ECB Says Banks to Repay More Than Forecast of 3-Year Loan

by Stefan Riecher,  |  published on January 26, 2013

The European Central Bank said banks will next week repay more of its emergency three-year loans than economists forecast in another sign the euro region’s debt crisis is abating.

Some 278 financial institutions will return 137.2 billion euros ($184.4 billion) on Jan. 30, the first opportunity for early repayment of the initial three-year loan, the Frankfurt- based ECB said in a statement today. That compares with the median forecast of 84 billion euros in a Bloomberg News survey of economists. The ECB’s first loan totalled 489 billion euros and banks can continue to make early repayments in coming weeks.

“The ECB is taking back some of the extra liquidity it injected into the banking system a year ago,” said Christian Schulz, senior economist at Berenberg Bank in London. “This is a stark contrast to other central banks such as the U.S. Federal Reserve, the Bank of England and the Bank of Japan, who are still blowing up their balance sheets. No wonder that the euro exchange rate is going up.”

The euro rose about half a cent after the report to $1.3465, the highest since February last year. It traded at $1.3437 at 1:15 p.m. in Frankfurt.

The ECB flooded financial markets with two tranches of so- called Longer Term Refinancing Operations totaling more than 1 trillion euros a year ago after banks stopped lending to each other because of Europe’s debt crisis. Banks have the option of repaying the loans, which were offered at the average of the ECB’s benchmark rate over their duration, after a year.

The prospect of banks repaying early and draining money from the system has driven up interest rates in the futures market. The rate on three-month Euribor futures expiring in December 2013 rose as high as 0.54 percent on Jan. 18, the most since July and up from 0.23 percent at the start of the year. It climbed to 0.51 percent today from 0.42 percent yesterday.

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