IT wouldn't be fitting to mount a barrage of "sale" and "special offer" signs in the windows of jewelers crowded into the heart of Antwerp's diamond district. But traders, cutters and retailers say business is terrible.

Just a handful of diamonds can be worth a fortune, so the diamond industry - centerd since the 16th century on the Belgian port city of Antwerp - has for years depended on debt. Now plunging demand, falling prices and lender reticence have left it looking uncomfortably overdrawn.

The global industry's debt, which peaked at US$15 billion in mid-2008 according to banks and industry groups, plays a crucial role in financing some US$50-60 billion of trade in cut and rough stones.

"It's one big holiday ... There's just no appetite to buy," said broker Joseph in the well-policed core of Antwerp's diamond district, a multicultural hive with a large core of Jewish and Indian merchants.

He said trade was about one-tenth of usual levels.

Producers De Beers, Russia's Alrosa, Rio Tinto, BHP Billiton and Harry Winston Diamond Corp have come together to discuss plans for an unprecedented joint marketing effort.

De Beers used to foot the bill for generic advertising: "A Diamond is Forever" was its most memorable slogan. "Fewer, better things" is, tellingly, the message for this downturn.

Some experts and insiders predict company failures and a major industry shake-up, that could force greater transparency and might draw in outside investors.

"Some players may not be around. Some big players may not be as strong. The market will be smaller and debt will have to fall," said Victor van der Kwast, international diamond and jewelry group head at ABN AMRO, one of the main names in the business.

Manufacturing

He said a 30-40 percent market contraction was possible.

So far only a couple of houses have failed, in Israel. In India, the center of manufacturing, about half a million of some 800,000 workers have been laid off.

Antwerp, once home to 25,000 cutters but now to only 1,000, has escaped that level of pain. But the city which handles about 80 percent of all rough diamonds and more than half of all cut stones for an annual turnover of US$43 billion, is exposed.

Other centers, notably Dubai, are seeking market share. Israel-based diamond expert Martin Rapaport says top-end demand from the rich and super-rich, such as Russian oligarchs or Arab sheikhs, has dried up completely and only smaller gems for engagement rings are keeping the market alive.

The sector's debt is a "clear red flag," bearable with current low interest rates, but not if they creep high.

"It's wait and pray," he said, adding equity positions of diamond companies were "technically wiped out."

Whether or not that is the case diamond jewelery sales in the United States, which accounts for about 45 percent of the world market, fell by 20 percent in the traditionally strong Christmas season.

"Manhattan was horrible. It was supported by a lot of foreign buyers, but now that too has dried up," said Dilip Mehta, head of Rosy Blue, a diamond group with US$1.7 billion in annual sales.

The collapse is amplified back along the chain, Mehta said, with demand for cut stones predicted to fall by as much as 30 percent and requirements for rough diamonds likely to drop by up to 60 percent in the year from October.

Even though some traders hope diamonds can acquire the luster of gold as a relatively "safe" bet, consumers now need convincing to buy a diamond.

Cut and rough prices have fallen by around 15 and 50 percent respectively from mid-2008 peaks so anyone holding diamonds as prices collapsed would face problems.

"Nearly everyone with stock has lost as much as 30 to 50 percent. The big players have lost even more," said small trader David outside one of some 1,800 diamond businesses in the area.

Many say business is at its worst at least since the early 1980s when a speculative bubble burst, prompting a wave of bankruptcies.

Andre Gumuchdjian, whose family has been in the diamond trade for over a century, said the sector itself faced greater problems in 1981-82, although the mood now was possibly as bad.

"The rest of our investments have fallen as well," said Gumuchdjian, who is president of the Belgian Polished Diamond Traders Association. "We are wondering what will happen."

Christian Van der Veken, sitting in his upmarket jewelery store, noted one key difference: interest rates in the early 1980s were above 10 percent. Where servicing debt was the main problem then, now the struggle is maintaining credit.

Substantial

Banks battling with credit problems of their own have had to take a closer look at debt, particularly in view of reports that traders are selling at substantial losses.

"That's when they start hesitating," said Philip Claes, spokesman for the Antwerp World Diamond Center. "Everyone is cautious about business today. You have to ensure you get paid."

Van der Kwast of ABN AMRO said banks had not aggressively lowered limits for clients, but added that it was in no bank's interest to finance losses for a customer.

The biggest firm in the industry, De Beers - which sold about two-thirds of all rough diamonds at the turn of the century and handles around 40 percent now - last month received a two-year US$500 million interest-free loan from shareholders including mining group Anglo-American.

But not all can access such funds.

Debt has tailed off and Rosy Blue's Mehta believes it will drop to some US$10 billion with a smaller, leaner market.

However, Charles Wyndham, diamond consultant and founder of industry Website www.polishedprices.com, said turnover had fallen by much more than had the debt used to finance it, meaning the relative level of debt had risen.

Van der Kwast thinks the downturn may persuade institutional investors to put money into diamonds, and said some pension funds are looking at them as a possible safe haven.

And experts point out diamond prices have held up relatively well compared with most metals and stock markets.

Gumuchdjian also draws attention to the steady recovery of gold prices this year: "I think prices are more poised to go up than down. Diamond prices have always followed gold."

Wyndham argues a sector shake-up may clip the wings of some bigger players and force the sector to accept change, such as adopting clearer pricing.

"I hope for a huge increase in transparency ... If the industry is going to grow it needs to become transparent so as to attract outside funds," he said.

Van der Veken, who sells jewelery priced up to 100,000 euros (US$129,279), believes the market has calmed since a calamitous final quarter of 2008. Optimists talk of a pick-up late this year. But many feel the recovery will not happen until 2010.

"Personally, I wouldn't be surprised if we are among the last to recover," said the AWDC's Claes.