LONDON Feb 1 A rapid rise in euro money market
rates came to an abrupt halt on Friday as the initial flood of
crisis loan repayments to the European Central Bank shrank to a
Having paid back, at the first time of asking, over a
quarter of the 489 billion euros ($664 billion) handed out in
the ECB's first round of 3-year LTRO loans, banks will return
only 3.4 billion next week.
Money market traders polled by Reuters at the start of the
week had predicted a 20 billion euro repayment and the much
smaller return, after the initial 137 billion euro payback, left
many rethinking how quickly the excess of cash in the system
would return to a more normal level.
One-year Eonia rates fell below 0.195 percent
for the first time this week, having been as high as 0.243
percent before the repayment was announced. The euro also
The one-year Eonia rate reflects what overnight bank-to-bank
lending rates are expected to average out at over the year, and
has already risen 0.25 basis points -- the equivalent of a
typical ECB interest rate hike -- since December.
"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 weekly repayments are gaining increasing market
attention, both because of the jump in interbank rates and
because they are being seen as a proxy of banks' health and
ability to survive without central bank help.
They have another two years to pay back the money and can
repay as little or as much as they want each week, but returning
the cash is increasingly being seen as a badge of honour to be
waved at rivals, rating agencies and shareholders.
Credit Agricole was the latest bank to say it had
started repaying its LTRO funding on Friday and
its in-house strategists said the small overall weekly number
would prompt the market to revert to its original view that the
pattern of repayments would be steady rather than sudden.
They expect Eonia rates for one-year and beyond "to
gradually rise - hence, normalise towards the refi rate - while
the shorter-dated tenors, particularly up to the six-month
tenor, should have scope to fall modestly from current levels,"
they said in a note.
The effect of the liquidity withdrawals has been greatest on
longer-dated money market rates because the excess of cash is
large and not expected to fall to 'normal' levels for some time.
For Europe's struggling debtor countries and the ECB, the
jump in banking market rates is not ideal because it effectively
tightens money policy and creates unwanted stress just when the
bloc's economies are showing fragile signs of improvement.
The loans, which banks can keep for up to three years, were
designed to stop lending freezing up after its sovereign debt
crisis spiralled in 2011.
Influential ECB Board member Peter Praet demonstrated the
central bank's sensitivity to a too-rapid withdrawal of
liquidity earlier this week.
"We will exert vigilance to ensure that ... the overall
liquidity conditions prevailing in the money market will remain
consistent with the degree of accommodation that the current
outlook for prices and real activity warrant," Praet
Market analysts will now focus on the ECB's monthly policy
meeting next week before switching the bulk of their attention
to Feb. 22 when the ECB will announce how much banks want to
instantly repay of the second 530 billion LTRO (longer-term