, the full range of the country’s financial crisis with credit constraints (2009–2011), and later, the recovery stage with credit expansion (2012–2015). Using propensity score matching based on economic activity and company size, we show that guarantees allow for the relaxation of credit constraints, driving turnover and investment during both recession and growth. We also find that mutual guarantee schemes constituted a greater stimulus for firms during contraction; thus, they can act as countercyclical policies. Moreover, although guarantees had a substantial effect on all small companies (those with fewer than 50 employees), they had the greatest impact on microenterprises (those with fewer than 10 employees). We show the activities for which guarantees constitute a greater boost, which may inform public-policy designs for specific types of business.