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The coming depression blog | April 20, 2019

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ECB Says Banks to Repay More Than Forecast of 3-Year Loan

ECB Says Banks to Repay More Than Forecast of 3-Year Loan

The European Central Bank said banks will next week repay more of its emergency three-year loans than economists forecast in another sign the euro region’s debt crisis is abating.

Some 278 financial institutions will return 137.2 billion euros ($184.4 billion) on Jan. 30, the first opportunity for early repayment of the initial three-year loan, the Frankfurt- based ECB said in a statement today. That compares with the median forecast of 84 billion euros in a Bloomberg News survey of economists. The ECB’s first loan totalled 489 billion euros and banks can continue to make early repayments in coming weeks.

“The ECB is taking back some of the extra liquidity it injected into the banking system a year ago,” said Christian Schulz, senior economist at Berenberg Bank in London. “This is a stark contrast to other central banks such as the U.S. Federal Reserve, the Bank of England and the Bank of Japan, who are still blowing up their balance sheets. No wonder that the euro exchange rate is going up.”

The euro rose about half a cent after the report to $1.3465, the highest since February last year. It traded at $1.3437 at 1:15 p.m. in Frankfurt.

The ECB flooded financial markets with two tranches of so- called Longer Term Refinancing Operations totaling more than 1 trillion euros a year ago after banks stopped lending to each other because of Europe’s debt crisis. Banks have the option of repaying the loans, which were offered at the average of the ECB’s benchmark rate over their duration, after a year.

Euribor Futures

The prospect of banks repaying early and draining money from the system has driven up interest rates in the futures market. The rate on three-month Euribor futures expiring in December 2013 rose as high as 0.54 percent on Jan. 18, the most since July and up from 0.23 percent at the start of the year. It climbed to 0.51 percent today from 0.42 percent yesterday.

While today’s data may suggest banks are returning to health, some economists cautioned not to read too much into them.

“We have to wait to see what happens with the three-month tender,” said Juergen Michels, chief euro-area economist at Citigroup Inc. in London. “Only then will the number really tell us anything. It could be that banks switch from three-year loans into three-month loans.”

Unlimited Lending

The ECB still allows banks to borrow as much money as they want against eligible collateral for periods of one week, one month and three months. Some economists say this reduces the importance of the three-year loans being repaid.
From today, the ECB will issue a weekly estimate of early LTRO repayments. The first opportunity for financial institutions to return money from the second tranche, which amounted to 529 billion euros, is Feb. 27.

A “very large amount” of the initial 137 billion euros in early repayments will come from Spanish banks, Spanish Finance Minister Luis de Guindos told Ryan Chilcote in a Bloomberg Television interview in Davos today.

“Spanish banks are going to repay an important amount of money, and I think that this is a very clear sign that Spanish banks have recovered market access and that confidence not only on the banks but on the Spanish economy is on the rise,” he said.

Early repayment of the loans is “a positive signal,” ECB council member Ewald Nowotny said this month.

Draghi Optimism

Financial markets have rallied since the ECB pledged last year to buy unlimited amounts of government bonds if needed to counter speculation of a euro breakup. While the bond program, which requires governments to meet certain conditions, remains untapped, ECB President Mario Draghi today praised the progress the euro area has made in correcting imbalances.

“Governments ought to be given credit for what they did,” he said at the World Economic Forum in Davos, adding that 2012 will be seen as the year the euro was relaunched. “For the first time in many years, the process of restarting European integration got momentum.”

The 17-nation euro economy fell into its second recession in four years in the third quarter of 2012. It probably contracted 0.4 percent in the fourth, according to the median of 26 economists’ forecasts in a Bloomberg survey.

German Confidence

Still, business confidence in Germany, the region’s largest economy, rose more than economists expected in January, notching its third straight increase, the Munich-based Ifo institute said today.

While the jury is still out on whether the economy has turned for the better, the economic activity appears to be in the process of stabilizing at a low level and “we foresee a gradual recovery in the second part of the year,” Draghi said.

The higher-than-expected loan repayment figure “is a further confirmation of the sea-change in sentiment toward the euro zone over the last several months,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy Ltd. in London. “Yet this is a double-edged sword if it’s the start of a significant withdrawal of liquidity at a time when the euro zone economy is in recession.”


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