Loading...
See More

Eurozone tensions fade

Jan 25 2013 15:57

England Cricket (File)

Related Articles

Banks to pay back €200bn ECB loans

ECB tender could ease credit crunch fears

Eurozone private sector lending stronger

Banks gorge on ECB loans, market cheer short

US stocks jump after ECB action

Debt blame game

 

Frankfurt - New evidence suggested Friday that the eurozone might finally be emerging from its crisis with a European Central Bank announcement that banks were starting to repay some emergency loans ahead of time.

In an unprecedented move a year ago, the ECB pumped more than €1.0 trillion ($1.3 trillion) into the banking sector to avert a looming credit crunch in the 17 countries that share the single currency.

At the time, the ultra-cheap three-year loans, known as long-term refinancing operations (LTROs), were credited with marking a turning point in market sentiment towards the embattled euro.

The LTROs were launched in two batches, in December 2011 and February 2012 and both included provisions to allow early repayment after one year, with the first repayment window opening on January 30, and the second on February 27.

After that, repayments can continue on a weekly basis, depending on demand.

In a widely-watched announcement on Friday, the ECB said that 278 banks would repay €137.16bn of the first €489bn LTRO on January 30.

That is much more than the €100bn euros expected by analysts.

Some experts believe the magnitude of the repayments is a sign of the improved health of the financial markets as it suggests banks are enjoying better access to funding.

The euro certainly spiked higher on the news, rising to $1.3436.

Nevertheless, other observers warn of possible problems further down the line if it emerges that only banks in the stronger core countries such as Germany repay the loans, while banks in still vulnerable, peripheral countries, such as Spain and Italy, become "stigmatised" for not being able to repay.

The ECB did not provide details as to the nationality of the 278 banks which have decided to repay the cash, but some banks have made their intentions known via press statements.

Berenberg Bank chief economist Holger Schmieding said it was "no wonder that the euro exchange rate is going up. We see the voluntary return of excess liquidity to the ECB as a strong vote of confidence in the euro."

"Most of the funds will be returned because banks no longer need them," Schmieding argued.

Private funding markets had reopened since the ECB unveiled its other anti-crisis weapon, a bond purchase programme, last August, the expert said.

"The large repayment shows how the ECB's intervention is successfully healing the eurozone financial system," he concluded.

But Annalisa Piazza at Newedge Strategy was more cautious, suggesting that "markets might start to price in risks of tighter liquidity conditions in the future, should the repayment continue at the same pace."

Nevertheless, the eurozone has seen other positive news this week, with private business activity across the eurozone -- as measured by the widely watched Purchasing Managers' Index or PMI -- hitting a 10-month high in January.

And in Germany, the region's top economy, both business and investor confidence is also rising sharply.

"With business confidence recovering faster, at least in Germany, and the financial system healing, the resilience of the eurozone to future shocks is slowly growing," said Berenberg Bank's Schmieding.

"Serious risks remain... but they should be more manageable than in the last two years," he said.

Speaking to the world's top business and political leaders at the World Economic Forum in Davos, ECB chief Mario Draghi hailed what he called "relative tranquility" on the financial markets and said: "All the indices point to a substantial improvement of financial conditions."

But Draghi also warned that it was too early to declare the battle over.

"Are we satisfied...? I think to say the least, the jury is still out. Because all in all, we haven't seen an equal momentum on the real side of the economy and that's where we will have to do much more," he said.

Follow Fin24 on Twitter, Facebook, Google+ and Pinterest.

economy  |  loans  |  ecb
NEXT ON FIN24X

 
 
 

Read Fin24’s Comments Policy

24.com publishes all comments posted on articles provided that they adhere to our Comments Policy. Should you wish to report a comment for editorial review, please do so by clicking the 'Report Comment' button to the right of each comment.

Comment on this story
0 comments
Add your comment
Comment 0 characters remaining
 

Company Snapshot

We're talking about:

Small Business

Retailers of any shape and size can now unlock the power of mobile transacting.
 

Money Clinic

Money Clinic
Do you have a question about your finances? We'll get an expert opinion.
Click here...
Loading...