MONEY MARKETS-ECB payback pushes markets into uncharted water

Thu Jan 24, 2013 9:49am EST

* ECB to give initial LTRO repayment details on Friday at
1100GMT
    * Ample excess cash to remain in 2013, stabilising spot
rates
    * Steeper money market curve seen as uncertainty hits
forward rates

    By Emelia Sithole-Matarise and Marc Jones
    LONDON, Jan 24 (Reuters) - Money markets are bracing for
volatile trading in coming weeks which could lift short-term
rates as banks start paying back the 1 trillion euros of
ultra-cheap European Central Bank loans that have kept them
afloat over the past year.
    The ECB will say on Friday how much of 490 million first
tranche will be returned immediately by the 523 banks that took
part in the first of its twin three-year funding handouts at the
end of December 2011.  
    Estimates of the payback total are averaging around 100
billion euros according to the latest Reuters poll, although
some analysts believe it could be as high as 300 billion euros.
    That would roughly halve the amount of so-called "excess
liquidity" sloshing around the system and has kept bank-to-bank
lending rates pinned at record low levels for almost a year.
    Historically money market rates, which effectively underpin
what banks charge firms and consumers for loans, only tend to
move freely once excess cash drops below 200 billion but the
lengthy repayment timeline has left them in uncharted water.
    Speculation about how much could be repaid early jolted
money markets last week. Interbank lending rates hit their
highest since July a senior ECB member brought them back down by
saying he thought the amount would not be enough to have an
impact.    
    For banks, the desire to show shareholders, regulators and
rating agencies that they are weaning themselves off central
bank life support is a tempting reason to return the cash.
    Germany's Deutsche Bank and Commerzbank, France's BNP
Paribas, Societe Generale, Credit Agricole, Spain's Santander,
BBVA, Caixabank, Sabadell are all angling to pay back the money,
while UK's HSBC, Lloyds, RBS and Barclays and Italy's Intesa
Sanpaolo and Unicredit are also said to be thinking about it.
    But the desire to look good must also be weighed against the
fact funding markets remain extremely fragile and for many in
the demonised periphery are still far more costly than the ECB.
    While BNP Paribas may only pay 1.2 percent for a 2-1/2 year
loan at the moment, a struggling Spanish or Italian bank has to
pay far more, making it near impossible to give up the ECB cash.
    "The case for not paying back is not really big enough for
many core banks," said RBC Capital markets analyst Carlo
Mareels. "It is a different story for many periphery banks.
Maybe their shareholders would rather they kept the money and
did something with it."
    
    FRONT LOADED, BACK END IMPACTED
    As with last week's move, money market pricing is likely to
be most pronounced in Eonia forward contracts which lock in an
overnight borrowing rate over a longer period. 
    Analysts think a large repayment would see one-year rates
, currently at 0.15 basis points, quickly bump back
up to the 0.22 percent they hit last Thursday when speculation
of a big return was growing.
    Spot rates are expected to remain at their ultra
low levels, however, given the belief there will still be enough
cash in the system through 2013 to keep them anchored near the
ECB's zero deposit rate which acts as a floor for the market.
    "The market is working on the assumption that liquidity is
going to reduce significantly over time, so forward rates are
going to be under pressure because of the uncertainty over how
much it will be reduced by in a year or so," a trader said.
  
    
    PERIPHERY PRESSURE 
    Euribor futures , which price in expectations of
where the market expects interbank rates to be in future, were
also seen kicking higher especially for the 2014/2015 strip.
    As banks get back the government bonds and other collateral
they used to borrow from the ECB, the lending markets for those
assets could also be affected. 
    While much of the focus will be on the ability of banks from
the euro zone's troubled peripheral countries to repay the
funds, the initial repayment may be largely influenced by the
northern European banks that dominated the first LTRO. 
    Data on who took the cash is not released by the ECB, but
combing national central bank data shows over the two handouts
Spanish and Italian banks took the lion's share at around 175
billion and 130 billion euros respectively. 
    And digging even deeper shows French and German banks took a
more significant share of the first round at 44 and 30 billion
euros - not quite as much as the 55 billion taken by Italian
banks but more than Spanish banks' 25 billion.
    With those bank more able to make repayments, it means
Friday's figures may provide more of a big bang than the ones
from the second LTRO which will be published on Feb. 22.
    Once repayments are allowed, banks can pay the ECB back as
much or as little as they want every week until the end of
January 2015 for the first LTRO, February 2015 for the second.
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