FRANKFURT (Reuters) – The European Central Bank is ready to start on Friday the largest withdrawal of money from the euro zone’s banking system in its history, because it gives banks a primary probability to repay a whole lot of billions of euros in ECB loans.
The move is an element of ECB efforts to fight record-high inflation within the euro zone by raising the associated fee of credit and it’s its first step towards mopping up much more liquidity next yr by trimming its multi-trillion-euro bond portfolio.
The euro zone’s central bank will announce at 1105 GMT how much banks plan to repay of the two.1-trillion-euros ($2.17 trillion), multi-year credit they’ve taken under its Targeted Longer-Term Refinancing Operations (TLTRO).
While this early TLTRO reimbursement is voluntary, the ECB has given banks an incentive to eliminate those loans by taking away a rate subsidy last month.
Analysts expect banks to repay around half a trillion euros value of TLTRO loans at this week’s window – the primary of several – which might make this the largest drop in excess liquidity since records began in 2000.
ECB policymakers will take a look at how the market digests this sudden drop in money to gauge how briskly they’ll proceed with reversing the ECB’s 3.3-trillion-euro Asset Purchase Programme, which they’ll discuss at their Dec. 15 meeting.
The best impact from the repayments can be seen in peripheral countries, which might see a much bigger proportion of their government bonds come back in the marketplace after being locked on the ECB as collateral for the TLTRO loans.
“Clearly, Italy, Spain, Portugal and Greece would suffer from big repayments, whereas the impact could be smaller for Germany and France,” said Louis Harreau, a strategist at Credit Agricole.
But he cautioned there was less of an incentive for banks in southern European to repay because they relied on TLTRO for his or her funding to a greater extent than their northern peers.
The opposite area of focus for the ECB can be money markets, during which banks lend to one another for a short while.
Those markets have been hampered by the ECB’s policy for years as banks couldn’t find high-quality bonds to make use of as collateral for borrowing or didn’t have an incentive to achieve this when they may simply tap TLTRO for subsidised loans.
Antoine Bouvet, a strategist at ING, said any TLTRO repayment greater than 500 billion euros would ease concerns a few scarcity of collateral but in addition make the Euribor rates that banks charge one another costlier.
“If TLTRO repayments lead to some indications of cash market stress, the ECB could resolve to introduce a recent facility as a backstop to exchange TLTRO but with much less generous terms,” he added.
But Marco Brancolini, a strategist at Nomura, said he didn’t see “much of an impact” even when banks repaid 600 billion euros.
He cited an ECB survey from last April that showed 56% of banks said they used TLTRO money to grant loans to the non-financial private sector and 44% said in addition they deposited a few of it on the ECB.
“The latter is the part that needs to be repaid, with limited consequences for the actual economy,” Brancolini said.
“Only a limited amount of the TLTRO funds were used to purchase bonds: banks are unlikely to unwind those positions as it could crystallise losses just ahead of yr end.”
Banks had until Nov. 16 to notify the ECB about their intention to repay TLTRO loans, however the reimbursement will only happen on Nov. 23.
The following repayment window is scheduled for Dec. 21, meaning some bank treasurers may decide to wait until then before making a move, analysts said.
(Reporting by Francesco Canepa; Editing by Paul Simao)
Copyright 2022 Thomson Reuters.
