23 January 2013

FT: Window for ECB loan repayments nears

On Friday, the ECB receives its first indication of how much of the roughly €1 trillion of three-year loans taken out by hundreds of eurozone banks just more than a year ago will be repaid early.

The early repayment window officially opens at the end of January, giving banks the option to repay money borrowed under the ECB’s three-year longer-term refinancing operations once a week, every week until the LTRO matures.

Early repayment of the loans should be a “good thing”, says Georg Grodzki, head of credit research at Legal & General. “It shows confidence in a bank’s business model and should alleviate concerns about banks being addicted to ECB funding.” That, in turn, should help bond issuance in ­public debt markets.

He says it will also help overcome fears that banks could “fall off a cliff” when the three-year loans reach maturity as lenders all rush at the same time to issue debt to replace money borrowed from the ECB.

Much has been made of the loss of excess liquidity in the financial system and whether it will force short-term interbank overnight rates higher. But, based on early repayment estimates for the first quarter, ­analysts say the expected loss of liquidity would be unlikely to prompt a substantial increase in euro overnight index average rates over the next few weeks.

The real importance of the early repayment figures lies in what it tells policy-makers and investors about the health of the eurozone – and the divide between banks in the core and the periphery. Mario Draghi’s promise to do “whatever it takes” to save the euro and the launch of the ECB’s government bond-buying programme has reduced the tail risk of eurozone break-up, paving the way for a far-reaching markets rally.

Northern European banks – many of which took the ECB loans as an insurance policy to protect against further shocks – are most likely to repay first as they take advantage of better funding conditions and seek to make better use of excess cash. Commerzbank said it would repay early but other contenders include BNP Paribas, Deutsche Bank and Barclays. Southern European banks, the biggest users of the LTRO, could pay back as little as one-tenth of what they borrowed, says Morgan Stanley.

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