Borrowing costs for SMEs in Italy and Spain fall to two-year lows Borrowing costs for small and medium-sized companies in crisis-hit Spain and Italy have fallen to two-year lows in a sign that the financial fragmentation afflicting the eurozone is abating just as a fragile economic recovery takes hold. The news is likely to be welcomed by the European Central Bank's governing council, which meets on Thursday to discuss interest rates, especially amid business surveys that have provided the latest evidence of an improving economic climate. The stark divergences between the typical cost of borrowing faced by SMEs in Spain and Italy compared with their peers in places like Germany had called into question the effectiveness of the ECB's monetary policy, since its record-low interest rates were not being translated into real world borrowing costs in the countries that most needed it. The interest rate on a bank loan in Spain of up to €1m for one to five years fell in July to 5.46 per cent, down from a peak of 6.5 per cent one year ago and its lowest level since January 2011, according to ECB data published on Tuesday. In Italy, the cost of a similar loan, typically used by SMEs, fell to 5.25 per cent - again, down by a percentage point since July 2012, and the lowest level since September 2011. The figures are still considerably higher than in Germany, where such a loan cost 3.57 per cent in July, but German borrowing costs have remained broadly flat since December, following a steep fall in 2012, while the Spanish and Italian interest rates have continued to fall. The 17-nation bloc remains weighed down by record unemployment numbers so policy makers see alleviating funding problems for job-creating SMEs as fundamental to encouraging a sustained recovery after the euro area exited its 18-month recession in the second quarter. Earlier on Tuesday, the Organisation for Economic Co-operation and Development raised its growth forecasts this year for Germany and France, the two biggest eurozone economies, to 0.7 per cent and 0.3 per cent, respectively, up from 0.4 per cent in Germany and a forecast contraction of 0.3 per cent in France in its last forecasts in May. "The gradual pick-up in momentum in the advanced economies is encouraging but a sustainable recovery is not yet firmly established," Jorgen Elmeskov, deputy chief economist, said of the world's advanced economies. Major risks remain. The euro area is still vulnerable to renewed financial market, banking and sovereign debt tensions. The ECB had signalled concern about the divergences in borrowing costs faced by SMEs but, after reflecting on the issue, chose not to attempt direct action to alleviate it, although it has said it is working to encourage a revival of the dead asset-backed securities market to improve the funding situation for smaller European companies. At its meeting on Thursday, the bank is expected to keep its main refinancing rate on hold at 0.5 per cent. However, Mario Draghi, ECB president, is likely to face questions about the effectiveness of the bank's "forward guidance" policy which pledges to keep rates low for an extended period. That is because predictions of an interest rate rise, as reflected in forward money market rates, have ignored the guidance, although they still only predict a rise in two to three years. The money market interest rate move is only likely to cause concern at the ECB if it leads to an appreciation of the euro against other currencies, by attracting money from outside the euro area, since that could harm an economic recovery that is dependent on exports. Laurent Fransolet, head of fixed income research at Barclays, said that because US short term interest rate expectations had also been moving higher lately there was not a widening differential between the US and eurozone, so this concern was muted for the time being, although the trade weighted euro exchange rate has been appreciating. "The appreciation of the currency is the one factor that pushes against the recovery that we're seeing," he said. Since the ECB is highly unlikely to want to cut interest rates any further, this could prompt it to consider injecting more liquidity into the banking system through another long term refinancing operation or LTRO, which it used in 2011 and 2012 to inject €1tr in cheap three year loans . "At this point I don't think that they really want to actively play against the upward push in rates but I wouldn't be surprised if [Mr Draghi] says something about LTROs," Mr Fransolet said.