All is not lost for small, struggling companies around Milan. The local chamber of commerce’s “Fondo Sbloccacrediti Milano” – literally, “Milan’s fund to Free up Credit” – is a sign of the gloomy times across parts of Italy’s business community. Set up by UniCredit, the country’s largest bank, and the local business lobby, the credit line offers a last ditch chance for small viable businesses with nowhere else to turn.

With just €15m available, however, the fund may quickly prove inadequate. 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.

Mario Draghi, ECB president, said last week the central bank had averted a “major, major credit crunch” by providing €489bn in unprecedented three year loans to eurozone banks. Reassuringly, the ECB survey did not show tightening as severe as in the months after the collapse of Lehman Brothers in September 2008. Germany, the eurozone’s largest economy, has escaped any kind of credit squeeze this time.

But the performance of Mr Draghi’s native Italy, where banks drew heavily on the ECB’s three year loans, will be an important indicator of whether the lenders’ retrenchment will disrupt the eurozone’s putative rebound.

“The biggest risk to the recovery is clearly credit conditions,” said Martin Lück, European economist at UBS in Frankfurt

Despite worries among small businesses – encapsulated by the Milan chamber of commerce’s emergency aid scheme – the Italian picture is mixed. Unlike after the collapse of Lehman Brothers, the problems are homegrown. Companies’ difficulties have arisen from the knock-on effects of soaring interest rates on Italian sovereign debt and Italy’s sharp economic slowdown. Those more reliant on other markets are doing better.

“There are the companies that export and they are doing well, and then there are the companies that don’t export and they are having problems,” said Alessandro Profumo, a leading Italian banker.

ECB lending graphic

While many smaller Italian companies may struggle to survive this year, larger groups have become more resilient. Giovanni Cavallini, chairman of Interpump, which makes high-pressure pumps and does 80 per cent of its business outside Italy, says his company learnt from 2009’s deep recession and bolstered its working capital buffers – a strategy that is paying off. Interpump has had “all the funding we’ve wanted, although the costs have clearly been higher than they were,” he said.

The eurozone’s credit squeeze has strengthened the case for more cuts in the ECB’s main interest rate, currently at the record low of 1 per cent. But the Frankfurt institution will probably not rush. Erik Nielsen, global chief economist at UniCredit, expects the effect of the ECB’s three year long term refinancing operation to start to ease funding costs in the spring, taking into account “a three to four month lag” from when the funds reached the banks. By then, the worst of Italy’s slowdown may be over. For all the credit crunch worries, the country’s manufacturing purchasing managers’ index, released on Wednesday, improved sharply in January, although still pointing to a contraction in activity.

Meanwhile separate eurozone inflation data provided another reason for the ECB to wait. At 2.7 per cent in January, the annual rate was unchanged from December and above the ECB’s target range of “below but close” to 2 per cent.

The ECB’s quarterly bank lending survey, conducted between December 19 and January 9, showed the balance of balance of banks that had tightened credit conditions for eurozone companies over those reporting a loosening jumping to 35 per cent – up from 16 per cent in October’s survey and the highest since April 2009. More banks reported that demand for corporate loans had fallen than reported an increase, with the scaling back of fixed investment plans cited as the most important factor behind the weaker demand, followed by a decline in mergers and acquisitions. A further significant decline in demand was expected in the next three months.

The ECB said survey participants had “explained the surge in the net tightening of credit standards by the adverse combination of a weakening economic outlook and the euro area sovereign debt crisis, which continued to undermine the banking sector’s financial position”.

It added: “The prevalence of tightening appeared to be widespread across larger euro area countries, with the notable exception of Germany.”

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