FT Predicts Divergence in European Corporates’ Borrowing Costs

Aggressive central bank action to lower the cost of funding will mainly benefit German and French businesses, which will see their borrowing costs fall sharply over the coming years according to an analysis by the
Financial Times
.

However, basing its prediction on European Central Bank (ECB) data the paper warns that countries in the credit-starved periphery of Europe – the main target of easy monetary policy – will continue to struggle and will benefit far less from a projected €42bn reduction in debt payments over the next five years.

German groups are set to see total interest payments decline by €14bn, or 3.5% of 2012 annual pre-tax profits, assuming all loans are eventually refinanced at the current loan rate of 2%, says the
FT
. French companies would pay €9bn less.

By contrast, Italian borrowing costs will fall by no more than €2.3bn, while Spain and Portugal are likely to see a slight increase as the cost of new loans is higher than average existing borrowing costs, according to ECB data.

The business daily quotes Julian Callow, chief international economist at Barclays, who comments: “German and French companies seem to have benefited disproportionately from ECB action. The situation has clearly improved but there is still evidence of eurozone fragmentation.”

The
FT
report notes that businesses based in the eurozone pay around €167bn gross in interest to banks every year, representing 15% of their annual pre-tax profits. This is set to fall by €42bn over about five years as companies gradually refinance at lower rates.

Lower borrowing costs reflect the ECB president Mario Draghi’s pledge last July to do “whatever it takes” to prevent a break-up of the eurozone, which has sharply reduced average bank borrowing costs for small and medium-sized enterprises (SMEs) in particular.

However, the paper notes that the divergence of funding costs for companies in the core and periphery adds to fears of the eurozone’s ‘financial fragmentation’ – the sharp differences in financial conditions that have plagued the 17-country region over the past two years.

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