ECB to Give First Indication of Three-Year Loan Repayment

The European Central Bank will give a first indication today of how much of its 1 trillion euros ($1.33 trillion) in three-year loans banks plan to repay early.

In a statement at around noon in Frankfurt, the ECB will say how much of the first three-year loan banks have pledged to hand back at the first early-repayment opportunity on Jan. 30. They will initially repay 84 billion euros, according to the median of 10 estimates in a Bloomberg News survey of economists. Some 150 billion euros of the first loan, which totaled 489 billion euros, will be given back early as banks continue to repay the funds over coming weeks, the survey shows.

The ECB flooded financial markets with two tranches of three-year loans a year ago to avert a credit crunch after banks stopped lending to each other because of Europe’s sovereign debt crisis. Banks have the option of repaying the loans, which were lent at the average of the ECB’s benchmark rate over their duration, after a year. While today’s data may give an insight into the health of banks amid signs the debt crisis is abating, economists cautioned not to read too much into them.

“Even if the first amount is lower than expected, we might still see higher amounts in the weeks to come,” said Nick Matthews, senior euro-area economist at Nomura International in London. “It may be a marathon rather than a sprint. I don’t expect the first announcement to have a huge impact on the money market.”

Market Rates

The prospect of banks repaying the so-called Longer Term Refinancing Operations 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 was at 0.42 percent today.

The ECB’s non-standard policy measures, ranging from the LTROs to an as-yet untapped bond-buying program, have helped to calm financial markets and reduce borrowing costs. ECB President Mario Draghi suggested this month that the worst of the three- year debt crisis may be over. The ECB expects the 17-nation euro economy to emerge from recession later this year.

Early repayment of the loans is “a positive signal,” ECB council member Ewald Nowotny said this month.

Spanish Banks

Spanish banks Banco Sabadell SA and Bankinter SA (BKT) yesterday committed to start repaying the emergency loans as investor confidence improves. Sabadell plans to return 1.5 billion euros of 24 billion euros in three-year money, Chairman Josep Oliu said. Bankinter said it will repay 15 percent of its 9.5 billion euros of LTRO loans this year.

Lloyds Banking Group Plc (LLOY), Britain’s second-biggest taxpayer-assisted lender, intends to repay most of the 11.4 billion pounds ($18 billion) of three-year loans it borrowed next month, according a person with knowledge of the plan who declined to be identified. The bank will repay about 8 billion pounds of the money on Feb. 27 -- the first opportunity for repayment on the second LTRO -- the person said.

The second three-year loan totaled 529 billion euros. Early repayments of that tranche will amount to 138 billion euros, according to the Bloomberg survey. That would result in 288 billion euros of the total 1 trillion euros being given back early.

From today, the ECB will issue a weekly estimate of LTRO repayments.

The ECB still allows banks to borrow as much money as they want against eligible collateral for periods of one week, one month and three months. Some economists say this reduces the importance of the three-year loans being repaid.

“If a bank finds out it has returned too much money and faces liquidity problems, it still has the option to get an unlimited supply of money from the ECB,” said Joerg Kraemer, chief economist at Commerzbank AG in Frankfurt. “The LTROs are only one piece of the entire puzzle.”

-- With assistance from Kristian Siedenburg in Vienna and Fabio Benedetti-Valentini in Paris. Editors: Matthew Brockett, Frank Connelly

To contact the reporter on this story: Stefan Riecher in Frankfurt at sriecher@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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