By Walter Kurtz, Sober Look

As capital becomes more scarce for banking institutions in the Eurozone and balance sheets become constrained, the tightening of credit to the “real economy” accelerates. The lending standards that banks impose to provide credit to companies are becoming considerably stricter.

FT: A European Central Bank survey on Wednesday showed the eurozone debt crisis has triggered a severe credit squeeze across the region with banks imposing significantly harsher loan terms on businesses and consumers. Demand for mortgages and loans to fund corporate investment was also falling sharply, the survey showed.

But not all the Eurozone nations are impacted in the same manner. One would think that the differences in lending standards is defined by the divide between the “core” and the “periphery” nations. But that’s not exactly the case. The divide is between nations with stronger banking institutions and the weaker ones. French financial institutions, in spite of being part of the Eurozone core, have been weakened dramatically by the crisis and are therefore tightening loan terms. Germany on the other hand is not impacted while Italy is in bad shape. The chart below shows how lending standards depend on nations’ banking system strength.

Source: JPMorgan Economic Research

There is a reason the ECB is going all out to provide funding with unprecedented terms/amounts to the banking system – they are trying to arrest these tightening lending conditions. The liquidity should help, but the damage has already been done to the Eurozone’s corporations and consequently to jobs and the area’s economic growth.