Don't ask Victor Duran Naranjo about the European recovery thatinvestors are betting on.

His eight-employee software company, based in Spain's CanaryIslands, still can't get a bank loan even after its revenue rose 10percent last year.

“In theory banks are more open, but in practice it's not easierto get funding now than in 2009,” he said in a Jan. 21 telephoneinterview.

While sovereign borrowing costs in Greece, Ireland, Italy,Portugal, and Spain fell this month to a euro-area record,according to Bank of America Merrill Lynch bond indexes, and theStoxx Europe 600 Index reached its highest in six years, decliningbank lending and record unemployment tell a different story as theregion struggles out of its longest recession.

“The mood in financial markets may have improved, but theeconomic situation in most European countries will not improve thisyear,” UBS AG Chairman and former Bundesbank President Axel Webertold a panel discussion Jan. 22 at the World Economic Forum inDavos, Switzerland. “After several years of crisis it's quitenormal to look on the bright side and get excited aboutimprovements. However, it may be a too one-sided view.”

Policy makers in the euro area's 18 nations are looking to movebeyond the debt crisis that started in Greece in 2009 and torethrough the currency bloc, focusing on shoring up the bankingsystem.

Still, the recovery remains fragile. The region's unemploymentrate has held at a record 12.1 percent since April. Inflation isless than half of the European Central Bank's (ECB's)price-stability target. Euro-area government debt will averageabout 96 percent of gross domestic product this year, according tothe European Commission.

Overall, the euro-area economy contracted 0.4 percent last year,according to estimates by the ECB, which forecasts an expansion of1.1 percent in 2014.

“There's still a long way to go from a European point of view interms of having a banking structure that will stabilize alleconomies and create growth and create jobs,” Irish Prime MinisterEnda Kenny told Bloomberg TV in Davos today.

Self-Sufficiency

All that has kept a lid on bank lending to companies andhouseholds, which is vital for generating growth. It shrank for the19th straight month in November, according to the ECB. Meantime,Stoxx 600's price-earnings ratio has climbed to its highest since2009.

“Looking at markets in Europe and at the underlying strength ofthe economy, valuations are slightly expensive,” WouterSturkenboom, who helps oversee $237 billion as investmentstrategist for the Europe, Middle East, and Africa at RussellInvestments in London, said in a telephone interview on Jan. 16.“We don't think growth will shoot the lights out. We don't thinkexpectations embedded in equities are fairly representative” of thesituation in the euro area.

The struggle of Duran's closely held firm, AvanTIC, shows why.“We have reduced all the costs we could to be self-sufficient,” the40 year-old said. “We are securing more projects, but they are lessprofitable, so we need to be able to fund ourselves.”

'Big Challenges'

Total bank lending in Spain, the euro area's fourth-largesteconomy, has dropped 21 percent since 2008, according to the Bankof Spain. While November saw the first month-on-month increasesince March, up 0.2 percent on October, it nevertheless representsan annual fall of 13 percent.

Spain, which on Jan. 23 exited its 41 billion euro ($56 billion)European bailout program that helped recapitalize it banks, isbattling the second-highest unemployment rate in the euro region.Spain's National Statistics Institute said on Jan. 23 that thecountry's unemployment rate was 26.03 percent in the final threemonths of the year, the sixth straight quarter it has been above 25percent.

The Spanish economy still faced “big challenges,” European UnionEconomic and Monetary Affairs Commissioner Olli Rehn told El Paison Jan. 23, and needs more than a decade to recover.

Lending remains weak elsewhere as well. Loans from banks inPortugal, which was forced into a 78 billion-euro bailout in 2011,fell 6.9 percent in November from the year before, its central bankreported on Jan. 22. In France, the euro area's second largesteconomy, the annual growth rate of loans to firms remainedsluggish, at 0.3 percent in November, after a decline of 0.1percent in October, the Bank of France, said on Jan. 8.

Italian companies are also seeing little benefit from thefinancial-market gains. In the three months ending in November2013, bank lending to firms contracted 8.4 percent compared withthe same time the previous year, the Bank of Italy said in itJanuary bulletin.

There will be a “gradual improvement” in bank lending “due tothe improvement in the economic situation,” ECB Executive Boardmember Benoit Coeure, said in a Bloomberg News interview on Jan.15. “Also, risk being reduced in stressed economies and ongoingstructural reform should have an impact on credit spreads.”

The dearth of credit is also curbing investment. Italian firms'spending on capital goods declined by 1.2 percent in the thirdquarter of 2013 compared with the previous quarter, according tothe Bank of Italy. Purchases of machinery and equipment fell 1.1percent in the third quarter after a 0.2 percent decline in theprevious three months.

“The healing has barely started,” Ashoka Mody, the former headof the International Monetary Fund's research and Europeandepartments, said in Brussels on Jan. 21. “A reversal of some ofthe optimism is still possible.”

For now, optimism is the market rule. According to 57 percent ofthe investors, analysts, and traders who are Bloomberg subscriberspolled last week, Europe's bond markets have ceased deteriorating.That is the first time in two years of being asked that a majorityhas backed the view that the debt crisis is over.

“Green shoots are clearly visible,” Rehn said at a conference inBrussels on Jan. 21. “But fragilities remain.”

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