ECB modestly successful in tempering eurozone rates divergence European Central Bank action has had only modest success in easing big differences in interest rates paid by businesses across the eurozone, which remain near peaks seen at the height of the region’s debt crisis. Companies in the eurozone’s weakest economies still face significantly higher borrowing costs than rivals in countries such as Germany, according to a cross-market analysis by Goldman Sachs. The extent of the divergence has fallen since a peak in May 2013 but is higher than in mid-2011.
The degree of fragmentation will disappoint the ECBand fuel its concern about constraints on private-sector credit flows to the eurozone "periphery" economies. Mario Draghi, president, warned earlier in December that it was "essential that the fragmentation of euro area credit markets declines further". The ECB has slashed official interest rates and Mr Draghi has pledged to prevent a eurozone break-up, moves which have pushed yields on the government debt of peripheral countries sharply lower. But the effects have failed to feed through into interest rates charged by banks in countries such as Spain or Italy. "We have turned an important corner in Europe and the acute, financial phase of the crisis is behind us. But the process of healing financial markets . . . is slow and hesitant," said Huw Pill, European economist at Goldman Sachs, who was previously a senior monetary policy official at the ECB. If severe fragmentation became a long-term feature of the eurozone, it could cast doubt on whether a single monetary policy was workable, Mr Pill warned. "If we have to live with the current level of fragmentation, the viability of monetary union will eventually be called into question." The divergences highlight weaknesses of the eurozone banking system, which policy makers are urgently trying to resolve. They also reflect the greater attention being paid by financial markets to country-specific risks and the impact the eurozone crisis has had on perceptions about the dangers of defaults. "The problem is that the genie is out of the bottle, because Greece did default and Cyprus also came close to exiting the eurozone. It is going to take a very long time to get the genie back in the bottle," said Julian Callow, international economist at Barclays. "Interest rates are still high in those countries that most need lower interest rates." Goldman Sachs’ interest rate divergence indicator measures cross-border variations in interest rates charged by eurozone banks on a variety of business loans. The indicator hit a high of 4.7 percentage points in May 2013 and fell to 3.9 in October, the latest month for which data were available and the lowest reading since September 2011. Eurozone policy makers hope the creation of a European "banking union," with a common regulatory and bank resolution framework will help break the link between borrowing costs for banks and those for sovereigns. But analysts said the interest rates in different countries would always reflect differences in the credit standing of borrowers. The ECB is also encouraging greater use of "securitisation" – the packaging up of loans to redistribute among investors – as a way of improving credit flows to job-creating small- and medium-sized companies in the eurozone periphery.