Spanish debt collectors in fancy dress, whose roots go back to the Middle Ages, are bracing for a surge in business as rising interest rates begin to slow economic growth, squeezing companies and consumers. After holding rates steady for more than two years, the European Central Bank on March 2 raised its benchmark rate for the second time since December, bringing it to 2.5 percent.

"Interest rates are rising as inflation eats away at the real income of Spanish borrowers," says Pere Brachfield, director of the default studies department at Escuela de Administracion de Empresas, a business school in Barcelona. "For some, it'll cause a cataclysm."

Spain's economic growth, which has outpaced the euro-region average for a decade, will slow to 2.8 percent in 2007 from 3.4 percent in 2005, according to Banco Bilbao Vizcaya Argentaria SA, the country's No. 2 lender. Consumer prices rose at an annual rate of 4.2 percent in January, the fastest pace in nine years and the highest rate in the euro region.

The ECB probably will raise its key rate to 3 percent by year end, futures trading shows. Every percentage point increase in rates means 50,000 more Spanish families will have trouble paying their debts, estimates Fernando Herrero, vice-president of the Association of Banking Consumers, known as Adicae.

Inflation Accelerates

"The economic cycle is finally turning in our direction," says Juan Carlos Granda, commercial director of Madrid-based El Cobrador del Frac, whose 250 debt collectors sometimes don eye- catching top hats and tailcoats when tracking deadbeats. "We're preparing to grow our business in every way."

Bank loans to Spanish companies and families have risen at an average annual rate of 15 percent for the past 10 years, according to the central bank. Total debt now exceeds 100 percent of gross domestic product, up from 60 percent a decade ago.

"More Spanish are living at the extreme limits of indebtedness," Herrero says.

Debt collection firms are usually hired to go after small businesses and their owners, says Javier de la Fuente, the attorney for El Cobrador Escoces, which outfits some of its employees as Scottish pipers.

Banks Wait

Any increase in defaults hasn't shown up on the balance sheets of Spanish lenders. Banco Espanol de Credito, a unit of Santander Central Hispano SA, Spain's biggest bank, said bad loans as a percentage of total loans fell to a record 0.49 percent in December, from 0.63 percent at the end of 2004.

"I'm not expecting a major default problem for Spanish banks," says Bruno Duarte, a banking analyst at Fox-Pitt, Kelton Ltd. in London. "Ask me what I think in six months."

A loophole in Spanish law allows costumed debt collectors to use public humiliation -- banned elsewhere in Europe -- as a tool of their trade. While Article 18 of Spain's constitution guarantees the right to "personal and family privacy and to personal reputation," no government has passed a law to enforce the provision, says Brachfield, 47.

"Most countries outlawed this kind of behavior years ago," he says. "It's almost medieval."

Humiliation has indeed played a role in Spanish debt- collection since at least the Middle Ages, when deadbeats were paraded through the streets on donkeys while wearing cone-shaped hats and tunics bearing painted red crosses, Brachfield says. Most debt collection companies in Spain use conventional tactics that don't rely on humiliation.

Dangerous Territory

Chasing deadbeats in Spain can be a dangerous business.

Last month, a Galician man fired two shots into a car belonging to El Torero del Moroso, a collection firm whose name translates as ``Bullfighter of the Defaulter.''

"He just came out with his shotgun and went boom boom," says Jorge Garcia, administration director of Torero, based in the city of La Coruna.

Torero's debt collectors drive yellow cars with pictures of bullfighters brandishing red capes on the doors, but don't wear costumes, Garcia says.

Monasterio's collectors dress as friars to "stress the morality of paying on time" says Gonzalez, 40. "We prefer not to call it humiliation; we think of it as encouraging people to do what's right."

The company's representatives accost deadbeats in places that will cause maximum embarrassment, such as outside their homes or clubs, Gonzalez says.

Double Life

"The classic deadbeat is often someone who leads a double life with a certain social standing that's expensive to maintain," he says. "Wives and children may not know what's been going on."

Monasterio charges a commission of 10 percent to 30 percent of the value of the debt recovered, Gonzalez says.

ACA International, an association of credit and collection professionals with members in 55 countries, considers any tactic aimed at humiliating consumers into paying their debts professional misconduct, Nate Thompson, a spokesman for the Minneapolis-based organization, said in an e-mail.

Debt collecting in Spain has a distinguished literary pedigree, says Frac's Granda, 55. The company's Web site carries a dedication to the author Miguel de Cervantes, who in 1594 began work recovering tax debts for the government.

What Frac fails to mention is that Cervantes was dogged by financial troubles for much of his life, says Brachfield of the Barcelona business school. He started writing Don Quixote, the work for which he's best known, in a debtors' prison in Seville.

Source :

Avec l'aimable autorisation de P.J Brachfield et Bloomberg.

To contact the reporters on this story: Charles Penty in Madrid
cpenty@bloomberg.net