Credit turmoil to raise Europe's borrowing costs

By Krista Hughes - Analysis

FRANKFURT (Reuters) - Credit market turmoil over the past week is pushing up borrowing costs for euro-zone companies and households and sparking fears that the 13-nation region may suffer a hit to economic growth.

Despite the European Central Bank (ECB) pump-priming money markets with extra cash last week, the cost of borrowing for any longer than a week is edging up as worries persist about the widening fallout from the U.S. subprime mortgage crisis.

Three-month interbank interest rates rose to six-year highs on Thursday as shares tumbled and some measures of risk aversion hit their highest level since the September 11 2001 attacks. Short-term credit worries outweighed falling government bond yields in driving commercial borrowing costs higher.

"It's all on the back of the liquidity squeeze," said a money market trader. "It's within banks at the moment, but if it continues down the line it will have an impact on corporates."

Economists said it was too early to see the full impact of the market upheaval on companies' and consumers' spending plans. Firms are still reporting healthy profits, although shares tumbled to a five-month low on Thursday.

JPMorgan economist Silvia Pepino expects the market turmoil to first show up in confidence surveys, starting with Germany's ZEW gauge of investor sentiment next week.

But she said it was too soon to start revising forecasts for euro-zone growth, which she still has pencilled in at a healthy 2.6 percent this year, above its medium-term trend.

"The real economy has not yet been affected," she said.