Southern European companies are bearing the brunt of lenders’ reluctance to pass on cheap central bank funding as they seek to repair recession-battered balance sheets, according to Morgan Stanley.

The amount of loans offered to companies in the south of the continent is falling, while the cost of lending is rising amid the European Central Bank’s efforts to pump money into the broader economy, Morgan Stanley analysts led by Alice Timperley wrote in a report. The “transmission mechanism” between funding and lending is still “acutely fractured,” they wrote.

“It is materially more expensive for Italian and Spanish companies to borrow from their banks as banks focus on repair, leading to higher average funding costs, which we do not see reversing in the near term,” the analysts wrote.

Tight financing conditions are hurting southern European countries and remain the main problem facing the region, EU Economic and Monetary Affairs Commissioner Olli Rehn said on February 28. The lack of credit is “suffocating” economic activity and export growth in Spain, Portugal and Italy, he said.

Banks held 4.5 trillion euros ($5.9 trillion) of European company loans in January 2013, 2.5 percent down from a year earlier, according to ECB data compiled by Morgan Stanley. Borrowing by companies in Italy was 3 percent lower than last year, while for Portuguese companies it was down 7 percent, Greece was 9 percent lower and lending fell 11 percent in Spain.

“Peripheral-demand weakness continues to drag lending lower, and the new data speaks to the fragmentation in bank credit supply and demand across the euro area,” the Morgan Stanley analysts wrote.

The average interest margin paid by Italian companies was 350 basis points more than the European interbank offered rate, according to the report. That’s higher than Spanish corporates, which pay about 320 basis points, while German corporates paid an average 200 basis points, the analysts wrote. A basis point is 0.01 percentage point. [Bloomberg]