The ECB is embarking on a major cash cleanup as banks pay back €296 billion in loans

  • Payout much lower than expected
  • Key money market interest rates fall after announcement
  • Move seen as the first step towards relaxing the band

FRANKFURT, Nov 18 (Reuters) – Banks in the Eurozone will repay nearly 300 billion euros ($310 billion) in loans to the European Central Bank next week, the ECB said on Friday, the largest withdrawal of money from the Eurozone financial system in the 22-year history of the euro.

The move is part of the ECB’s effort to combat record high inflation in the eurozone by raising the cost of credit, and it is the first step in cleaning up even more liquidity next year through its multi-trillion-euro bond portfolio. to shrink.

The Eurozone central bank said lenders would repay €296 billion of the €2.1 trillion multi-year credit they have taken out under its Targeted Longer-Term Refinancing Operations (TLTRO) when given the first opportunity to do so. to do on November 2. 23.

This is less than the half trillion euros that analysts had expected, but still the largest drop in excess liquidity since measurements began in 2000.

The one-week ESTR rate, which measures borrowing costs for banks after the repayment goes through, fell after the ECB announcement, as did two-year Italian government bond yields, albeit short-lived.

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

“These large prepayments reduce the balance sheet of the Eurosystem and thus contribute to the general normalization of monetary policy, which is necessary to bring inflation back to target over the medium term,” ECB Executive Board Member Isabel Schnabel said on Twitter.

This is the first voluntary repayment period, so analysts had warned that some bank treasurers may choose to wait until the next one on Dec. 21 to better understand the state of their balance sheets ahead of year-end results.

“Even larger repayments may be made in the December repayment term,” says Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, who estimates repayments in that period at 900 billion euros.

While this early TLTRO repayment is voluntary, the ECB gave banks an incentive to get off those loans by taking out an interest rate subsidy last month.

The largest impact of the redemptions was likely to be seen in peripheral countries, where a larger share of their government bonds would return to the market after being tied to the ECB as collateral for the TLTRO loans.

The ECB’s other area of ​​focus is the money markets, where banks lend each other money for a short period of time.

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

Antoine Bouvet, a strategist at ING, said the lower-than-expected repayment “is a blow to hopes of short-term relief” from the scarcity of collateral.

He and Ducrozet both said the ECB may have to introduce a new long-term bank financing facility, albeit on less generous terms, if banks come under pressure.

($1 = 0.9647 euros)

Reporting by Francesco Canepa; Edited by Paul Simao and Toby Chopra

Our Standards: The Thomson Reuters Principles of Trust.

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