Banks around Europe will repay less than half the expected amount of the crisis loans they took from the European Central Bank a year ago, suggesting much of the euro zone financial system is still hooked on cheap ECB funds.
The ECB loaned banks a total of more than 1 trillion euros ($1.3 trillion) in twin three-year, ultra-cheap lending operations in December 2011 and February 2012 — a ploy that ECB President Mario Draghi said "avoided a major, major credit crunch."
A bumper repayment of 137 billion euros ($181 billion) of the first round of cheap loans, or long-term refinancing operations (LTROs), at the first opportunity on Jan. 30 had suggested parts of the euro zone financial system were returning to health.
On Friday, however, the ECB said that of the 800 banks that took money in the second round of the three-year loans, 356 had opted to repay a combined 61.1 billion euros ($80.8 billion) at the first chance on Feb. 27.
That was less than half the 130 billion euros ($172 billion) forecast in a Reuters poll on Monday, showing that many banks are still dependent on the ECB.
"The lower-than-expected repayment shows that banks in the euro zone periphery, and possibly also in the core, still want to hold on to the LTRO funds as market access remains constrained and fears over future market turmoil persist," said Tobias Blattner, economist at Daiwa Securities. "For the ECB, however, this should be positive as it is likely to reduce the upward pressure on money market rates and the downward pressure on inflation through the exchange rate."
Two-year Eonia rates fell after Friday's announcement and Euribor futures rose — both signals of lower rate expectations. German bond yields also fell across the curve.
The euro hit a six-week low of $1.3157 from around $1.3210 beforehand and was down slightly on the day.
Last month's bigger-than-expected repayment of the first round of the cheap loans led to higher market interest rates.
Policy Contrast
The market-driven unwinding of the ECB crisis measures stands in contrast to the policies being pursued by central banks in the U.S. and Japan, which are looser.
This policy contrast had helped drive up the euro, which is also supported by investor confidence that the bloc will hold together after Draghi's pledged last July that the ECB would do "whatever it takes" to preserve the single currency.
Early repayment is a badge of honor for banks anxious to impress investors and ratings agencies and distance themselves from more cash-strapped rivals.
Reuters calculations show excess liquidity in the euro zone — the level of cash beyond what banks need to cover their day-to-day operations — has dropped since the first chance to repay the first loan on Jan 30.
The excess measure has fallen to below 500 billion euros ($661 billion) from some 600 billion euros ($794 billion) prior to the first repayment.
"Excess liquidity won't disappear any time soon, and we'll be at current market rate levels for a long time if the situation does not change fundamentally," Nordea analyst Jan von Gerich said following Friday's announcement.
Draghi said earlier this month that even after the repayment of the second three-year loan, excess liquidity should remain well over 200 billion euros, which he said would confirm "the monetary policy stance as being accommodative."
Joachim Nagel, a board member at the German Bundesbank, said excess liquidity levels must be watched closely.
"If the excess liquidity in the banking system abates significantly, then it would be time to consider an exit from the non-standard measures brought on by the crisis," Nagel told Reuters, without giving a specific level. "It is not yet completely clear when exactly it will be time for the exit. The markets and the financial system are still far too fragmented for that. I warn against declaring an end to the crisis despite the calmer phase on markets in recent months."