Sovereign stress and SMEs' access to finance: Evidence from the ECB's SAFE survey

We study the effect of sovereign stress on SMEs' capital structure using restricted-access data from the European Central Bank. We find that during the sovereign debt crisis, and controlling for borrowers' quality, firms in stressed countries became more likely to be denied credit, to be credit rationed, and to face higher loan rates. Less creditworthy firms were not more likely to become credit constrained, suggesting no flight to quality in lending. We also find that in order to make up for the decline in bank credit firms in stressed countries began relying considerably more on retained earnings and government subsidies.