* Firms in southern countries see biggest rate falls
* Continuing rate differentials remain headache for ECB
* ECB blames weak demand for slump in private sector loans
By Sakari Suoninen
FRANKFURT, Feb 4 The interest firms had to pay
on loans ticked down in the euro zone in December, with southern
European countries seeing the biggest falls, data showed on
Tuesday, in a boost to the currency bloc's crisis-hit states.
The European Central Bank can take some solace from the
development as evidence that its efforts to repair the so-called
"fragmentation" of credit markets across the euro zone is having
At the same time, differences in interest rates remain
large. Firms in periphery states often face rates at least twice
as high as their northern peers as banks in stressed countries
face higher fund-raising costs and demand higher loan margins.
Funding costs for euro zone companies began to diverge as
the financial crisis laid bare country-specific risks, prompting
investors to demand premiums in some member states.
More than five years on, that divergence persists despite
extraordinary measures implemented by the ECB. The gap is also
a headache for the ECB, which sets policy for the euro zone
average. However, the difference has begun to gradually narrow.
The ECB's measure of cross-country variation showed that
corporate loan interest rates were at their closest in December
since January 2012. The same measure showed that mortgage loan
variation was the smallest since December 2011.
In December, corporate lending rates fell in most stressed
countries, with Italy and Cyprus being the exceptions. In the
periphery, funding costs varied between 3.35 percent in Spain
and 5.79 percent in Cyprus. In Greece, they fell to a 3-1/2 year
low of 5.41 percent.
Among the economically strong euro zone core countries,
national average interest rates on new corporate loans varied
between 1.99 percent in Luxembourg and 2.55 percent in Germany.
For the euro zone as a whole, corporate borrowing costs on
new loans fell by 4 basis points to 2.94 percent, the biggest
monthly drop since August, ECB data showed.
Household borrowing costs fell by 3 basis points to 3.05
percent, the first drop since June.
However, the difference between loan costs to large firms
and smaller ones grew wider, with borrowing costs for loans with
maturities longer than 1 year and of more than 1 million euros
ticking down while those between 250,000 and 1 million euros
Despite cheaper loans, lending to the private sector has
slumped, with annual declines the largest in stressed southern
European countries, including Spain and Italy.
ECB policymakers have said that weak lending is mainly due
to a lack of demand in the 18-nation euro zone, with firms
unwilling to invest when the economic outlook remains cloudy.
However, the central bank has lately started to accentuate
the positive and, while stressing that the recovery is still
tenuous, has said financial market improvements seem to be
working their way into the real economy.
In the coming months, banks expect loan demand to increase
across the board and have also said they are done tightening
lending rules, the ECB's bank lending survey showed last week.
The ECB has high hopes for ongoing bank health checks,
expecting that confidence in the banking system will return as
markets form a clearer picture of its well-being and that this
will lead to smaller differences in bank funding costs.
(Editing by Gareth Jones)