Eurozone financial markets fragmented, ECB says

The European Central Bank headquarters in Frankfurt. (Bloomberg)

FRANKFURT (AP) ― The European Central Bank warns that debt crisis hitting the 17 countries that use the euro is causing the region’s financial market to become increasingly fragmented

The region’s central monetary authority highlighted the fall-off in money being lent across borders and the differences in money-market and bond interest rates between financially stronger and more troubled countries in the region as signs of the split.

The bank’s statement Wednesday expanded on comments by bank head Mario Draghi, who has said that the central bank can step in and help lower excessive interest rates under some circumstances. The bank has said it may buy government bonds to drive rates down, if countries first ask for help from Europe’s bailout funds.

The ECB said cross-border loans in the overnight money market fell to 40 percent of the market earlier this year, from 60 percent in mid-2011. Banks in Spain and Italy, recent focuses of the debt crisis due to heavy government debts, are increasingly tapping emergency credit from the ECB. Meanwhile banks in more financially secure countries are turning to the central bank for credit only to a limited extent.

Lenders are increasingly keeping money within borders in the 17-country currency union. Respondents in an informal ECB survey showed that some 75 percent of respondents said the first factor they considered when lending was what country their potential borrower came from and would charge higher interest depending on their geographic origin.

The division of borrowing and lending along national lines undermines one of the key purposes of the single currency. It was supposed to create a broad financial market with many borrowers and lenders operating across national boundaries, which should in principle lower borrowing costs and ease access to credit markets for all members.

That has been disrupted by the debt crisis, which has seen Greece, Ireland and Portugal taking bailout loans from the other eurozone countries to avoid disastrous defaults on their government bonds. Spain and Italy are seeing higher borrowing rates because investors fear they may default or need bailouts as well. The willingness to lend to banks in indebted countries is affected because the banks hold government bonds and could suffer losses if those bonds fall in value or are not fully paid.