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

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

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

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 the Stoxx Europe 600 Index reached its highest in six years, declining bank lending and record unemployment tell a different story as the region struggles out of its longest recession.

“The mood in financial markets may have improved, but the economic situation in most European countries will not improve this year,” UBS AG Chairman and former Bundesbank President Axel Weber told a panel discussion Jan. 22 at the World Economic Forum in Davos, Switzerland. “After several years of crisis it's quite normal to look on the bright side and get excited about improvements. However, it may be a too one-sided view.”

Policy makers in the euro area's 18 nations are looking to move beyond the debt crisis that started in Greece in 2009 and tore through the currency bloc, focusing on shoring up the banking system.

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

Overall, the euro-area economy contracted 0.4 percent last year, according to estimates by the ECB, which forecasts an expansion of 1.1 percent in 2014.

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

Self-Sufficiency

All that has kept a lid on bank lending to companies and households, which is vital for generating growth. It shrank for the 19th straight month in November, according to the ECB. Meantime, Stoxx 600's price-earnings ratio has climbed to its highest since 2009.

“Looking at markets in Europe and at the underlying strength of the economy, valuations are slightly expensive,” Wouter Sturkenboom, who helps oversee $237 billion as investment strategist for the Europe, Middle East, and Africa at Russell Investments in London, said in a telephone interview on Jan. 16. “We don't think growth will shoot the lights out. We don't think expectations embedded in equities are fairly representative” of the situation 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,” the 40 year-old said. “We are securing more projects, but they are less profitable, so we need to be able to fund ourselves.”

'Big Challenges'

Total bank lending in Spain, the euro area's fourth-largest economy, has dropped 21 percent since 2008, according to the Bank of Spain. While November saw the first month-on-month increase since March, up 0.2 percent on October, it nevertheless represents an 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, is battling the second-highest unemployment rate in the euro region. Spain's National Statistics Institute said on Jan. 23 that the country's unemployment rate was 26.03 percent in the final three months of the year, the sixth straight quarter it has been above 25 percent.

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

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

Italian companies are also seeing little benefit from the financial-market gains. In the three months ending in November 2013, bank lending to firms contracted 8.4 percent compared with the same time the previous year, the Bank of Italy said in it January bulletin.

There will be a “gradual improvement” in bank lending “due to the improvement in the economic situation,” ECB Executive Board member Benoit Coeure, said in a Bloomberg News interview on Jan. 15. “Also, risk being reduced in stressed economies and ongoing structural 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 third quarter of 2013 compared with the previous quarter, according to the Bank of Italy. Purchases of machinery and equipment fell 1.1 percent in the third quarter after a 0.2 percent decline in the previous three months.

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

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

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

Instant Insights /

Euro Lending Curbs Keep Lid on Growth

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