Nervous banks hold back Europe's revival strategy
* EU struggles to restart growth as lending stalls
* Finance ministers set to discuss banks at Denmark meeting
* Businesses struggle most to borrow in peripheral countries
March 26 (Reuters) - Among the piles of papers on one European diplomat's desk in Brussels is a memo with the words "growth" and "jobs" scrawled in blue ink, followed by a large question mark.
"I think we're missing something," said the diplomat as he sucked his pen. "There's a lot of talk about growth strategies, but what about the banks? They are still not lending."
When EU finance ministers meet in Copenhagen on Friday, banks - and their reluctance to lend - will be high on the agenda as Europe looks to its economies at a time of austerity.
Blamed four years ago for triggering the global financial crunch and Europe's ensuing debt crisis, banks are now being criticised for being too cautious.
The European Central Bank points to a steady rise in the cost of borrowing and says access to finance has become one of the most pressing concerns of small business.
"Most small businesses feel almost hatred towards their banks," said Mark Fielding, head of the Irish Small and Medium Enterprises Association. "The level of loan approvals is somewhere in the region of 50 percent. The smaller the business, the less chance you have of getting money."
Europe's smaller firms are critical to the health of its economy, generating some 80 percent of all jobs in the 17-nation euro zone.
A record 17 million people are unemployed in the single currency area - more than one tenth of the workforce - and the bloc is sliding into its second recession in just three years, likely pushing the jobless rate yet higher.
EU leaders have repeatedly attempted to craft a formula for growth, most recently in a snowbound log cabin in the Arctic Circle at the weekend. Without higher bank lending, the effect of any strategy will be muted.
European companies tap banks for almost three-quarters of their financing, compared to about a third for businesses in the United States which rely more on capital markets.
European banks say they are willing to lend. But their resources have has been depleted through the financial crisis and they are under regulatory pressure to increase capital buffers, meaning they have to tread carefully when making loans.
LOOKING FOR A CROWD
Banks are most reluctant to lend in the region's weakest countries - Greece, Ireland and Portugal - where the stakes for the euro zone's stability are highest and growth is needed if mountainous debt levels are ever to be whittled away.
But in 2011, only one in four loan applications by small businesses were successful in Greece and Ireland, compared to seven out of 10 in Germany.
"A country's ability to borrow sets the benchmark for its banks and corporations," said Sony Kapoor, at think-tank Re-Define. "That is why this is not a uniform problem throughout Europe, but concentrated in the periphery."
Firms in Greece will likely face more stress as the country's banks wait for fresh capital agreed under the second bailout.
"The real oxygen will only come into the economy once Greek banks are recapitalised later this year," Horst Reichenbach, the head of the European Commission's Greek task force, told Reuters. "I hope that will be a turning point for the country."
The ECB has lent European banks an unprecedented 1 trillion euros of cheap money over three years but banks have consistently parked roughly three-quarters of the money at the ECB overnight, instead of issuing loans.
"There's a growing realisation among EU policymakers that the ECB's stimulus may have calmed financial markets," said a senior EU diplomat working on financial affairs. "But it hasn't translated into anything tangible for the wider economy."
Companies in Britain and France are turning to a grassroots system known as crowd funding, where entrepreneurs publicise projects online to try to win backers.
One website, Funding Circle, was set up in response to the credit freeze following the 2008-2009 financial crisis. It allows people to lend directly to small firms in Britain.
Investors have lent 28 million pounds ($44 million) to some 670 firms through the website since August 2010, although that is just a fraction of the financing that businesses need.