The European Central Bank's pledge to buy sovereign debt has slashed borrowing costs for Spain and Italy, but not for the small businesses that are key to economic revival.
Interest rates on business loans of up to $1 million surged throughout the eurozone periphery in January and are now only modestly below levels before ECB President Mario Draghi vowed to do whatever it takes to save the euro.
Loans up to five years carry an interest rate of about 6% in Spain and Italy and 7% in Greece and Portugal, compared to just 3.5% in Germany.
The spread between small-business borrowing costs in the periphery and Germany is now wider than it was before Draghi unveiled his bazooka last July.
The Cyprus bailout and Italy's inconclusive election may have expanded such yield spreads.
As the ECB prepares to meet Thursday, concern is growing that unless this small-business credit crunch is addressed, the relative financial market calm that has pervaded since last summer will be temporary.
Draghi has admitted that access to credit remains too tight in some countries. The central bank has dampened expectations that it can provide a fix.
"In our view, this is the ECB's top policy priority at the moment," Barclays economist Antonio Pascual wrote. But Barclays doesn't think the ECB has "a policy tool ready to be deployed immediately.
Last summer, the ECB argued that the risk some countries might exit the euro had blocked the effectiveness of monetary policy and justified buying of government debt — under some circumstances.
Still Clogged But elevated lending rates in Italy and Spain, two countries where small business accounts for about half of all jobs, show that easy money transmission channels are still clogged.
The result: Declines in business lending volumes are compounding the economic impact of government austerity via tax hikes and spending curbs.
February data out last week showed that bank lending to business has been contracting for a year in Italy and was down 3% from a year earlier. The contraction has been deeper and longer in Spain.
While export growth may help in places where demand suffers amid deficit cutting, high lending rates create a disadvantage, putting more pressure on wages.
Bleak news out of the eurozone this week confirms that the current mix of policies is disastrous. The jobless rate hit a record 12% in February, and the pace of economic contraction accelerated in March. Meanwhile, Spain is signaling that it will have to raise its deficit projections as government revenues miss forecasts.
In this economic climate, businesses in the periphery already have plenty of reason to shy away from risk. Elevated borrowing rates, while perhaps a fair reflection of economic risk, only raise the hurdles to investment.
One possible way the ECB could lower borrowing costs for small business would be to buy securitized small business loans. But such loans aren't typically securitized and the move would expose the ECB to credit risk.
"I do not see that as a very realistic way forward, frankly," ECB governing council member Erkki Liikanen said last week.
The method of resolving the latest crisis in Cyprus, involving huge losses for uninsured depositors, underscores the need for the euro area "to kick-start non-bank intermediated credit . . . and to establish deeper corporate bond markets, because banks are now less able to do so," wrote Jacob Kirkegaard of the Peterson Institute for International Economics.
"Too many weak banks in one troubled country could aggravate that country's credit crunch in the short term, requiring the ECB to consider new non-standard measures to channel credit to them in order to help small and medium enterprise (SME) borrowers," he wrote.
Kirkegaard suggests that a partial guarantee of small-business loans by national governments or the European Commission could provide cover for the ECB to buy them in securitized form.
All this suggests that the ECB lacks power to fix what ails the eurozone.
What the region needs most is stronger economic growth. Labor market reforms that make it easier and less costly to fire workers would encourage businesses to invest, borrow and hire. Such changes, like those in Germany a decade ago, would have a long-term payoff but not a quick fix.