ECB actions bring down periphery firms' borrowing costs

The large difference in interest rates charged to firms across the euro zone narrowed slightly in December, providing further evidence that European Central Bank actions are easing financial market fragmentation.

With the debt crisis leaving businesses in indebted states such as Spain and Greece paying much more to borrow than firms in more solvent countries, the stability of the entire bloc was threatened.

The ECB has looked to combat this with a range of polices, chiefly its yet-to-be-activated bond-buying program.

In the euro zone as a whole, corporate loan interest rates remained broadly unchanged in December, ECB data showed on Friday. But rates on loans of over 1 million euros came down in southern Europe - the biggest fall being in Cyprus - while they rose in the better-off north.

But while the interest rates on those Cypriot loans fell to 6.89 percent from 7.13 percent, they remain the highest in the common currency area and are almost four times the rates in Belgium, currently at a bloc-low of at 1.77 percent.

ECB President Mario Draghi said last week in Davos that the number one objective for this year was to overcome financial market fragmentation, but added that the "positive contagion" in financial markets had not transmitted into the real economy yet.

Nevertheless the central bank will find solace in the fact that in addition to lower rates in Cyprus, which is negotiating a bailout from its European partners, they also fell in Spain and Portugal and Slovenia.

Rates rose in Austria, Germany, Finland and the Netherlands, countries which have escaped the debt crisis with the least damage.

The central bank announced its government bond-buying program last September, which has helped remove fears of the common currency area breaking up.

Additionally, the ECB's main refinancing rate has been at a record-low level of 0.75 percent since July and main interbank lending rate, the 3-month Euribor, was largely stable in December.

But firms in the so-called 'core' of the euro zone still pay much less than their counterparts in Southern Europe - around 2 percent interest on large corporate loans, compared to 3.4 percent in Spain, close to 7 percent in Cyprus and above 6 percent in Greece.

This divergence is still having a strong effect on the struggling economies of the euro bloc, with ECB data on Monday showing that corporate lending was still falling in Spain.

This will do little to help a country which has been sucked deeper into the euro zone crisis and where unemployment has been sky-rocketing, with currently quarter of the labor force being out of work.

Smaller businesses also saw similar developments, with rates on loans less than 1 million euros in Spain falling to 4.93 percent in December from 5.09 percent the previous month. Italian small firms were charged 4.40 percent, down from 4.46 percent.

(Reporting by Sakari Suoninen)