FRANKFURT: Banks will repay more than 130 billion euros ($173bn) of crisis loans to the European Central Bank (ECB) next week, handing more cash back early than expected in a sign at least parts of the financial system are returning to health.
The ECB made over one trillion euros of ultra-cheap three-year loans to banks in twin lending operations in December 2011 and February 2012 - a move ECB president Mario Draghi said had "avoided a major, major credit crunch".
The euro zone's central bank said yesterday that 278 banks would repay a total of 137.2bn euros of the December loans at the earliest opportunity on January 30, although it did not name them. A total of 523 banks tapped the first of the two long-term loans, known as LTROs, just over a year ago.
German debt prices fell and banking stocks and the euro rose on news of the early repayment, which exceeded the 100bn euros forecast in a poll. Banks can repay the money early on a voluntary basis weekly from now on. Repayment of the second LTRO starts on February 27.
"This exceeded expectations, I expect the pace to slow down considerably in the next week," said Nordea analyst Jan von Gerich. "Quite a few stronger banks paid back as soon as possible, whereas weaker banks took money in the second LTRO.
"I don't think that repayments will reach a level where overnight interest rates will start to move up," he added.
The large early repayment will be welcome news to some ECB policymakers, who were concerned about the increased risks the central bank carried on its balance sheet with the loans.
Geman Chancellor Angela Merkel said at the World Economic Forum in Davos, Switzerland: "It will be important for Europe as well that the ample liquidity that was given out to banks last year is collected back again."
Banks generally borrowed cash for three reasons: as an insurance policy in case the euro zone crisis worsened and left them short of liquidity; as a "carry trade" to finance purchases of higher yielding government bonds; or to fund their loan books if they were struggling to access cheap funding.