By Terhi Kinnunen and Tracy Rucinski
LAPPEENRANTA, Finland/COLMENAREJO, Spain (Reuters) - Saara Merritt is excited. She and her husband have sold their house in a Helsinki suburb and taken out a cheap mortgage to buy a new, more spacious property back in her provincial hometown.
At the other end of the euro zone, Daniel Ballestero is desperate. He has tried for months to sell his apartment on the depressed outskirts of Madrid but found no buyer. If anyone can get a mortgage to buy the property, the loan will probably cost twice as much as Saara Merritt's.
Their stories reveal a paradox bedeviling the euro zone economy. People in the relatively prosperous northern nations can usually borrow easily and cheaply, while fellow Europeans in the troubled southern nations are paying much higher interest rates, if they can get credit at all.
"I used an inheritance from my father to buy the flat. Now that money is gone and I still owe more than it's worth," said Ballestero, 50, who needs the money as he lost his job selling musical instruments.
Ballestero is among an army of Spaniards who bought property during a boom which collapsed in 2008, saddling them with debts they can hardly repay and dragging down the entire economy.
By contrast, 33-year-old Merritt arranged a relatively straightforward move to Lappeenranta, a Finnish frontier town which is prospering nicely from trade with neighboring Russia.
"The (mortgage) negotiations were very easy, they were very willing to lend money," she said, sitting under an apple tree in her new garden. "(Interest rates) are so low at the moment."
Her Australian husband Shannon found an IT job locally, while Saara stays at home to look after their two young children, and she now lives closer to her elderly parents.
Lappeenranta, a lake-side town of 72,000 people, makes a pleasant home for the Merritts who also spent some time in Australia after selling their Helsinki home a year ago.
Its old town dotted with picturesque wooden buildings is packed with visitors from St Petersburg who come for tax free shopping and the restaurants. Healthy economic growth in Russia, fuelled by energy exports and rising wages, is helping Lappeenranta to prosper.
NO COMMON CONSUMER RATES
Finns and Spaniards have shared a common currency for more than a decade, and yet the euro zone is failing to achieve anything like a common set of interest rates for consumers in its 17 member nations, thanks to the debt crisis.
Borrowing costs are now arguably too low in the northern members of the euro zone, and much too high in the south.
The European Central Bank has set a single benchmark interest rate for euro zone financial markets since 1999, but the system of transmitting this to the borrowing costs of citizens and businesses has broken down.
For instance, a typical Spanish family has to pay almost 300 euros a month more on a 250,000 euro, 25-year mortgage than its Finnish counterpart.
In theory, central banks should engineer lower interest rates for struggling economies and higher ones for buoyant economies. Precisely the opposite is happening in the euro zone.
Spanish lenders charge twice as much in interest on home loans as their Finnish counterparts: in May, the average rate for a Spanish mortgage was 4.32 percent, compared with 2.03 percent in Finland.
Spain desperately needs cheap credit. It is stuck in its second recession of the past few years, unemployment is the highest in the euro zone at a record 24.6 percent, and speculation is growing that the government may have to take a bailout from the European Union and IMF.
By contrast, the Finnish economy is growing, unemployment is less than a third of Spain's at 7.4 percent and Helsinki is a funder of EU bailouts rather than a recipient.
Life is tough for countries on the euro zone periphery such as Spain and Italy as well as those that have been forced into government bailouts: Greece, Ireland, Portugal and Cyprus.
"At this stage the crisis is self-fulfilling," G+ Economics' Lena Komileva said in a note to clients. "Peripheral market isolation has become chronic."
"This is the very antithesis of a monetary union," she added. "Euro breakup over the next two years has become a realistic risk."
The ECB is worried about the divergence of borrowing costs that is happening even though most mortgages are tied to the same reference rate, the 12-month Euribor. This is the rate at which euro zone banks lend one-year funds to each other.
In the last year, mortgage rates in Finland have fallen in line with Euribor, but have climbed in Spain. In boom times, Spanish mortgage costs were only slightly above Finland's.
When the market functions well, the ECB nudges Euribor up and down through its policy rate changes and market operations. Since the sovereign debt crisis erupted, many banks have become reluctant to risk lending to their peers in the euro zone's most troubled nations.
Southern banks are also charging more to make up for losses on bad loans, which have rocketed in countries such as Spain due to the combined effects of recession and the property crash.
Unable to borrow commercially, many banks including most of Spain's have been forced to turn to the ECB for funding. However, they have to put up collateral to borrow, and often all they have is assets whose credit rating has fallen sharply during the crisis, such as Spanish government bonds.
Overall, the cost of funds that banks raise for lending activity such as mortgages is influenced more by the financial state of their home governments than by ECB policy.
"The interest rate charged to individual banks depends on the funding costs of the sovereign and not on the rates set by the central bank," ECB Governing Council member Christian Noyer said. "This means that the monetary policy transmission does not work," he added, describing the situation as unacceptable.
Unacceptable or not, the problem persists even though the ECB has loosened its collateral requirements to help banks in the peripheral nations.
And it's not only about the cost, but also the availability of credit. Sometimes people in countries like Spain cannot find loans at any affordable price, and this is widening the gap between the euro zone's northern and southern economies.
"The price effect is not the only negative element. We also have a quantity effect, so it's a double problem," Unicredit economist Marco Valli said. "(It is) obviously undermining monetary policy transmission, amplifying the differences in growth. This complicates trying to keep everything together, when forces are pushing in different directions."
The problem is helping to deepen the Spanish property crash and the misery of people like Daniel Ballestero. Like many Spanish borrowers, he is in negative equity: he owes more on the attic flat than its current value as prices have dropped about 30 percent from their peak at the end of 2007.
Six years ago he paid 234,000 euros ($282,800) for the property in the Madrid satellite town of Colmenarejo. First Ballestero lived in it, but later he moved back in with his mother to save money and rent out the flat.
However, the rent didn't cover his mortgage payments and when he lost his job, he put the flat on the market. Now his bank estimates it is worth 145,000 euros, less than the 170,000 he owes on it.
His mother recently died, meaning his current home will also have to be put up for sale eventually so that his siblings can take their share of the inheritance.
Ballestero, who lives with his partner and a newborn baby, nevertheless admits that others suffer more. "There are a lot of people who are worse off than I am," he said.
The problem also applies to corporate loans, which had been cheaper in Spain than in Finland in late 2006, before the credit crisis appeared. Now Spaniards pay 1.5 percentage points more, and firms in Greece, Portugal and Italy face yet higher charges.
It is also almost impossible for Spanish customers to switch to northern European lenders, despite a push for euro zone financial integration. Banks are loathe to lend for house buying outside their home base as they lack the means to judge the value of the property used to secure the loan.
Analysts say more pain is to come, as Spanish property prices are unlikely to have reached their bottom.
"The adjustment is anything but done and will weigh on the business cycle and banking sector solvency for several more years," Deutsche Bank analysts Thomas Mayer and Jochen Moebert said, adding that they see the Spanish real property market as still roughly 25 percent overvalued.
While high rates are stifling the southern property markets, worries are growing that the low rates in the north might encourage a Spanish-style boom and bust. Since the beginning of the financial crisis in 2007, housing prices have risen most in Finland, Austria and Germany among the euro zone nations.
In those countries, cheap money has allayed consumer jitters and the latest data show the Finnish economy is the fastest growing in the euro zone, with Germany not far behind.
The Bundesbank has warned of a potential housing bubble in Germany after prices rose 5.5 percent last year in the biggest cities. However, analysts said it is difficult to say the rises there are unsustainable.
"Historically seen, only every other boom ended in a real property bubble," Mayer and Moebert said, forecasting prices will continue to rise, especially in the big cities.
The Finnish central bank is not yet worried. "The house price increase relative to economic fundamentals cannot be considered excessive," Bank of Finland economist Jarkko Kivisto said in a research paper.
SOME SMALL RELIEF
To ease the rate divergence, the ECB has tried buying government bonds to the tune of 210 billion euros, pushing 1 trillion in 3-year funds into the market and cutting interest rates, but things have only got worse.
Analysts said the most likely ECB measure to help the periphery is to cut its main policy rate - already at record low 0.75 percent - but the impact would be limited.
"Lowering the policy rate further would bring some small relief, but would certainly not be the long-term solution that would change the picture for good," Unicredit's Valli said.
Speculation has also grown that the ECB will resume bond buying, following comments last week from President Mario Draghi that it was ready to do, within its mandate, whatever it takes to preserve the euro.
In the end, the debt crisis can be solved only if governments regain the trust of bond markets, and this may take a long time. To alleviate the situation in the meantime, large-scale bond purchases would be the best way to go, analysts said.
For the ECB to buy bonds, it would have to see deflationary pressures and then do quantitative easing - basically print money. But even this could be seen as succumbing to pressure from euro zone governments, and letting them off the hook in tackling their budget deficits is the last thing it wants to do.
"It's not easy to solve the transmission problem because it's also a political game," Unicredit's Valli said. "We are confident that policymakers including the ECB will do everything which is in their possibilities to keep the euro zone together, but the ECB is really looking for signs that governments are stepping up their efforts." ($1 = 0.8275 euros)
(Writing by Sakari Suoninen in Frankfurt; editing by David Stamp)