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Please share this article wi th others using the link below, do not cut & paste the article. See our Ts&Cs an d Copyright Policy for more detail. Email ftsales.support@ft.com to buy addition al rights. http://www.ft.com/cms/s/0/cbf94b90-993b-11e2-8dc6-00144feabdc0.html#i xzz2pAorkUhj Blow for ECB as wider loan rates hit south By Ralph Atkins in London AFP Divergences across the eurozone in interest rates paid by businesses on bank loa ns have reached record highs, despite European Central Bank action to prevent Eu rope s monetary union fragmenting. Widening differences in borrowing costs, shown in an analysis by Goldman Sachs, highlight how ECB measures have prevented a catastrophic eurozone break-up but f ailed to ease crippling credit conditions in much of the region s southern periphe ry, where economic growth prospects remain bleak. Eurozone fragmentation Eurozone fragmentation More ON THIS STORY ECB damps hope of cheap loans Global Insight ECB battles demons US money market funds warm to eurozone Loans payback points to divided eurozone ON THIS TOPIC Eurozone rate divergence disappoints ECB Euro hits 2-year dollar high Banking union falls short of EU goal Women at the Top ECB fails to draw female job applicants IN BANKS Banks face years of mistrust, says Jenkins US banks have reasons to be cheerful Profumo quit threat over MPS cash call Regulators eye exemption to part of Volcker Since mid-2012, the spread between yields on Spanish and Italian sovereign 10-ye ar debt and the German equivalent has narrowed significantly. Goldman Sachs inter est rate divergence indicator measuring cross-border variations in interest rate s charged by eurozone banks on a variety of business loans also dipped initially . But the indicator has since risen again and reached a record of 3.7 percentage p oints in January, indicating companies in southern Europe were paying significan tly higher interest rates than northern rivals. Market segmentation remains, divergence in bank lending rates persists and, as a result, immediate growth prospects in the periphery are bleak, said Huw Pill, Eur opean economist at Goldman Sachs, who was previously a senior monetary policy of ficial at the ECB in Frankfurt. The results will disappoint Mario Draghi, the ECB s president, ahead of the meetin g of its governing council on Thursday. They highlight the challenge the ECB fac es in ensuring low official interest rates feed through into lower borrowing cos ts, especially for job-creating small businesses in countries such as Italy and Spain. In much of the eurozone periphery, small companies depend heavily on bank financ e. Contagion effects from the crisis in Cyprus not yet reflected in the Goldman Sachs indicator may have intensified further the financing pressures they face. Since taking office in November 2011, Mr Draghi has battled against the eurozone s financial fragmentation first by injecting more than 1tn in cheap three-year loa ns into the financial system and then by pledging last July to do whatever it tak es to ensure the eurozone s integrity. Reasons for the latest widening in interest rates paid by business are not obvio us but could include heightened tensions ahead of Italy s elections in February, a

further weakening in banks finances, or a reversal of the initial improvement in financial market sentiment that followed ECB policy actions. Worries about the depth of the recession hitting the eurozone s south have fuelled expectations that the ECB will cut official interest rates further. The ECB s mai n policy rate has been held at 0.75 per cent since last July.

84,35% 81,01% Alpha Bank 83,71% Eurobank* 93,55% * Eurobank , , , :