COLUMN-Europe sails into its own credit crunch

By James Saft

LONDON (Reuters) - Europe is next in line to feel the impact from tighter credit, a tough situation for an economy heavily dependent on bank financing.

The European Central Bank's April bank lending officer survey showed a continuing sharp tightening in lending standards combined with a weakening in demand for loans.

The survey showed that loans to businesses, consumers and house buyers all became harder to get and more expensive in the second quarter of the year. And future expectations point to further tightening.

Why? Banks are worried about the prospects for the European economy, its housing market, their banking clients and the industries those clients compete in.

Yet even as banks are making their excuses to clients and declining to lend, those same clients are backing out of the door, smiling tightly and politely declining to apply for loans in the first place. Demand for loans in the euro area is deteriorating at the most rapid pace in the survey's five-year history, according to the ECB, due to less interest in fixed investment or in mergers and acquisitions.

That could lead you to conclude that Europe is experiencing a normal slowdown but not a credit crunch.

However, while the euro zone has thus far been spared the worst of the impact of the global credit difficulties, there is reason to believe that is more a matter of timing than immunity.

"If the economy is slowing down and you get a supply-driven credit squeeze on top, then you might face a more significant and more prolonged downturn in economic growth," said Marco Annunziata, head of global economics at Unicredit in London. "In Europe this is a significant risk."