RPT-FEATURE-Recovery in Germany runs into credit headwind

* Companies report sharply tighter credit conditions

* Policymakers fume as bankers hoard cash

* Little agreement on what next to boost lending

By Paul Carrel

BERLIN, July 10 (Reuters) - News headlines speak of recovery but for Hannes Hesse, managing director of Germany's VDMA engineering association, financing is still a big problem.

"Conditions are beyond difficult," he says.

The VDMA, whose members include Siemens and Volkswagen, says its incoming business has suffered record declines this year. Now the dearth of credit to tide firms over is a new headache, which frustrated policymakers are blaming on reluctant banks.

A poll in the July 6 edition of business weekly WirtschaftsWoche found some 57 percent of companies surveyed in June were feeling a credit crunch.

In March, only five percent had reported having such difficulty accessing credit.

The frustration stems partly from the fact that late last month the European Central Bank poured 442 billion euros ($615.2 billion) of low-interest one-year funds into money markets -- its biggest ever injection -- that is not trickling down to entrepreneurs.

"It's a euro area-wide problem and therefore this question of a credit crunch is a big issue for the ECB," said Juergen Michels, euro area economist at Citigroup. "It's a big, big headwind for the recovery."

Even though the problem is generating protest from policymakers including European Central Bank President Jean-Claude Trichet and German Finance Minister Peer Steinbrueck, with bankers hoarding cash there is so far little agreement on how best to increase lending flows.

German exporters' association BGA has warned that German firms risk a "massive credit squeeze" by late summer -- a scenario that could throttle any recovery and prolong the deepest post-war recession in Europe's largest economy.

The biggest and smallest firms are suffering most, studies show.

Peter Schaaf, president and CEO of Messer Cutting Systems, a privately held group that makes precision laser-cutting equipment, says his company has financing but his customers are suffering from tight credit which is having a knock-on effect.