By Mike Dolan
LONDON (Reuters) - Investor optimism about the euro zone may actually tally with what at first sight appears to be an untimely credit squeeze within the bloc over the past couple of months.
Although a new year surge in world markets has leveled off this month, February's survey of investors and analysts by the German ZEW think tank showed sentiment toward Europe's biggest economy rising to its highest in three years.
Perhaps buying into the idea that a pumped up Germany will pull the whole euro train, the same survey also saw a big jump in equivalent euro zone sentiment. Respondents expecting an improvement in the bloc's economy from here outnumbered those expecting a further downturn by some five to one.
For skeptics, it's all relative.
The contracting euro economy could hardly get much worse than the dour final months of 2012, optimism is still shaped by the European Central Bank's "whatever it takes" pledge to rescue the euro last July, as well as being a lagging response to January's global markets surge.
What's more, the mood jars most with a re-tightening of financial conditions within the zone since the turn of the year.
The euro's rebound in recent months looms over exports and earnings, meantime, and the zone's blue chips <.STOXX50E> have reversed nearly all their 2013 gains already.
More worrying, the latest ECB bank survey shows stricter loan standards in the pipe for firms and households. And the ongoing early payback by the region's banks of last year's emergency ECB loans has draining "excess liquidity" and nudged up short-term interest rates.
As if to reinforce the point, European car sales fell to their slowest level in January since records began in 1990.
So what are the grounds for investor optimism as unemployment stays high and austerity programs bite?
As ever, the picture varies widely from the relatively robust core in Germany to the cash-strapped periphery of Italy or Spain.
But for optimists, this year's financial tightening must be seen in the context of the dramatic defusing of last year's tensions, with the ECB loan payback signaling a move towards normality in the banking system.
So-called Financial Conditions Indices - where forecasters aggregate a range of financial metrics from sovereign and corporate borrowing rates to energy, currency and stock prices - show only partial reversal. Goldman Sachs Euro FCI, for example, has pushed about 50 basis points higher since the start of 2013 but this is less than half its drop over the past 12 months.
But the malfunctioning banking system, at the root of three years of government debt crunches, austerity and recession, is likely where any recovery will have to take hold first.
To that effect, the early ECB loan payback, where banks this Friday are expected to pay back another 125 billion euros of last February's three-year loans, is also seen as positive.
"The payback of the LTRO loans is a sign of healing," said JPMorgan's European economist David Mackie.
"Banks borrowed from the ECB a year ago because they couldn't borrow from anywhere else. To the extent they can now borrow more cheaply than at the ECB - which they can do in some cases against certain bits of collateral - they will do that."
But what if this removal of liquidity pushes short-term funding costs even higher, as seen in one-year euro interest markets in December and January in anticipation of the payback?
Barclays' Laurent Fransolet and Guiseppe Maraffino think rates may even fall after Friday's operation, where they see about 130 billion euros being returned. With a maximum of 300 billion euros from all operations likely to be paid back by mid-year, they reckon this "would not alter liquidity conditions too much."
A retreat in short rates would also likely take upward pressure off the euro, whose strength has in itself had the silver lining of blunting the rise in dollar-priced oil imports.
However, concerns persist that if euro banks are paying back cheap ECB lending but continuing to cut back their own lending to comply with regulatory pressure on repairing their own balance sheets, then the economy stays starved of new funds.
Yet again, the story seems to be one of increments. The ECB loan survey showed a net 20 percent of respondents expected to cut riskier loans, or risk-weighted assets, in the first half of 2013 - yet that was down sharply from 32 percent in late 2012.
What's more, larger firms at least are tapping capital markets despite stingier bank lending. ThomsonReuters data shows international euro corporate bond sales rose by almost 50 percent in 2012 to total almost $300 billion. Although year-to-date totals are down slightly on the equivalent boom period last year, more than $50 billion worth has been sold so far in 2013.
The jarring optimism then may just be akin to seeing the darkest hour before dawn. Investors are perennially seeking turning points in economies and countries where expectations have been battered and now seem happy to bet on a return to euro zone growth in the second half of this year.
(Editing by Ron Askew)