* ECB says 27 banks to repay 3.5 bln eurs LTRO funds on Feb
* Second round of early LTRO repayment much lower than first
* Reuters poll forecast for second LTRO repayment 20 bln eur
FRANKFURT, Feb 1 Banks will pay back only
another 3.5 billion euros ($4.8 billion) of emergency three-year
loans from the European Central Bank in a second repayment
window next week, suggesting a whopping 137 billion handed back
this week was a one-off show of strength.
Financial markets were shocked by the scale of last week's
repayment, which slashed the amount of cash floating around the
euro zone's banking system and encouraged hope that the region's
lenders are in better shape than some had feared.
The resulting boost in confidence has driven the euro to
14-month highs, and the lack of a second substantial repayment
to on Friday trimmed those gains only slightly.
"It's fair to say that banks put on a good show last week,
surprising the market with the volume of cash handed back to the
ECB, but this was likely a one-off," Icap strategist Chris Clark
"The road back to normalisation of euro money markets will
be a very long and slow one."
The figure did disappoint on consensus forecasts for around
20 billion euros in repayments and forward EONIA rates edged
lower in response while Euribor futures erased losses
and turned positive.
But the euro fell just slightly to $1.3640 from
$1.3667 before stabilising, still well up on the day and just
off 14-month highs to the dollar.
The early return of some of the 3-year funds the ECB pumped
into the system in late 2011 and early 2012 to avert a credit
crunch marks the beginning of an unwinding of the crisis
measures taken by the ECB of the past four years - the opposite
of action being taken by other central banks.
The ECB's balance sheet is likely to have shrunk to around
2.8 trillion euros as a result, the lowest level since February
2012 just before the second 3-year loan offering. Overall the
excess of euros washing round the euro zone's banking system has
fallen by around 140 billion euros.
That all effectively adds up to a tightening of monetary
conditions at a time when the euro zone economy is showing its
first feeble signs of stabilising, prompting some economists to
muse about the chances of a cut in official ECB interest rates
to offset any damage to growth prospects.
"Monetary conditions are likely to be a major concern at the
ECB, and by that irony the ECB may be closer to a rate cut now
than in December and January," Nordea economist Anders Svendsen
wrote in a note ahead of the announcement of the loan repayments
on Friday, though this was not yet his baseline scenario.
The ECB is set to discuss interest rates at its next
Governing Council meeting on Thursday and has been widely
expected to leave rates at a record low of 0.75 percent.
Banks took more than 1 trillion euros in total in the two
offerings of 3-year loans in December 2011 and February 2012.
They can begin to repay funds early on a weekly basis from Jan.
30 for the first tranche and from Feb. 27 for the second.