ECB to start big cash clean-up as banks repay billions in loans

ECB to start big cash clean-up as banks repay billions in loans

  • Banks have repaid around 500 billion euros in TLTRO loans
  • Moving seen as a first step towards the unwinding of obligations
  • ECB and analysts to monitor impact on bond and money markets

FRANKFURT, Nov 18 (Reuters) – The European Central Bank is set to begin the biggest cash withdrawal from the eurozone banking system in its history on Friday, as it gives banks a first chance to repay hundreds of billions euros in ECB loans.

The move is part of the ECB’s efforts to tackle record inflation in the eurozone by raising the cost of credit and is its first step to mopping up even more liquidity next year by reducing its bond portfolio by several trillion euros.

The eurozone central bank will announce at 11:05 GMT how much banks plan to repay of the 2.1 trillion euros ($2.170 billion) in multi-year credit they have taken out as part of its operations long-term refinancing schemes (TLTRO).

Although this early redemption of the TLTRO is voluntary, the ECB prompted banks to get rid of these loans by removing a rate subsidy last month.

Analysts expect banks to repay around half a trillion euros in TLTRO loans at this week’s window – the first of several – which would make it the biggest drop in excess liquidity since records began. in 2000.

ECB policymakers will look at how the market is digesting this sudden drop in liquidity to gauge how quickly they can proceed with the cancellation of the ECB’s €3.3 trillion asset purchase program, which they will discuss at their December 15 meeting.

The greatest impact of redemptions will be seen in peripheral countries, which would see a greater proportion of their government bonds return to the market after being blocked at the ECB as collateral for TLTRO loans.

“It is clear that Italy, Spain, Portugal and Greece would suffer from large repayments, while the impact would be less for Germany and France,” said Louis Harreau, strategist at Credit Agricole.

But he warned that banks in southern Europe had less incentive to repay because they relied more on the TLTRO for funding than their northern counterparts.

MONEY MARKETS

The other area of ​​interest for the ECB will be the money markets, where banks lend to each other for a short period.

These markets have been hampered by ECB policy for years as banks either could not find high quality bonds to use as collateral to borrow or had no incentive to do so when they could simply mine the TLTRO for subsidized loans.

Antoine Bouvet, strategist at ING, said any TLTRO repayment above 500 billion euros would allay concerns about the scarcity of collateral, but also make the Euribor rates that banks charge themselves more expensive.

“If TLTRO redemptions give rise to signs of money market stress, the ECB may decide to introduce a new backstop facility to replace the TLTRO but with much less generous terms,” ​​he said. added.

But Marco Brancolini, a strategist at Nomura, said he didn’t see “much of an impact” even if banks repaid 600 billion euros.

He cited an ECB survey from last April which showed that 56% of banks said they used TLTRO money to make loans to the non-financial private sector and 44% said they also deposited some with the ECB.

“The latter is the part that should be reimbursed, with limited consequences for the real economy,” Brancolini said.

“Only a limited amount of TLTRO funds have been used to buy bonds: banks are unlikely to unwind these positions as this would crystallize losses just before the end of the year.”

Banks had until November 16 to notify the ECB of their intention to repay the TLTRO loans, but the repayment will not take place until November 23.

The next repayment window is scheduled for Dec. 21, which means some bank treasurers may choose to wait until then before moving, analysts said.

($1 = 0.9687 euros)

Reporting by Francesco Canepa; Editing by Paul Simao

Our standards: The Thomson Reuters Trust Principles.

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