DIFFICULTIES IN obtaining finance have intensified for small and medium-sized businesses in the euro zone, according to a survey that casts fresh doubt on the strength of its recovery.

Rejections of bank loan applications rose significantly in the second half of last year compared with the previous six months, a European Central Bank (ECB) survey of small and medium-sized businesses (SMEs) showed, with Spanish companies worst hit.

Access to finance was also cited as their most pressing problem by 19 per cent of those surveyed – up from 17 per cent previously.

The results add to evidence that a weakened banking sector is constraining economic growth, with the effects of the global financial crisis still feeding through into individual bank lending decisions. The larger role played by bank loans in the euro zone, especially for SMEs that cannot raise funds from capital markets, makes the region more vulnerable than the US to a loan drought.

There are further signs that the recovery is losing momentum. Germany’s ZEW institute reported its “economic sentiment” indicator for Europe’s largest economy had declined for a fifth consecutive month. However, at 45.1 in February, down from 47.2 in January, the index – regarded as a useful indicator of likely trends in economic activity – was significantly higher than its historical average.

Last week GDP data showed the euro-zone economy expanded by just 0.1 per cent in the fourth quarter of last year, with Germany stagnating.

The ECB launched its survey of financing conditions facing SMEs in September. After the first survey, Jean-Claude Trichet, bank president, seized on results – showing that, in the first half of last year, 77 per cent of SMEs had received in full or partly the bank loans they had sought – as a sign that credit was continuing to flow into the real economy. But in the final six months that figure deteriorated to 75 per cent.

The share of SMEs saying bank loans had been rejected rose from 12 to 18 per cent. The rejection rate for bank loan applications deteriorated from 6 to 15 per cent in Germany, from 9 to 18 per cent in Italy, and from 20 to 25 per cent in Spain – (Copyright The Financial Times Ltd 2010)