Banks will repay the European Central Bank 61.1 billion euros ($80.5 billion) in the second of two 3-year loans they took a year ago, handing back less than expected in a sign much of the eurozone financial system is still reliant on ECB funds.
The ECB said on Friday that 356 banks had decided to repay funds from the second loan at the earliest opportunity, on Feb. 27. A total of 800 banks tapped the operation in February 2012.
A Reuters poll on Monday estimated banks would return 130 billion euros of the second round of cheap loans, so-called LTROs (long-term refinancing operations).
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 0.1 percent on the day.
"The lower-than-expected repayment shows that banks in the eurozone 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."
The ECB lent banks a total of more than 1 trillion euros in twin 3-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."
Last month, banks opted to repay the ECB 137.2 billion euros of the first of the twin loans at the first opportunity to do so, handing more cash back early than expected, which led to higher market interest rates.
The market-driven unwinding of the ECB crisis measures stands in contrast to the policies being pursued by central banks in the United States 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.
Banks opted to repay 137 billion euros of the first LTRO at the earliest opportunity on Jan. 30.
A total of 523 banks tapped the first of the two long-term loans, and 800 tapped the second.
Reuters calculations show excess liquidity in the eurozone - 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 from some 600 billion euros prior to the first repayment.
"This is clearly smaller than the first LTRO payback," Nordea analyst Jan von Gerich said of Friday's announcement.
"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," he added.
ECB President Mario Draghi said earlier this month that even after the repayment of the second 3-year loan, excess liquidity should remain well over 200 billion euros, which he said would confirm "the monetary policy stance as being accommodative."
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