BERLIN — The first banks stepped forward Friday to make (EURO)137.2 billion ($183 billion) in early repayments on the European Central Bank's cheap, three-year emergency loans, in a sign of easing market conditions in the euro area.
The ECB launched the unprecedented (EURO)1 trillion ($1.3 trillion) loan operation in two tranches at the end of 2011 and again in February 2012 in an attempt to relieve stress on banks at the height of the debt crisis in the group of the 17 European Union countries that use the euro.
The repayments announced by the ECB Friday were slightly higher than expected by most analysts, whose estimates ranged around (EURO)100 billion.
"This is a sign of easing tensions in the eurozone," said Holger Schmieding, an economist with Berenberg Bank in London. "It's a vote of confidence by the banks in themselves and in the euro."
When it launched the loans, known as the Long-Term Refinancing Operation, the ECB's aim was to ensure lenders had enough funding to do business so that the flow of credit to the wider economy wasn't squeezed. The loans have been credited with easing the region's debt crisis by tackling fears that one or more of its shaky banks might fail.
At the time the program was launched, banks were given the option to pay back the loans early, with the repayment window opening at the end of January. Analysts have been eager to see how many banks would join the scheme, as it would give an indication whether parts of the eurozone's financial system were returning to health.
"The patients no longer need that much medicine," said Ulrich Kater, an economist with DekaBank in Frankfurt. "That was a voluntary dosage reduction, so this is a step back on the road to normalcy," he added.
The euro, used by some 330 million people across the 17-nation bloc, rose against the dollar by 0.5 percent to above $1.34, its highest level in several months.
As well as helping banks, the loans also provided indirect relief to heavily indebted countries, such as Spain and Italy, which were facing high borrowing costs in bond markets. Flush with cheap credit from the ECB, banks started buying government debt. That raised bond prices and lowered bond interest rates, which equates to lower borrowing costs for the struggling countries.
Overall, the eurozone is experiencing a lull in its three-year-old debt crisis, with bullish financial markets and further decreasing borrowing costs for weaker eurozone nations. Many analysts say that's because fears of a eurozone break-up have almost vanished since the ECB last year announced that it was prepared to buy up unlimited quantities of bonds of countries struggling with their borrowing costs.
The central bank said 278 lenders will make the early repayments on Jan. 30. In keeping with the ECB's usual practice, the central bank identified neither the lenders involved nor the countries they come from.
Nomura analyst Nick Matthews said the lion's share of Friday's payback most likely came from banks in the eurozone's stronger countries including Germany, France or the Netherlands. Nomura estimates, however, that about two-thirds of the ECB's loan offering was taken by lenders in the bloc's more troubled members, including Spain, Italy, Portugal and Greece.
When the ECB lent (EURO)489 billion to 523 banks in late December 2011 and another (EURO)529.5 billion to 800 banks at the end of February, it was charging its main interest rate of 1 percent. Since then, the ECB's benchmark interest rate has been lowered to 0.75 percent – meaning banks can now get short-term funding from the central bank at an even cheaper rate.
DekaBank's Kater said the fact that banks are giving back part of their secure long-term funding to return to cheaper – but riskier – short-term operations is a further sign of healthier financing conditions in the eurozone.
Several analysts forecast that banks will also use a redemption date next month to start paying back the second tranche of emergency loans, bringing the total repayment to about (EURO)300 billion – or a third of the total amount.
When the ECB offered the loans, there were concerns – particularly in Germany – that the increased supply of money in the economy would push up inflation. Analysts now say that the early repayments back to the ECB should reduce the risk of prices rising too quickly.
"As a side effect, the repayment shows that the German fear of the ECB's big balance sheet causing inflation is irrational," said Berenberg Bank's Schmieding.
"It shows that it's easy for the ECB to scale down its operations again when it's the appropriate time."