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Loan Rates Point to Euro Zone Fractures

Ralph Atkins in London
Monday, 3 Sep 2012 | 7:54 PM ET

Interest rates paid by companies in the eurozone’s weaker economies have surged, highlighting the bloc’s fragmentation as the European Central Bank loses control of borrowing costs.

M. Lorden | Taxi | Getty Images

ECB data on Monday showed Spanish small businesses face the highest bank borrowing costs in almost four years – while interest rates paid by German rivals are at record lows.

The sharply diverging interest rates have put southern European companies increasingly at a competitive disadvantage to their northern European rivals.

They provide a gloomy backdrop to this week’s ECB governing council meeting, which will discuss plans for intervening in eurozone government debt markets, as investors price in the chance of a break-up of the 14-year old monetary union.

David Riley, head of sovereign ratings at Fitch Ratings, said: “The fragmentation is getting worse. If this trend gains even greater momentum we’ll face a fundamental reordering of the eurozone. It undercuts the whole rationale of the euro, and could eventually make it easier for it to break up.”

Mario Draghi, president, has justified possible ECB action by citing the financial fragmentation, which has seen banks reducing substantially their cross border exposures and the ECB replacing private capital flows on a large scale. The ECB president has pledged to do “whatever it takes to preserve the euro” – although he has made a bond-buying programconditional on the benefiting countries first accepting conditions imposed by Europe’s bailout funds.

With economies such as Spain’s already hit by severe fiscal austerity measures, the divergence in businesses’ borrowing costs “will make the pill even more bitter to swallow”, said Julian Callow, European economist at Barclays.

The interest rate charged by banks on a corporate loan of up to €1m lasting between one and five years – which would typically be taken out by a small business – was 6.5 per cent in July in Spain, according to the ECB figures. That was the highest since late 2008, when central banks started cutting official interest rates after the collapse of Lehman Brothers investment bank. In Italy, the comparable figure was 6.24 per cent. But German counterparts paid just 4.04 per cent – the lowest since the ECB figures started in 2003.

Mr. Draghi has repeatedly stressed the importance to job creation of Europe’s small and medium-sized enterprises. The economic impact could be greater than implied by the headline figures because underlying inflation rates are lower in the eurozone’s weaker economies – widening the divergence in effective interest rates, according to Mr. Callow.

The eurozone’s financial fragmentation has seen banks reducing considerably their cross-border exposures – often as a result of pressure from national regulators – exacerbating the credit squeeze in the periphery countries.

Huw van Steenis, analyst at Morgan Stanley, said the crisis had led to banks reappraising their business models. “They are saying ‘we have to match loans and deposits more along geographic lines. I don’t see that being reversed. The genie is out of the bottle.”

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