Spain's Prime Minister Pedro Sanchez stands during an event marking the 40th anniversary of the February 23 | POOL

Prime Minister Pedro Sanchez announced an extra 11 billion euro package on Wednesday to help Spain's small and mid-sized companies and the self-employed cope with the economic crisis wrought by the coronavirus pandemic.

He gave no details. A government source said the plan, whose contents were still being discussed with the Bank of Spain and the banking sector, would include haircuts for state-backed loans and recapitalisations of SMEs.

That would be in line with what the sectors hardest-hit by the crisis, including restaurant owners, have demanded, bringing them direct aid after the Spanish government initially provided mainly state-backed loans and furloughs.

"We don't just want to save businesses and jobs. We want to create new businesses and jobs," Sanchez told parliament.The Bank of Spain declined to comment.

Another government source told Reuters that the goal was to help companies cope with the pandemic but the exact instruments were still being worked out.

"Agreeing on the details (of haircuts) is very complicated," said a financial source with direct knowledge of the talks on the package.

A third government source stressed that this would in any case also need approval by the European Union's executive commission.

Several sources had told Reuters earlier this month that the government was preparing this new set of measures.

In November, Madrid extended its 140 billion euro ICO liquidity scheme until June, but that was not enough to offset the impact of the third wave of the pandemic on heavily indebted companies.

The European Commission has allowed member state governments to temporarily provide direct aid and convert some debt into grants to support their economies through the pandemic.

The implementation of haircuts on ICO loans is a controversial issue and the Spanish banking association has been saying that those measures are not a priority.
Under the plan being discussed, banks, who already share some guarantees with the state under the scheme, would also share some of those losses, a source told Reuters recently.

Consultant firm Oliver Wyman has been working with the Bank of Spain on assessing firms' financial needs and found that SMEs were in need of 5 billion euros while larger corporates required 7 billion euros in support, without saying if this should be direct cash injections or haircuts, according to a source with knowledge of the process. Oliver Wyman declined to comment.

The Spanish hospitality sector has been complaining that they were not getting the same help as in other EU countries, pointing to valued-added tax cuts for the catering industry in Germany or a reduction in social-security charges in France.

Spain has been one of the countries worst hit by COVID-19. Its tourism-dependent economy shrank a record 11% last year.